First, it is unfair to judge a social networking product that has been in the market for days on the same basis as anything that has been around for years. When Facebook was rolled out, for example, or (less comparably) Twitter, none but a handful of very early adopters knew about these services, and the features offered were far lesser (in quantity as well as quality) to what we today take for granted. With increased usage and popular attention, social networks improve. With passing time and experimentation, consumer applications do also. This brings us to the second point: Apple’s product development culture and its product rollout style.

This may be best to illustrate with contrasting images; and as is standard procedure when contrasting Apple to anything, Google serves as natural counterpoint. While probably unfair to single out unsuccessful launches such as Buzz or Wave absolutely, the style demonstrated by both of these – and by Google’s general approach to product development – is noteworthy. Lacking a better way to describe, let’s call it the “everything-and-the-kitchen-sink” method. This is a style characterized by muchness, by something for everyone, by assortment and selections to keep several planets busy after the core market is saturated. And yet, we still mainly use search, YouTube, and Gmail, and we had no idea what to do with Wave. In short, Google begins with largesse, and eventually shrinks to the core. (Which may be a result of its technology-focused culture.)

Apple, on the other hand, does the opposite. The iPod at its initial launch had almost no features at all, other than the buttons normally found on a casette deck. Now, it is a web-browsing device with 250,000 apps and a built-in camera. Between these two milestones, the company spent considerable resources understanding the market, perfecting a design, listening to the customer. This approach is more patient and long-term oriented, and it is one that allowed Apple to segue from iPod to iPad seamlessly. It is a style based on progress in stages, building incrementally and with a distant view. Throughout Apple’s history of innovation, the first version of anything is never the last, but an original point in a series that extends and improves from the origin.

As I read countless complaints and panicked advice related to Ping, from Apple’s admirers and detractors alike, I can’t help but feel that we misunderstand the situation. When Google introduces a product that has – literally – everything built in, any semblance of incompleteness or market dissatisfaction will be an ominous foreboding: let’s face it, there is nothing left to do. When Apple, on the other hand, launches a product that is obviously incomplete, unsatisfactory by most standards, and with almost nothing built in, this is neither a positive nor a negative indication. This is how Apple does stuff. For better or worse, and with exceptions, the company has proven that a long-term plan is always followed. We must stay tuned, relaxed, and watch the stock price continue to outperform.

Of all the products and features unveiled by Apple this afternoon, the one that may turn out to be the biggest news is Ping. Not to take away from the elegance of new iPod models, or the sleekness of the new Apple TV device, but neither of these offerings is ground-breaking for Apple. If anything, such a comment speaks to the high expectations that the company has established in the marketplace and the high standard to which we now hold it. And although Apple TV must still prove itself after an initial false start (while other alternatives have since begun to offer more or less similar consumer possibilities), there is good reason to believe that Apple TV will make an impact. Given the company’s trademark brilliance at product launches, updates, relaunches, redesigns – notwithstanding a so-called “antennagate” hiccup that nobody now even remembers – Apple TV could well become the standard that the iPod, iPhone, and iPad have already become.

Particularly for this reason – particularly because when Apple launches a product or service it is to be taken seriously, particularly because of the company’s enormous popularity – a new social network launched by Apple should be big news. Because this launch takes Apple into an entirely new direction – Ping isn’t a device or an upgrade to one, but a new application – it should be even bigger news. (Could search be next?) And because Ping additionally happens to be in the segment now dominated by the seemingly invincible Facebook – a field that even Google has been unable to penetrate – it may be huge news… for all involved.

Putting aside the enormous built-in user base that iTunes represents, giving Ping an immediate springboard in its launch, and not delving too much into the nuances of music appreciation, (i.e., the extent to which music sharing and related dialogue is more or less conducive to social interaction than other subjects), we should probably be mindful of one issue foremost when it comes to Apple and social networking: Privacy. Unlike Facebook (or Google), Apple’s is a closed system that does not make its money from advertising. Despite (or, rather, because of) the reputation for complete control that Steve Jobs has spent years fostering, it is probable that the average social networker would trust Apple much more than Facebook (or Google) with personal information. Because Apple sells hardware and does quite well at it, it is probable that the collection and analysis of big data, and the scrubbing of personal messages for targeted advertising opportunities, do not feature prominently in Apple’s near-term plans.

