It has the potential to serve as an early warning system and provide measures to manage and mitigate the spread of financial crisis.

There’s nothing new in analyzing the correlations between stocks in an individual market, using parameters such as market index and volatility to determine whether prices of stocks will rise or fall in tandem. But with this project, the researchers have introduced the concept of the meta-correlation, in which they measure the average correlation of countries’ stock markets against one another. The result is a precise understanding of how changes in one market impact another. At worst, these connections can lead to a fast spread of financial crisis.

To develop their method, the researchers looked at data from six major world markets — the U.S., the U.K., Germany, Japan, China, and India — from the beginning of 2000 to the end of 2010. Choosing the leading stocks in each market, the team then mapped the correlations between the groups of stocks from each country over the 11-year period. With the exception of China, which tended to operate independently, the researchers discovered an interesting pattern of interdependencies between these markets. Some markets, such as the U.K. and U.S., were closely connected, as predicted. But there were also surprising findings, such the fact that Japan fluctuates in its financial alignment between western and eastern countries.

A Financial Seismograph

According to the researchers, this method of understanding market connections could help each country predict when a financial crisis is imminent, allowing it to set up policies that will protect their own markets from becoming dangerously intertwined with struggling markets. As Prof. Ben-Jacob of TAU’s School of Physics and Astronomy says:

In the current era, when the global financial village is highly prone to systematic collapses, our approach can provide a sensitive ‘financial seismograph’ to detect early signs of global crisis.

Citing Greece’s financial problems and their impact on the European market as a whole, Ben-Jacob’s Ph.D. student Dror Kenett continues:

There are different safety mechanisms that each country can implement. Germany is so invested in Greece that they don’t have an option other than to bail Greece out

noting that if it had been able to see the extent of their dangerous connection with Greece, Germany could have opted to reduce its investments earlier.

A new world order (continued)

The rise of emerging economies (China, India and Russia on all) emphasizes the fact that in a growing proportion of the world economy, the state governance plays a fundamental role in allocating resources for international investment. In the last twenty years, the political leaders of Western countries have followed the dictates of Ronald Reagan and Margaret Thatcher, trying to subtract as much as possible the influence of the government from economic life. Markets should be working (only) on three key principles: Privatisation, Liberalisation and Deregulation. However, the problems faced by the financial markets since the end of 2006 following the outbreak of the subprime mortgage bubble, have brought black clouds on the “market-only approach” to modern capitalism. After the near collapse of the U.S. and EZ banking system and the serious problems posed by the world credit crunch, on the horizon is looming the return to state governance crucially more involved in international economic and financial affairs.

In other words, we are finally beginning to understand that the dichotomy that opposes the “more government, less market” to “more market, less government” is false, and that the historic changes set in motion by globalization and technological revolution require much more complex response of the old-fashioned statism or of a liberism preaching the “laissez-faire capitalism”. Probably, the answer can be found in the scheme “more government, more market”, meaning for “more government” not necessarily a stronger presence of public money, but certainly a stronger ability to determine policies, indicating the strategic guidelines to move the productive forces, and for “more market” a set of simple rules that should ensure the greatest possible transparency to the dynamics of profit.

Somebody may wonder if that could mean a return to a Keynesian economic system. In my humble opinion, the theory of John Maynard Keynes cannot be proposed “as is”. Instead, if returning to Keynesianism means the rediscovery of the need to definitively overcome the dichotomy liberalism – statism, and recovering the role of public policies in the market, then it is useful and appropriate to return to speak of the man who is rightly considered the father of modern macroeconomics. With his theories, Keynes argued the need for regulatory intervention by the state, primarily by using the instruments of monetary policy and credit. His thinking is certainly useful when reasoning about the future of globalization: there is no doubt, in fact, that we have entered a sort of “phase two” of the process of integration of global economies and markets, and this season should not be characterized from a return to protectionism, but from the definition of common rules and new world organizations that go beyond technical ones, such as IMF and World Bank, and political ones, such as various G7-G20 .

