There are some interesting things to think about and perspectives to ponder.

• If I were a policymaker in a competing state I would probably want to take a close look at my home state and how it compares to to Texas.  I would be interested in finding ways to attract more employers and job hunters.

 

• Which came first? The chicken or the egg?  Did these employers setup shop here because of a good stock of skilled talent or whas the initial move a cost-benefit one where taxes and state provided incentives were offered?

 

• Forbes did not publish (or at least I did not see it) their data tables but I would be interested to see how each city in their list ranked in terms of transportation options.

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They don’t mention any details as to how the ’smart routing algorithim’ works but my guess is that they are using decision tree learning with a heuristic algorithm like ID3 or C4.5.  Their model would probably need some way to factor in arbitrage opportunities within the electricity markets on a real time basis while simultaneously tracking data-center loads.  One of the problems they mention that holds this technology back is that most data-centers today lack the ability to throttle power usage with loads – in other words, the servers need to be able to consume a fraction of their full load power when idle.

What are some potential implications for the future?

New market opportunities for those firms that can offer the hardware solutions to make servers ‘energy elastic’.

This could be a boon for the software cloud, as network computing could take advantage of these routing systems to find the least costly resource.  Remember back in college when you had to use one of the computer labs?  It was basically a room full of computer stations made available for everything from creating presentations to developing software applications.  Now imagine if each of the computers in that room costs a different amount to use.  The ideal thing to do would be to walk around the room to find the cheapest one – of course making sure that it has the needed capabilities.  I can imagine a situation where cloud software would locate the least costly computing resource for a given task anywhere around the country or world just as I would walk around that computer lab searching for the cheapest available station.

I’m speculating here but could this lead to a normalization of electricity prices across the country as data centers compete for locating and using lower cost centers?  I was only able to find one 2005 article mentioning that data centers consumer about 1.5% of all U.S. electricity.  I think it would be a fair guess that today’s number might be closer to 2% or higher.  If so then how would that impact states that currently have lower electricity rates?  Lots of potential externalities here to contemplate.

The article also mentions that energy companies could negotiate with large internet firms in advance of expected peak loads to mitigate potential outages or problems.  Energy companies could essentially ’shape’ their loads to prevent failures or outages.

A problem I see with this technology is that if it is used extensively in a decentralized manner then most of the cost savings could evaporate quickly.  I know what you are thinking here, “but that is to be expected.  Its simple supply and demand here – increase the use of product x over product y until the marginal cost reaches marginal benefit”. 

Here is my problem:
If every party acted independently and outside of a central market or clearinghouse then the anticipated savings would be lost to transactions costs.  These transactions costs being those associated with moving data from one place to another and doing so with incomplete information. Take for example if an underutilized data center pops up on the radar of ten or so Internet companies.  They each, independently and unbeknownst to the others, make the move to the new data center.  This surge in load may lead to an increase in costs and therefore mute any cost savings.  There could even be a potential for some Internet companies to have to move yet again - further increasing the cost of the move.

I think that a centralized market or clearinghouse for this type of transaction would facilitate this form of intelligent routing.  Of course, I am no expert in data center economics or how or if some of these problems or opportunities are realistic.  But with my limited knowledge they would be questions I would ask.

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Ok, let’s start with the basics:

Blowing Bubbles
Home prices on average across the U.S. have risen too fast over the last decade.  There are many factors that are attributed to this unsustainable rise.  Some include banks offering easy money to anyone with a heartbeat (or credit report), the Media portraying real estate as an easy low-risk and high reward endeavor, the Federal Reserve doling out low interest rates to banks like water, oh and lets not forget the average Jane and John Doe making poor, irresponsible and sometimes downright stupid financial decisions.

Thanks to Careless & Company mentioned above there was too much purchasing activity going on with little regard or consideration for actual value.  The end result being a market that has strayed far from its sustainable position.

What Goes Up Must Come Down
Perhaps some people are not familiar with the concept of what the media and others call a “market correction” but let me shed some light on this.  When you hear one of these talking heads or news reporters talk about a market correction they are referencing the notion that when the price of a good gets away from reality (what the market is willing to bear for that product) then the inevitable result is that price will make its way back to reality.

The reason for this is that if something gets too expensive then buyers will stop buying.  When that happens the only way to move additional product is to lower the price to make it attractive for buyers again.  Going back to the housing situation there is an apparent need for a market correction.

Home prices have departed from reality.  So what am I getting at?  Why am I complaining about these news reports?  See examples below:

From the New York Times, Click to read the article
“There were some signs that the decline has started to abate. Prices in seven regions, including Boston, Dallas and Charlotte, improved in May, some for the second straight month. Boston, for example, was up 1.05 percent in May, though values are still 6.2 percent below where they were a year prior.”

