Nexus by Mark Buchanan

Subtitle: Small Worlds and the Groundbreaking Science of Networks

I am fascinated by networks. Certainly the social networking websites currently available are revealing in a less abstract manner how far our connections are really spread. The most rewarding aspect of joining these sites was the initial 30 minutes after having signed-up when you were quickly reconnected with ex-colleagues and long-forgotten high school acquaintances. From there it is mostly downhill and I am still amazed by those who find so many non-commercial ways to occupy their time posting, tweeting and chatting away.

I spend little time on these sites and am becoming more and more skeptical that they will be able to retain their entertainment value (and massive subscriber growth) before being besieged by individuals and companies trying to push their products and services on you. A recent interview from a Pepsi marketing manager I unfortunately saw on CNN should give a clear indication of what is to come. Pepsi's desire to have a "conversation" with its customers does not bode well to those who find a large aspect of Facebook's appeal to be the limited advertisements pasted on its pages.

However, I do confess to having a soft spot for LinkedIn. It has focused on the business community from day and is now evolving into a profitable company with a clear business model. By being a site catering to business users, it is somehow more justified to find ways to drive revenue - a luxury not necessarily granted to Facebook.

LinkedIn is so great because it allows the users to really see the reach of their networks. By using the "people" search function on the site, I discover to have contacts in Madagascar, Saudi Arabia and Suriname and all of them are only one contact removed from me - meaning that they are connected to someone in my own 170-person network. 20 years ago these same networks existed but it was just much harder to visibly construct them.

The premise of Nexus is that there is scientific evidence demonstrating how the network that links the six billion of us is not completely random in nature but actually has a certain structural configuration. The author then demonstrates how such network structures are not just relevant for human acquaintanceship.

Buchanan introduces the argument by referring to a fascinating experiment conducted by the psychologist, Stanley Milgram in the 1960s. I was familiar with Milgram for the famous test that bears his name yet was unaware he was also credited what came to be know the "six-degrees of separation".

In the Six-Degrees test, Milgram mailed at random letters to people living in Omaha, Nebraska and asked them to forward the letter to a stockbroker friend of his in Boston. He provided no address for the stockbroker but instead asked them to send it to someone who they believed to be "socially closer" to him than they were. Most of the letters made it to his friend as each subsequent recipient forwarded the letter to the next person applying the same request. The most surprising aspect was that it did not take hundreds of mailings but six.

It was then the work of two other academics, Watts and Strogatz, who when further studying Milgram's test, found these six-degree connections to be neither orderly nor random but somewhere in between. These patterns took on an even greater significance when they started examining other types of networks such as electric power grids, human brain cells or the world wide web only to discover clear similarities in all of them.

Before returning to the book, let's look at an example given by one of my professors, Dr. Karen Stephenson, during my graduate studies that should help in understanding how these networks are patterned:

Think of the organization you work in. Most likely it has some type of hierarchical structure of management. Yet by looking at this pyramid, does it really show how the organization is networked together? It is true that the person at the top holds a lot of decision making power but it is certainly bound to be the case that individuals scattered throughout the ranks wield a disproportional amount of network power. These linchpins are the types of people you go to for questions, information or advice and most certainly others turn to them as well.

If every person in the organization drew lines to each person they contacted throughout the day for a question or advice and then all of these drawing were compiled together, you would see a web-like structure emerge. In this web certain people would be crucial "hubs" as they would appear as being connected to a lot of other people as well. Interestingly enough, it is probably the people towards the top of the pyramid who have the fewest connections to others in the organization.

This type of network formation exists in all the communities we interact with on a daily basis. Yet how is it that we are connected in such a short number of steps to people on the other side of the globe if we interact only with our local communities? It is by people acting as "bridges" to other groups far beyond the ones we are involved with at a local level. The exchange student you still keep in touch a couple times a year via email serves as a bridge to her entire network of friends and family back home. Lose connection with her and this whole world (even if you are in no way actively apart of it) disappears.

As stated earlier, this network layout applies to other areas of science as well. One of the more vivid examples is the development of the world wide web. Internet pages are being developed randomly and frequently. However if you look at the links between all of the billions of web pages, you find once again Internet pages acting as "hubs" and a certain order to the random development. What it also means based on the study that examined the network of the web is that even as another billion webpages are added, the number of clicks required to navigate will not change by more than one or two clicks.

These "small world networks" thus make information, electricity or gossip travel much faster than a world without them.

Read more...

