Archive for the ‘Economics’ Category

Why domains are better than dollars – Part II

Tuesday, February 9th, 2010
Why domains are better than dollars – Part II

The financial wizards are hard at work so far in 2010. On the heels of the annual Davos summit, central bankers and finance ministers from around the world have been on world tour — from Sydney to the Arctic. There would appear to be a lot of fingers in the dam right now as national economies try to wean themselves from government stimulus. Herewith are a couple of major developments to watch in the coming weeks along with the implications for domainers.

roller coaster

Precious Metals
Precious metals, notably gold, is what some economists call Armageddon Insurance. Mathematically, for gold to function as a global currency, it would need to trade in the range of $3,000 to $5,000 per ounce — well above the current level of $1,077 which is already more than the intrinsic value. In other words, the trading price is partly about intrinsic value, but mostly it is a bet on the viability of traditional national currency systems as an enduring store of value.

What is interesting about precious metals as a store of value is that most of it is held in the form of paper rather than physical metal. The typical paper forms are (1) Exchange traded funds like GLD, (2) long or short commodity contracts, and (3) shares in mining or resource companies. In recent days there has been chatter about the breakdown of the physical market for bullion.  Here is one relevant analysis about the Breakdown in the Gold Market.

Although not being covered in the mainstream press, many mints and dealers are reportedly out of stock and backordered of physical precious metals.  In other words, supply is greater than demand when it comes to the physical good.  Unlike fiat currencies, or paper contracts, one can’t conjure up more physical supply of a rare metal. New supply has to be discovered, mined and processed. This is a development worth watching.

Greece — why it matters

In other news, pay close attention to recent movements in Greek’s Sovereign debt.  This is more significant than Iceland’s national bankruptcy.  It is a test case for the future of the Euro as a currency union. It is part of the larger PIGS story, which stands for Portugal, Ireland, Greece and Spain, all of which are pushing the boundaries of EMU membership compliance.  The below picture tells the story of a nation whose credit card is in the process of being shredded:

greek spread

For the moment, there is more rumor than news.  If Greece is bailed out, as is now being rumored, the whole thesis of EMU fiscal guidelines (e.g. 3% maximum deficit as % of GDP) is completely out the window; member nations will have been granted an implied license for moral hazard.  STRATFOR did a good analysis of why Greece matters, and notably why Germany is stuck between a rock and a hard place.

Domain names as asset class

The implication here is that as the global economy struggles to resume a sustainable and endogenous growth track, the fundamental risks are still largely unchanged.  At the same time, the list of attractive alternatives to the US Dollar is shrinking — this at a time when the US Dollar is not all that attractive! The silver lining for Domainers is that the online economy is healthy, capital efficient and increasingly profitable.

Premium domains have many of the characteristics of being a desirable alternative asset class.  Over the last several weeks, I have had a series of discussions with asset management groups and hedge fund managers about the “Domain names as asset class” thesis. The light bulbs are going on and for a growing percentage of these fund managers, there is serious consideration of domain names as a store of value in uncertain times.

Why does this make sense? Simple. Domain names can be priced in any currency, operated from anywhere, and owned by anyone. In other words, domain names are a portable store of value that can be transferred instantly across the globe from one owner to another. They can even be owned anonymously. This message of “Domains as an asset class” is an important one to reinforce as it is key to moving beyond intrinsic value and unlocking speculative value.

For more on the topic of domain names as asset class, see my prior post on why “Domains are better than dollars“.

Posted in Domain Names, Economics, Uncategorized | 7 Comments »

The Gini is out of the bottle

Friday, December 4th, 2009
The Gini is out of the bottle

The Gini coefficient is a topic that I expect we will be hearing a lot more about in the coming months.  For domainers, it is worth understanding because it is a reliable indicator of seismic changes in national economies.  It also happens to be good news for domainers.

What is the Gini coefficient
Simply described, the Gini coefficient is a mathematical index for income inequality. The coefficient has a value of between 0 and 1, where  1 represents complete inequality and 0 represents complete equality. Is this a useful statistic? The CIA uses the Gini coefficient as one predictive indicator of social unrest. If you look at a database of national Gini coefficients, you see some patterns. Countries like Switzerland, Sweden, Canada, and Japan have Gini coefficients in the range of .25 to .35. Countries like Zimbabwe, Namibia, South Africa, and Argentina are all above 0.5.  For calibration, the US was just under 0.5 before the Great Recession, and is now probably at or above 0.5. This is troubling, particularly when you consider that this is national average.