For now, Ping is being promoted as a music oriented social network. For now, that makes sense, resident as it is on the iTunes platform. If Ping’s popularity takes off, however, it can’t be long before the movie and eBook sections of iTunes come into play, or before the iPhoto system of the Apple product is rolled in. Features like messaging will not be difficult to add with time, especially as these already exist in the Mac ecosystem. And soon enough, voilà: everything Facebook has, plus privacy and complete control. Then, Wired Magazine’s vision becomes more real, as the ultimate online experience – social networking – is taken offline with an app. At least one online competitor should have reason to worry, and possibly some others.

That last one, to be honest, blows my mind. It floors me, and seems more shocking even than Paul Allen’s lawsuit, (although each does a lot to confirm the other). As an investor and banker and capitalist, far be it from me to make moralistic value judgments about the elevated status of wealth and monetary rewards that both of these news stories imply. As an investor and banker and capitalist, I pause at the limited upside that is suggested. Being younger would buy someone more time, to correct mistakes, pursue new fields, grow all over again… but one has to feel motivated for it. When survey respondents prefer to skip all that stuff and nonsense and get straight to the bunch of dough, there is in this decision a shortage of energy, inspiration, and belief in the future. This is not unlike one’s suing cash-rich corporations for their use of an allegedly proprietary technology – invented a decade ago and since used by such titans undisturbed. Disturbing them now, after years, might indicate that the plaintiff is low on new ideas, may have become less busy, and is now coming around to the bottom of the barrel.

This shortage of fresh ideas was in part the subject of Alan Murray’s column about corporate management, and maybe some of it reflects in the cash hoarding that large organizations have over the last few years consciously or unconsciously conducted. As a next stage in such corporate evolution, the HP vs. Dell competition is a signal of consolidation ahead. This anyway seems to be a more likely phenomenon than massive innovation by cash hoarding titans. For large corporations, the trend may be consistent with history, but it comes as a growing surprise each day to see innovation lapse even among the start-up and venture stage community. There are 250,000 apps now in the Apple ecosystem, countless Groupon imitators, and several check-in platforms without a substantiated point. It should not be surprising, then, that the venture model is breaking down, all the way to the seed accelerator level (as previously noted) and beyond. It should not be surprising either that economies seem stuck in a murky middle-ground between a double-dip recession, a recession that is ongoing, and an environment that may be improving but without material impact.

What we need is renewed energy, truly modern ideas, fresh perspectives, and new solutions to problems that are also very new. Paul Allen should be working on his next Microsoft rather than trying to extract wealth from Apple. Dell and HP should be working on new technologies that will provide new platforms for new entrepreneurs. Venture investors should identify new investing modes that better conform with new practical realities, rather than continuing to force the same square peg into the same round hole that hasn’t really worked since the late 90s. And survey respondents should want to be young again, automatically, without even thinking, because who would pass on a second chance to make an improved statement? The very thought should be inconceivable.

Economists and other pundits have made a great deal of fuss about the excessive leveraging of individual and institutional balance sheets that took place in the past decade. Exhibit A in such discussions has been the sub-prime mortgage bubble that led to all kinds of other debt-related ills. Exhibit B has been the level of sovereign debt and risks associated to it, a flavor of which risks were sensed some months ago. More recently, in reaction to what has been pointed out by economists and punditry, segments of the global economy have begun to delever. Corporations, for example, have hoarded cash (which is a net debt reduction), consumers have reduced credit card obligations, and sovereigns have implemented austerity measures. Few market observers, however, (if any), have commented on the financial leverage that is venture capital, and the degree to which this segment has encouraged its “borrowers” to over-extend themselves. Unchecked, the problem will continue, which is to say, entrepreneurial deleveraging is unlikely to occur.

Clarification by example: When entrepreneur/founder “X” raises venture finance, this allows X to multiply his or her capital resources, and X sacrifices a subordinate position to the venture capitalist’s preferred equity in order to attain such a benefit. This is financial leverage. With liquidation preferences typically structured into the transaction, sometimes in multiples of the original investment, X will not see any positive economics accrue to him or her until this liquidation preference has been satisfied. Conceptually, the structure is not unlike debt… though, in a way, somewhat worse: Because unlike a bank or other lender that would allow – indeed, encourage – a borrower to reduce debt with cash flow that operations generate, venture capitalists don’t want to hear from cash distributions. Venture funds are not designed to take dividends. Venture funds profit from exits – the bigger, of course, the better – and for this reason wouldn’t want cash flow accumulating on the balance sheet either, but rather to be reinvested in the business for growth. No cash hoarding in this scenario, and no way to deleverage but one: sell the enterprise and hope for a sufficiently large price to take care of common stock with excess. A most inflexible structure.

