Special Report: The Four Major Forces Influencing the PSE’s Brokerage Industry

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism—Joseph Schumpeter 

Special Report: The Four Major Forces Influencing the PSE’s Brokerage Industry

The brokerage industry will continue to be impacted by four significant factors, mainly rooted from creative destruction: the shift to online trade, the downtrend in trading volume, asymmetric regulations, and the global trend of zero-bound commission rates.

Creative Destruction: The Shift to Online accounts

 

Client accounts jumped 25.4% to 1.09 million in 2018, according to the PSE. That’s still less than 1% of the total over 100 million population (108 million 2019 by Worldometer) or 1.4% of the estimated 73.5 million labor force.

 

Online accounts delivered over 100% of growth in 2018. Online accounts grew by 60.92% to 236,900, but brick and mortar accounts contracted 3.4% or by 16,266 accounts.

Online accounts have come to dominate the PSE’s client base with 57.44% share in 2018 from 44.76% in 2017.  According to the PSE’s data, the age brackets of 18 to 44 years captures about 70% share of online participants.

 

Total accounts growth spiked as retail participants chased 2017’s 25.11% returns and as the PSE reached 9,058.62 on 29th January 2018.

Shrinking Peso Trading Volume

Aside from the shift to the online platform, the second fundamental force affecting the PSE has been trading volume.

From 2009 to 2013, the PSEi carved a record high, backed by substantial volume expansion, signifying a genuine boom. That all changed after. Trading volume has been downhill since.

When the PSEi reached a fresh milepost of 9,058.62 in January 2018, this was primarily because of a narrowing breadth of participation, or increasing concentration of trading activities toward a few index sensitive issues.

For instance, the Sy Group of companies accounted for a whopping 32.95% share of the free float market index, as of November 2019, significantly higher than the 21.34% in November 2015. In perspective, the Sy group’s share of the index rocketed by a stunning 54% in 4 years at the expense of most of the member issues! 

 

Five firms account for 49% of the free float market cap or the headline index, as of the 5th of December 2019. Five issues are all it takes to move the headline index!

That’s the result of sustained marking the close pumps mostly concentrated on the Sy Group of companies. And this week’s magnificent facelifts!

Bloomberg publishes charts of most of the global bourses. It includes intraday charts.

https://www.bloomberg.com/markets/stocks/world-indexes/asia-pacific

https://www.bloomberg.com/markets/stocks/world-indexes/americas

https://www.bloomberg.com/markets/stocks/world-indexes/europe-africa-middle-east

Not a single benchmark in any of these bourses features an almost daily substantial marking-the-closes.

 

Anyway, ironically, as the peso trading volume declined, retail participation in the stock market trading escalated in 2018. The low volume rip eventually took its toll, the headline index retreated from its peak of 9,058 and have trudged since. New retail accounts, which likely chased the 2017-2018 runup, have been, mostly, bruised.

More importantly, the cascading peso trading volume has resonated with the BSP’s data of the banking system’s dwindling cash reserves, which also began in 2013. The shortfall in the banking system’s liquidity has percolated and affected the PSE’s trading volume.

In the 11-months of 2019, because of block sales, the cumulative peso trading volume was up 7.9% YoY. However, based on the board's transactions, the total 11-month peso turnover was down slightly by .92%, even when the PSEi posted a 3.7% return over the same period.

Furthermore, because a sustainable bull market depends on a concordant growth in volume, the deterioration in peso volume has prompted a redistribution from the broad market to select issues of the PSEi, which has been a consequence of selective pumping.

 

Selling activities have dominated trading activities in the PSEi even when the index hit 9,058 in January 2018. The decaying internals has been consistent until now.

So unless liquidity in the banking system improves, or unless foreigners become aggressively bullish the on domestic equities, the PSE’s peso trading turnover can be expected to remain lackluster.

And here is the thing. Brick and mortar brokers will be contesting a contracting share of clients in the face of diminishing peso turnover. Of the 130 active brokers, 30 have online facilities.

Given this scenario, the latest R&L Investment scandal shouldn’t be a surprise.

Asymmetric Regulations

The third force would be the regulatory environment.

Considering the difference in the operating platforms, regulations on brokers will diverge, which should likely favor online operators.

The R&L Investment scandal will possibly further skew the regulatory bias against the traditional brokers.

