Alan Greenspan was adjusting interest rates upwards for a number of consecutive quarters since 1999 maintaining on the need to keep inflation in check citing that once unleashed, inflation is like a forest fire that is painful to stop because of the expectation spiral. His stand on inflation shifted somewhat towards the later part of 2000 saying that it is possible to have growth without inflation with productivity growth made possible by technological advances as the filler of the gap. In line with this belief, a neutral interest policy ensued. Thereafter, he moved interest rates downward 6 times to arrest the downturn with a view to lower interest rate further to help jump start the economy. I am convinced that this recession is more complex than just keeping money supply and inflation on a tight balance with serious structural cracks caused by the bursting of the technology bubble especially in the technology sector.
A couple of key events that could have contributed to the creation of this bubble are as follows:
3G Madness
3G, a technology that promises a 40 fold increase in bandwidth to our existing mobile phones and unleash a gambit of services that is not possible today because of the bandwidth limitations of current 2G mobile technology. New services includes mobile video conferencing, full web browsing as oppose to current WAP, mobile digital TV and whatever you dare dream of.
All this is great except that the price tag has gone wrong even before the service is launched. Just to give you an idea of the madness, the carriers in European Community with a population of about 300 million people has issued about? 300 billion worth of commercial papers to pay government telecommunication regulators for the rights to the radio frequency spectrum necessary to run 3G. As a matter of herd instinct, the carriers has tried to out bid one another for these radio spectrum believing that it is a race that they can ill afford to lose as many saw 3G as being central to everything happening in the mobile scene of the future. In retrospect, it is easy to see that the carriers have over paid based on an average of $1,000 per capital but the executives at these carriers were under tremendous pressure and the strategic over hang could have clouded their judgments.
The telecommunication regulators did not help the situation by an over emphasis on competitive bidding over the beauty contest mode of dishing out radio spectrum. To help the executives dig their own graves, high street investment bankers were more than ready to help the carriers get the money by underwriting the commercial papers for them and earning big fee in return. In the same light, these high street investment bankers also have analyst to rate these papers. In addition, the equity analysts had also written the equity markets to dizzy heights and one of the proverbial logic of a dollar each for license, equipment and internal cost. The stocks of equipment vendors like
Lucent,
Nortel,
Nokia,
Ericsson,
Alcatel and et al rose wildly and fell like Niagara fall when the bubble burst. Of course we know that these investment bankers have 'Chinese Walls' to ensure that their analysts provide objective views independent of the interest of the employers.
MAD
I would call it the Mergers and Acquisition Directive (MAD in short). We live in an age of instant everything where nobody has any patience for anything that takes time and this includes research and development and product development. Companies are increasingly turning to shoring up companies with promising potential technology or product as a quick way out. Like the 3G phenomenon, many of these companies were bided to towering heights. Many of the large incumbents leveraged their rising stock prices by paying for most of these acquisitions by issuing new stocks instead of paying for them with cold hard cash. The owners of the target companies were more than happy to accept this form of payment (with some moratorium period) as everything pointed upwards until recently. To make a joke of the situation, it was once related to me that Nortel executives only had 1 day to make a 9 billion dollar acquisition of Bay Networks as Lucent and Alcatel was ready to jump in if they do not. We might as well throw everything there is to know about due diligence and live and die by our guts relearning to do business at the speed of light. I must add that investment bankers are here again collecting big fees for their M&A advisory or the lack of it in the process.
Optical Illusion
One year ago, optics was the darling of Wall Street and the likes of
Corning,
Nortel Networks, and
JDS Uniphase were rising by leaps and bounds. Optical was the mirror image of 3G except it travels through looking glass instead of thin air but either way; they all suffered the same fate. When fiber optic was invented, it was able to carry 34Mbps on a pair of fiber optics or about 450 phone conversations simultaneously. With dense wave multiplexing technology, it is possible to carry about 640Gbps on the same pair of cable translating to 1 million phone conversation or the total number of phone calls in USA during peak hours. Optical evangelists argue that the current driver for larger bandwidth is no longer voice but data with the internet being the killer application. The evangelists are not entirely wrong about the demand for bandwidth created by the internet but miss the estimates by a mile partially because of the dot com fever turn into a dog bomb for many and bandwidth did not increase by the 1,000 fold and what followed was a bandwidth glut leading to a price and market collapse for the carriers world wide.
Playing Host
When the dot com fever started, hosting companies sprung up everywhere like mushrooms to address the needs of dot com to host their applications. Big names like
Exodus started an accelerated globally built up of up to 45 hosting centers globally covering almost every conceivable major commercial center and time zone. These hosting companies are now faced with tremendous over capacity with limited take-up of their vast capacity. Many have taken the practical route by offering to host and manage application services for enterprises.
Inventory
Traditional wisdom of depleting inventory as a leading indicator of economic recovery might have limited use here. With the current pace of technology innovation, we are looking at a product life cycle of less than 18 months in most cases and many of these high technology companies are learning quickly that when inventory turns turn sour, they not only have to deal with holding cost but also massive write offs. Companies used to push products from first world markets to third world markets and with the world now a much smaller place due to globalization, the time differential between first world markets and third world markets are now narrowing to the degree that this bag of trick no longer works.
Do not look at inventory levels blindly as a leading indicator of economic up turn.
Besides all these negativities, there are silver linings in the horizon that could point to better time ahead. For one, Microsoft recent launch of Windows XP will hopefully trigger a whole stream of demand. Greater processing power from Intel and the likes, more memory to forestall the falling prices of memory chips, bigger disk capacity for the likes of
Seagate. Compaq,
IBM,
Dell and the likes would also benefit from selling more PCs and servers and an army of consultants to get enterprises migrated to XP. The carriers and networking companies would also benefit from larger bandwidth appetite of XP. Many enterprises are still suffering from computing constipation from the large sum of money they have put into Y2K and the proverbial promise of technology delivering the productivity and differentiation edge.
Whether interest rate cuts alone is enough to get us out of this recession remains to be seen as it would normally take a quarter or two for the cuts to work itself into tangible results. Otherwise, let's get our bandages ready to stop the bleeding from all the cuts (job, price, demand, GDP and etc) that we are experiencing with this recession.
Peter Lye aka lkypeter
lkypeter@gmail.com Safe Harbor. Please note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organizations or individuals. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution. Happy Reading. Peter Lye (c) Peter Lye 2014
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