Which would be well and good if it worked. But for the most part, it hasn’t. According to newly released data, 10-year venture capital returns through time-present have been negative. Given the preferred positions of venture rounds in capital structures, if these tiers show negative returns then common shareholders get nothing. To be clear, this observation is based on aggregate data rather than individual deals or individual funds; but, aggregately speaking, entrepreneurs have nothing to show for the last ten years of work. Aggregately speaking, entrepreneurs have “borrowed” too much, and exits have been insufficient to pay down enormous financial leverage. If such entrepreneurs had been sub-prime mortgage borrowers or the nation of Greece, they’d be on the receiving end of a talking-to surely. Is it not time to revisit plans and models? Is it not time to revisit financing strategies? Is it not time to try a modified approach?

For example – and only to pick one aspect to illustrate – let’s take the treatment of liquidity and illiquidity. We have been taught and are well practiced in the concept of a liquidity premium when dealing with public versus private securities, and have learned to differentiate between assets that cannot be liquified at will and those that can. The idea being this: Independent of the underlying profile of a business, collateral, or other security or holding, there is a risk to illiquidity – which is to say, an owner’s inability to readily convert the asset to its cash equivalent – which risk is reflected in a discount priced into such an asset. It may not naturally come to mind, however, that as a very different point from illiquidity risk and its discount, the opposite of illiquidity – pure cash – has inherent value that should be priced at a premium. In a deflationary environment, in which the purchasing power of cash increases over time, a “cash premium,” if you will, is something to which we might begin to pay homage.

(Much has been discussed recently about the hoarding of cash by major corporations; and much has been observed in regard to a supposed Treasury bubble. In a deflationary environment, even an interest rate of 0% is not as low as advertised, and accumulating cash is not a lost opportunity when real assets are devalued and equities fall flat. Referring to the bond environment as a bubble, and to cash savings as hoarding, may be evidence that old habits and established perspectives are difficult to break. Should evidence of deflation continue to mount, such perspectives will undoubtedly change.)

In another article I touched on the positive effect on equities, venture capital, and entrepreneurship, of a high-inflation environment. In a reverse scenario, of deflation rather than high inflation, the opposite will be true for all involved, unless underlying models and underlying thought processes are modified. While structurally difficult for private equity to change objectives, an emphasis on immediate cash such as through dividend distributions may be indicated, for example. And entrepreneurs may be well served to think along similar lines: to build businesses that don’t require ongoing capital infusions, and to invent technologies around cash-generating models rather than the other way around.

In this brief and simplified discussion I’ve only selected a couple of examples from many, and these probably hit closer to home with some than with others. Much more extensive analysis is obviously necessary, and some has already been formulated by economists like David Rosenberg. We are nowhere close, however, to the idea becoming mainstream just yet, and maybe this is a good thing for good reason. But as was previously noted, evidence is starting to build, and changing perspectives can take time and a little bit of effort. It is never too soon, or a wasted effort, to consider possibilities.

Whether the Internet exploded in the mid-90s because lab conditions were ideal – which is to say, because the economy and capital markets were thriving – or whether the Internet caused parts of the economy and capital markets to thrive – which is to say, took over and became the lab – is even with hindsight a difficult question. Maybe if we currently experienced a technological revolution as profound as the Internet, this would provide a sufficient boost to the economy to shake it out of its stagnation. But the reality is that (with the possible exception of clean tech or alternative energy), there aren’t many technical explosions on the horizon, at least not of sufficient importance to carry the day. And so, technology and its myriad startups, rather than taking over the lab and defining its conditions, is now rather a component part of the whole. As such, and because this whole is not at the present time thriving, the success or failure of startups, the results of iterations and experimenting, are occurring under lab conditions that are less than ideal. On one hand, this context calls for more focused concentration – and much luck – and on the other hand its results are less conducive to scientific repeatability.

In such an environment, formulas and recipes for success become a matter of greater nuance. It is no longer sufficient and is an oversimplification, possibly a flaw, to follow “established” precepts – say, for example, a finance approach based on seed funding augmented by multiple VC rounds, or, in building a business, pursuing a bowling pin strategy that was successful years ago elsewhere – because of a different context now in relation to the time when such formulas were invented. Strategies and precepts, however, are also challenging to invent anew, because the testing and the iteration of these will take place under suboptimal conditions for experimentation. From the perspective of founding entrepreneurs, a volatile laboratory environment indicates that simple products, simple business models, addressing simple market needs with simple solutions, are (within reason) superior to the more complex or convoluted. This was no doubt always indicated, but especially so in the present economic climate in which external volatility is already of inordinate proportion. From the perspective of investors, two themes would become more pronounced and advisable than in the past: diversification, and visibility to cash flows. Ideally, visibility should be good enough to discern the shapes of objects without prescription-lens support.

