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The Great Depression that started in 1980 is ending along with WW III.

The US debt and GDP growth from 1980 to 2010 is very similar to the 1920 to 1950 time period. By projecting similar debt and GDP growth as in 1950 to 1980 30 year period we arrive at the following number for 2040 (see hyperlink below for spreadsheet):

http://www.flickr.com/photos/shakercherukuri/6143679891/

US Debt in 2040 = 50 Trillion (Nominal)

US GDP in 2040 = 140 Trillion!!! (Nominal)

So why is the next 30 years going to be similar to the 1950 to 1980 time period?

1) WWIII is ending. Financial Pearl Harbor has lead to currency wars. We are approaching the climax. Euro will be replaced by Yuan as the second reserve currency. The Euro zone’s contribution to world GDP will diminish. BRICS will be larger than Euro zone soon.

2) Winners will be people who own Assets and make money via capital gains, dividends, real estate etc. Loosers will be everyone else on fixed income (Social Security and/or fixed wages).

3) The new boomers are in BRICS and other emerging BRICS.

4) US will arrest the growth of debt by limiting the growth of entitlements, depreciating the dollar and inflating the assets (same as in 60s and 70s). It is already happening.

5) The US stock market, 80% of the market cap is the S&P 500, will benefit from the deprecating USD since the majority of the S&P 500 corporations have most of their receivables in other currencies and most of the payables in USD. The new healthcare law is also a huge boon for the S&P 500 corporations (see item 6 below).

6) The healthcare law is actually a huge boon for the free marketeers since there is no public option and people need to buy private insurance. This whole fight against this new law is a farce. The insurance industry and the corporations got exactly what they wanted with some minor concessions. Lifestyle change is what is needed to fix the big four root causes (diabetes, high blood pressure/heart disease, obesity, bad diet/no exercise) that are responsible for 80% of the cost. The insurance companies in collaboration with the corporations will enforce this via incentives. Most of the regulations will impact small business that do not provide any healthcare to their employees. This requirement will limit their ability to compete with the S&P 500 corporations.

7) US consumer will eventually benefit once the inflation shows up in the wages (most likely in 2020 and beyond trickle down) and their major expense, the mortgage, is fixed at the current low 4%. So lock in those rates!!

The new entrants to the US labor force in 2020 and beyond will not be able to afford homes. They will have to settle for apartment like most of the consumers in rest of the world. The $3000 automobile and $30,000 homes of the 50s are $30,000 automobiles and $300,000 homes today. Most of the US middle class has still been able to buy those due to credit expansion. In the not too distant future (in less than 20 years) we will see another ten fold increase and less credit. So the writing is on the wall. The wages will not rise to keep up with this sort of inflation.

Page 18, 19 and 20 make an interesting read – Derivates and index (SP500/FTSE) 2020 put contracts (sold by Berkshire in 2004/2005 thus taking a long position on the index over 15 to 20 years). Some of these contracts (8) have been unwound in 2010 at the instigation of the counter parties requiring payment by Berkshire, but still resulting in a gain since the premiums paid were more than the unwinding cost (plus free use of the float of’course).

This incident is in the news again. The French authorities have resumed the search again for the black box. The Root Cause(s) of this incident were never conclusively established. A National Geographic indipendent investigation implied that when super cooled water came in contact with the pitot tubes (speed sensors) it froze all the sensors (four?) and the control system lost air speed thus deactivating the auto pilot. The pilots, due to error message overload and having lost track of the throttle position (which does not adjust to its actual setting as in older electro mechanical aircrafts), were not able to set the aircraft to safe thrust (85%) and wing angle causing a catastrohic stall.

Nat Geo’s investgators catogorically ruled out Lightening strikes as a possible cause (as alluded to by me). Not sure why the control system would not default autamatically to the safe thrust (85%) and wing angle when disengaging the auto pilot.

