Business

CRYPTO KINGPIN - Calvin Ayre is Back

ROB Magazine

Crypto kingpin

Calvin Ayre gained vast riches and notoriety as a gambling mogul, but ended up a fugitive from U.S. law. Now he's made a big bet on bitcoin, the world's most explosive cryptocurrency. Will this adventure have a happier ending?

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I have to hand it to him. Ten years since the last time I saw him, and he's the same Calvin Ayre. Does his gym time, I'll bet; eats well. His eyes are a little bleary, maybe he drinks a few more than his doctor wants. But at 56, he still comes off like a young guy, a rebel, a force of change. He walks into Scott's in Mayfair—fanciest fish joint in London, unless there's another place selling Dungarvan oysters for $32 a six-pack. The place is pure London bling, with a tricked-out bar with tiled pillars and a mountain of ice studded with lobsters. There are paparazzi parked out front 24/7, waiting for Ronnie Wood or Elton John, Tamara Ecclestone, Tom Hanks. Scott's is where Charles Saatchi grabbed Nigella Lawson by the throat a few years back. It's that kind of posh.

Ayre strolls in wearing torn jeans and a grey T-shirt. His hair is shaved close on the sides, long down the back. Soul patch, glint of mischief in his eyes. The waiters swarm in their sharkskin suits, pulling out chairs and smoothing the tablecloth. They don't know he's the most famous son of Lloydminster, Saskatchewan, the only Canadian Prairie export to make the cover of Forbes's billionaire issue. They're thinking he's a star they haven't yet quite recognized.

"How ya doin'?" Ayre says, a big paw extended for a shake. I feel like I'm meeting up with a favourite eccentric uncle.

Last time I saw him, the mood was strikingly different. We were on the Playa Tambor in Costa Rica, Ayre sitting on an elevated chair, flanked by sullen models, watching a mixed martial arts tournament. He was an online gambling mogul back then. His Costa Rica–based website, Bodog.com, which he wholly owned, had revenues of more than $7 billion (all values in U.S. dollars unless otherwise indicated). Ayre had a mansion outside San José and a penthouse apartment in Vancouver worth $6.2 million (Canadian) at the time, easily double that today.

But there was also a distinctly dark air about the man back then. Bodog's money was coming almost entirely from American gamblers, which put Ayre on the far wrong side of U.S. law. He wasn't yet a fugitive from the Department of Justice, but he told me he was about to flee Costa Rica for extradition-proof Antigua. And the whole atmos-phere of our meeting had an end-times edge. All those fighters standing around flexing their muscles, girls in Brazilian bikinis smoothing lotion on one another's shoulders. When I went to his mansion later, I was buzzed in at the front gate by security hiding behind one-way glass. I passed through the abandoned courtyards; the pool, with its swim-up bar; the barbecue pit; the outdoor gym. I found Ayre being photographed in a back room, spread out in a suit on a bed covered in red satin alongside a model in lingerie. Scarface came to mind, the final act. And when we spoke in his office afterwards, he was gruff, referred to the press as pigs, didn't look me in the eye once, leaving that job to his framed portrait, unnervingly mounted on the wall over his shoulder, which menacingly stared at me throughout.

 

All gone. I mean the mob-boss bits. The bulletproof Hummer. Even Bodog itself is mysteriously distant—licensed, he says, to independent regional operators. Ayre himself disavows any current involvement. "Bodog is the name of my boat," he tells me with a shrug. "I honestly don't think about it otherwise."

He's still Calvin Ayre, make no mistake. And he's still conscious of projecting a badass image. So he parades down Mount Street in Mayfair looking like one of the grizzled mechanics from Discovery Channel's Vegas Rat Rods. He enters trailing a PR person and a Filipina named Candy, who sits opposite him throughout our lunch and utters not a single word. But his eccentricities have a distinctly lighter shade. If he had one eye over his shoulder before, he's staring into the future now. So he really doesn't want to talk about Bodog. He really doesn't want to talk about his 10 years on the run from the DOJ, the last five of which he essentially couldn't travel outside Antigua or Canada.

He wants to talk about his new thing: bitcoin.

---

Ayre may be reticent about the gambling backstory, but it's important for understanding his position within the Wild West of planet Earth's most explosively popular virtual currency. Bitcoin is either the biggest commodity bubble in the history of financial assets, or it's going to revolutionize global payment systems and make somebody the world's first trillionaire along the way. Or possibly both. But whichever description you're drawn to, you can find confirmation in bitcoin's near vertical trend line (it trades as BTC on dedicated online exchanges). Now there's a chart that either ends in tears or tracks the biggest gold rush we've ever seen.

Ayre's stint as a target of U.S. law enforcement underpins his interest in this realm. Back in 2006, 95% of Bodog's business was reported to be with American customers. And while he claims to have backed out of online gaming shortly after, the DOJ wasn't going to forget the billion dollars he'd amassed while he was still in it. United States prosecutors initially indicated that he could avoid indictment if he was willing to part with $350 million in fines. Ayre declined.

"He didn't do what he was expected to do," says Patrick Basham, director of the Democracy Institute, a libertarian think tank based in Washington, D.C., that has spent years tracking the online gaming sector. "The point of the U.S. action was to get Ayre to throw up his hands to avoid having his life taken away." Ayre himself explained his demurral in a 2006 magazine interview when he paraphrased Sun Tzu's The Art of War: "I'm going to win this war without fighting battles."

Ayre may not have wanted a fight, but the DOJ did. It indicted Ayre in 2012 on charges of operating an illegal online gambling operation that engaged in international money laundering. But the low point came shortly thereafter, when Ayre's associates in the Philippines decided they could exploit his weakened position. Basham hinted at violence, so I probe Ayre for details at lunch.

"What was that all about in the Philippines?" I ask, as ceviche and potted shrimps, shellfish cocktails and scallops arrive.

Ayre puts down his fork and wipes his mouth with a napkin. "That was all about unscrupulous people trying to take advantage of my situation with the U.S. and steal my shit, basically."

But what did they do? I press.

"Oh," Ayre says, realizing I don't know the details. He picks up his fork and starts eating with enthusiasm, talking with his mouth full. "They tried to kidnap me. A few times. But they…ah…they missed. So, lucky me! Candy, have you tried these? They're yummy!"

 

Ayre was finally cleared of U.S. felony charges this summer. After 10 years of legal wrangling, it seems the government blinked. Maybe it was because Ayre really was out of gambling, as he claimed. Maybe it was the World Trade Organization rulings that repeatedly said the U.S. couldn't go after Antiguan gambling interests, which is where Ayre was by then based. Ayre pled guilty to a single misdemeanour of being an accessory after the fact to the transmission of wagering information. The penalty was a year of unsupervised probation and a $500,000 fine. The end of the ordeal came in a conference call hosted by his lawyer in Vancouver in July 2017. But Ayre doesn't view it as the key moment. That occurred shortly thereafter, when he arrived in London, free to cross borders without fear of being extradited for the first time in five years.