The Girl with the Dragon Tattoo by Stieg Larsson

When I was home in Seattle a few months ago I took a trip to my favorite book store, The Elliott Bay Book Company, in Pioneer Square - the city's most historic neighborhood. Unfortunately, it was most likely my last visit at its current location. The bookstore is preparing to move to another part of the city. Considering the fate of many independent bookstores, this outcome is far from terrible. And reflecting on it objectively, I should actually be happy.

For those of you unfamiliar with Seattle, Pioneer Square captures perhaps the last glimpse into the origins of our modern city. While I have a hard time believing the commercial- residential buildings constructed in the last decade that include a Quizno's Subs and tanning salon on the ground floor will withstand the tests of time from an architectural standpoint, Pioneer Square with its brownstone edifices offered something different. This "difference" also included the aroma of stale beer and urine on the vast majority of its sidewalks. Yes, Pioneer Square is truly dying and with the loss of Elliot Bay it's destined to become an urban carcass of its former self. Notwithstanding the verbal assault by numerous panhandlers and con artists, I thoroughly enjoyed the trips into Pioneer Square to visit the bookstore. There is a certain sense of loss. Yet as I already said, the move will actually benefit me because Elliot Bay will now be located in an area I actually do frequent for its nightlife.

It was exactly for this reason that Elliot Bay was forced to move locations after a very difficult last 12 months in terms of sales. An independent bookstore relies on foot traffic, especially in the evening. And you can trust me that those going out in Pioneer Square after dark were not the same market segment likely to pop into the reading room to hear an author present her latest work.

I respect Elliot Bay's store as well as its business model and wish it the best of success! We should all be cheering it on as the outcome "post-move" will tell us a lot about what businesses will work and which will fail in the future. One mantra of business strategy is based around the belief that a company must either focus on being a cost leader or a high value-add specialist. Finding yourself in the middle is a recipe for disaster due to the competition you will face from both sides.

Elliot Bay Bookstore does not discount its books. In the days of Amazon, I know it is a hard concept to grasp that a bookstore may actually sell its goods at the list price found in small print on the back of the cover. But it is the case. They do this because they clearly recognize that a war based on price cannot be won against the likes of online retailers or massive chain stores. What they do offer is exceptional staff who know what they are talking about. My favorite thing to do there (and what can also be done in an excellent music or wine shop) is to go in with a set amount you want to spend, say $100, and let them recommend different books for you based on your interest. It is a great way to get guidance in new directions you may have not normally ventured and it is not something Amazon can offer you - even though they try.

However, as this move is eluding to, the specialization they are offering may still not be enough. It is my belief that our ever enduring quest for low prices is devastating large aspects of value and we are not fully aware of it. This value is what lies between a normal versus a basement bottom price. Before parting on too extreme of a tangent, I will just say that the subject of pricing will be further addressed in an upcoming post.

And how is this connected to The Girl with the Dragon Tattoo? I was in Madrid last July. It was a balmy afternoon and we had made an appointment to meet a friend who was getting off work for her lunch hour. She arrived toting the huge, hardback copy of this book. She was in full addiction mode and was unwilling to part with it even on her lunch break.

During my discussion with a salesperson at Elliot Bay a few months back, I noticed my basket of books becoming disproportionately overrepresented with non-fiction and I therefore asked him for a good piece of 2009 fiction. He pointed me towards this book and thinking back on my friend in Madrid, I grabbed it without hesitating.

It is certainly an engrossing story which combines mystery, sex, violence and Sweden. I consumed it in a couple of days much in the same way I would plow through a good TV series if I had the whole thing on DVD. It is entertainment above all else.

Read more...

Straw Dogs by John Gray

Subtitle: Thoughts on Humans and Other Animals

I have confessed in other postings that my background in philosophy is far from profound. However, it is a subject (in a very broad definition) that is calling out to me with greater regularity. I have read few of the great works and each attempt to do so thus far has been a struggle. On the other hand, I am always in search of modern day thinkers from whatever academic discipline who are writing about society in a more robust, and shall we say, philosophical context. It is very difficult to do so without tying in the arguments of some of history's great minds and therefore provides me a way to slowly develop a better understanding of some of their principle theses. Wrapped in the discussion of modern society makes it a much less abrupt approach.