Should we care about income inequality?
My wife, Jill, and I were out for dinner this evening. At one point, Jill asked the young server how it was going. To which, the college-aged man replied “I am doing great. Earning minimum wage … Living the American dream!” He said it with the type of cynical optimism that just tugged at your heart. People are frustrated, and increasingly vocal and upset. The tone is shifting from forward-looking hope to growing despair. As a right-leaning, serial entrepreneur, I am all for free markets but this is crazy. The Gini is out of the bottle.  To put the Gini coefficient into historical context, here is a useful trendline:

Gini coefficient in USA

Gini coefficient in USA

Anyone longing for the 60’s, may well be “Dreaming of Gini” — when the US experienced its lowest Gini coefficient in recorded history. Incidentally, the last time the US Gini coefficient was at 0.5 was in 1929 — the end of “The Roaring 20’s” and right before the Great Depression. In other words, when the separation between “haves” and “have nots” gets this wide, the historical precedent is that a major intervention occurs.

What’s a Government to do?
The US Federal government is scrambling. This week’s Jobs Summit was a blatant appeal to the private sector for employment creation. Don’t hold your breath — these businesses are competing globally for customers and capital at a time when labor is plentiful. Keynesian public works projects are a replay of the FDR formula of the 1930’s — roads, bridges and public transportation. It worked well in the 1930’s. Yet, the situation is different this time. Why? Over the last 80 years, we have gone through 3 distinct cycles:

1. Tax and spend –  The New Deal, under FDR, public works were funded through taxation. The term “Tax and Spend” comes from the FDR era. It worked.

2. Borrow and spend — This was the growth formula under Reagan, Bush I and Bush II. Cut taxes, and borrow the difference. It too worked.

3. Print and spend — The current practice of Quantitative Easing, whereby the Federal Reserve “prints” currency which the US Treasury then borrows.

The United States is executing the plan that looks rather similar to Zimbabwe and the Weimar Republic. For the moment, the US is getting away with it, in part because of the brand strength of the US dollar as international reserve currency, overwhelming military superiority of the US, and hat-in-hand diplomacy by our Commander in Chief. The following cartoon, courtesy of Ramsay Devreux, tells the story well:

how-to-greet-foreign-leaders

Looking ahead to 2010, Healthcare Reform, a lot more public works projects, more extended unemployment benefits, and now the surge in Afghanistan, will come at the cost of debasing the US Dollar since raising interest rates would just increase the deficit even faster. The alternative would be massive tax increases, notably on the rich. The problem this time around is that (1) the rich are a shrinking population, and (2) the truly rich hold capital that is not captive to the boundaries of any sovereign nation.  Wealth, and the people who control it, can live anywhere and work anywhere.

Implications for domainers
So, what does rising inequality in the US mean for domainers.  If we get Great Depression II, I believe domains are a better store of value than currency.  However, in the more moderate U or W scenarios, I believe there are tectonic shifts in the value chain that are equally interesting for domainers. Here are a few examples:

  • Products – As more products are sold online, more producers will go direct to consumers.  The US retail shakeout is far from over. During 2010, I expect that producers will be looking for more ways to sell directly to consumers. Concerns about channel conflict will be trumped by the need to protect profit margins. Producers that are selling online through Amazon, Wal-Mart and Target, are getting squeezed by free shipping and price comparison. At what point do these producers start selling directly to consumers in a risky effort to regain pricing control? It will happen and when it does, these producers will need memorable, trademark-safe, SEO-friendly domain names on which to sell their products. Advantage: domainer.
  • Content — Book publishers, Newspapers, TV and Radio are all feeling the heat. The cost of production and distribution has plummeted and now anyone can produce and distribute content. If it is good content, the world will discover it because social media has leveled the playing field.  Content producers no longer need printing presses or broadcasting towers to distribute content. However, once a content producer’s brand is established, why not take control of the online brand and host the content on your own domain name? Content producers — notably journalists and authors — are finally waking up to to this and the mainstreaming of eReaders will be a huge accelerant. Advantage: domainer.
  • Professionals — The unemployment trend in 2009 has not bottomed yet. In normal economic cycles it would have bottomed by now. It has not. Jobs are still being lost on a monthly basis, though at a decelerating rate.  Sooner or later, people will realize that to an increasing degree we are living in the era of “You, Inc.”.  In a growing number of professions, providers will be better off selling their services directly to consumers. I actually expect this trend to accelerate in 2010.  These newly independent professionals will need their own websites through which to ply their trade. If they can’t get a great TrademarkAttorney.com, they might settle for a subdomain, e.g. Seattle.TrademarkAttorney.com. Advantage: domainer.

In summary, I believe the real path out of rising inequality is not more taxation or more public works. It is entrepreneurial courage by capable producers who are currently underutilized.  The Founding Fathers of the United States knew this well:

“A government big enough to give you everything you want, is strong enough to take everything you have.”