Moreover, aside from likely regulatory bias, the scandal will likely draw traditional accounts toward online operators, furthering the challenges of the brick and mortar platform.

Zero Bound Commission

The fourth critical force that would likely induce a radical change in the business model of the brokerage industry is the zero bound commission rates. The US has broken the ice.

From CNBC: “There may be no free lunch in the financial services industry, but there is now free trading of stocks, exchange-traded funds and options. Charles Schwab announced on Oct. 2 it would eliminate commissions on those products for retail and registered investment advisor clients on its platform. TD Ameritrade and ETrade quickly matched Schwab, and Fidelity followed suit a week later. Pershing is the only major custodian not to have cut commission rates to zero. While the change was not a big surprise, it represents a major turning point in the wealth management industry.”

 

Despite the net selling in 10-months of 2019, not only have foreign funds dominated trading activities, their share of the total volume has been increasing since the end of 2017.

And for the PSE to attract fresh or maintain the current level of interest of foreign funds, it will have to compete with the world to lower transaction and opportunity costs. Hence, not only to spread globally, this zero-bound commission rate trend can be expected to be embraced by the local industry eventually.

The thing is, Joseph Schumpeter’s “gale of creative destruction”, brought about by innovation, would induce a potentially disruptive overhaul of the industry’s business model.

The transition towards the online platform, tumbling trading volume, regulatory inequality, and zero-bound rates are the four major forces that will continue to influence the brokerage industry.

The existing participants will have to adapt to such technology-induced changes to compete intensely in acquiring the growth segment of the industry's market. But adaption in itself is no guarantee of survival or success.

...

Spielberg-Lucas Fearless Forecast: Movie Industry Will Implode!

I have been constantly saying that the information age will reconfigure almost every aspect of our lives. And much of the social frictions I have been posting here signifies as the angst of the transition from the legacy of the industrial age dynamics of top down, centralized and mass production, mass media and mass market forces to the decentralized, bottom up, highly specialized, niche production, niche media and niche based market forces of the information age.

Movie moguls Steven Spielberg and George Lucas predicts that the movie industry will suffer a disorderly evolution. Hollywood may suffer a meltdown!

Here is David Cohen from the Variety.com (bold mine)

Looking into their crystal ball, George Lucas and Steven Spielberg predicted the imminent arrival of a radically different entertainment landscape, including pricey movie tickets, a vast migration of content to video-on-demand and even programmable dreams.

Speaking on a panel at the USC School of Cinematic Arts, Spielberg and Lucas took a grim view of the future of the majors and predicted theatrical motion pictures will become a niche market.

“They’re  going for the gold,” said Lucas of the studios. “But that isn’t going to work forever. And as a result they’re getting narrower and narrower in their focus. People are going to get tired of it. They’re not going to know how to do anything else.”

Spielberg noted that because so many forms of entertainment are competing for attention, they would rather spend $250 million on a single film than make several personal, quirky projects.

“There’s eventually going to be a big meltdown,” Spielberg said. “There’s going to be an implosion where three or four or maybe even a half-dozen of these mega-budgeted movies go crashing into the ground and that’s going to change the paradigm again.”

This would be the forces of creative destruction at work, which should benefit the movie consumers as well as the industry, who will have to compete to reformat or restructure to suit the desires of the consumers, overtime.

Brain Dead Economics: Wars as Economic Stimulus

Marketwatch columnist and former war veteran Paul Farrell is aghast at politicians who are agitating for war in the guise of ‘stimulating the economy’

Mr. Farrell writes, (bold original)

Yes, I’m mad as hell again. I just read some bad news that should make every American mad as hell. In fact, two bad news items.

First, as a U.S. Marine vet, I got angry reading that there have been more military suicides than war deaths the past decade. Yes, more Iraq and Afghan war vets have killed themselves than were killed by America’s enemies in combat. And more are expected as we had more than two million serve in the two wars.

A soldier from the U.S. Army's Charlie Company, 1/12 Infantry, 4th Brigade Combat Team, 4th Infantry Division scans across the border at houses in Pakistan during a Sunday patrol near Dokalam village in Afghanistan's Kunar Province.

Second, if the economic, psychological, political and moral consequences of the past two wars aren’t bad enough, many politicians and candidates — some of whom never served in the armed forces — are proposing that the full Congress pass the Ryan budget and force Pentagon generals to spend billions more than they requested.