"That was cool," he says, remembering. "Very cool." Then he laughs. "London is the epicentre of online gaming and the epicentre of bitcoin. And that's not a coincidence."

---

Ayre's bitcoin eureka moment came in 2010. He had already given up the Bodog operation, and a technology specialist working with him on a new venture (which he declines to name) presented the idea of a currency exchange for bitcoin. Ayre was only vaguely aware of the virtual currency, which had no commercial applications and negligible value at the time. But once he had the details—an international payment system involving encryption, distributed accounting, pseudonymity and no centralized control—Ayre started paying attention.

"I was like, this technology does what? Like, seriously, what?" Ayre recalls. "From the first moment I had it fully explained, I knew it was going to be huge."

Given that Ayre was in the crosshairs of the most powerful government in the world, the fit was clearly good. After all, bitcoin is a fundamentally libertarian idea. The technology emerged from online discussions between a group of American cryptographers and a mysterious person (or possibly several people) known as Satoshi Nakamoto. Satoshi first formalized the bitcoin concept in the November 2008 white paper "Bitcoin: A Peer-to-Peer Electronic Cash System." Then, following an online posting warning against using bitcoin to send donations to WikiLeaks, he abruptly disappeared. Speculation about Satoshi's identity has become the digital-age equivalent of trying to uncover Deep Throat. In 2014, Newsweek famously found someone with the same name and turned his life into a circus before realizing they didn't have their man. A couple of years later, a blustery Australian crypto-enthusiast and businessman named Craig Wright stepped forward, claiming to be Satoshi. GQ magazine hired cryptographers of their own and busted his hoax. But Satoshi's spirit—a will to invisibility, to a perfectly preserved individual autonomy, to an absence of centralized control—informs the whole bitcoin project. And it has always appealed to people who have reason to distrust such control in the hands of government.

But Ayre was also starting to understand why others were talking about this currency like it represented a revolution. "You have to look at bitcoin as not just a payment. Payment is just the first usage," says Shone Anstey, a Vancouver entrepreneur whose company, Blockchain Intelligence Group, designs software that law enforcement agencies use to track cryptocurrency transactions. "Bitcoin adds a trusted transaction layer to the Internet itself. It's a very fundamental shift in the world. Once you understand it from that perspective, you start to see how big it's going to get."

The original motive of bitcoin's inventors may have been to evade governments, banks and especially law enforcement, but in recent years the currency has been making inroads into mainstream consumer markets. This year saw an explosion in the number of users, which now hovers around 12 million. Today, dozens of companies offer software and hardware "wallets" to securely store the coins and exchanges on which to trade them. And companies ranging from Microsoft to spaceflight business Virgin Galactic will sell you their goods and services for bitcoins.

To appreciate the scale of this growth, consider that in mid-2010, the trading value of BTC was fractions of a penny. Users were mostly cryptographers experimenting with the protocol formalized in Satoshi's white paper. In the most famous story from those days, Florida developer Laszlo Hanyecz paid 10,000 BTC to have a couple of pizzas delivered, just to prove that the currency could theoretically be used in commerce. A few months after Hanyecz's experiment, BTC took off. Within a year, it was trading at $30, making those pizzas worth about $150,000 apiece. But the steepest run-up is happening this year. As of early November, the value of 10,000 BTCs stood at $70 million. That makes Satoshi Nakamoto's reported position of one million bitcoins (his founder's stake) worth $7 billion. No wonder people still want to find him.

This growth may exhibit "irrational exuberance," as Alan Greenspan famously characterized the dot-com bubble of the 1990s. It has also created a problem—the same one that plagued the early Internet, when its user base went from geek specialists to commercial entities: scalability. How do you grow the thing without breaking it? If you're old enough, you'll remember that some developers never thought the Internet would be able to handle images. Then it was video. And on it went. But techies—often working in porn, gambling and other shady reaches of the web—devised ever new ways to accommodate user growth and the emergent demands that those users put on the system.

In bitcoin's case, as for any cryptocurrency based on "blockchain" technology (see "Crypto cheat sheet," below), the growth will be constrained by the system's capacity to process transactions. The exploding user base is already slowing down the BTC exchange systems, which leads to higher costs for those who maintain the system, which leads to higher transaction fees to users. Roger Ver, a Tokyo-based entrepreneur whose early championing of bitcoin has given him cult figure–like status and the moniker "Bitcoin Jesus," tells me that the fees have gone from fractions of a penny per BTC transaction in the early days to about $10 now. Key BTC proponents are talking about average fees reaching $100 or even $1,000 per transaction, he says.

 

That reality has caused a proliferation of competing cryptocurrency platforms, such as Litecoin, Ethereum, Zcash, Dash, Ripple and Monero. Think of these nascent digital tenders as alternate routes people start to seek out when the highway becomes gridlocked. Some cryptocurrency enthusiasts—notably Calvin Ayre, Roger Ver, Craig Wright and anti-virus software pioneer John McAfee—have been voting with their feet by abandoning BTC and embracing a new currency launched on Aug. 1 of this year. Called Bitcoin Cash (trading as BCH), it is expressly designed to speed up payment validation, lower system maintenance costs and ultimately reduce users' transaction costs. According to its proponents, BCH is a bid to get bitcoin back to Satoshi's original vision: fast, easy, cheap and reliable peer-to-peer transactions, with privacy for users and no central control.

Ayre grows animated as the topic of BTC scalability and the schism with BCH comes up. As the wine is poured and our mains arrive—lemon sole on the bone with sauce Béarnaise, monkfish and tiger prawn masala—the judgment he renders is unequivocal.

"For bitcoin to be successful, you need to have massive scaling, increased velocity of transactions and low transaction fees. I firmly believe that. And so do the people we're working with in this industry. BCH is bitcoin. BTC might survive off in the wilderness as something else. But it's not the real bitcoin."

Those appear to be more than words. In what may be the biggest gamble of his career, Ayre has pulled his cryptocurrency investments entirely out of BTC and put all that money into Bitcoin Cash. "You know what you should do?" he says, knife and fork in hand, getting ready to dig in. "Twenty-five percent of your net assets. Put them in BCH. Don't even let yourself look at it for a year. Then see what you have."

---

So Ayre's all in BCH. Or so he says. It's hard to quantify his bet, since he won't say anything about his net worth or where his money might be otherwise invested. For what it's worth, when I ask Ver if Ayre is a big player in Bitcoin Cash, he laughs out loud. They've never met, but the first thing Ver wants me to know is that he's honoured Ayre even knew enough about him to mention him positively in our conversation. That's coming from Bitcoin Jesus. Then he says, "Any time a billionaire gets involved in your area, they become a big player. Yeah. Calvin's a really big player."

Ayre's description of his battle plan suggests he's moving on multiple fronts. He's investing in fintech startups that relate to the cryptocurrency arena. He's developing the capacity to verify BCH transactions (see page 38 for more on the process, known as "bitcoin mining") and seeking cheap electricity to support the massive server farms that endeavour will require. He needs less than 5¢ a kilowatt hour, he tells me. Russia is looking promising. Ayre has also built a private commerce platform, based in Antigua, that processes cryptocurrency transactions globally, both as a currency exchange and an intermediary for commercial entities.