Here is a very convincing statement of Dani Rodrik of Harvard University [click for reference]

The first three decades after 1945 were governed by the Bretton Woods consensus — a shallow multilateralism that permitted policymakers to focus on domestic social and employment needs while enabling global trade to recover and flourish. This regime was superseded in the 1980s and 1990s by an agenda of deeper liberalisation and economic integration. That model, we have learned, is unsustainable. If globalisation is to survive, it will need a new intellectual consensus to underpin it. The world economy desperately awaits its new Keynes.

A new world order

Towards the end of the nineteenth century, the borders of Britain’s financial empire went well beyond politics. The dependence of a country from English economic power was ahead, more or less formally, to the submission to political power. When the Egyptian Khedive had the need to raise cash to cover his personal debt in respect of some British private banks, he could do nothing but sell its shareholding in the Suez Canal Company. The Khedive certainly did not act better when it came to managing the Egyptian public debt: the difficulty in honouring it brought England and France to take control of the Egyptian Treasury, and finally, in 1882, Egypt was put under military occupation. [click for reference]

In 1956, the decision of Egyptian President Gamal Abdel Nasser to nationalize the Suez Canal Company (owned by an Anglo-French coalition) provided to UK and France a justification for organizing a joint military operation against Egypt, which led to the occupation of the Channel from England (along with France and Israel, with the latter having joined the conflict on the side of the European powers). The financial status of the UK, however, was no longer that of the previous century: Britain had indeed a small current account surplus, but in 1956-57 the pound sterling had become subject to speculative pressures. The Bank of England made extensive use of its dollar reserves to support the exchange rate existing between the pound and the dollar, but came to a point where the threat of a forced devaluation or a change to a flexible exchange rate system was real. The United States, then the largest single creditor of Great Britain, declared that their intention to continue to provide direct financial support to England and to participate in an IMF loan for the United Kingdom, would depend to the compliance by British government with a UN General Assembly resolution calling on the United Kingdom, France and Israel to withdraw from the Suez Canal. [click for reference]

The American ultimatum forced Britain to reconsider its position. Anthony Eden, then British prime minister, explained that:

We were therefore faced with the alternatives, a run on sterling and the loss of gold and dollar reserves till they fell well below the safety margin [...] or make the best we could of UN takeover and salvage what we could. [click for reference]

The lesson which follows from the the Suez crisis should be, especially for the United States, rather obvious: political strength is (almost always) related to financial strength. For example, the capabilities of a debtor country to carry out military actions depend largely on the support provided by creditor countries. Militarily, the United States are stronger today than it was Great Britain in the ’50s and are also not obliged to keep the dollar exchange rate to a predetermined level. However, in other respects, US financial position is more precarious than English one at the time of the Suez crisis. Indeed, while in 1956 the English had even a small current account surplus, the United States, at the end of 2010, had a current account deficit of about $ 120 billion, i.e. -3.2% of their GDP. Furthermore, Britain’s main creditors were British political and military allies (the United States on all) while, on the other side, U.S. debt, is not funded by “allies”: without investments in U.S. government securities made by China, Russia and the Gulf countries, the dollar would suffer a substantial depreciation, boosting U.S. interest rates. This would be difficult to sustain for the United States, because it would put entirely on the shoulders of the domestic economy the cost of maintaining their international role.

After all, it seems that the U.S. have the ability to borrow huge amounts of money at very favourable rates. Their dependence on foreign financing could be considered not as vulnerability, but as a sign of strength on the international scene: simply, the American economy could be too big to fail.