Mr. Farrell questions the underlying motives for such calls… (bold italics mine, bold original)

Treating war as an economic stimulus program became clear a decade ago in the early years of the Iraq war. That fact was stressed in a Huffington Post interview with Oliver Stone. Ryan Grim said that in a 2004 meeting President George W. Bush said to the Argentine prime minister: “All the economic growth that the U.S. has had, has been based on the different wars it had waged.”

Apparently that same ideology remains strong in today’s election politics.

Let’s put all this in the larger macroeconomic context. War should be about national defense. Wars should have nothing to do with scoring domestic political points. And yet, increasing the Pentagon budget has become a political hot button in today’s election drama.

This is insane: Do politicians plan to start new wars?

Ask yourself, are they already itching for a new war? After two exhausting wars? Eleven years? We put 2.3 million in Iraq and Afghanistan; 800,000 served multiple deployments, one of the big reasons for vet suicides. So why demand bigger budgets? Why in a time of national austerity? Why when they’re complaining about high taxes?

No, war shouldn’t be about domestic politics, but it is. And that’s bad news for taxpayers, for investors, for America’s values.

Somebody’s got to pay for all this. The taxes of all Americans will go up if the Senate passes the Ryan budget plan, forcing Pentagon generals to spend $554 billion in 2013, billions more than they requested. Plus it’ll add $6.2 trillion new debt and taxes over the next decade.

Yes, this is insane. A few private contractors will get richer but taxpayers will suffer in this zero-sum economics game.

National defense? No, it’s about getting rich, the rest pay the price

America is on a dangerous and costly path. Not just politicians. Americans love war, it’s in our genes. Congress spends over 50% our tax dollars on the Pentagon war machine. America spends 47% of the total military budgets of all nations in the world.

Why does the public tolerates such absurdities? Why do we hide this insanity deep in our collective conscience? Why are we planning new wars? Why do we see war as an economic stimulus program? The Iraq-Afghan “economic stimulus” strategy got us in the mess we’re in; are we really crazy enough to try it again?

Forget all the campaign rhetoric about national defense. That is not why our politicians want to spent trillions more on the Pentagon war machine. Politician are interested in reelection not national defense. They need votes and will keep military bases open because that means local jobs, satisfied voters.

They need campaign cash. Military contractors are great donors. Cutting war-related jobs is political suicide. So they pass big military budgets, waste billions on outdated weapon systems. Keep throwing money at the Pentagon war machine. Anything to get reelected. National defense is not a first priority; their job, their reelection is.

I share Mr. Farell’s revulsion

For me, it’s only politically brain dead people who really argue that destruction (war or natural catastrophes) serves as economic ‘stimulus’.

Post destruction economic activities extrapolates to REPLACEMENT and NOT VALUE ADDED. Yet loss of lives CANNOT be replaced. And deaths along with incapacitated citizens, decreases productivity. This is essentially the Broken Window Fallacy.

And it would be a mistake to relate war with creative destruction. Innovation or advances of technology, which renders obsolete old products or business models, is the outcome of markets in pursuit of consumer satisfaction.

During war, consumers become subordinated to the political forces, particularly through taxes, price controls and rationing, as in World War II.

The point is in war, the economy produces guns, tanks and warplanes and NOT TVs, telephones, private cars. This simply shows how naïve and absurd any such supposed economic comparison is. And this also shows of the dangers of making analysis based on statistical aggregates which tend to discount the real costs, particularly the human factor.

During the World War II, Keynesian economists worried about what would happen to the US economy once the war would culminate.

Then the Keynesian high priest Paul Samuelson quoted by Professor David R. Henderson

When this war comes to an end, more than one out of every two workers will depend directly or indirectly upon military orders. We shall have some 10 million service men to throw on the labor market. [DRH comment: he nailed that number.] We shall have to face a difficult reconversion period during which current goods cannot be produced and layoffs may be great. Nor will the technical necessity for reconversion necessarily generate much investment outlay in the critical period under discussion whatever its later potentialities. The final conclusion to be drawn from our experience at the end of the last war is inescapable--were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties--then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced. [italics in original]

Of course, the end of World War II turned out in total contrast to Samuelson’s prediction, the US economy boomed.

Today, brain dead economics turn the table to tells us that the boom that followed World War II had been due to ‘stimulus’. This is a wonderful example of verbal manipulation.

