Cyrillic Partners

Brian Caulfield, a mentor and friend, let me in on a secret to good magazine journalism: stories should be surprising and have a point of view.

There are two ways to come up with a surprising story. One may “break” news by getting a scoop, or unveil some hidden insight. Scoops are pretty straight forward and the providence of the best magazines and newspapers. Insight is a little trickier to grasp, however.

When we worked together at a business magazine, Brian and I came up with several basic flavors of insight that might be applied to any news story:

1.  Forward Spin: Come up with some analysis of what’s going to happen next. If one company buys another, what might be the next corporate pairing in their market? What will a company’s competitors have to do to counter its new measures? What is this news going to mean for investors down the road? Will the company be able to hit its earnings numbers next quarter?
2. Pearl Necklace: Is the piece of news one in a series of similar events? Is it worth pointing out that deal X is the third such deal that’s happened in the past month or that involved the same investors?
3. Bunch of Grapes: Is this piece of news fundamentally demonstrative of a much larger trend? Is it one particularly succulent grape from a much larger bunch?
4. Lessons Learned: Business person X just did amazing thing Y. If you want to do the same sort of amazing thing, you should take note of these key lessons.
5. Reality Inversion: Take what everyone believes to be true, turn it upside down and look for examples or proof. Everyone believes a recession is bad, for example. Invert this commonly accepted maxim to get that “a recession is good,” then find who that’s true for. Recessions are great for people in the repossession business and generally improve sales at liquor stores. Profile these thriving businesses when a recession hits.

I particularly like the “Reality Inversion” principle for coming up with interesting stories and like to use it to test out various theories and try to use it as frequently as possible.  In a recent conversation with one of my coworkers, I started off by saying: “Well known investor X isn’t really that good.” Which lead to a very interesting discussion of what makes a good investor based on a very different point of view. Even if you end up throwing out the inversion, it forces you to think in creative and different ways.

My team met with Chris Ahearn, a manager at Reuters, who put us wise to Reuters Labs. The site highlights some of the new, experimental tools and services the media giant is playing with.

There’s a lot of pie-in-the-sky technology on the site. I haven’t had a chance to plumb each different technology, but my initial take is that maybe a third of it will catch on with early adopters. Maybe 1/12th of it will ever get into the hands of journalists or consumers.

I’ll be looking at it in depth in the coming weeks.

Howell Raines, former managing editor of the New York Times, opines on the newspaper’s dubious business future unconvincingly in a column in Portfolio Magazine.

He lays out a thin case against being bought out by Rupert Murdoch citing the “jolly pirate’s” use of newspapers and broadcasting “…in a broadly unprofessional way—as political muscle to advance his commercial interest.” There’s no mention of any examples of such behavior, of course, Raines assumes that everyone following the debate feels the same way he does.

I submit this counter argument: If Murdoch is so bad for journalism, why do people still read the papers his company put out? Does he really have the time to throw his weight around by strong arming journalists and editors?

At least one may still trust stories in the Wall Street Journal to be accurate. Raines, as readers may remember, was fired from the NYT for his inadequate oversight of the Jayson Blair fact fabrication and cheating scandal. His “argument” against a Murdoch buyout demonstrates the same loose attitude toward facts that got him fired.

But maybe I’m being to harsh on the guy. It’s obvious he’s living in an outdated paradigm where the New York Times still anchors information trafficking. He writes: “There is no more important question in American journalism than the future of the Times…”

I offer five other, more important questions for American journalism.

Ignoring the fact that ethics and accuracy should have been a more important issue for him during his tenure at the NYT, it’s worth pointing out that the NYT ($2.93B) is smaller than The Washington Post ($6.28B), USA Today publisher Gannett ($6.99B), or Reuters ($7.42B). To be sure, lots of people read it, but fewer than USA Today or The Wall Street Journal. It’s important to journalism like Ford Motor Company is important to the auto industry.

It’s barely worth eviscerating each of his suggestions for an anti-Murdoch NYT future: sell to Google, sell to Bloomberg, focus on just the New York Metro area, replace the board, or go private.

• Google isn’t buying the world’s information, it’s organizing it.
• Why would Bloomberg want the NYT? His company has been focused on data and real-time news: not stuff the NYT has a real lock on. Better bet for Bloomberg would be spinning out some of the financial data assets from McGraw Hill, such as its CapitalIQ product.
• Focusing the Washington Post on Beltway politics makes sense for D.C. but what would a New York-focused publication focus on? New York is too diverse for such a parochial scope. Still, focus is good and the NYT might profit from doing it.
• Replacing the board with pro-journalism people might be an interesting short-term strategy for preventing a takeover, but it doesn’t seem to be a long-term tenable strategy.
• Raines is right when he says going private would have been more likely two years ago. It’s no secret that the buyout business is taking a hit thanks to the credit crisis. But the buyout business isn’t just about leveraging businesses anymore, or streamlining by selling off unnecessary assets. There’s got to be some operational opportunity for growth that somehow can’t be realized under the scrutiny of quarterly earnings. I’m not sure what that would look like for the NYT, but I can’t imagine a PE firm giving the company more free reign than the Sulzberger family…

Raines needs to get off his soap box and exit his echo chamber.