"I've become one of the biggest private bitcoin processors in the world today," he boasts, leaning back as a waiter ghosts in to peel the skeleton out of his lemon sole in a single deft motion. "And when I say 'private,' that means I process only for people that I want to process for."

The last part of his plan, Ayre tells me, is to become a spokesperson for Bitcoin Cash. With the DOJ shackles off his travel, he can move around and talk to people. He's purchased CoinGeek.com, a site devoted to cryptocurrency news, so he has a platform from which to get the BCH message out. And, of course, he's here in London eating lunch with me. "Yeah," he says. "Part of the reason I agreed to this is that I want to work on polishing my own personal brand in the bitcoin space. Our group needs more people like me, like Roger Ver. People willing to step forward."

He has a habit of drumming his hands on the table to emphasize a point that particularly excites him. He does that now, on either side of his plate: badabadabada bum!

Certainly, there is evidence of street-level excitement about Bitcoin Cash. Ver remains diversified, he tells me, holding a range of virtual currencies, but he now owns more BCH than BTC. Even more telling is his willingness to wager on the success of Bitcoin Cash, which he did recently with Wang Chun, owner of the mining pool F2Pool and prominent supporter of original bitcoin. At the 2017 Shape the Future Blockchain Global Summit in Hong Kong, Chun suggested that BCH "will be short-lived." Ver put $1 million on the table and gave Chun a two-year time frame. Chun demurred.

Others are also stepping forward to back BCH. A couple of weeks after my lunch with Ayre at Scott's, Craig Wright—the one-time would-be Satoshi Nakamoto—appeared in London to speak about cryptocurrencies at an event held in the basement of a pub. In a rambling, wine-fuelled address to a room packed with more than 100 people, mostly young men, Wright extolled the history-shifting virtues of BCH. "There is no need for a gold and silver of bitcoin," he said. One investment grade will do: "We only need Bitcoin Cash."

If Ver's wager and Wright's zeal carry the day, then Ayre's big gamble comes good. But it's worth considering what might stand in the way. BTC market share has eroded with the emergence of BCH and other virtual currencies—Ver says it's down from 99% three years ago to less than 50% now—but there are still more proponents than critics of the original bitcoin.

Shone Anstey of Blockchain Intelligence, whose software helps law enforcement agencies prevent money laundering or terrorism financing using cryptocurrencies, thinks BTC will prevail. "It has more computational power behind the network than BCH by a long shot." More importantly, Anstey argues, BTC has reached the tipping point of broad acceptance. He reminds me of the acrimonious debates of the early Internet, which also relied on an open architecture. "But the Internet just kept motoring along and getting bigger, and eventually…there was so much momentum that it became impossible to kill." He believes that's where bitcoin is now.

Investors choosing between BTC and BCH might do well to also consider which variant is more likely to garner the support of regulators, who are eyeing the currencies warily. While the culture of cryptocurrencies in general remains inherently hostile to surveillance, original bitcoin may be safer in this regard. Anstey's confidence in the original bitcoin is based partly on the fact that BTC transactions can be analyzed using software tools of the type his company develops, which untangle the encryption and link individuals to suspicious transactions (the U.S. Department of Homeland Security is a client).

Supporters of Bitcoin Cash, in contrast, claim that one of its advantages is that it makes tracking activity more difficult. First, by increasing the size of the transaction blocks, the currency greatly raises the volume of data authorities must sift through, Ver explains. Second, with BCH's much lower transaction fees, users can afford so-called mixing services that scramble transactions and make them harder to trace to individuals. And if these features disrupt efforts to curb money laundering or terrorism financing, or complicate taxation and the setting of national economic policies, so be it. "People having more control over their money is a good thing," says Ver. "So it's bad that al-Qaeda will have more control over their money too. But the genie is out of the bottle, and there's no putting it back."

---

As our lunch draws to a close, Ayre ends up echoing Ver's point almost exactly. Bitcoin Cash is better at eluding centralized control, which he views as a net gain. He brings up Russia again, as the government most likely to support the cryptocurrency ideals. "People talk about Russia shutting this thing down," he says. "They won't. Because it's the one thing they have as a hedge against American control of the global financial system."

So who invented bitcoin? I ask. Who is Satoshi? Could Russian intelligence be involved?

 

He smiles at that, leans back. The waiters have cleared the table. Candy sits in silence, waiting for this long conversation to be over. The noise in the restaurant has been rising steadily since we arrived, all of posh London seemingly crammed into the same place, laughing, talking and clattering silverware. I can't tell if Ayre had previously considered that Russia might be behind this most recent disruptive technology. It wouldn't be the first time Western libertarian impulses received support from those who used to peer at us over an Iron Curtain.

But no. He shakes his head. Satoshi was a group of people, that much is true, he tells me. To explain, he comes back to his new bitcoin commerce platform—that private service he claims makes him one of the largest crypto-transaction processors in the world and which he offers only to chosen clients. Like who? I ask. He leans in, lowering his voice. "Gaming sites," he says. "Non-U.S. facing, of course. But here's a little story."

Satoshi: People say the big idea came out of the market crash of 2009 and the subsequent frustration with Wall Street. Not so, he says. "Bitcoin comes out of the gaming industry. The people who created it were online gaming companies responding to aggressive governments. There's actually poker code writing in the original bitcoin code. Did you know that? It's there if you know where to look."

Ayre is pleased to share this detail. There's no way for me to confirm it, of course. And it certainly fits the narrative Ayre seems eager to spin: of gaming companies as the heroes of independent enterprise, ingeniously overcoming hurdles erected by Big Government, just as Ayre himself has rounded the track, taking hurdle after hurdle, outlasting his pursuers and ending up in a new place that can yet be seen to have emerged from the old. In orbit again around the planet Chance. Bets down. Outcome pending. A crooked smile on a gambler's face.

Lunch is over. Ayre is on his feet. The expensive Burgundy he ordered has hardly been touched.

"We gonna take this?" he asks Candy. "We can drink it later." And with that, he's off and out into Mayfair, bottle in hand.

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Posted: Friday, Nov. 24, 2017 11:49am
Tags:

They're Everywhere

 

Holy stickers Batman. These things have hit Toronto, New York, Halifax... everywhere.

Now they've reportedly crossed the pond. They're going up in the UK now.

Move over Banksy. Or whatever. I have no idea what this means.

Posted: Thursday, Jan. 19, 2012 9:47am

Negative Empathy

Should writers of fiction review the work of colleagues? I avoid it personally, and my rational for doing is the basis for my side of a debate that was part of the CBC Literary Smackdown series recently. The other side of the issue was taken by esteemed Victoria-based novelist and nonfiction writer Robert Weirsma, who also writes a lot of fine reviews.

You can find our respective essays on the topic here, along with a link to the debate as broadcast on Sheila Rogers show Next Chapter.