On moral grounds, how is it righteous for people to wish ill for the others? People who really see war as economic growth ought to go to the battlefront, along with their families, and fight the wars themselves. The reason for their chutzpah is because they know someone else will do the dying for them. The same applies to any destruction as stimulus. Talk about pretentious moral high grounds.

Politicians urge for war because war is the health of the state. Aside from the war as the origin the state, wars provide the pretext for the expansion of the state or the “ratchet effect” as coined by Professor Robert Higgs.

Professor Art Carden explains,

In Crisis and Leviathan, Higgs argues that during a crisis a "ratchet effect" produces net increases in government discretion that are not completely reversed after the crisis. Two things happen when government intervenes. First, the bureaucracy naturally tends to expand beyond its stated goals — mission creep. Second, intervention alters incentives; that is, the creation of a bureaucracy to address some problem also spawns a rent-seeking pressure group with interests that will prevent reversion to the status quo ante.

The bottom line is that war as stimulus has never been about economics but about propaganda to expand the power of the state and of the economic interests of those attached to the state or the political clients or the cronies.

For those wishing for war, be reminded of the Golden rule (Matthew 7:12)

Therefore all things whatever you would that men should do to you, do you even so to them: for this is the law and the prophets.

If not they deserve this.

Quote of the Day: Change is the Core for Great Civilization

Wait!

It’s NOT the kind of pernicious “CHANGE” peddled or promoted by politicians and their political zombie followers seen in media or in mainstream institutions where (emotionally packaged) ‘change’ for them means that people need to think more collectively and become conformists which implies the surrender civil and individual freedoms to become tacit ‘serfs’ in ‘service for society’ (society here is a euphemism for political overlords).

Instead, the changes which makes society prosper is when people are allowed to think and act DYNAMICALLY—where danger, failure and losses are seen as virtues rather than a curse, as these represent crucial elements for discovery, learning and importantly creative destruction, all of which adds to the betterment of civilization.

Jeffrey Tucker at the Laissez Faire Books in magnificently expounds on these…

The impulse to create environments that are hyper-cushioned and protected does not prepare anyone for effective functioning in real life. That’s because this type of environment has nothing to do with the real world. No matter how much we regulate, manage, create safety nets and otherwise build systems that remove obvious dangers from the word, the structure of the universe guarantees that the future is always unknown. Uncertainty does exist and cannot be eradicated. Change happens, and we have to be prepared to adapt to it. Nothing that happened in the past can necessarily be repeated in a changed future.

This is especially true in the economic environment. In a growing and developing economy, there is no stasis. Nothing is the exactly the same one day to the next day. There are constant changes in prices, resource availabilities, consumer tastes, worker availability and, especially, in technology. If a system cannot accommodate these, it is useless.

In a growing economy, there are profits and losses, success stories and bankruptcies, amazing triumphs and terrible losses and, most of all, there are surprises around every corner. Every day is an opportunity for something newer and better.

The government talks of stabilization, but there is no stability in a developing economy. Change, change and more change is the central character. Institutions rise and then must be torn down and replaced by new institutions.

This is the core of what builds a great civilization. It is not safety and stability but open-endedness, the opportunity for discovery and reinvention — that is the driving force of social and economic development. This also happens to be the very thing that bureaucracies and regulations oppose. They shut opportunity and constrain innovation. They tend to want to preserve what is outmoded and put fetters on what is emerging.

But here is the irony: If we think of history as the competition between controlled safety under despotic rulers and open-ended uncertainty under freedom, societies that embrace freedom win out every time. Freedom leads to growth and long-run triumph.

The above should apply not only to commerce but to all aspects including regulations as well.

Read the rest here

Capital Markets in the Information Age: More Financial Innovations

The world does not operate in a vacuum. Given the trend of rapid increases in the imposition of strangulating bank and financial regulations, entrepreneurs have been exploring ways to sidestep or bypass the system, by harnessing advances in technology, where they can profit from serving the consumers.

I have earlier pointed out that the internet has spawned innovative ways of borrowing and lending, of payment systems, and of the financing of commercial projects via P2P Lending and Crowd Funding.

