25 November 2014

Play to the Front Row

The pundit class has been wondering, in print, how it can be that we have increasing income/wealth inequality, but, if one believes the data, a recovery from The Great Recession and general growth.

The answer, in a nutshell, is Apple. Apple has made a living by ignoring the bottom 80% (or thereabouts) and selling a limited set of models to the top 20% (or thereabouts). A small list of models means what Henry Ford (is said to have) said, "you can have it in any color you want, so long as it is black". Smaller global BoM, smaller unit cost, higher gross margin. You just have to convince your market that they only need that one model. Mo money. As other microeconomists and quants see the light; likely have for some time, what can we expect?

As these endeavors have pointedly asserted, when it comes to data, analysis and decisions based on data is a worthy exercise only when the venue under analysis obeys God's (or Nature's, depending on the -ism you subscribe to) laws. Read the news every day, and you'll find a case where the clever (but not clever enough to avoid getting nabbed, of course) have bent or changed the rules to their advantage. Data on human endeavors is not reliable when used to predict the future. The future's rules won't be today's or history's. When the players are making up the rules as they go along, relying on recent data is foolish. Data driven decision making only works when the decision makers are forced to obey a rule set out of their control. Lower animals and glaciers come to mind.

When the recommendations of data and incentive conflict, follow the incentive. The clever will, like mouses, squeeze through the tiniest crack in the wall. Build a new wall, and they'll find the new cracks. Time series won't tell you where those cracks are.

So, what does Apple have to teach us? First, that by concentrating on the High End, its market in units is limited; as concentration continues apace, the number of individuals near the top X% diminishes as the X%-ers accrue more moolah. Apple counters that fact by limiting models of any device, and thus minimizing corporate BoM. The counter is to increase the number of distinct devices. Whether the iPad (or the don't-call-it-an-iWatch) can survive is an unanswered question. Reporting today reveals geographic/economic differences in mix between iPhone 6 and 6+. Why might this be? The logical conclusion is that lower wealth populations will have more buyers willing to compromise both ends of the size factor by having just one device. The phablet only holder, while the higher wealth populations will have a more reasonable device for each end of the size factor. Should this be a surprise? Not.

What of the macro effect then? It depends. That Burberry marketing gal had an easier time of it peddling coats than she will compute devices. In general, the top X% will have more moolah to spend on bling, but they won't necessarily spend more on bling from any one XYZ, Inc. widgets. Said widgets, unlike fancy coats, may have no value beyond having one. What we should expect then (looking at the incentive, not the old data), is to find more XYZ, Incs. making different sorts of bling for the X%-ers. Samsung was reported in the last couple of days to be reducing its model count drastically. Lowering the corporate BoM to make more moolah. So, what's the next big thing in X%-er bling? I wish I knew.

But, not all is wonderful in X% land. Consider participant sports. Turns out Tiger Woods is thought by some to be key to the golf widget makers' survival. Golf can be an expensive pastime, right up there with skiing. Poor person envy? May be yes, may be no; but it doesn't matter to the analysis. I've never had any interest in either, which I can duly afford if I wanted to. And therein lies the problem with growing the moolah flow to providers of the various bits and pieces associated with them: how to engage the small population that is the X%-ers, because only they can afford the vig. What Americans play tennis anymore?

Professional team sport provides some insight into how it can be done. Players in these stadium sports get ever more tens of millions of dollars per annum to behave like teenagers. How can this happen? Again, look to the incentive. Partly, TV dumps billions of dollars into the pot. But consider the stadiums. Research (I've not got cites to hand, but they weren't hard to find when last I went looking) has shown that most are partly or fully paid for by taxpayers, both directly and indirectly. Most are in large metropolitan areas, where the number of seats is a small fraction of the market population. Since, let's say, the stadium on average needs 50,000 behinds to fill it up, then the team need only convince the increasingly wealthy 50,000 to attend out of a few million in total population. They have no need to attract the lunch bucket crowd. IOW, the Apple crowd has another way to spend disposable income. For the privilege of being special, they can afford to pay yet more. The Washington football team attacked in 2009 when The Great Recession hit. All was not well in Mercedes land (for the record, the real money in the DC area isn't made by civil servants). What's odd about such suits (the piece reports that Washington is not alone in suing) is that, according to legend, season tickets for Washington football (and many others) has a long waiting list. Hard to see where the loss is? Kind of like foreclosing on a house that's still brand spanking new. It should be no surprise that the various leagues expansions into ever smaller markets (hockey in Florida, Arizona, and North Carolina???) have led to failures, and near so. They have to have some minimum population to have the necessary 50,000 X%-ers. Some leagues (3 of 4, not NBA, near as I can find) counter with "revenue sharing" wherein the rich big city owners give to the small hick town owners, aka rich white guys' Socialism.

In general, the incentive for an economy's production under rising concentration of income/wealth is to shift to more varieties of lower volume bling. No one needs two smartphones, drug dealers and con artists possibly excepted, so some other forms of bling must be created to sop up the excess moolah. This happened before in the USofA. The most well known was called The Gilded Age, a coinage and book title from Mark Twain, which, by way of setting context, he wrote before both "Tom Sawyer" and "Huckleberry Finn".

So, the question for macros, micros, and quants: can such an economy thrive? And, of course it can. Except for the period post-WWII to the 1973 oil embargo, that's been the history of the USofA. It was only that rather short period of unspoken Socialism that is the unusual condition. The downside, depending on which side of the X% you sit, is the necessity of an increasingly motivated police state to keep the non-X% from revolting. If you read 19th century American history, it was awash in minor and major insurrections. The fact that there was ever more land to move to and pillage helped keep the lid on, until it didn't. The Civil War is the one remembered, but there were more clearly economic ones across the century. Here is another list, but both don't include Bloody Kansas, more properly the First Civil War. So, of course we can have an economy based on the top X%, but as X gets smaller, the police state must get more motivated. And to think, all those ex-Middle East armored personnel carriers and such have found their way to civilian police under a black president. The X% can't say, "if you don't like it here, move to the frontier and see if it's any better." There is no more frontier. Have a nice day.

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