I enjoyed the discussion because I enjoy talking to Robert. But I knew going in that arguing my side of the resolved was a thankless proposition. That's because I was arguing that the prevalence of competitiveness and envy in our culture and economy - magnified incredibly, in my view, by the migration of that culture and economy from offline to online - makes the review that one writer writes of another writer highly suspect. Consciously or unconsciously, in other words, insider reviews (positive or negative) end up being strategic, designed in their subtle and not-so-subtle ways to serve the purposes of the reviewer. Better that the writer withdraw from this toxic maeltsrom of mutual appraisal and measurement (as exemplified in our hysterical interest in our own online profiles) and leave reviewing to "professionals", people who write from within literature but not within the writing community.

Robert's argument for reviewing was from the standpoint of empathy. As a novelist, he could empathize more with the writer being reviewed than could a non-writer. Empathy, in this analysis, provides the novelist/reviewer with insights into the writing process and the significance of the literary accomplishment as it's ultimately delivered (or not) on the page.

That point is interesting because it shows that Robert and I come to our respective conclusions in response to our observation of what are closely related human capacities. Empathy, after all, is the mother of envy.

Here's Martin Amis putting his finger directly on the button in The Pregnant Widow:

"It was only Nicholas, his male flesh and blood, that Karl really envied. And envy, the dictionary suggests, takes us by a knight’s move to empathy. From L. invidere “regard maliciously,” from in- into + videre “to see.” Envy is negative empathy. Envy is empathy in the wrong place at the wrong time."

That's a very powerful idea: that "to see into" someone (their work, their tastes and tendencies, their condition) might "by a knight's move" lead us to "regard maliciously", wanting what the other has and quite possibly wishing them ill.

Powerful, but as I said, thankless. Who wants to hear that? It self-recriminates. And since we prize independence of mind and the idea of personal autonomy perhaps above all other things in our culture, that very idea that we are vainly comparing ourselves to others and finding ourselves wanting is bitterly distasteful.

Of course, my whole argument was also an abstraction. I wasn't saying Robert specifically was envious and therefore a strategic reviewer. I was making a point that is as inwardly directed as it is outwardly.

In an interesting Facebook disscussion that sparked to life after Canada Writes posted the essays, the downsides of taking my position were immediately plain, as I was asked to produce my evidence and provide an example from Robert's reviewing of the envy that I felt prohibited the novelist/reviewer from effectively reviewing a colleagues work.

Fair play. I was in the realm of abstraction. And while I won't take on Robert's work, I'll happily take on my own. Consider this review I wrote of Jason Anderson's 2006 novel Showbiz, published by ECW. It ran in the Literary Review of Canada, and I now regret writing it. Not because I don't stand by the points I made, but because I can hear my own strategic positioning in it. I was writing about celebrity myself quite a lot at that time. (The Blue LIght Project was in the works.) So I had criticisms of Anderson's approach. Far more important is the fact that Anderson and I were doing the same thing at the time. Literarily speaking, we were after the same prize. We were undifferentiated competitors.

Call me a wimp, then, but I still feel icky about that review. Maybe I even withdrew from reviewing books by colleagues because of it. But the story ends well, because in a turn worthy of, I don't know, Flaubert, my own 2006 novel, Story House, was then bitterly trashed and stomped only six months later *in the same publication* by a reviewer named Adele Freedman.

Story House is about architecture. Freedman is an architecture critic. And she tore me a new egress, to put it politely.

Let's agree to call that karma.

 

Posted: Friday, Dec. 30, 2011 11:49am

Portlandia Update: Canada Days

I had the occasion to attend Canada Days in Portland, Oregon, not long ago. It's a week-long celebration of Canadian industry, arts and culture, but it also added up to being the strangest trip south of 49 I've ever had. Until I received the email invitation, I had no idea there was such a festival, despite the fact that it started in Anchorage and is now happening in various other American cities including Boise. In any case, it’s apparently the brain child of the Canadian consulate in Seattle – and as unlikely as such an event might seem, I was happy to be asked. Let's be honest, it was a chance for me, a Canadian novelist, to talk about the literary life in my country. I had a book to promote. And besides, the email promised a room at the Westin. I think I probably accepted in less than five minutes.
 
I was picked up at the Portland airport by Rudy, a public affairs officer in the Seattle consulate. He’s an American citizen, and on the way into town, all he wanted to talk about were the mid-term elections. These had gone pretty heavily the Republican way, and Rudy was aghast. Many people he knew were aghast. I'd just taken a 6:30 AM flight from Vancouver and frankly, I wasn’t fully awake, much less offended by American electoral developments. Sensing this, Rudy changed the topic. Be it resolved that Portland is a pretty city although, admittedly, Canadians has pretty high standards in this regard. No sparky debate ensued.
 
As it turned out, the Westin was too expensive, so we were put up at the Mark Spencer instead, which a Portland resident would later estimate to be the city's cheapest hostelry that does not rent rooms by the hour. This didn't bother me. Having a health care system to protect, I'm on side with cost-cutting measures. Besides, I told myself while walking up the six flights to my room (the elevator was broken) Rudy had me booked solid with readings. I’d hardly be in the hotel. Indeed, my first engagement was an hour later, at Portland Community College. Kevin, another cultural affairs operative at the consulate, and also American, called to suggest we meet at the Westin.
 
"But we're not staying at the Westin -- " I started, then the nickel dropped. That's where consulate staff are staying. Of course.
 
Kevin warmed up the 30-odd students at PCC with a quiz. How many of you know the capital of Canada? How many of you know the name of the President of Canada? Sullen silence. And then: how many of you have seen one of these before?
 
He reached into his briefcase, but for what? A maple leaf? A can of Blue? No. What Kevin pulled out was a Coffee Crisp chocolate bar. "It's from Toronto!" Kevin said, smiling indulgently and begging to distribute more of them to the class.
 
I'm not normally in favour of giving out candy before a reading. It smacks of bribery. Plus, I can't stand crinkling paper when I'm trying to emote. But I needn't have worried. So convincing was Kevin's portrayal of the Coffee Crisp as alien object that most of the students were reluctant to taste them. A girl in the back row gingerly peeled away the wrapper and sniffed the contents, frowning. After a minuscule bite, she grimaced and shuddered. First taste of whale blubber, you might think.
 
Happily, the reading went over well. The students asked many intelligent questions and I left feeling upbeat. But in the car Kevin, the quarterback of Canadian cultural imperialism in Portland, revealed that he’d been given one thousand Coffee Crisps by Nestle and was committed to the task of distributing them. Since all of my scheduled readings combined were unlikely to accumulate an audience big enough to eat 1000 chocolate bars, he was staging a Coffee Crisp Give Away in Pioneer Courthouse Square the next day at noon.
 
We read that night at the Portland Public Library. It's a beautiful building and my writer colleague and I enjoyed the literary ambience, the suggestion of a large crowd made by all the chairs (a Coffee Crisp set neatly on each one) though in fact, attendance just squeaked into two digits. And the Q&A afterwards got off to a predictably sleepy start when my reading partner announced that she was boycotting all future American readings in support of Rohinton Mistry.
 