Jeffrey Tucker at the Laissez Faire Books shows us more

Squareup. This is an innovation by Jack Dorsey (Twitter fame) and his friends, and came about only in 2010. The first problem they were trying to overcome was there has to be an easier way for merchants to accept credit cards. They decided to give the hardware away for use on simple mobile phones, and then charge per transaction. Win!

In the course of developing the business, which is valued already at $1 billion, they solved an even stranger problem that all of us have but never really noticed that we have: If we don’t have our wallets with us, we can’t buy anything.

Now this is genius: Square allows you to pay by saying your name. The merchant matches a picture of your on the square system with your physical face. You look each other in the eye and the deal is done. Anyone can sign up. Yes, it is incredible. Simple and wonderful.

The Lending Club. Again, this is mind-blowing. The Lending Club matches up lenders and borrowers while bypassing the banking system altogether. The idea emerged in October 2008, just as the existing credit system seemed to be blowing up. Today, the company originates $1 million in loans per day.

Anyone can become a lender with a minimum investment of $25 per note. Lenders can choose specific borrowers or choose among many baskets and combinations of borrowers to reduce risk.

Any potential borrower can apply, but of course the company wants to keep default rates at the lowest possible level, and these are published daily (right now, they are running 3%). As a result, most applications to borrow are declined (this is good!).

The average rate of interest on the loans is 11%, cheaper than credit cards but more realistic than the Fed’s crazy push for zero. As a result, the average net annualized return is 9.6%.

The focus if of course on small loans for weddings, moving expenses, business startups, debt consolidation and the like. If you are an indebted country with large unfunded liabilities, you probably can’t get a loan. But if you are student with a job who needs upfront money to put down on an apartment, you might qualify.

Dwolla. This is a super-easy, super-slick online payment system that specializes in linking payments through social networks like Facebook and Twitter. Like most of these companies, the idea was hatched in 2008 in response to the crisis. The system was breaking down and needed new services that worked. Dwolla got off the ground in 2009, and today, it processes more than $1 million per week.

An easy way to understand Dwolla is to view it as the next generation of PayPal, but with a special focus on reducing the problem that vexed PayPal in its early years: getting rid of credit card fraud. Dwolla is focussing its product development on ways to pay that do not require sending credit card information over networks.

Dwolla has also taken a strong interest in the Internet payment system called Bitcoin, a digital unit of account that hopes to become an alternative to national monetary systems. It is a long way from becoming that, but it is hardly surprising that a young and innovative company would be interested in competition to failed paper money.

These are a few of the services, but there are hundreds more. None were created by the money masters in Washington. They are results of private innovation, individual entrepreneurs thinking their way through social and economic problems and coming up with solutions. They accept the risk of failure and enjoy the profit from success.

Indeed, as forces of decentralization deepens, we should expect more innovative technology based solutions to emerge and flourish in every industry; finance and money notwithstanding.

Creative Destruction: The Demise of Encyclopedia Britannica Print Edition

From the Washington Post (hat tip Professor Mark Perry)

Encyclopaedia Britannica Inc. said Tuesday that it will stop publishing print editions of its flagship encyclopedia for the first time since the sets were originally published more than 200 years ago.

The book-form of Encyclopaedia Britannica has been in print since it was first published in Edinburgh, Scotland, in 1768. It will stop being available when the current stock runs out, the company said. The Chicago-based company will continue to offer digital versions of the encyclopedia.

More signs of how the information age has been reconfiguring commercial activities.

Capital Markets in the Information Age: The Advent of Crowd Funding

I believe that the information age will also introduce material changes in the capital markets. And part of such changes may have emerged through crowd funding, which according to the Wikipedia.org,

signifies as the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations.

And social media networks are likely to serve as major platforms for crowd funding with Facebook leading the way.

From the Wall Street Journal,

Facebook Inc., with an eye toward future business relationships, wants to be friends with more social-media start-ups.

So it is going after those start-ups' investors.

Facebook's new fbStart program is open to early-stage business investment groups, also known as "seed funds" and business "accelerators," that have social-media developers in their portfolios. Developers at companies supported by the fbStart partner firms will get an advanced look at new tools and features Facebook is creating for its site. In return, Facebook hopes that some of those start-ups could eventually build a business around its platform.

So far partners in the fbStart program include Seedcamp, sFund, 500 Startups, TechStars, and Y Combinator, among others, a Facebook spokesman said.