One of my favorite current writers is Nassim Taleb, renown author of Fooled By Randomness and later The Black Swan. In an interview I saw of him he recommended two modern scholars - Karen Armstrong and John Gray - for their intellectual excellence in their respective fields. Gray is the former professor of European Thought at the London School of Economics and author of several books. He has written on globalization, religion and philosophy. As is often the case, shorty after being introduced to him and his works, I came across several articles reviewing a recently published book of his.

Straw Dogs was published in 2002. It is a collection of musings stitched together by Gray's underlying belief that humans, in their rather modern distortion of humanist thought, have essentially created a new faith but fails to recognize it as such. This form of humanity, grounded in its roots of Christianity, is based on progress and mankind's ability through such progress to create a better world. Gray argues that "to believe in progress is to believe that, by using the new powers given to us by growing scientific knowledge humans can free themselves from the limits that frame the lives of other animals."T his humanistic vision of progress, outside of science, is a myth fabricated only recently in Western society. It was not long ago when humans thought of themselves as equal to other animals. In many cultures they were even worshiped by humans.

Gray recognizes that humans are a highly developed, and incredibly destructive species. Since our arrival in the New World 12,000 years ago, approximately 70% of the world's species have been eliminated which is quickly approaching the same number caused by whatever event, most likely a meteor, wiped out the dinosaurs 65 million years ago.

At the same time, our destructive species is raging on in fierce debate about how - through science - we can save the earth from the overheating caused by greenhouse gases. Perhaps it is Earth's means of ridding itself us?

Ironic to me is how many of the central responses to climate change revolve around the use of elaborately developed technological tools to save us from such overheating. Humans have never been farther removed from nature as they are now. It is through the abandonment of certain forms of technology that we will make the easiest and fastest gains in this battle. Changing the way we eat based on a diet of local vegetables and occasional meat consumption and distancing ourselves from the meat industry would make enormous gains. Walking or bicycling as opposed to the frequent use of the automobile is a very simple concept that proves incredibly difficult to grasp. In a later chapter Gray reminds us that the average American puts in 1600 hours in the car to get 7500 miles: less than five miles per hour. Not much more than what someone would walk in the same time. It is obvious the automobile represents more to us than a form of transportation.

Straw Dogs is not a book on environmentalism, however the example demonstrates a certain fallacy in human thought based on scientific progress. Many other such anecdotes make up the remainder of the book though I found they begin to stray more and more from his central thesis along the way. Nonetheless, they are fascinating and provocative. It is a book that does not need to be read from start to end but can be "dipped into at will" as well. Either way, it will get you thinking.

Read more...

The Dain Curse by Dashiell Hammett

After three rather arduous non-fiction reads, I was more than eager for a quick injection of crime mystery, one of my favorite fictional genres. Hammett, most famous for The Maltese Falcon, is certainly one of the most well-regarded American mystery writers. And it was a late night viewing of The Maltese Falcon with its solid performance from Bogart and a quirky and devilish Peter Lorre as Joel Cairo that prompted me to dive further into the works of Hammett.

It is clear that Hammett knows what he is writing about after having been a private investigator for many years. His writing style is tight, direct with no superfluous words. In both The Maltese Falcon and The Dain Curse the stories move at a breakneck speed. To be honest, some time the speed and number of characters in the latter was too much for me. I often had to flip back a few chapters to remind myself who was who and what had they done. The book does not disappointment but it did not leave me floored either.

What crime/mystery writers do you like?

Read more...

When Markets Collide by Mohamed El-Erian

Subtitle: Investment Strategies for the Age of Global Economic Change

As 2009 comes to a close and we prepare for the unknowns of 2010, it seems a just time to quickly summarize the current status of our global economy.

There is a global shift taking place from the traditional power centers - the U.S. and to a lesser degree Western Europe - towards heavily populated, emerging players. This shift, which would have taken place even without the near collapse of our financial system, is now intertwined with the decisions made to stave off disaster over the last year.

The United States acted as the motor for growth and consumption over the last fifty years. The American consumer has driven this consumption, especially over the last twenty years, through debt. We are all aware this can no longer occur and a shift towards savings and debt repayment means consumption will have to come from elsewhere. This U.S. led consumption has made an enormous impact on other countries as well. By importing more goods than it exported, the U.S. generated a large current account deficit resulting in the sending of vast sums of US dollars to the exporting countries. Oil producing nations have likewise accumulated hundreds of billions of dollars due to the exporting of oil to the U.S. and other rich world countries. Amassed with US dollars these countries through vehicles such as sovereign wealth fund, are seeking a home for their liquid dollar assets - from homes on the French Riviera to large stakes in Morgan Stanley.