At this point some background is necessary. There are two types of political Oregonians: "Dry-siders" (who live inland and are extremely conservative) and "Wet-siders" (Portland-based, typically liberal). Since Dry-siders are not well known for attending celebrations of Canadian culture, tonight’s crowd was a Wet-side crowd. And if you tell a Portland Wet-side crowd you're boycotting them because of their own federal policies – after these particular mid-term election results, anyway – you will be met with FAR greater enthusiasm than if you try to give them free chocolate bars. The small audience was practically on its feet with excitement at the opportunity to talk trash about US immigration and homeland security policy with the undisputed champs of self-trash-talking, Real Canadians. Literary discussion was derailed.
 
"What do writers in Canada think we should do?" one woman asked, poignantly highlighting a deep leadership crisis in Oregon.
 
Another man, misty with regret just hours into my colleague's first visit to his city, said, "All I know is that I'm sad you're not coming back. We're going to miss you."
 
I was tempted to announce my own boycott just to even things up. But all the egregious policy screw-ups I could think of were Canadian. And clearly these folks would not respond well were I to boycott Canada. I considered announcing a boycott of American accounting firms, but the audience would have sensed there was no personal sacrifice in it. And personal sacrifice, surely, is what gives moral rigour to my colleague's announcement.
 
The next day, I felt my zeal waning. I met Kevin at the Westin again and realised he still had a van-full of Coffee Crisps. I sensed the assignment was starting to weigh on him too. Maybe he’d just found out that Nestle was actually a Swiss company whose motto is: "The World's Food Company". In any case, yesterday's chocolate bar give-away didn't liquidate the inventory as expected due to a steady, torrential rain. And there are only so many Coffee Crisps the squeegee kids can eat.
 
We were scheduled to address another group of students, smaller but more political. I started to wonder if they thought this would make me feel at home, but I was hardly seated before the electoral lament began. Not even my benign presence – I was trying to silently communicate the forgiveness of all Canadians – nor even the Coffee Crisps, which I finally decided would be the focus of my own life-long boycott, could console them.
 
"We're so depressed," said an 18-year-old man, conscious no doubt that a life of statistically normal duration would grant him only 27 more opportunities to right these recent electoral wrongs.
 
We pressed on through our grief to questions about writing, losing ourselves briefly in discussion of character development and the creative process. No one even raised the issue of Canada as a feature of my writing until the instructor asked about the Canada Council. And I had to skirt this question, since I have not (as yet) enjoyed the benefits of that august and generous body.
 
On the drive back, Kevin showed an interest in the writerly side of things. He had recently, he said, read a freelance piece in the Wall Street Journal comparing hotel room service across America. "Just going from hotel to hotel, ordering room service," he sighed as we pulled up in front of the Westin. "That's pretty much the perfect job, isn't it?"
 
The climax of my visit was an evening reading at the Borders bookstore in central Portland. Not a soul showed up. Nada y puis nada. I'm not blaming anyone. It was my book they were ignoring. What was notable, however, was the guy browsing shelves who stopped me on the way out. He may not have wanted to hear us read, but he at least wanted to apologize for his lack of interest.
 
"I think it's a sign that an empire has grown too big when we forget our neighbours," he said, making earnest eye contact. "You'd think after 2000 years, this country would be a little more sophisticated."
 
I turned to leave. He put a hand on my arm. He wasn’t one of those Americans, he reassured me. He cared about Canada. He was a Vancouver Canucks fan. And a Chretien fan too. I stopped, fascinated by this quirky set of enthusiasms. He was especially impressed, he went on to say, when Chretien cautioned America about projecting her power in ways that might humiliate other nations. "That was insightful, that was wise," he said. "And simply extraordinary coming from a man who used to be a professional wrestler."
 
I thanked him, sincerely, for his comments. I had no chance to thank Rudy and Kevin, however. They didn't show up for the reading either. Rid at last of their Coffee Crisps, I concluded, our cultural officers had vanished into the Oregonian night.
Posted: Monday, Dec. 19, 2011 10:17am

CEO of the Year: Christine Day of lululemon

Man, did I get pilloried for this article online. Lululemon fans thought it was insulting (and I didn't even get into the whole Who is John Galt business). Worse, someone on Facebook called it a puff piece, because I didn't get into the real psychology of the CEO in question. Who is Christine Day and why have the ROB editorial staff picked her as CEO of the year?

Well it won't make any difference to those who hate the piece, but for what it's worth, Day's scarcity strategy - described below - is my best answer to the question "why is she the CEO of the year?". It's my answer, because it's the way that Day is approaching the very difficult problem of transitioning a niche brand with a very special aura, over into the big bad world of mass market brands. It's her canny strategy for preserving something special in a brand that is about to become ubiquitous and ordinary. That takes skill. So credit where due.

A final note. The scarcity model is something that lululemon extends from inventory management to public and media relations. We had no response to interview requests for this piece until the day before my filing deadline. On that day, we were offered one hour. Regrettably, I was on a plane that day, heading off to my next assignment. (The quotes below are from a series of questions she finally answered by email.) So, all that said, psychological insights into the person of Christine Day were circumstantially limited.
CEO OF THE YEAR: CHRISTINE DAY
The success of Lululemon Athletica Inc. (LLL-T45.32-1.00-2.16%) has been one of the biggest and arguably most mysterious stories in retail over the past year: a premium-priced product, sold with extensive reliance on feel-good intangibles, flourishing while so many other retailers have flagged. But on a sunny Saturday afternoon in Vancouver, you could pop into any store—the flagship Kitsilano location, for example—and, by doing nothing more than people-watching, easily get a sense of what underscores its success.
What you’ll see: mostly women, the staff youthful, the customers (called “guests” in Lululand) ranging from teenagers up to senior citizens. But it’s not so much how customers and staff look (although it has to be said, there is a common rosy glow about them). It’s more to do with how they sound. All of them are engrossed in avid conversation. Lululemon on Saturdays is a seriously chatty place. Women comparing notes on fabrics or special-edition collars. Staff modelling wraps and toques, detailing product features. Light shimmers of giddy laughter rippling through the lineup to the change rooms.
What’s notable here is that it’s not just shopping that you’re hearing. It’s community building. And if you have any doubt that Lululemon is deliberate in encouraging this sensibility, you need only read the slogans that adorn their shopping bags, advertisements and websites. Communitarian sentiments such as “That which matters the most should never give way to that which matters the least” and “Jealousy works the opposite way you want it to.” “Friends are more important than money” and “What we do to the earth we do to ourselves.” Plus, my personal favourite: “Dance, sing, floss and travel.”
Christine Day, CEO since 2008, tends to reinforce this sensibility. She says that she considers Lululemon to be “part of, and contributing to, a bigger macro-trend that affects consumers from their early teens to their 70s. Investing in your health will pay big dividends for individuals and society...elevating the world from mediocrity to greatness.”
But then, what’s interesting about the chosen quote is that it layers an interest in community over a reference to Atlas Shrugged, Ayn Rand’s treatise on the essential shamefulness of being merely like everyone else and the necessity that truly great people strive through all obstacles toward individual dominance. Rand’s 1957 novel is one of the core documents of libertarianism, bear in mind. Yet Day makes no bones about acknowledging the inspiration of the book and the life of its author. “I believe in a culture of personal accountability and not compromising your values,” Day tells me. “Atlas Shrugged is both about not accepting mediocrity and being personally accountable for the life you are creating.”
 