1. Is it worth fighting content commodification? Most local papers feed on content pulled from the Associated Press newswire and offer little in the way of context or local significance. Do people still need a local spin or a verticalization of the content to reflect its impact on their interests?
2. How do you make investigative journalism work now? It’s harder to allocate resources to do the work of investigation with staffs shrinking and budgets tightening. Investigative digging takes time and lots of effort. There’s another factor at work here too. The journalists that remain in the business are often viewed with trepidation instead of trust by would-be sources. The profession regularly ranks just above used-car-salesman on trust polls. A journalist’s best scoops typically come from someone whom she or he already knows and trusts. Maybe this is a sub-point to number one of this list, since it might be considered a side effect of commoditization.
3. What’s the best way to separate signal from noise? Traditional advertising has been, for many companies, supplanted by spending on “public relations.” A large corporation may have more PR executives on staff than any one of the business magazines that cover it. How do you pick out the real news from the processed and packaged crap that’s pushed out to already over-extended journalists? Citizen journalists, bloggers, pundits and others now weigh in on everything, often without adding any new details or context.
4. What’s the best way to monetize online content? Every news publication struggles with this. People don’t want to pay for things online. Online advertising is growing, to be sure, but many small publications are left out when the cost of securing advertising outstretches the benefit. Studies show that most people don’t even see the advertisements served online.
5. What community does a news organization target and how does it interact with that community? The internet has radically changed the way many people classify themselves into communities. Left-handed lovers of Dungeons and Dragons may find others online with whom they have more in common than the person who they live next to. The comment thread underneath stories and social networks aren’t adequate for one major reason: they don’t make money.

Okay, the latest from the world of informational warfare is only a little off topic for an economics blog. But since encryption underlies every ecommerce transaction and all kinds of protected communications, anything that shakes that foundation is worth knowing about.

John Markoff, an awesome reporter for the NYT, writes about Princeton professor Ed Felton’s latest hack: physically freezing a computer’s DRAM to slow it down and make it spit out the encryption keys that should have only been momentarily stored there.

It’s not the sort of thing that a hacker could exploit from far away, you actually need to pop the computer open and spray the chip with air.

Physical hacks are becoming increasingly popular as computers become more portable. Laptops follow employees home from work or walk out the front door with thieves–often with reams of “private” data.

Now it will be even easier to swipe data from those computers. And unlike software, there’s no easy way to send out a “patch” for this exploit.

[Thanks to iit.edu for the pic]

The Amber Room, a gift from Prussian King Frederick I to Russia’s Peter the Great in 1716 and looted by Germans during WWII may now be found.

The ornately detailed room is believed to have been lost in Königsberg, Germany as the war ended. But German treasure hunters discovered a man-made cavern 20 meters underground in Germany near the Czech Republic, that may contain the looted remains of the Amber Room, they say.

It will take several weeks to dig up, the treasure hunters say. Read the whole story here.

[Image of a reconstructed Amber Room from Wikipedia]

Michael Lewis, an awesomely interesting writer, offered readers of March’s Portfolio Magazine an overly bearish appraisal of the Black-Scholes options pricing model.

This may not, of course, be Lewis’ fault. Portfolio is published by Conde Nast, notorious for yellowing-up its journalism to maximize the shock/sex/scandal factor. How Conde Nast sexed up Wired Magazine to the point of near-unreadability is a sore spot with many readers to this day who say the magazine was “Conde Nastified.”

The story, titled “Inside Wall Street’s Black Hole,” (natch) posits this: The credit crunch ousted bank executives and average Joe Homeowner alike because everybody was mis-pricing their downside protections. Wall Street broker/dealers used Black-Scholes, which provides a framework for pricing options, to justify extending credit to would-be homeowners. But the famous formula doesn’t take into account the possibility of cataclysmic downturns. When the downturn happened, the predictive model didn’t hold up. Therefore, Black-Scholes screwed everybody.

Lewis then goes on to “prove” the point by including quotes from one interview and by paraphrasing much of Nassim Nicholas Taleb’s work (for this feat of journalism he gets paid an ungodly amount per word).

The thesis belies a surprising amount of naivitae. It’s like getting lost on the island of la Grande Jatte and blaming Georges-Pierre Seurat for not giving you an accurate map.

Lewis would do well to remember that a financial theory is just that. It is not a universal law. Newton’s theories of motion start to fall apart when you approach the speed of light, so should anyone be surprised when Black-Scholes starts to break down as the economy fluctuates wildly?

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When the Portfolio cover-line promised me “The Formula that Wrecked Wall Street,” a very different formula immediately jumped to mind: 2 and 20.

That’s the compensation formula used by most hedge funds. It works like this: A hedge fund raises $100 million from private investors, university endowments, large banks and the like. The managers get 2% of that a year, regardless of performance. If they make a profit on their investing operations, say the portfolio gains 10% to $110 million, they get 20% of the profit, or $2 million.