As exporting nations have been producing goods for the U.S. at low cost, they have put ever more demand on natural resources (commodities). They have begun to see an upward pressure on wages as their local economies grow. Both of these factors, demand for commodities and increasing wages, will fuel inflation. Add on top of this the government spending in the rich world in the forms of various stimulus plans and inflationary concerns abound even though we are currently in a quasi-deflationary period.

Basic demographics are also changing with Europe's population getting older, the US being in between and countries such as Brazil possessing a rather young population. Governments will have to respond accordingly as they struggle to provide the services these population segments require. Demands for certain goods and services will become more relevant based on these shifts.

The above encapsulation of global economics is the context within which El-Erian, the world's largest bond investor, and former directer of Harvard's Endowment fund, frames this concise and relevant text. The majority of the book is spent setting the stage for what is to come and what has developed over the last few eventful years.

He then attempts to outline measures that can be taken to benefit from these shifts taking place. How as investors can we accumulate the wealth needed to support a prosperous future? And, equally as important, how can we counter balance our portfolios to prevent massive loss through huge downswings in markets or erosion of certain asset classes due to inflationary effects?

I am no longer in possession of the book so I can only recall what stayed with me since I read it over one month ago. This will have certainly been meshed together with my own beliefs. Perhaps this is a more useful exercise. Some points for investing in the future:

1. Develop a view of the global economy and dedicate a certain percentage of assets to the shifts you believe likely to occur. If inflation is a concern due to rising wages in Southeast Asia, commodities, real estate or inflation protected securities will be safer bets than cash or certain types of equities.

2. Watch out for "home bias". Investors have the tendency to buy stocks from their home country, especially in the U.S. but also in other countries as well. Active Swedish investors place 48% of their invested money in Swedish stocks even though Sweden makes up 1% of the global economy (Thaler & Sunstein, 2008). Investing in what you know makes sense up to a certain degree but does not warrant such a disproportional approach. This is equally true in the States where a robust and transparent equity market warrants a large percentage of investment focus but not the absurdly high percentages most Americans have in their home market.

3. Emerging Market Government Bonds can essentially be grouped with more traditional bond types as their government balance sheets are in healthier shape than many more traditional markets, e.g. Greece and Ireland.

Read more...

The Prize by Daniel Yergin

To claim The Prize to be a book on the history of oil already by such definition limits the impact this commodity has had on the development of society over the last 150 years. What it really is is an analysis of global economic and military history over this time period framed within the context of oil.

The book begins by concentrating on the historic period before World War I when Winston Churchill, as civilian head of the Royal Navy, began to see the importance of replacing the coal fired fleets of the British navy with those using oil in order to gain in speed and agility. Yergin chooses this as his starting point, even though he then moves back 60 years to the true founding, because this was an important turning point in how oil was used. It was at this time when oil became a "disruptive technology" as it moved from an energy source mainly used for providing light to one that would become the standard form of fuel for all transportation.

After this introduction, The Prize returns to its chronological unfolding using as the starting point a key series of scientific discoveries regarding oil's potential uses and then later to the first wave of major U.S. discoveries. Though oil's history can be dated back long before this, the foundation of oil as an industry and major fuel source has an American heritage. .

In 1859 the Drake Well in central Pennsylvania was hit thus sparking the first wave of oil mania. This mania brought all types of people from expert scientists and geologists to green thumb enthusiasts with nothing to lose. The creation of boom towns in desolate parts of the U.S. became common. These towns would quickly be erected often to satisfy the needs of the fortune seekers (booze and prostitution). Means for distributing the oil would be hastily devised with a very short term approach to get the black liquid to far off markets. Once the source showed signs of reduced volumes or a bigger source was discovered elsewhere, the towns would quickly find their streets and brothels empty. The comparisons between the boom towns and the massive cookie cutter neighborhoods erected in the last five years in the States during our latest housing boom are strikingly similar.

The next part of the book explores how the fragmented industry, from finding the oil to distributing it, paved the way for on opportunity of massive levels of consolidation and vertical integration. It was seized and later exploited mainly by one man - John Rockefeller of Standard Oil. Rockefeller bought other oil companies both large and small, keeping the efficient ones and merely closing down the others to limit any potential threat of competition. Standard Oil was the first true monopoly in the U.S., controlling 90% of the oil derivative, kerosene. Its dominance led way to growing discontent of the American public who lacked alternatives to Standard Oil products and became more aware of the incredible fortune being amassed by Rockefeller as a result. In 1911 the Supreme Court ruled that Standard Oil be split into 32 different regional companies who would then compete with each other for customers and markets.