Day, who came to Lululemon after 20 years at Starbucks, where she was president of the Asia Pacific Group of Starbucks Coffee International, lives in Vancouver with her husband and the youngest of her three children. Befitting a Lululemonite, she does yoga and lives the Vancouver lifestyle: hiking and biking and walking the seawall. Yet it is her performance as CEO that has mesmerized analysts and the markets. With 122 stores in Canada and the United States, and 100 more now under consideration, this is a company well on its way to mass popularity. Lululemon saw its stock climb to almost $60 this fall, up over 280% from when Day joined the company, and a whopping 250% gain year over year.
If you want to know how Lulu has done it, however, don’t bother reading the financial statements. They reflect good numbers, of course: net revenue up 39% in the second quarter to $212.3 million year over year; comparable store sales 18% higher on a constant dollar basis and income from operations up 74% to $59.5 million (both over the same period). But no matter what the numbers say, when a stock is trading at 48 times earnings in the retail sector, something other than arithmetic is involved. This would be yet another contradiction that Lululemon artfully manages to maintain: in this case, a company seemingly devoted to its “guests” that nevertheless refuses to give them exactly what they want.
Need a Scuba Hoodie? You’re in luck if you like Heathered Rose Petal, but there’s no more in the Blackswan Creekside Camo. Got your eye on an Integrity Hot Tank? No problem, so long as you’re not size 8, 10 or 12. And don’t even ask about the Gratitude Wrap originally released in 2009, which sold out almost immediately and started selling on eBay for $250, because while Lululemon did re-release that item in October, 2011, it did so only in a single store, in Coquitlam, B.C., which then promptly sold out in most sizes.
Frustrating? Über-Lululemon fan and dedicated brand blogger Christina Chalmers certainly thinks so (lulumum.blogspot.com—“a place where fans can drink the lemonade together”). But then, she’s not surprised either. Because, having followed the brand as closely as virtually anyone on the planet over the past few years—Chalmers posts almost daily about company and product developments, including information on products in the pipeline that the retailer has asked her to remove in the past—she also knows that active discouragement is a key part of Lululemon’s very savvy plan. It even has a name.
“It’s called the ‘scarcity model,’” says Chalmers. “And it’s about frustrating the customer.”
Which might sound scandalous, but Christine Day isn’t shy about using the term herself. In a 2010 conference call, when the topic of inventory strategy came up, she said that while Lululemon didn’t want to be running out of core items in stores, “frustrating [customers] on that special jacket in terms of scarcity, I’m willing to do.”
Why would a company treat its guests this way? What seems highly counterintuitive (potentially fatal if publicized) is not necessarily so after considering how this rather unique brand was built and the growth challenges it now faces. According to Vancouver-based retail strategist and Lululemon-watcher David Ian Gray of DIG360 Consulting Ltd., this is a brand that has been built very deliberately. And from the beginning, Lululemon founder Chip Wilson was “very clever about guerrilla-style marketing.” What Gray is referring to is the way that Lululemon promotes itself not merely as a product—with objective features that might be compared to similar premium-priced products—but as a set of ideals expressed in those slogans of well-being and self-worth that adorn its bags, most of which obliquely reference yoga’s spiritual roots.
Which is not to say that the identification with yoga requires you actually to do any yoga. “Lots of people don’t care about the yoga and just buy the product because it makes their bum look good,” Gray says. “But Lululemon has done a great job of wrapping the brand up in a lifestyle.” That is, Lululemon is very skilled at making a healthy-seeming, one-for-all shell around what is essentially an egocentric stab at looking great.
The result is that, compared to more price-driven products, Lululemon apparel gives its customers the feeling that they’re purchasing a lot more than mere “value.” Buy a Cabin Long Sleeve T-shirt and you’re involved in bettering yourself. Pick up one of those cute Lucky Luon headbands and you’re joining a community of like-minded people. Those ideas combine powerfully, creating a sensation quite unlike that which accompanies the purchase of other premium-priced products. Lululemon isn’t an indulgence, like Bordelle lingerie or Dolce & Gabbana pumps. It’s a thing of virtue. Budget in other spending categories if you must, the brand seems to whisper, but don’t stop taking care of your body and building a better society.
With the stores full of shoppers and the stock price rising, it would appear investors believe Lululemon is pulling this off handsomely, creating real-world social networks that support the brand and insulate it from yoga-wear competitors (which now include the likes of Nike, Adidas and Under Armour). The challenges facing Day, however, stem precisely from the fact that investors are the ones making this appraisal. Publicly traded retail operations, Gray reminds me, need to show growth. That can come from same-store sales increases, but, at some point, those top out and the retailer has to expand.
The bigger problem is that Lululemon’s canny branding—which creates that aura of virtue—is fundamentally at odds with the mass popularity that will ensue if Day delivers to investors the growth they’re demanding. The “specialness” of a brand is hard to sustain when you see it on every street corner or, in this case, on every other woman in your yoga class or in the elementary school playground when you pick up your kids. That sense of being part of a haloed community starts to dissipate when the group has grown so big that it encompasses almost everybody—which is exactly what happened mid-’90s to the Gap, or mid-2000s to Starbucks. “Starbucks still has a halo compared to, say, McDonald’s,” says Gray. “But, yes, success does tend to make you ordinary.”
When I ask Day whether expansion represents a threat to brand “specialness,” her answer is unambiguous: “Yes, which is why you see us focus on scarcity of certain product styles. It is our goal not to have women wearing the same thing in their fitness classes.”
The question going forward is whether the balance can be maintained; stripped of their virtuous aura, those Groove Pants are just $98 sweats, after all. According to blogger Christina Chalmers, there are already signs that the brand is in transition from niche to mass, and that the special aura is indeed being dispelled by its ubiquity. “I’m getting a lot of comments from people saying, ‘I went to the gym today and there was another girl wearing my top!’” Chalmers tells me. “And that’s not good.” Meanwhile, in the process of growing more ordinary, Lululemon will also further open itself to comparisons with other ordinary brands, and the inevitable price side-by-sides that will follow. Case in point: a $69 Zellers jacket, released this year, modelled on the $228 Lululemon Audrey Jacket. Zellers reportedly sold out of them within a week in several Vancouver stores.
In the end, the growth-driven transition from special to ordinary may not be one that Day can avoid. But it may not be something investors want her to avoid either. There’s a lot of money to be made in being a massively popular item, even if not a virtuous one. Gray considers this to be part of a natural evolution that brands must follow.
“The management challenge is to have this brand sustain itself,” he says, “but also to reinvent at the appropriate moments. The Gap, Starbucks, Apple—these are all brands that have had their moments of reinvention.”
Lululemon’s expansion, meanwhile, should remain Day’s central concern, Gray argues. “I’m not saying [existing brand features] aren’t important to her, but in terms of day-to-day activities, she has tremendous experience in rolling out a lifestyle brand, and that’s what she was brought in to do.”
Certainly that’s what the analysts seem to think. Although with Day’s remarkable success so far, Edward Yruma of KeyBanc Capital Markets, who follows Lululemon, does not see much upside potential in the stock price; he rates it an underweight. “Lululemon Athletica is one of the best growth concepts in our coverage,” he wrote in a September, 2011, release, “but valuation remains full.” Yruma goes on to say that investors might like to hold off for a better price point before they purchase. In other words: Wait for the inevitable fall.
One gets the feeling that even moderating interest in the stock markets will not deter Day, however. Asked to comment on personal philosophy, she quotes Ayn Rand again: “The question isn’t who is going to let me, it’s who is going to stop me!” I’d say: probably nobody.
 