T-mobile appears to be taking the big bang approach to upgrading their networks (Geographically) as opposed to limited markets (i.e NYC, CA, Las Vegas, FL, etc). However, the upgades themselves are incremental as opposed to transformational (i.e LTE). It will be interesting to see which approach is more effective in capturing the next generation of users/applications and gain market share. This is very similar to what Walmart did with its expansion – focused on under served markets.

I just switched from Sprint CDMA Blackberry to T-Mobile GSM HTC Google Froyo G2 Android (after briefly considering AT&T iPhone4 GSM) due to due T-mobile’s HSPA+. No other carrier has 8mbps+ in my market at this time. I got the G2 as opposed to the MyTouch primarily due to the physical keyboard and I don’t anticipate the need to use video calling (similar to iPhone 4′s facetime) on the myTouch cell phone/smart device.

The acronyms not withstanding, it is all about implementation and systems management. The system is only as good as its bottleneck. Theoretical capability in a lab does not equate to reality. All providers are using whatever they have and can port on it most cost effectively to get the best ROI. With the G2 on HSPA+ it is like upgrading from the horse drawn buggy to an automobile. A much better mobile experience than before due to the phone/device, OS, carrier, HSPA+ and the google ecosystem.

The unlimited data plan from T-mobile was the icing on the cake for me. I don’t anticipate the need for unlimited voice minutes since I can just log into my Google Voice on the device and use the VoIP to make calls (and receive).

So is the death of the cell phone as we know it near as discussed in my blog about the changing mobile landscape?

Update 1 (Nov 6, 2010)
It appears that using Google Voice does use the minutes from the voice plan for now. So what makes sense is to use Google Voice for international calls only (it can be set up as such on the HTC G2). Reason being that the standard US calling plan does not include international calling. Using Google Voice for international calling is much more cost effective than using cellular international plan or Skype. Since Google Voice and possible Wi-Fi calling use the minutes from the voice plan, it would appear that one might opt for the unlimited voice plan as well.

Update 2 (November 10, 2010)
Here are the bandwidth test results based on 34 samples in the HSDPA mode and 13 samples in UTMS mode on my T-Mobile HTC Google Android Froyo G2 HSPA+ (the phone/device switches between HSDPA and UTMS):

http://www.flickr.com/photos/shakercherukuri/5164493726/

The HSDPA version of UTMS is supposed to reduced the latency and can be seen in the data. The data was captured between November 6 and Novermber 10, 2010 on the south side of Indianapolis and the servers used were in Indiana or Ohio.

The data in the columns is independent of the rows. For example, the max values for the download, upload and latency are just that – max values for each from the data sample.

Caterpillar announced an acquisition of Natural Gas engine maker today following GE’s similar acquisition couple of weeks ago. GE’s acquisition of Dresser was a bigger deal ($3B) compared to Caterpillar’s $800MM deal to acquire MWM.

Both these deals are obvious product diversification in the energy space (Dresser is mostly upstream and MWM is further downstream). For both GE and Caterpillar this could be one of the several repositoning efforts to build capability in the transition of US transport economy for dependence on crude oil to shale Natural gas.

US is the Saudi Arabia of Natural Gas reserves. Mr. Boone Pickens has been pounding the table on this for few years now. With the US dollar depreciating, the barrel of crude could soon surpass even the most optimistic predictions (remember the $200 targets when it hit $145 in 2008).

GE appears to be slowly entering into the automotive sector via the infrastructure/service provider strategy. Charging stations for the electric cars and now the Natural Gas IC engines. GE energy makes Natutral Gas Turbines used mostly in the combined cycle plants and peaker natural gas only units (for power generation). That might change soon as the demand keeps exceeding supply in the power generation sector and the long gestation period for Nuclear Plants combined with reluctance to build new coal plants and cheap shale natural gas makes it economical to build base load plants using Natural Gas Turbines.

The passenger car market could certainly benefit from small natural gas engines. Most US homes already have natural gas supply. It should not be that hard to get set up to fill ones automobile with Natural Gas at home. Will have to compress it first to liquify it. Home Depot and GE could collaborate (since Mr. Nardelli is not at HD anymore) and sell that capability to consumers.