In documents filed for its initial public offering last week, part of Facebook's pitch to potential shareholders is that it can serve as a platform for other companies, and ultimately take a percentage of those companies' revenue. Since Facebook first opened up to developers in 2007, a growing number of start-ups, such as social-gaming firm Zynga Inc., have built almost their entire business around the social network. Other examples include BranchOut Inc., a professional network, and Color Labs Inc., which provides live phone-based broadcasts to Facebook friends.

"We've been asking Facebook for ways to get better access and advance information for our companies, and this is their way of doing that," said David Cohen, founder and chief executive of TechStars, a Boulder, Colo., start-up accelerator that has helped nearly 100 new businesses raise more than $125 million since 2007.

About half of TechStars' portfolio of more than 80 active companies are expected to make use of the program, he said, ranging from ventures that develop entire platforms on Facebook, to others that incorporate social-media tools and features from the site.

Most of the 70 start-ups in 500 Startups, a $30 million seed fund and business accelerator in Mountain View, Calif., use the Facebook platform in one way or another, said Christine Tsai, a 500 Startups partner. With fbStart, "they're putting a lot more manpower behind working with us in a more formal way," she added.

As internet based crowd-funding grows, we should expect incumbent financial institutions to integrate them or if not social media networks will likely get a larger slice of the capital markets.

The internet has been validating the great F. A. Hayek’s knowledge revolution through the forces of decentralization.

Online Interactive Learning: Flipped Classrooms

I have been predicting that the information age or digital economy will be driving radical changes in many aspects of social life especially in education.

Peer based instruction seems as another frontier for innovation in education.

From Harvard (bold emphasis mine)

Researchers at Harvard University have launched the Peer Instruction (PI) Network (www.peerinstruction.net), a new global social network for users of interactive teaching methods.

PI, developed by Eric Mazur, Area Dean for Applied Physics and Balkanski Professor of Physics and Applied Physics at the Harvard School of Engineering and Applied Sciences (SEAS), is an innovative evidence-based pedagogy designed to improve student engagement and success.

Mazur, famous for his talk titled "Confessions of a Converted Lecturer," developed the method after realizing in the 1990s that his physics lectures at Harvard, while popular, were not helping students to master the basic concepts.

The PI technique relies on the power of the "flipped classroom." Information transfer (i.e., a teacher transferring knowledge to students) takes place in advance, typically through online lectures. In short, students study before rather than after class.

As a result, the classroom becomes a place for active learning, questions, and discussion. Instructors spend their time addressing students' difficulties rather than lecturing.

While originally developed for Mazur's introductory physics courses, PI is now used across multiple disciplines, from the sciences to the humanities.

The Peer Instruction Network will serve as a hub for educators around the world to connect and share their PI experiences, submit questions, and engage with other PI users.

Most of the changes will gravitate towards personalized or individual based learning rather than from the current mass based ‘classroom’ education. Online education will bridge the geographical distance and competition should drive down costs. Online learning will drive the knowledge revolution.

Sweden’s Free No-Classroom Schools

A private school in Sweden jettisons the conventional classroom based education

From the Businessinisder,

A new school system in Sweden eliminated all of its classrooms in favor of an environment that fosters children's "curiosity and creativity."

Vittra, which runs 30 schools in Sweden, wanted learning to take place everywhere in its schools -- so it threw out the "old-school" thinking of straight desks in a line in a four-walled classroom (via GOOD).

Vittra most-recently opened Telefonplan School, in Stockholm. Architect Rosan Bosch designed the school so children could work independently in opened-spaces while lounging, or go to "the village" to work on group-projects.

All of the furniture in the school, which looks like a lot of squiggles, is meant to aid students in engaging in conversation while working on projects.

The school is non-traditional in every sense: there are no letter grades and students learn in groups at their level, not necessarily by age.

Admission to the school is free, as long as the child has a personal number (like a social security number) and one of the child's parents is a Swedish tax payer.

As I have been continuously pointing out, the information or digital age will radically change the way we live or do things.

And the secular trend will evolve towards the personalization of educational services. And moving away from the classroom model, as the above, is just an example of such transition. Aside, online platforms, and other competition-driven innovations will drive such transformations that will send the current firmament high costs of (industrial era designed) education spiraling down.

Pivotal changes happen at the fringes. As I earlier pointed out the Khan Academy’s P2P collaborative tutoring, free online education as the University of People and Stanford University’s expanding online courses could be representative of the early movers.