World War I was a very labor intensive struggle fought and won in the trenches with limited reliance on machinery. World War II, as painted by Yergin, was a war in which oil played a decisive role in the outcome. Both Japan and Germany lacked domestic sources of oil and were therefore dependent on other countries, namely Romania and Indonesia, to provide the oil needed to power their ships, planes and tanks. The lack of this crucial resource and the failure in certain cases to effectively distribute it to the divisions in need led to losses at key junctures in World War II events . An interesting example is how German troops, led by the brilliant Rommel, were unable to seize control North Africa to the extent desired because at key battles they were without fuel needed to power their panzer tanks.

The U.S. and Russia were instead at a particular advantage because they could rely on domestic fuel sources. An agreement between the U.S. and the U.K. also meant Britain, whose North Sea source would not be found until decades later, was also able to receive its needed share of American oil. However, having access domestically is only one part needed for success. How you manage your operations is another. Yergin's description of a floating fuel station comprised of numerous ships and tankers that were able to provide fuel to other ship fleets in the South Pacific was fascinating. Though the author dedicated several chapters explaining why Japan and Germany were greatly hindered by their lack of oil, I found the book thin on other examples of Allied success.

The post-World War II era led to the rise of what Yergin defines as the "the Hydrocarbon man", i.e. the individual consumer who developed an ever growing thirst for oil. It also was the period of the oil producing dominance of the Middle East region. The book is probably at its strongest here. It brilliantly explains how the major oil companies established themselves with marketing (downstream) channels in the consuming countries and favorable partnerships with Middle Eastern countries. By providing technical expertise in this region they were given a disproportionately large share of the revenue generated from each new barrel. Later Yergin clearly explains how OPEC was born and the economic significance it played in the market - essentially by controlling two levers - setting supply levels as well as prices per barrel.

The 800-page book is referred to as "the Bible" of oil history. The magnitude of this industry in terms of global scale and historical importance over the last 150 years means that in order to effectively write one, all-encompassing volume a certain high level approach and style is necessary. Yergin succeeds in incorporating the macro level history and economic connections oil has played over this time period. However, by taking such an approach it is inevitable that some other aspects regarding such an important subject will be less adequately addressed.

I respect the focus Yergin took in writing the book and his unrelenting ability not to defer from it. However, there were two main faults I found in doing so. The impression he gave when discussing the "hydrocarbon man" and his insatiable thirst for oil was that the oil companies were passively responding to the demand for their product that was being begged for by consumers. However it was never discussed how this demand was stimulated to such excessive levels. What was lacking in the text was an adequate explanation as to why consumption levels grew at such astounding rates over these years. What were the relationships like between the auto manufactures and the oil companies? Certainly these industries were strongly connected to the centers of power in Washington D.C. yet was never mentioned.

Hydrocarbon man became dependent on the automobile due to lack of alternatives. The classic example of the removal of all tram lines in Los Angeles certainly encouraged such behavior yet it, nor any other relevant example was even eluded to. And why were such large vehicles in such demand? Yergin refers to the adaption of the first fuel economy standards in 1975 of 27.5 mile per gallon within 10 years as revolutionary step which led to a drastic reduction in oil consumption. Though the book was published in 1990, a few years prior to the SUV boom, it is hard for his praise of such regulation not to ring hollow considering the impressive gas mileage of the Ford Expeditions and other "light trucks" exempt from these standards. Such SUVs went on to make up 50% of all vehicle sales in the U.S. The automakers gained on the higher profit margins of these vehicles as well as special deprecation status they were granted for business purposes. Oil companies also make more money the more often consumers need to fill up their cars. Such a thrust by automakers towards these types of vehicles certainly pushed hydrocarbon man's demand for oil. These type of factors were absent in his book.

The focus of The Prize as a work of economic history also meant that the small time victims of such a massive industry were ignored. As someone who is far from an expert on the industry, I am still aware of tragic stories such as the one of Ken Saro-Wiwa's, who fought against Shell and the Nigerian government because of the environmental damage the oil drilling was causing in the Niger delta. A reference, at least collectively, to the victims of the oil industry as well as the environmental impact it has made was something due in the book yet was nowhere to be found.

Regardless, The Prize is required reading for those on all sides of the debate as it provides the foundation to what has become the lubricant of our daily lives.

Read more...