Posted: Wednesday, Dec. 14, 2011 12:22pm

Do You Trust Your Phone?

The Blue Light Project weirdly presages this extraordinary news story: WikiLeaks founder Julian Assange has told smartphone and email users "You're all screwed", as he unveiled his latest publications.

The 287 documents Wikileaks has released point to 150 agencies around the world that are making use of *existing technology* to monitor people's phones and computers. Software and hardware to perform this "mass surveillance" is being sold by intelligence contractors around the world and allows for data collection targeted at "entire populations".

That news is strange and scary enough. But in The Blue Light Project, the main character Rabbit has a very particular backstory. He used to work for a secretive company developing phone software. Here's the relevant excerpt. Bear in mind that what's being descibed in this passage was SciFi in my mind as I wrote it. But as I was writing about the very near future, it should perhaps be no surprise that the SciFi future was (at least according to Assange) happening already, only in the folds of secrecy that surround our present moment.

Excerpt from The Blue Light Project:

“Nobody was dying as a result of my work, I realize that,” Rabbit told Eve. “There were jobs at Raytheon and Intel where I could have worked on control systems for cluster bombs and joint stand-off weapons. I was working on a phone. I was helping design the newest, latest, hottest version of a device most people use to order pizza, text their friends.”

<?xml:namespace prefix = o />

But what a phone. What an idea. From a technical standpoint, it had been fun to work on. Naturally it was also an internet device and a video camera and a GPS and a music player. And yes, the prototype was also designed with an integrated biometric fingerprint and retina scanner, so the device was useless if it was stolen, and it could also log user medical information like blood pressure, blood type, pulse rates, et cetera. But the fact that it could do all those things was secondary to the phone’s chief innovation, which was a function that would ultimately be invisible to its users.

“And what was that?”

“It listened to you,” Rabbit said.

Eve thought about that one for a second or two. “Don’t all phones listen to you?”

“Not actively,” Rabbit said. “They just transmit. And even so, they generally don’t transmit unless you’re on a call.”

Eve was trying to work this through. “The phone was designed to eavesdrop?”

User intelligence, they called it. Or sometimes: behavioral fingerprinting. The phone was designed to sample the life of its user: ambient noises, television shows on in the background, music choices. The system then synched that data up with all the other information collected—downloads, GPS logs, voice traffic, medical data—and built a user profile that allowed the device to assemble phone books or web links, push ads and suggestions at you through the browser, even dial 911 and transmit medical data in the case of certain medical emergencies.

“Which was maybe a little more phone than some people would want,” Rabbit said. But what was a lot stranger, what really got into Rabbit’s head and wouldn’t come out, was the client-side request late in the project timetable for silent dial-out functions.

“Silent what?” Eve asked.

Dial-out. These capabilities enabled the phone to upload user profile data to pre-set third-party locations.

“As in, without people knowing,” Eve said.

Rabbit shrugged. Conceivably without them knowing, yes. The phone could have been designed to do that. He, personally, never got that far with it.

“Because you realized all this would be completely illegal?” Eve asked.

“It wasn’t illegal to test it,” Rabbit told her. “We were designing a prototype. A feasibility study.”

MADDAM, the client called it. Massively Distributable Data Acquisitions Module. Rabbit didn’t remember thinking once about what the device might represent if half the country or half the world owned one until that late client request that upload features be developed. And if there was any chance Rabbit was going to get his head around that part, there was much less of a chance the following morning when a whole raft of new nondisclosure agreements were shipped over by the client’s lawyer to be signed immediately and returned. Rabbit signed. But why the paranoia? What exactly had they been working on?

“Maybe we really were just tossing around ideas for a super-smart phone,” Rabbit said. “But that morning I realized I just didn’t know. Maybe I was developing the most sophisticated low-maintenance wiretap the world had ever seen. Selling people stuff and surveillance have a big overlap, if you’re seeing my point here.”

“I am. And I’m scared to ask the next part,” Eve said.

Rabbit nodded. He knew where this all led if you thought about it.

“Who was the client?” Eve asked.

“Short answer?” Rabbit said. “Nobody I worked with had any idea. We used a code name in house. Blue 52.”

“Blue 52,” Eve said. “And who did you think that might be?”

 *****

Please consider buying the book.

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Posted: Friday, Dec. 2, 2011 10:31am

The Solution to Inequality is Spelled: V-A-T

Early in the Canadian Occupy protests in October, Bank of Canada Governor Mark Carney described the movement as "constructive" - the understandable product of worsening income inequality. He was partly right. He should have said the protests were potentially constructive, but only if parties on both sides of the barricades open their minds about taxes, specifically the superior redistributive potential of consumption and value-added taxes (VAT) over income taxes. If you're interested in closing the gap between rich and poor and you believe that only higher income taxes on corporations and the rich will do it, you're defeating your own cause.

Let’s start with the complaint: income disparity. Both Carney and Finance Minister Jim Flaherty agree it’s getting worse in Canada. In an op-ed article published in several newspapers the day after the protests began, Mike Moffatt, an economist with the Richard Ivey School of Business, noted that Canada has fallen far down the ranks of developed countries by measures of income equality and that the gap between rich and poor here is widening faster than it is in the United States.

Serious problems require serious solutions, of course. That would exclude flaky ideas like “Smash Capitalism” and “End Ownership” (both suggested on protestors’ signs in Vancouver). Instead, Moffatt pointed out that countries with the least disparity of income tend to have moderate corporate taxes and high VATs. In Denmark, Sweden and Finland, where income disparity is low, the VAT rate averages 25%.

VATs such as Canada’s GST and the combined federal-provincial HST (in the provinces where it applies) are charged on the difference between the cost of inputs and the selling price at each stage in the manufacture and distribution of a product or service. VATs and sales taxes tend to be more efficient and harder to avoid than income taxes. Moffatt cited research by Stephen Gordon of Université Laval, which projects that a hefty increase in income taxes on the rich—say, 10 percentage points more on incomes higher than $500,000—would generate far less revenue than even a one-percentage-point HST increase. Despite the advantages of the HST touted by economists and governments, British Columbians voted to abolish their 12% HST in a referendum in August, although this will simply mean bringing back the province’s old sales tax and the federal GST.