And as the cost of education falls, knowledge will surge. Thus, the knowledge revolution will serve as the critical backbone to decentralization trends.

Creative Destruction: The Growing Obsolescence of Postal Service

The US Postal Service is a great example of how vertical hierarchical organizations or political institutions are headed the way of the dinosaurs.

From the New York Times, (bold emphasis mine)

The United States Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances.

“Our situation is extremely serious,” the postmaster general, Patrick R. Donahoe, said in an interview. “If Congress doesn’t act, we will default.”

In recent weeks, Mr. Donahoe has been pushing a series of painful cost-cutting measures to erase the agency’s deficit, which will reach $9.2 billion this fiscal year. They include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers — nearly one-fifth of the agency’s work force — despite a no-layoffs clause in the unions’ contracts.

The post office’s problems stem from one hard reality: it is being squeezed on both revenue and costs.

As any computer user knows, the Internet revolution has led to people and businesses sending far less conventional mail.

At the same time, decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs. Labor represents 80 percent of the agency’s expenses, compared with 53 percent at United Parcel Service and 32 percent at FedEx, its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.

The postal office model represents an artifact of the industrial age. The deepening of the information age or the internet revolution has been rendering such model obsolete. This is creative destruction at work.

This is also a magnificent example of how the internet has been reconfiguring social activities.

Because the postal office is a political institution, organizational inefficiencies have exacerbated its financial woes. This can be seen by the labor heavy share of the agency’s expenses relative to the private sector counterparts. Its existence has palpably been designed to generate votes than to serve the public.

Under current conditions, the agency’s survival entirely depends on taxpayer funding. With the welfare state apparently crumbling from the self-inflicted borrow-tax-spend ways, any imperative to balance the fiscal budget extrapolates to the agency’s prospective extinction or privatization.

The fate of the US postal service and its growing obsolescence will apply around the world.

How the Information Age Affects Asian Banking

The McKinsey Quarterly writes, (bold emphasis mine)

Banks doing business in Asia face rapidly changing consumer behavior, with big consequences for both local and multinational institutions. Consumers increasingly prefer local banks over multinationals, are less loyal to existing banking relationships, are much more cautious about borrowing, and are more open to Internet and mobile banking. These shifts in the nature of banking relationships, product and service needs, and channels are reflected in a 2011 McKinsey survey of 20,000 consumers in 13 Asian markets...

Asian consumers are being weaned from brick-and-mortar branches: for the first time since McKinsey began conducting the survey, 13 years ago, bank branch usage has dropped, plunging by 27 percent on average across Asia between 2007 and 2011.

This drop has been matched by an uptick in Internet and mobile banking, a trend particularly pronounced in developed Asian markets, such as Hong Kong, South Korea, and Taiwan. There, consumers now use new channels, such as the Internet and mobile devices, for their banking more often than traditional ones, such as telephones and branches: the use of new channels rose to 3.2 times a month in 2011, from 2.35 in 2007, while that of traditional channels dropped to 2.57 times a month, from 3.5. In China, about 18 percent of all people who patronize banks now use Internet banking, compared with only 3 percent in 2007.

That shift arises largely from the increased penetration of remote channels. A growing number of customers across income segments are getting accustomed to and comfortable with them for both sales and service. The multichannel environment has thus become a reality: our research highlights the fact that, on average, Asian consumers are using as many as 5 channels for research and 1.8 channels for maintenance.

Some comments

The rapid shift in the preferences of Asian consumers reveals of the increasing personalization or specialization of markets. This extrapolates to an intensifying trend of de-massification of financial services towards niche markets or a transition from products and services designed for the masses towards decentralization or localization. Providers who cannot cope will this seismic development will perish. This is the forces of creative destruction at work.

And this paradigm shift is being enabled and facilitated by the internet which again exhibits how the web revolution has immensely been affecting people’s lifestyle.

In addition, this is another proof that people are getting to be more sophisticated with an extended reach or access to information.

This also means more value added services for the increasingly discriminate consumers.

The forces of centralization seems to be paving way for reign of the forces of decentralization.

The great F. A. Hayek’s knowledge revolution is underway.