Will we have a natural gas turbine or natural gas internal combustion engine powered on highway Heavy Duty trucks, rail and other machinery one day? Looks like it will make sense at $500+ barrel cude oil….

It seems to me that the death of the regular cell phone is just around the corner. With FCC just voting to allow unregulated white space access in the TV broadcast spectrum, Google, Cisco, Microsoft, Apple, Nokia, Intel, Dell, HP, Oracle, IBM, Amazon could all blanket the country with their own so called Super Wi-Fi (as an integral part of the Cloud computing strategy) and give away a handheld device at a subsidized cost to access that Wi-Fi for a nominal monthly charge. Consumers could choose to allow targeted location based ads in exchange for a subsidized device and lower access charges. Businessses could opt for a ad free envirnonment and just pay for the device and access charges. This would be a game changer.

Google’s stake in Clearwire and the recent departure of Sprint executives from Clearwire board would seem to indicate that Google might be planning a super Wi-Fi using the clearwire network (setting it all up from scratch might take too long and be very capital intensive). Google already has the massive distributed data centers that would be an enabler for this super Wi-Fi (in addition to the white spaces in TV spectrum).

Others mentioned above and some of the existing Telcos could certainly do the same (using GSM and/or CDMA in combination with white spaces in TV spectrum). They do have the capability and more importantly, the capital.

The reason for appreciation in Japanese Yen could be due to hedges against a depreciation in the US dollar. If one needed to place a vast hedge for USD in a investment that is safe, liquid, available in unlimited quantity and not cause the underlying asset to move a lot then Japanese Yen is the best bet.

It seems to me that the vast majority of the Japanese (mostly savers in Postal Savings) should benefit (finally!) due to buy and hold strategy (of Japanese Yen) over the course of next few years as the USD (world’s reserve currency) depreciates.

The corollary to that is that the US equities will appreciate (especially those that have most of the receivables in other currencies and most of the payables in USD) and other equities would depreciate (more so if the local economies’ growth was due to exports to the US).

Most of the emerging market equities markets will collapase due to collapse of exports to US. US corporations and consumers will look for cheaper sources of goods internally as the US dollar depreciates over the course of the next decade (managed USD depreciation since this is the only way to fix the trade imbalance and create jobs for the long haul – a structural shift).

This will continue the momentum in the US equity market which started in March 2009 after the massive monetary injection by the Fed (see link below for details).

(http://process-improvement-solutions.com/blog/2009/03/19/the-fed-goes-all-insort-of/).

The Good Product and the stroke of Genius Capital Raise at $16+…..

The Bad overall go to market strategy. Apple has iTunes eco-system, Google has the Google eco-system, Nokia has the scale and trying to take the eco-system to the next level by creating the content for aggregation/distribution (not just the channel like iTunes), Motorola, well, it is a glorified contract manufacturer like Flextronics.

(Comcast’s acquisition of NBC is a move to own the content for the channel. Following AOL’s footsteps of Time Warner “acquisition” in 2000. Maybe Apple will follow Comcast and “buy” Disney!!)

What was Palm’s differentiator? Multitasking? WebOs? So why do we need a brand new cell phone?

The Ugly relationship management with the Carriers. An exclusive arrangement with Sprint was botched with the early overreaching to Verizon and AT&T. iPhone is still not available at any other Carrier. Sprint spent a lot early on promoting Palm Pre due to the exclusive arrangement and then they (Palm) come out with Palm pre Plus for Verizon. The marketing material I have been getting from Sprint lately does not mention Palm Pre at all (I am a premium Sprint Customer having been with sprint for over 10 years).

Apple took the time to build on its relationship with AT&T (to preserve the channel) and introduced the enhanced iPhone also only on AT&T. Palm showed absolute lack of tact and jeopardized its relationship with Sprint by overreaching.

What’s next? Take under, over? What the heck is “take under” anyway? Licensing WebOs? Game Over? 300 million debt and 300 million preferred stock = zero value for common stock in a year when cash = zero (just over 500 million in cash in 2010 Q1)? Or will Web Os be the Windows/DoS of mobile and Android be the IBM PS2? Or will it be the other way round?