Actually, one could suggest the opposite, namely that the growing U.S. current account deficit represents a strategic (read: political) understated vulnerability. The willingness of central banks in emerging countries to accumulate dollar reserves has provided a stable source of debt financing. The problem is that these central banks already hold far more reserves than they need, so that they can also be used to finance new investment vehicles (Sovereign Wealth Funds, in fact). True, central banks still have an interest in maintaining the dollar relatively strong, but the U.S. may have more to lose than to gain from a possible “showdown” with the monetary authorities in creditor countries. In a nutshell: the more the U.S. will continue to base their economy on deficit financed by the investment vehicles in emerging countries (central banks and sovereign wealth funds), the more they will reduce their strength on the international stage.

In addition to that, it can be observed that the economic weight of China, India, Russia, Brazil, Arab States of the Gulf and other emerging economies will increase in the twenty-first century. Also if China’s growth were to grow at a slower pace than the current, it is likely that China, over the next twenty-five years, will displace the U.S. as the largest economy in the world. [click for reference]

This step alone would involve substantial changes to the world economy and to institutions which are responsible for the global governance. At the moment, however, the increase in the relative economic importance of these new actors is accompanied by another dramatic change: the emerging economies have become creditors of the industrialized countries.

This flow of state capital appears more and more as the consequence of political choices rather than the natural evolution of the global economy. Indeed, the size of Chinese population suggests that China should be the first economy in the world and not the largest creditor of the West! Moreover, the weight of the U.S. foreign debt, concentrated in a limited number of counterparties – many of which do not share the Western democratic values – undeniably represents a strategic vulnerability. This certainly does not mean that these creditors will improperly use their “bargaining power”, but the United States should act to avoid the possibility that a foreign country, for example, could suddenly reduce its dollar investments as a response to a foreign policy dispute. Given the magnitude of the american debt position, this could cause a shock to the U.S. economy no less severe than that following the subprime credit crisis. (… here is the second part)

Over the next 10 years, the physical world will become ever more overlaid with devices for sending and receiving information [...] With the continuing exponential increase in the power of the planetary computer, one has to wonder whether we stand at the beginning of what Isaac Asimov’s “Foundation” series, more than 60 years ago, called “psychohistory.” His visionary genius Hari Seldon believed that statistical forecasting of human society’s actions would be possible with data from enough people throughout the galaxy.
In the next several decades, we will have a glimpse of whether something similar can emerge on planet Earth.

Larry Smarr: An Evolution Toward a Programmable Universe

Business Insider predicts that in 2012 we will see a lot of hype around The Internet Of Things. True or not, as a matter of fact, the also called Industrial Internet is already here. Across many industries, products and practices are being transformed by communicating sensors and computing intelligence. Low-cost sensors, clever software and advancing computer firepower are opening the door to new uses in energy conservation, transportation, health care and food distribution. The role of sensors — once costly and clunky, now inexpensive and tiny — was described this month in the NYT in the essay quoted at the beginning of this post (Larry Smarr is the founding director of the California Institute for Telecommunications and Information Technology).

Technology Roadmap: The Internet of Things (source: Wikipedia)

That may sound like blue-sky futurism, but evidence shows that the vision is beginning to be realized on the ground, in recent investments, products and services, coming from large industrial and technology corporations and some ambitious start-ups. One of the hot new ventures in Silicon Valley is Nest Labs, founded by Tony Fadell, a former Apple executive, which has hired more than 100 engineers from Apple, Google, Microsoft and other high-tech companies. Its product, introduced in late October, is a digital thermostat, combining sensors, machine learning and Web technology. It senses not just air temperature, but the movements of people in a house, their comings and goings, and adjusts room temperatures accordingly to save energy.

From this perspective, the consumer Internet (the one we are already accustomed to) can be seen as the warm-up act for these technologies. Think about software techniques like pattern recognition and machine learning used in Internet searches, online advertising and smartphone apps that are also ingredients in making smart devices to manage energy consumption, health care and traffic. Take Google’s driverless car, for example.

The automated cars, each with a human along for the ride, have deftly navigated thousands of miles on California highways and city streets. The project — a research effort so far — uses a bundle of artificial intelligence technologies, as does Google’s Search and AdWords/AdSense business.