P.S. My computer hasn't normalized yet so my post will remain limited

The Twilight Age of the Aircraft Carriers

Even the course of conventional-traditional warfare will be adapting to the ever changing realities. Vastly technology-enhanced anti-ship ballistic missile will render aircraft carriers obsolete

Writes Eric Margolis,

Batteries of DF-21D’s based safely inland may keep the US Navy far off China’s coasts, isolate Taiwan, and threaten US bases in Japan, Okinawa and Guam. In fact, the mere existence of the DF-21D’s and their deployment in sizeable numbers may be enough to keep US carriers at least 2,000 km from China’s coasts, thus beyond the useful range of the carrier’s strike aircraft…

But anti-ship missiles are lethal to carriers. Layered anti-ship missile defense can stop small number of attacking missiles. But if enough high-speed missiles are fired, and from different directions, at least one or two will permeate carrier and escort defenses.

Just one missile, filled with explosives and fuel, hitting a carrier will cause massive damage and fires that will put the great capitol ship out of action. I have joined numerous naval warfare simulations: in almost every case, some anti-ship missiles fired by enemy aircraft and subs inevitably leaked through layered defenses and hit the carriers. Each carrier and its escorts costs over $25 billion (not including its aircraft). They simply cannot be risked against relatively inexpensive Chinese missiles.

Officially, the US Navy denies claims its beloved carriers are increasingly vulnerable. The Navy’s brass is dominated by former naval aviators, just as the pre-war US Navy was run by battleship admirals. There is huge institutional bias against abandoning big attack carriers, just as there is bitter Navy and Air Force opposition to abandoning manned fighter aircraft and relying on drones.

Which makes all the more amazing an article in the May 2011 issue of the US Naval Institute Proceedings (for which I’ve written) by two Pentagon strategists urging an immediate end to building aircraft carriers, “Proceedings” is the voice of the US naval establishment.

For this heresy to be printed is a bombshell. But a needed one. It’s time the US Navy face facts and plan for the obsolescence of its attack carriers. There will still be a role for smaller carriers carrying drones and helicopters, but in wartime, the days of the mighty flattop that won the epic WWII victories at Midway and the Marianas are over.

Aircraft carriers signify as artifacts of the industrial age warfare. The information age (Third Wave) will radically change even the methods of engagement of military conflicts.

The Ten Growing and Dying Industries in the US

The Wall Street Journal compiles a list, from a study of IBIS World, of the rapidly growing industries, as well as, dying industries in the US.

First the sad news.

The Dying Industries

According to the WSJ Blog,

The dominance of the Web and digital media also puts Newspaper publishers, record stores and video-rental companies on the list. Meanwhile, photofinishing also takes its place among the top 10 dying industries thanks to the growing influence of digital photography.

Cheap imports are blamed for a decline in mills and apparel manufacturers. Companies that rent formal wear are also counted among dying industries amid both competition from abroad and lower prices making owning your own formal wear a more attractive option than renting.

The only clear recession casualty that makes the list is manufactured home dealers. The housing boom led to a surge in the industry, but now years after the bubble burst the sector has continued to struggle.

I have a different view from the political correct undertones of the above narrative.

The dying industries illustrates how the US economy has been evolving from commoditized (highly price sensitive) low value industries to high value technology based industries.

Now for the good news.

The Sunshine ‘Thriving’ Industries

Again the WSJ Blog

Unsurprisingly, the list is led by the tech and environmental sectors, which take up eight of the ten spots. There’s some good news for some of those in the top 10 dying industries. While wired telecom carriers dominated the dying list, voice over Internet protocol leads the list of thriving industries, illustrating the shift from one technology to another. Similarly, while newspaper publishers are among the dying industries, Internet publishers are counted with the thrivers.

Meanwhile, demographic shifts are also adding to the list of fastest-growing industries. Insurance-claims adjusters are in a growing sector as the Baby Boom generation ages. Unfortunately, a growing population also increases the need for prison guards, as correctional facilities make the list of thriving industries.

I observe two major factors from the fast expanding sectors:

One: creative destruction has been working her wonders.

Second: favored government sectors has been benefiting from political largesse.

As for creative destruction, let me quote Joseph Schumpeter Capitalism, Socialism, and Democracy (1942) (p. 83)

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. [emphasis added]

Bottom line: Despite segments of cronyism, the dynamic process of ‘Creative Destruction’ plays a very substantial role in providing benefits to consumers.

In short, capitalism still weaves her magic despite the US government’s very visible hands.