What about Nokia’s Symbian? Will Apple/iTunes go the way of AOL due to the closed system?

Dell is a great example of good Working Capital Management. They usually have a negative WC. For details on this click here (2MB PDF file) ->

http://process-improvement-solutions.com/Working_Capital_Gap.pdf

Dell seems to be transforming itself by acquiring the skill sets needed to provide complete solutions to customers instead of just a system thereby repositioning itself during a trough in the economy. Some of the skill sets are being acquired by hiring talent from competitors and some via acquisitions like the Perot Systems deal with the objective being to transform itself from being a vendor of just products to provider of services..

Dell had already reorganized into corporate (Small/Medium and Large), Consumer and Public Sector divisions which is a technique borrowed from GE that enables the corporation to better service its market segments by allowing all internal processes to be reorganized in terms of value provided to the customer. With today’s completion of tender offer for Perot Systems, Dell created a new business unit for Global Services similar to IBM’s Global Services division.

With $12 Billion dollars in cash on the balance sheet ($9 billion net of debt), Dell stock is trading at just under 5 times it’s trailing EBITDA (net of cash). Earlier this year when it was under $8 dollars, Dell was trading at just little above the cash on its balance sheet. Interestingly enough, this was the exact same situation Apple was in 2001/2002 when it bottomed out at just around $8 (at just under $8 billion market cap) with about that much in cash at that time.

Going forward, this repositioning strategy should enable Dell to expand its Operating Margin for itself and provide better value to its customers – consumers, government and business. In fact Dell is now the Amazon.com for corporations looking to one stop shop for their Information Technology needs including perhaps business process consulting and re-engineering eventually.

Update 1 (Nov 6, 2009)
So Dell’s approach to repositioning is different from Apple’s in 2002 (consumer products was Apple’s focus). It is a combination of Apple, IBM and Amazon strategy in the sense that Dell seems to be more interested in premium products for the consumers, services for corporations and public sector and one stop solutions provider for commercial and public sector. In essence, Dell is thinking a lot bigger than trying to do a Steve Job’s act.

Intel Rebates Issue
Rebates from suppliers to their biggest and best customers is a fairly common practice in all industries. For example, engine manufacturers routinely provide rebates to their truck customers. Most industrial’s do this. The reason this specific case is being singled out is because of Intel’s dominance in the processor space. Intel made a strategic decision to focus on Micro Processors over DRAMs under Andy Grove and since then has been able to constantly innovate and keep all competition at bay. Innovation and then fabrication in this space is very capital intensive. It is very hard for competitors like AMD to catch up once Intel has had such a huge lead. That by very definition is the true nature of free market system – the winners usually take all with distant 2nd and some times 3rd players (Duopoly) when the leader has a significant competitive advantage – it is happening in the financial sector right now after all the turmoil. Apple was able to establish huge dominant position with IPOD by locking up the supply chain for couple of years (in addition to creating the iTunes eco-system). This should be a non issue for Dell. As they said, they are free to choose their suppliers and in fact seemed to have managed to introduce AMD chips as well.

Update 2 (November 14, 2009)

Intel Rebates issues as I said above, is a non issue. Intel appears to have made a truce with AMD and the antitrust lawsuit should eventually loose its teeth in Europe and US. For Dell, over those five years it’s revenue was over $250 Billion. The $5 Billion seems to have been accounted for via either COGS reduction (challenging endeavor to match it with revenue since the rebates might be asynchronous) or put in a other bucket in the income statement and balance sheet (I looked at the statements for the years in question). The other bucket is quite small (few million).

Dell’s Smart (Phone) China Move

This is a smart (phone) move by Dell – Open source as opposed to proprietary software and entry via geographic location where the opportunity is vast and competitors are limited (as of now). The US dominance in smart phone segment by Apple and RIM is unlikely to continue.