– Thomas Jefferson, Founding Father and 3rd President of the United States (1801-1809)

Posted in Domain Names, Economics | 11 Comments »

The Times They are A-Changin’

Sunday, November 22nd, 2009
The Times They are A-Changin’

Over the weekend, I had an opportunity to catch up on some reading.  A few of the articles I read were particularly helpful to understand what is going on in the world. The first 3 articles are also related to my recent posts about China and the outlook for the US dollar. The last article  falls into the category of Christian theology and offers interesting perspective on the outlook for the US dollar, and by inference, for domain names as a global asset class.

Advice from Grandma
Thomas “The World is Flat” Friedman’s latest Op-Ed piece starts to throw cold water on the whole Pacific Century thesis saying that the US remains an innovation powerhouse and will come back. He then back-pedals and says that globalization has made the US sovereign borders less relevant, and goes on to draw a parallel between Arnold Schwarzenegger’s roll in governing the de facto bankrupt State of California, and President Obama’s declining credibility as savior of US global hegemony:

“A lot of the disappointment settling in among Obama voters today is prompted by their dawning realization that maybe, like Arnold, he can’t.”

This is notable because Mr. Friedman is a respected pundit who has supported Obama in the past. The next 2 months leading up to the January State of the Union address to Congress are pivotal for the Presidency and Democratic-controlled Congress.

United States Economy At Zero Hour To Service Debt Mountain
Simply stated, the article makes the case that the world largest importer is approaching an impasse with the largest exporters.  The formula that worked brilliantly for the past decade is starting to crack. 

Many countries that relied heavily on exports as a growth strategy are now geared up to provide goods and services to heavily indebted countries that no longer have the will or the means to buy them.

The article includes some useful trend charts, and draws some parallels between the US in the 2000’s and the Japanese in the 1990’s. Having lived in Japan, I would draw some distinctions between the US and Japan: (1) The Japanese cultural norm is one where there is a huge social duty to pay one’s bills in full and on time.  In fact, Japan is still mostly a cash economy. (2) Japan  maintained a healthy export machine while moderating its imports.  And (3) the Japanese never had the luxury of producing an international reserve currency.

Gold Market Reaching The Breaking Point
I received this article from domainer — and fellow skeptic of fiat curency — Ramsay Devreux with whom we are developing names like EmergencyFood.com, ModelShips.com, among other active projects.  The article raises some familiar questions about the accounting of physical gold.  It is almost 100% certain that a lot of physical gold has been sold multiple times, and that if everyone who owns physical gold actually took delivery on the gold they think they own, there would be a run on gold. While it was never the intent for a physical commodity to get levered, it turns out that it was. Here is an interesting visual from the article:

All the gold that has ever been produced would fit in a solid cube of about 19 meters on each side, and this cube is only expanding by about 12 centimeters a year (2%).

I also thought this statistic to be telling:

Statistics from United States Geological Survey show that the united states has exported 5000 metric tons of “Gold compounds” in last two years, and the US Census Bureau has assigned an astronomically high value to these exports.

One emerging conspiracy theory is that the “compounds” are composite of Tungsten, which conveniently has the same density as gold, but costs just $10 per pound, versus $1,030 per ounce for gold.  That’s one reason why some people are buying older numismatic gold and silver coins that were produced long before there was a need to “inflate” physical gold.

The Coming Epiphany
I came across a slightly dense eBook that is worth a read.  The book is  a primer on Christian End times theology. Revelations is pretty hard to parse due to heavy symbolism.  This book does a decent job of interpreting Scripture though it makes for slightly gloomy reading. Page 251 addresses the author’s academic analysis for why he thinks February 22, 2010 is judgment day for the US Dollar. You can download the eBook for free here at Lulu.com, the self-publishing platform.

Posted in Domain Names, Economics, Life | 3 Comments »

The Pacific Century

Saturday, November 21st, 2009
The Pacific Century

This past week was historic.  For the first time in probably a century, the President of the United States was not the most important person in the room.  As a US citizen — albeit of Dutch blood — this is not exactly the easiest thing to watch unfold. While troubling on one level, it just might be good news for domainers with a global view.

obama-japan

Oh my, the US President bowing down to Japan’s Emperor Akihito -- this is the son of Emperor Hirohito of WW II!

My first encounter with the Pacific Century was in 1994
In 1994, I was based just outside of Frankfurt, Germany in the town of Schwalbach working for Procter & Gamble. My boss in Germany was a Polish-American named Jacek Kedziora. Jacek had just moved to Japan. We had a successful run working together in Europe.  When he invited me to come work for him again in Asia, I jumped at the chance. I moved to Kobe, Japan in January 1995, a few weeks after the Great Hanshin Earthquake. Kobe was ground zero.

Although the next 5 years were pretty demanding, working with the Japanese was an amazing experience as was traveling throughout Asia.  By 1997, I was working on some of P&G’s first global projects while still based in Kobe.  By 1999, I had become a global expert on developing better baby diapers having developed them for every region of the world, including Latin America. Around the same time, it was becoming increasingly apparent that the Internet was going to transform a lot of industries.