In such a smart world, the real dilemma will rather be finding the right trade-off between society’s efficiency, innovation and (guess what?) control. We can only hope that politicians will be capable of dealing with such problems.

In the long history of humankind (and animal kind, too) those who learned to collaborate and improvise most effectively have prevailed.

In an era of unprecedented change in the communications, entertainment, and information technology sectors, it is about Digital Darwinism and our ability to thrive. Our future rests on how well we anticipate, adapt, and capitalize on the exciting changes that lie ahead.

According to the  FutureMedia Outlook 2012, a downloadable annual report by Georgia Institute of Technology (see link below) on the future of media and its impact on people, business and society, in the next five to seven years the media landscape will be full of increased personalization, innovation, and flexibility.

Six megatrends will have a pervasive impact:

Smart Data
In an increasingly noisy world, we’ll have to sift, filter and be smarter about what matters.

People Platforms
Beyond “true personalization,” they will be socially driven platforms made of algorithms from personal and associated data that people design and tailor themselves.

Content Integrity
Pervasive mobile devices, sprawling networks, clouds ,and multi-layered platforms have made it more difficult to detect and address our digital vulnerabilities, drawing us to trusted content sources.

Nimble Media
Media is evolving from a set of fixed commodities into an energetic, pervasive medium that allows people to navigate across platforms and through different content narratives.

6th Sense
Extraordinary innovations in mixed reality will change the way we see, hear, taste, touch, smell and make sense of the world — giving us a new and powerful 6th sense.

Collaboration
We will harness the power of many in an increasingly conversational and participatory world.

The report includes demonstration clips and video interviews with leading Georgia Tech researchers offering real-world examples of how the Institute is innovating in these areas. You can find it here.

Simplicity meets serendipity

[link here]

Given the title of this blog, you would admit my curiosity on the subject… It was then that I remembered the video of an interview with Jack Dorsey (creator and executive chairman of Twitter) about the existence of a business model founded on serendipity. How would I define it? Well, in a few words online serendipity is a phenomenon where users encounter something they like that they were not expecting (read my previous blog post on the same subject).

As Dorsey himself admits, Google AdWords has been the first application of this groundbreaking online marketing model. As with fashion magazines, where ads are so well integrated with the content to be not only pleasant but also useful to the consumer, AdWords has made online advertising reputable and even desirable.

In the same way that people believe that Google ads make the search experience better, Dorsey says that Twitter’s ad products – promoted trends, promoted accounts, and promoted Tweets – get engagement rates between 1 percent and 5 percent. And this is done, in fact, in an unconventional sense:

I don’t necessarily think of it as advertising in the traditional sense. It’s, how do we introduce you to something new? How do we introduce you to something that would otherwise be difficult for you to find, but something that you probably have a deep interest in discovering? It’s really just another algorithm, or it’s just more curation, but it’s something that you would find delight in anyway. [..] The user experience is what matters. If the user experience is bad, then we fail.

Now the key question is: How do you engineer a system that, while not literally random, produces the feeling of serenidipitous discovery, meaning emerging from what seems like meaninglessness? AdWords also works because it’s a natural part of the system. You perform a search in order to get results — some of those results come in the form of advertising.

If Twitter wants to fully rely on this business model, it must be sure that the strategy feels like it is natural part of the network.

Trying to figure out what the online media spend looks like, here is what he uncovered:

the digital media ad spend (search, display, mobile, etc) controlled by Google, Yahoo, Microsoft, Facebook, and AOL is about $40.1B

According to a recent ZenithOptimedia press release, worldwide digital advertising accounted for about $64.03B. That means that those ‘five sisters’ mentioned above, in that order, account for more than 60% of the worlds digital media ad spend. Moreover,

Google generates approximately 364% more revenue from advertising than it’s next closest rival, Yahoo!