In international markets like China, the smart usage is much different than in the US or Europe. Most consumers in countries like China, Brazil and India (BRIC countries) don’t even have landlines or access to internet at home or work (the problem in India though is that there are very strong local telecom competitors and regulation). Russia is still the wild west and very risky. Most of the consumers there depend on these phones for all their communication and online needs. They need real utility features and not millions of non value added apps that serve no real purpose except for bragging rights in commercials.

An excellent example is Vodafone’s Japanese foray. Vodafone entered Japan with same strategy that proved to be successful in Europe and failed miserably. The reason being that the Japanese consumers’ smart phone usage is quite different from the Europeans.

With focus and entry via China, Dell’s probability of success is greater in this space compared to foray via the US market by taking on RIM and Apple head on. Making it open source using Google’s Android makes lot of sense since in essence this allows the local market to develop the product and its applications. Dell can then learn from that and adopt the successful aspects for other markets.

The likelihood of a corporation being able to replicate iPod/iPhone/iTunes or Blackberry like success is very small – showing the consumers the hidden need and getting them to adopt it (with help from an excellent supply chain/content strategy by Apple and a great e-mail application by RIM). Nokia seems to be trying to replicate Apple by focusing on creating a content eco-system. Dell’s strategy (based on information available so far) appears to be to allow the marketplace and consumers evolve the eco-system – especially in a market the needs of which are unknown and the infrastructure limited.

Update 3 (November 21, 2009)

I am disappointed with Dell’s inability to manage the short term while executing the long term turnaround strategy. Having said that, by the nature of its current business model, Dell might be limited in what it can do to manage the short term results. I am still holding on to my Dell. Down side is limited. It is again trading it less than 5 times trailing EBITDA net of cash ($14 Billion Cash, $3Billion Debt, $11Billion net cash on Balance Sheet, $28Billion Market Cap, market value after cash is $17Billion, Trailing EBITDA is $3.73, 17/3.73 = 4.55). Even if the market were to correct, I don’t believe Dell will go down much from here.

The turnaround strategy is being executed, hence those restructuring charges. The gross margin was inline with historical average for this decade. This miss on the revenue was quite small (12.9B vs $13.2: 2.2%) and was higher than some analysts estimates. The real metric to watch is Operating Margin – that is what will create value for the shareholders as this turnaround strategy starts bearing fruit next year.

I also belive now that Dell is a possible take over candidate because of its valuation. The margin extraction from that $60 Billion in revenue would be easy with vertical integration play.

February 22, 2010 Update

The Perot acquisition is starting to payoff at the top line (30% Sequential growth in services). However, the cost of services revenue went up by 38%. There is room for improvement in services cost of revenue.

On the Operating Margin front, there was a $202 million charge related to restructuring and acquisition in addition to amortization charge of $86 million (about half of which looks like was because of Perot). So approximately $250 million hit to operating margin was due to restructuring and Perot Acquisition which translates to about 12cents/share.

Again, Gross Margin was within the normal range for the past decade. As stated above, the real metric to watch is Operating Margin which can be managed in spite of Gross Margin Contraction as demonstrated by numerous well run companies operating in highly completive environments.

Going forward, as the top line improves and acquisition/restructuring charges disappear, the Operating Margins should improve exponentially.

September 27, 2011

HPs missteps should also benefit Dell. PC market share, mobile, Enterprise, Services etc.

In today’s WSJ there is an article on Indiana’s problems with its Social Services. The claims process was outsourced to IBM and its subcontractor, Affiliated Computer Services. This is an excellent example of how automating a process without first understanding all the underlying process issues does not really fix anything. In fact it makes the problem worse as discussed in my Amazon.com review of the book published by the founder of Infosys.

Most IT projects fail because the process issues are not addressed first. It is a common fallacy to assume that simply installing technology systems and automating a process will resolve all issues. The problem in this case does not appear to be outsourcing the claims process, but rather, lack of effort upfront designing the right process to fix the issues. The constituents using the system are the customers here and really the entire process needs to be revamped from outside in – customers’ point of view.

Shaker Cherukuri
Managing Principal
Process Improvement Solutions, Inc.
Greenwood, IN
317-258-3552