But it isn’t only the perennial cranks this time that constitute the voices. It isn’t just the litany of doomsayers with doctorates – the likes of Marc Faber, for example, or Nouriel Roubini. Nor are the vocal academics (Krugman) or the prominent bears (Rosenberg) alone in the blogs and editorial pages anymore. Fed chairmen are chiming in, both past and present: Alan Greenspan is voicing serious concern, and so is, in his own way, Ben Bernanke. We take these fellows with a grain of salt because of political ties, right? OK, here then are independents: Silicon Valley favorite Kedrosky, fund management superstar Kyle Bass, famed cycle theorist Zulauf, Elliot wave guru Prechter, all in agreement, despite their wide assortment of fundamental and technical styles.

And still, the market prances on, bouncing happily around the trading range of summer and a joyous earnings season that just passed. In fairness to the sleepy, earnings season was indeed rather good, or at least better than the triple-threat of unemployment, heavy debt loads, and diminishing asset values, would imply. In short, earnings were up. Guidance was positive from certain corners, less so from others, and when all else fails, businesses can cut payrolls, or consolidate in a wave of M&A to trim more costs – in yet another round of layoffs. And in fairness to a market driven by trading, earnings growth is what matters, and the next quarter’s most of all.

Nevertheless – and as August is past its mid-way point it is probably acceptable form to begin, a little bit, to consider stuff – while high unemployment may positively reflect in higher corporate profits, and while reduced consumer spending may reflect in reduced debt, the longer term corporate news is this: At some point along these lines, revenues will start to fall. Eh, whatever, I know, we’re still in August, and we’ll worry about revenues after Labor Day… but I’m just saying. And when second-quarter GDP growth is revised to almost nothing next week, causing markets to stir a little before nodding off again, the issue is not resolved or mitigated on account of the month.

Come September, when we are ready to be serious, we will have catching up to do. And hopefully we will get right down to business. For purposes of markets and finance, which is the real subject of this post, the catching up should have something to do with re-evaluating everything. According to multiple sources, we are at the start of a new era that is quite different from a mere cyclical swing. According to one source (Rosenberg), we are in a great recession that never actually ended. According to one source (Kedrosky, not a crank), we are actually in a depression. For more than intellectual reasons, I can’t wait until September, because the sooner we begin to reassess and maybe even redefine pre-existing standards and notions, the better. Conversely, the longer we wait, the much less good.

Let’s now travel quickly into the future, from the point of origin depicted, to a time when a tweeter or Facebook or LinkedIn subscriber has hundreds, or possibly thousands, of followers, fans, or connections. In relation to that first update that was sent to his or her first social network contact, any message that is now broadcast to very large numbers will have a diluted impact. First of all, this message is no longer personally directed; and secondly, it will be received by an audience that in turn follows hundreds if not thousands of update senders. This is not an audience that pays intimate attention.

This new illustration is of the social networking world in which we now reside. Many of its participants, in fact, have already surpassed the numbers highlighted, in many cases by far. With 500 million Facebook subscribers worldwide – and the number of Twitter or LinkedIn users, (keeping to the original examples), approaching new powers of ten all the time – the vastness of individual networks is necessarily headed to extremes. As a result, the message of the individual is necessarily diluted. At an extreme point, that message is completely ignored, and social networking loses its meaning.

With this existentialist backdrop, it is of special interest to note the emergence of new online resources that aim to reduce rather than expand, and bring back a personal element to an increasingly anonymous experience. Peer Index, for example, which has built some momentum recently, offers to sift through the millions of opinions on social networks and deliver to the solicitors of such opinions those voices most likely to carry weight. As elitist as this may seem, it is at least a filter that can increase the opportunity for certain voices to be heard. An even better example, however, is a service that advertises itself as a sophisticated product recommendation engine:

Hunch has had no shortage of exposure – in blogs, social networks, technology publications – and this current edition is not meant to be part of the push. The development is worth consideration, however, that in a world of diluted social networks approaching anonymity, a service should rise to prominence as a result of the following message, (more or less): answer a few questions about yourself, and we will show you that we understand who you are. This understanding is demonstrated through the delivery of customized and highly personal recommendations, based on the user’s unique profile, for consumer products and entertainment.

That Hunch is a recommendation engine is, in my opinion, of secondary importance. This is not an end, but a means: the recommendation serves as a proof – you know me, Sir! – of which the subject is recognition. The reason that users gravitate to Hunch, in other words, is perhaps less for the suggestion of camera to buy or movie to see, than for the experience of being acknowledged. In short, this is a social network in reverse: rather than offering to blast a user’s message into an ocean, the ocean is captured in a snapshot, in the background, that is in fact a portrait of the user. Like any portrait, its subject can cherish it as a mirror.

