Wednesday, July 29, 2015

What is AirBnB's competitive advantage?

Cyrus Sanati, of Fortune, wonders what AirBnB's competitive advantage is, and if it will be able to ever earn the loft valuation is currently enjoys:
 I am not a fan of any business model where the person purchasing the service is expected to pay a  "fee" to a middleman, especially when that middleman (Airbnb), has no real competitive advantage whatsoever. Simply put, the barriers to entry online are way too low and Airbnb's sole revenue stream, the fees it charges its hosts AND guests, are very vulnerable to attack. I fear Airbnb will eventually be subject to vicious competition, forcing the company to lower those fees until its profit margins go to zero.

Is this true?
Real two-sided markets, like eBay (at least in the collectibles sector) have a very defensible middle man position, collecting fees both from buyers and sellers. I would add Uber in the same category, as I think the friction on the consumer side (multiple ride-sharing apps) and driver side (multiple ride-sharing apps), plus the positive externalities from network density, secure a strong middle man position.
AirBnB rentals would naturally cross-list on, or, and I'm willing to invest more time, at a website on a PC, to find something that's well priced. So I don't think I agree with Sanati that fee-for-service middle men businesses are destined to have low margins, I think it may be true for AirBnB in it's market.

Friday, July 24, 2015

The vector for financial contagion is hedge funds

This article sums up exactly my experiences at DE Shaw during the ruble default/LTCM melt down in 1998:
My Brazilian rate started trading. It blinked 17.40%, 1.50% wider than the prior day. I was out 3 million dollars, and I had no chance to trade. No chance to get out at 15.50% or 16.00%. The market had gapped.
The days following Lehman were notable not only because of the large moves, but because I, and many others, could never have traded at any price. Fists punched screens all across the globe.
It was a self-reinforcing problem. A feedback loop developed. I couldn’t sell my Brazilian rates so instead I sold another investment, Argentinian bonds. Others were doing the same, selling whatever they could, whatever was trading, moving the money into cash. The process devolved down the ladder of securities, from the least liquid to the most liquid. By the end, some of the largest stocks in the world, blue-chip stocks in the S&P 500 were also gapping.
The months following Lehman’s collapse saw the entire financial system start to fail, in a cascade of interconnected plummeting securities, and with them, the world economy.
Emphasis mine. The contagion has everything to do with the homogeneity of the financial investors, and nothing to do with actual market correlations between the assets.

Friday, July 17, 2015

Greece is a victim of Framing

SRW says that Greece, and the European crises, is a victim of framing:
The European crisis is a crisis of bad framing. Characterizing Europe-wide credit problems in terms of national actors, then fixing that characterization into place via intersovereign lending, were deeply pernicious, deeply destructive, errors. I don’t doubt these errors arose more from increments than ill intentions. There were pressures and interests and paths of less resistance — no need for any vast conspiracy. [2] The international framing was convenient to domestic constituencies throughout Europe. In every country, elites find it convenient to deflect passions to an external bad actor rather than take responsibility for mistakes at home. Sometimes on the merits they have a case, sometimes not. Regardless, inflaming passions against another nation is always a terrible choice. Even when a dispute really is a zero-sum conflict of interest between two nations, great diplomacy is called for. That may be a lot to ask for, but it is what civilized countries do.
I agree, but I don't think the problematic frames are "Greeks are lazy and corrupt" or "Germans are cruel and stingy". The problematic frame is "money is like gold" and "nations are like households".

The MMT crowd calls responsible management of fiat currency "functional finance" because it looks at the function fiat money plays in an economy -- as a general ledger entry to track obligations -- and rids it of the inherent value it holds as a store of value, implicit in the "sound finance" frame. In "sound finance", the nation, as a family, needs to have a rainy day fund of savings in case of bad times. In practice, this is disastrous as functionally, the nation needs to run deficits so it's people can net save and be employed, thus maximizing real value.

If you want a find a villain, look at the economics profession which continues to model money and finance as if it was a lump of gold instead of a spreadsheet entry. They are like the doctor's at Vienna General.

Thursday, July 16, 2015

Comments on Greece

Many comments on Greece have been morality plays of one sort or another but the most solid technical analysis comes from Warren Mosler:
[context: Greek debt reduction] 

As suspected, he’s was in it over his head.
My response would be to let the banks remain open with circumstances limiting withdrawals to available liquidity. Liquidity might come from earnings on assets, asset sales, and new deposits. The banks would be free, by mutual agreement, to issue IOU’s to depositors who didn’t want to wait for actual euro. The govt might issue IOU’s if it ran out of cash for operating expenses. To ‘seize control of the Bank of Greece from the ECB’ is nonsensical, as there’s nothing there but a computer with a spreadsheet. It would not give Greece the ability to clear funds outside of Greek member banks that are on that spreadsheet. Haircuts to bonds issued to the ECB and reducing Greek debt would also be meaningless in this context.
Mosler's point is that Greek needs to run larger deficits so it can address it's aggregate demand shortage. Debt reduction does not help this as it fundamentally still has Greece in a position to need surpluses, or too small deficits. So even if Greece had gotten it's haircut, it really would not have helped.

This aggregate demand manage is the prerogative (and responsibility) of any currency issuer, but Greece may not have anyone who knows how to set up a currency, and it certainly does not have anyone who knows how to run a fiat currency correctly. This is why Greece was talking about "seizing banks" when all it needed to do was issue IOUs (like California did briefly during it's budget crises).