In 1999, most people in Asia had no idea about the Internet. I developed the idea of creating an internet company that would address the challenge of conducting multi-country market research surveys using the web as the platform for collecting survey data. The idea for Global Market Insite was born. I quit my day job on June 12, 1999, moved the family to Seattle, and then spent the summer of 1999 teaching myself Linux, Apache, MySQL and Perl, wrote the first version of the software, and filed 5 patents.

The decision to be based in Seattle was not an accident. Seattle has an important geographic advantage that I think many people have yet to realize. Seattle is about 8 hour flying time to Tokyo, 9 hours to London and about a 5 hour red-eye to the US east coast. In other words, in the Pacific Century, Seattle is a reasonably central location from which to build global companies that would be well-positioned to bridge the gap with emerging Asia, and in particular, Japan and China.

In economic terms, China is crushing it
China’s foreign exchange reserves hit $2.2 trillion in the 3rd quarter. While this number is huge, in all likelihood it understates the reality. The official pace of growth of foreign exchange reserves is on the order of $600 billion per year. That is actually what is left over after actually spending a large portion of the inflows.

Message in a cookie: How do you expect to pay back all the money you're borrowing from us?

Message in a cookie: How do you expect to pay back all the money you're borrowing from us?

A lot of this foreign exchange is held in US dollar denominated assets.  The Chinese have kept the Yuan pegged to the dollar at around 6.83 Yuan/Dollar since December 2008. The next big exchange rate reset is coming, likely after the Chinese New Year in January. In theory, the US administration wants and needs this revaluation of the Yuan. The downside for China is that it represents a step-wise discounting of the US debt, and will create further margin pressure on US importers of Chinese goods.

The revaluation writing is on the wall. China’s purchases of US Treasuries has already peaked. Moreover, the most recent purchases are short-term, in spite of the anemic interest rate of short-term US treasuries. The US will have no choice but to ask the US Federal Reserve to print currency in order to pay the debt. This practice is called Monetizing the debt. It is among the more blatant forms of Quantitative Easing.

china-treasury-flow-22

So, what is China doing with all those extra dollars that it no longer wants to hold?

  • China is buying vast amounts of arable land, notably in Africa.   The headfake here is that this is supposedly about securing the national food supply. In reality, the domestic food supply risk becomes a factor in about 2030 based on current projections. That alone would not justify buying 2.8 million hectares of sub-Saharan arable land. They are dumping dollars.

What are the implications for Domainers
The twilight of the American century, and the start of the Pacific century is not the end of the world, and certainly not for the prepared domainer.  Unlike physical real estate which has a finite number of potential users or acquirers, domains can be accessed by any of the nominally 1.7 billion users on the internet in a near-instant.  The universe of potential buyers for a given domain name is similarly global.  What are some things that domainers can do to thrive in the Pacific Century?

  • Design global websites:  Founded in December 2007, Patents.com serves a global audience of nearly 1 million monthly visitors.  The site was designed to be global from day one because the addressable market for intellectual property is already global — to the tune of $500 billion per year.  Patents.com started out with a focus on global patent search. In the next phase, we’ll layer on efficient ways for global IP licensing and sale.
  • Learn to work with the Asians:  The Chinese term of Guanxi is not so different than the Japanese practice of nemawashi. Unlike the US, it takes a long time to build a commercially meaningful business relationship with a Chinese or Japanese partner. This can be a good thing if you are willing to invest the time to understand the cultural norms and differences.
  • Partner with Asia-based businesses: Epik recently agreed to develop 3 language-related domains — Japanese.com, German.com and Russian.com — in partnership with Brian Gilbert of Innovation HQ.  The first one to get developed will be Japanese.com using technology and content sourced from World Friends Network, a Shanghai based social network group that I first met in 2007.  The company is led by the talented founder and CEO, Dominic Penaloza.
  • Experiment with Drop-Ship:  As the international supply chain gets more efficient, I expect Chinese producers to start looking at ways to cut out the middle-man, a.k.a. WalMart and Amazon.com.  As part of this transition, I am convinced that there is a meaningful business opportunity to combine a network of product portals with an international drop-ship supply chain. Epik has released more than 150 product portals in the last 6 weeks and is producing new ones at the rate of 30-40 per week. And at $249 one-time setup fee, it is a domain development bargain.

In summary, I believe we have just experienced a seismic shift in the global economy.  What many economists predicted in the 1990’s is now a reality: the torch of global economic leadership passed to Asia — and specifically China — last week in Beijing at the Great Hall of the People.  The global Internet will be too important for China not to have a global strategy. How much longer before the Chinese start to acquire significant amounts of the raw land of the Internet? My prediction: it is coming in 2010.

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Posted in Domain Development, Domain Names, Economics, Growing up | 12 Comments »