In a sense, the period we are now entering is in proportion less perilous than those described above – and in some aspects even almost inconsequential – as economic growth is by all standard measures happening. But many are nonetheless nervous, neither sleeping nor partying, and this is for good reason. While the economic circumstance of stubbornly high unemployment, fragile property values, sovereign risks overseas, may run its course and pass like these things do, (this too shall pass), expecting the resolution to occur within normal boundaries of historical lessons is a deceptive and dangerous position. Despite possible appearances to the contrary, it can be argued that this time is not only more hazardous than prior times of crisis – due to the causes that lie beneath the surface, as described – but also different for the very fact that the hazard is underneath… a couple of steps removed, but stirring.

And the complexity of the environment this time around is also greater, the globe being a different place from what it was in Y2K. Correlations and multiplier effects that may have held ten years ago probably no longer hold in the same way. Consumer behavior is evolving all the time. Capital market reactions are influenced by a new set of standards and tools. Lastly, the impact of the crisis that just passed – unlike, say, the tech bubble that took place many years after the S&L collapse – is still being felt, has not yet been digested by the system. In short, if it was a good time to learn and adjust preconceptions in 1991 and 2001 and 2008, it is now positively great to do so, and is maybe even a matter of some urgency.

Without doubt, it will take a while to absorb new aspects and variants, and it could be years before the masters of academia, industry, banking, politics, really have it figured out. There is a risk that, in our age of instant results and instant answers, we won’t have the patience. There is a risk that, in this age of vast knowledge, we will be tempted to pretend like we know. But we don’t, the experience is wholly new, and the greater wisdom will be in observing this limitation. In this regard, it may be a positive indication that corporations are hoarding cash and that consumers are increasing their savings, despite being pushed to do otherwise by multiple sources. It is proof positive that there is wisdom in free markets, that common sense prevails outside the classroom, and that teachers may have good raw materials to mold.

In the meanwhile, some of us continue to conjure up images of Madoff. His also was a system predicated on stimulus spending, if you will, having built a platform in which all participants thrived as long as the market continued to draw new funds. One could almost argue that, had the blueprint been disclosed from its outset, and had it been marketed less exclusively, Madoff’s may have been a legitimate system to compete with any developed economy. It would have been in every participant’s interest to keep the flow going, and for that reason perhaps all may have done so. In a worst case, outside intervention would have been justified and probably obtained, it being a legitimate scheme and all.

Of course, there was nothing underneath the surface in Madoff’s structure – either the real or the fantasized – and it was especially due to this vacuity that it could not last. Call it a bubble that eventually must pop, or a domino effect that can’t continue perpetually: What we are really talking about is a “greater fool” concept. Although we sometimes kid, foolishness, like everything, really does have a limit. When this manifests itself, we see bubbles start to pop, and dominoes stop to fall, and, in economic terms, perceived value declines to where real value – actual value based on fundamentals and building blocks and so on – can support it.

So, if and when the dominoes no longer fall in the real economy – on account of no stimuli left to implement, or because the limit of foolishness should get tested – the difference in collapse between this and the Madoff microcosm will be the extent to which the real economy can produce real value. The greater that real value produced, the lesser the fall. Ideally, real (economic) and perceived (market) value coincide, in which case there is no correction at all… but this is too much to hope for in an environment of free money.

All of which brings me to a movie I saw again recently, The Last Days of Disco. Some of us remember the era that is the film’s subject, that time in the early and mid eighties when perspectives and goals changed en masse. This was the time when “hippies” and “punks” became “yuppies.” Such innocent times, with hindsight. (Even Gordon Gekko – a different movie, I know, but covering the same era – seems tame now. “Lunch is for wimps…”? How endearing, how downright naive.) With hindsight, this may have been the period that we will look back to as the beginning of a bubble that now must be kept from popping. This was the time when markets (perceived value) displaced the economy (real value) in the pecking order of attention.

Not to dismiss the importance of markets, which serve an economic purpose, but we may now wish to revisit history, maybe wax nostalgic about times when fundamental value drove financial value rather than the other way around, and refocus our energy accordingly. The party was nice and those of us who were there are fortunate to have been let in. But the sun is now rising on a new day and, as the crowd lets out into the early downtown street, the club doors have been closed and we find ways to move on. As my favorite singer used to like to say, when the music’s over, turn out the lights. This can be taken in a variety of ways.