To push this inequity even further, if you look at the comments in Herman’s blog post, Jon Steinberg (the President of BuzzFeed), points to another staggering statistic: 75% of all advertising spend is controlled by four advertising networks: WPP, Omnicom, Publicis and Interpublic (see his Flickr image here).

I’ll keep this in mind the next time I will be talking with someone of things such as concentration and dominant position. Apparently, these concepts also apply to the business models ruling the Internet. Which is something more difficult to occupy than any Wall Street.

The study determines that global corporate control is far more concentrated than many people think: a core of just 147 firms — many of them financial companies — control 40 percent of the wealth of 43,060 transnational corporations. A broader core of 737 control 80 percent, according to the theorists.

Map of the 1,318 companies at the heart of the global economy

Creating a ‘map’ of 1,318 companies at the heart of the global economy, the study found that 147 companies formed a super entity within this, controlling 40 per cent of its wealth. All own part or all of one another. Most are banks – the top 20 includes Barclays and Goldman Sachs. But the close connections mean that the network could be vulnerable to collapse.

In effect, less than one per cent of the companies were able to control 40 per cent of the entire network

says James Glattfelder, a complex systems theorist at the Swiss Federal Institute in Zurich, who co-wrote the research.

Some of the assumptions underlying the study have come in for criticism – such as the idea that ownership equates to control. But the Swiss researchers simply applied mathematical models usually used to model natural systems to the world economy. Moreover, the value of the study wasn’t to see who controlled the global economy, but the tight connections between the world’s largest companies. The financial collapse of 2008 showed that such tightly-knit networks can be unstable.

If one company suffers distress, this propagates

Glattfelder says.

The data used by the Swiss theorists was from 2007. IMHO that ownership is even more concentrated now. For example, Barclays is at the top of the list from the 2007 data. But Lehman Brothers, which was acquired out of bankruptcy by Barclays, is also on the list. The global financial consolidation that followed the financial crisis has only made the concentration worse.

The top 50 of the 147 superconnected companies

1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
9. UBS AG
10. Merrill Lynch & Co Inc
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
17. Natixis
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation
26. Lloyds TSB Group plc
27. Invesco plc
28. Allianz SE
29. TIAA
30. Old Mutual Public Limited Company
31. Aviva plc
32. Schroders plc
33. Dodge & Cox
34. Lehman Brothers Holdings Inc*
35. Sun Life Financial Inc
36. Standard Life plc
37. CNCE
38. Nomura Holdings Inc
39. The Depository Trust Company
40. Massachusetts Mutual Life Insurance
41. ING Groep NV
42. Brandes Investment Partners LP
43. Unicredito Italiano SPA
44. Deposit Insurance Corporation of Japan
45. Vereniging Aegon
46. BNP Paribas
47. Affiliated Managers Group Inc
48. Resona Holdings Inc
49. Capital Group International Inc
50. China Petrochemical Group Company
* Lehman still existed in the 2007 dataset used

The full study is available in PDF format:
S. Vitali, J.B. Glattfelder, and S. Battiston – The network of global corporate control (2011)

This year at Web 2.0 summit in San Francisco, she did it again.

The complete slideshow (see above) is insightful as usual, and it goes through the present and foreseeable internet trends, with a particular attention to the mobile phenomenon – she’s been focusing on mobile the past few years.

However, the last part of the presentation is dedicated to USA Inc., a look at the US federal government as if it were a business. As Meeker states in the intro of the original USA Inc. report:

Imagine for a moment that the United States government is a public corporation. Imagine that its management structure, fiscal performance, and budget are all up for review. Now imagine that you’re a shareholder in USA Inc. How do you feel about your investment? – Mary Meeker USA Inc. Report, Feb. 2011

Well, looking at slide 60, If I were an American citizen, I would not feel good at all.

How to fix this issue? Depending on the solutions, we will have very different social and economic situations.

And, probably, a new U.S. president.