It’s not a bad deal if you can get it: The hedge fund manager walks away with $4 million in income for getting about the market rate of return.

But what’s really deleterious to Wall Street, and general macroeconomic stability, is what happens in year two.

Let’s say the hedge fund manager has a bad year and the portfolio loses 10% of its value (It’s now worth $99 million). The manager still gets $2 million for his “management fee,” but doesn’t take home any bonus pay.

It doesn’t sound like that would have a negative effect, but it does. That compensation structure creates the incentive for the hedge fund manager to take wild risks, literally gamble it all for a shot at a bigger management fee because there’s no downside to poor performance.

If the manager loses all the fund’s money after five years, he or she still walks away with $10 million in fees. And since there’s so little visibility into the performance of hedge funds, there’s little accountability. An unscrupulous hedge fund manager might easily be able to raise another fund. (Which is why public disclosure is important and why journalists serve a role in the new economy.)

So why not risk it all? Go for the one in a hundred chance you’ll get a 100x payoff. It’ll always be preferable to the one in two chance of a x/2 gain.

That’s a formula that’s wrecking Wall Street and probably scares the heck out of Ben Bernanke.

Bernanke and Paulsen went before the Senate Banking Committee today to say that the economy is slowing down but a full-blown recession is unlikely. Big Ben also said he’s not afraid to push the rate-cut button if the economy starts to free-fall.

Perhaps more interesting was what the senators had to say during the meeting, from CNN:

Sen. Charles Schumer, D-N.Y., suggested the problems in credit and financial markets pose a greater threat to the economy than a slowdown in consumer spending.

“Aren’t you underestimating, not giving enough attention to, the severity of the problem in the credit markets?” asked Schumer. He said Wall Street executives he’s talked to “seem much more worried” about credit woes than Paulson and Bernanke.

No question who butters Schumer’s bread. It’s not the first time he’s said nasty things to Bernanke either. He did a chicken little dance back in November (read our coverage). But as Bernanke has pointed out before, the current downturn is hitting financial institutions a lot harder than the rest of the economy. Fed Governor Mishkin already said that Wall Street’s losses weren’t going to be Fed priority numero uno back in November (read our coverage).

Rupert Murdoch, the media mogul extraordinaire, decided to keep the Wall Street Journal behind an online pay-wall, dispelling rumors it would be free after his purchase of the product.

Silicon Alley Insider deconstructs the reasons to keep it a pay-to-read publication:

• Not giving away a growing revenue stream of $75 million + in free money.
• Preserving the brand’s exclusivity.
• Continuing to charge premium CPM rates for a known audience.
• Preserving the value of the print paper for a long as possible (subscribers will be less inclined to drop their subscriptions if they have to pay for the content anyway). Continue Reading »

Dean Calbreath has a neat editorial comparing the current “credit crisis” to that of the great depression.

When FDR took office, the nation was seeing an average of 1,000 foreclosures a day.

During his first year in office, Roosevelt created the Home Owners Loan Corp., or HOLC, to help debt-laden borrowers pay off their mortgages. The HOLC took borrowers out of their high-interest loans and put them into 15-year loans – financed through federal bonds – with rates fixed at about 5 percent. Unlike many government bureaucracies, this was specifically designed to be a short-term program, intended to extend loans for three years and then oversee those loans for an additional 15 years.

With the HOLC and the Federal Housing Administration, the Roosevelt administration virtually created the long-term loan, which soon evolved into the 30-year, fixed-rate mortgage.

It’s unlikely such a plan could pass today’s government–but no matter how dire times seem, they’re not as bad as the great depression days. At least not yet…

[Image from AMNY.com]

James Surowiecki returns with a strong column on employment data in the January 21st edition of the New Yorker Magazine after a nearly month-long hiatus.

His always-insightful column takes on Wall Street’s obsession with economic data–despite the huge variance baked into the estimates. From his piece:

…the payroll report has a sampling error of as much as plus or minus a hundred thousand jobs (which means that, instead of gaining eighteen thousand jobs last month, we may have lost eighty-two thousand), while the household survey’s error margin is even bigger, at plus or minus four hundred thousand jobs. The payroll numbers are also subject to big Continue Reading »

We usually don’t cover politics—though its bond to economics is undeniable.

The link between the two disciplines stands to be even more overt in the Czech Republic, which will vote on a new president this February. The incumbent, President Václav Klaus, is facing a real challenge this year from economics professor Jan Švejnar.

Švejnar currently serves as the chairman of CERGE-EI, the Czech Republic’s most prestigious economics institute and Volha’s alma mater. He is also the chairman of one of the country’s largest banks.

Martin Jan Stránský has an interesting post about the race. He writes that it may be time for change in his country and says the progressive Švejnar is the man to do it:

Švejnar is running on a platform of EU integration, economic reform and open dialogue.

Klaus is not running on a platform based on anything, but instead claims that we should all be “familiar with his positions” based on his “previous statements and actions.”  Continue Reading »