It almost sounds like the author is disappointed that prices are 6.2 percent below last year’s.  What do you expect?

From the USA Today, Click to read the article
“The steepest decline in the index is in Las Vegas, where prices were down 28.4% from a year ago. Miami is a close second, with prices down 28.3% from last year.”

Wow, now that is something I did not know; no wait, the A/C repair man told me how Las Vegas and Florida are getting hit the hardest several months ago.

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Gone were the days when profit was the outcome of arbitrage opportunity. The notion that a profit could only be made when you bought something for less than what the market was offering was – well too boring. There was nothing exciting about a slow and methodical process by which one would identify, analyze and invest in arbitrage opportunities. Who cared about value when you could buy something hot today and flip it tomorrow when it would be even hotter?

Today the buzzword is real estate, but the problem remains the same. This time however the experts have been replaced with shows like ‘Flip This House’ and ‘Buy Me’. Now every Jack and Jill in America is convinced that they can play the real estate game and win big.  Notice I said win big; this is because many actually believe that they will win regardless of the outcome. To make matters worse, many more Americans foolishly decided to use their personal homes as ATMs; squandering whatever equity they had to ˜upgrade” their lives.

We are beginning to see the effects of this widespread imprudence, and there is more to come for sure. The worst part of this situation is not that home prices across the nation and on average may be at inflated levels, but that their exists a precarious yet logical step towards a reconciliation or market correction i.e. losing money, lots of money.  It is estimated that America will lose about 1% of its GDP to the current real estate situation and a 20% failure rate is anticipated among sub prime lenders. Unemployment, which is around 4.4% could rise by as a much as 1%.

Overall we could see higher unemployment, slower economic growth, many Americans facing financial distress and or ruin from higher mortgage payments, and a sad reversal of home ownership across America. This is yet another example of the ˜madness of crowds’ and how this irrational behavior can and usually does lead to widespread failure.  My recommendation is that we should focus our attention now to those who are weathering this storm and perhaps even profiting from it.  The game of money is a classic zero sum game – “ someone else’s ruin is another’s success.

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Now this one may be a stretch, but if you find yourself unable to make those mortgage payments because you bought a house that you cannot afford or lied on your stated income form or thought an ARM loan was the best thing since sliced bread then all you have to do is foreclose and then blame it on those evils banks.

I won’t comment on President Bush’s lack of ownership on his administration’s actions.  I don’t want to send the terrorists “mixed signals” or “embolden” them anymore.

What I will comment on is the serious lack of responsibility we as a nation are taking with so many aspects of our lives.  What happened to saying, damn I shouldn’t have done that instead of I got hurt because YOU let me?  When did it become someone else’s responsibility for your actions?  The logic behind blaming someone else for your actions is so backwards that I just can’t fathom that it should be pointed out and much less explained!

It would sound pretty absurd (and stupid) if I told my son (hypothetical son) to run across the street without looking and if he gets hit by a car then we will sue the driver.  It would also be foolhardy for me to visit an internet chat forum to get anonymous stock tips, make investment decisions based on those tips, lose my shirt, and then complain to the government that I should get my money back.

Now that I think about it, I’m rolling around in my sleep wondering who is going to sue me for breaking into my home, stealing one of my dinner forks and then shoving it into an electric socket!  I wonder if I can get some kind of ‘Stupidity’ insurance.

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I was impressed with Bush’s presentation – well done; but I am not moved. He continues to polarize and aggitate. He continues to call anyone who disagrees with him a defeatist, isolationist (incorrectly), or a protectionist.

America is a great nation, but I think it should be more humble; and that includes refraining from saying things like ‘we are the envy of nations’.

He mentioned lots of new initiatives as well as the effects of previous ones. Again, I am not moved. Why he would mention the succes of the No Child Left Behind Act when he has continued to stifle it by not funding it adequately, I can only guess. He says that our economy is doing well… well, I am not a doomsdayer, but I think the jury is still out on that one.  Hold off for a little longer Mr. President.

You see, while you mention GDP I think about higher interest rates and how that will affect spending (the engine of choice in our current economy) as well as how higher short term interest rates will affect the housing market in the long run. I am also deeply concerned about stagnant wage growth and the increasing gap between the rich and poor.

Instead of giving the nation a real state of the union address, he gave us a sugar coated pep talk. When I buy shares of stock in public companies, I listen to the quarterly conference calls made by the top level executives. I, as well as most other prudent investors, tend to respect and give credibility to those executives that highlight their mistakes and problem areas and how they will be addressed. Those executives that simply walk up to the podium and say, “everythings going great guys” deserve that much more scrutiny.

After all, didn’t Kenneth Lay and Jeffrey Skilling say that everything was ok?

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