Why are VATs and sales taxes so unpopular? One common critique is that they are regressive. On average, poor families spend a higher proportion of their income on consumption than rich families, who generally have surplus earnings to save. But if you measure a VAT or sales tax relative to total spending by individuals—the rich generally spend a lot more than the poor—those taxes actually look progressive.

VATs can also be tailored to soften or reverse any regressive impact. You can exempt or charge low rates on products such as groceries, and tax luxury goods more heavily. Political leaders can also direct VAT revenues to programs targeted at low-income groups.

In the end, however, it will probably be a lack of options that drives us to embrace VATs. This might happen if the fiscal crisis deepens. As Bruce Bartlett wrote in an article in Forbes late last year: “A VAT is never going to be seriously considered unless the need is overwhelming.” Perhaps it’s that sense of need that underscores the so-called 9-9-9 plan touted by Republican U.S. presidential candidate Herman Cain, in which he proposes to slash federal personal and corporate income tax rates to 9%, and make up for lost revenue with a 9% national sales tax.

Whatever we think of Cain’s plan, we probably won’t seize the VAT solution until deficits start driving inflation and interest rates higher, and income disparities get worse. It would be better to act now, rather than later. But that would take movement on both sides of the barricade.

Posted: Monday, Nov. 28, 2011 10:56am

Are student loans the next financial bubble?

My regular Big Ideas column for the Globe and Mail Report on Business Magazine is this month about a looming potential problem that everybody seems to know about already. It was interesting to learn, researching this piece, just how widely the problem is already being discussed while nothing is really happening at higher levels to forestall a disaster. You have to wonder whether President Obama calling for every American to pursue a year or more of college education is, in fact, ramping up demand for an asset class that is not providing a return on the investment people are making. If that analysis is valid, then Americans could be in a very similar position in education to where they were in real estate circa 2007.
***
Seems like everyone can agree what the next big economic bubble will be. For those who haven’t seen the alarming study released by Moody’s Analytics last month, that would be student loans. There are 1 trillion dollars now outstanding in American student loans and Canadians aren’t in much better shape with a total of 22 billion and counting outstanding in August.
Posted: Monday, Oct. 3, 2011 8:26am

Too Big to Fail?

Originally published in The Globe and Mail Report on Business Magazine:

Newt Gingrich is back and doing what he's done so often: igniting controversy. The architect of the Republican congressional revolution of the 1990s has created a firestorm by proposing a U.S. federal law that would allow states to go bankrupt. At present, only cities can do that, and it's been rare. But the debate escalated in January and February, as dozens of states and cities said they would have to make brutal spending cuts to slash massive budget deficits. The crisis is already so advanced that star Wall Street analyst Meredith Whitney told 60 Minutes that she expects 50 cities to declare bankruptcy in 2011.

Gingrich's plan is basically a free-market solution to deficits-the bond market will exercise the discipline that politicians cannot. Manhattan Institute scholar Nicole Gelinas explained the logic in a Boston Globe op-ed piece in January: "If bondholders worry that states won't repay their debt, then they'll jack up interest rates, or just stop lending money." That's how the market punishes underperforming companies. And legal bankruptcy, or even the threat of it, is often a powerful tool used by executives or regulators to force unions, management and other stakeholders to get real-either moderate your demands, or we'll close the doors and sell off everything for whatever we can get.

Not surprisingly, U.S. tax reformers and proponents of limited government like Gingrich's idea. It gives Washington another option for troubled states besides bailouts. The feds could just say "No." The states could then squeeze public-sector unions. Given a choice between taking their lumps at the negotiating table or possibly having their contracts swept away in bankruptcy, sane union leaders would likely take the first one.

Opponents of Gingrich's plan are vitriolic-"stupid," "horrid" and "disaster" are typical responses. You'd expect that from unions under siege. But the proposal could also backfire on Washington by rattling already wobbly markets for municipal and state bonds, and pushing local and state political problems upstream into federal courts.

Then there's the question of what happens after governments hit the wall. Unlike bankrupt companies, states and cities can't simply be shut down and auctioned off. Someone will still have to provide some services. And as Gelinas noted, the spectre of bankruptcy may not result in the deep spending cuts that Gingrich and his crowd would like to see. "If you're a bondholder, you often prefer tax increases to spending cuts," Gelinas said.

Bankruptcy also wouldn't eliminate the states' biggest financial obligations by far: unfunded pension liabilities. Reuters Money & Politics columnist James Pethokoukis says that states face a total unfunded pension shortfall-the value of future obligations already incurred minus the current value of investment assets-of $3.2 trillion (U.S.). That makes the $250 billion in budget deficits forecast for the next two years look like a blip.

Canadians should pay close attention, because fiscal problems are swelling here, too. The federal budget deficit totalled $56 billion in the 2009-'10 fiscal year. The Harper government has vowed to eliminate that by 2015-'16. But Parliamentary Budget Officer Kevin Page says that a $10-billion deficit will likely remain. "We do not have sustainable fiscal structure," he said, ominously. Ottawa also has a shortfall of $208 billion in its pension plans for federal employees, according to a recent C.D. Howe Institute paper.

Entire countries have gone bust and repudiated debts in the past, of course. But the fundamental problem with Gingrich's idea in a democracy is that it's asking the market to do a job the electorate should be doing: punishing politicians who spend too much money.

So why do politicians keep overspending? Often it's a timing issue-spending decisions are made long before bills come due, or by politicians who don't have to implement them. We have a great example of this in Vancouver, where I live. The B.C. Teachers' Federation has a contract with the provincial Ministry of Education that calls for improved wages and benefits for this school year, yet the ministry failed to increase the provincial education budget enough to cover it. The Vancouver School Board had to work with the collective agreement it had been handed. The board's solution: cut programs and school days.

Which politicians, if any, will Vancouver voters choose to punish? The trouble with the electorate, of course, is that our personal finances are as bad as those of governments. A recent Vanier Institute of the Family study noted that the average Canadian family's debt-to-income ratio has soared to 150% over the past 20 years, while the savings rate has plummeted. We've all been borrowing and spending irresponsibly for a long time. No wonder it's so hard to stop politicians from doing the same thing.

Posted: Tuesday, May. 24, 2011 8:57am

Hiring: Gut Feel or Hard Numbers?

Originally published in The Globe and Mail Report on Business Magazine:

Mike Brydon and Peter Tingling are decision theory specialists at Simon Fraser University's Faculty of Business, and they have a question they like to ask when giving presentations to senior management groups, especially to human resources managers. "How many here have taken golf lessons to improve their game?" A lot of hands go up. Then they ask: "How many have had instruction to improve their decision making?" No one raises a hand because, as Brydon and Tingling have discovered, all managers, but especially those in HR, consider themselves to be expert decision makers already.

We all tend to judge others intuitively, having "evolved to take the measure of people quickly," Brydon says. But in recruiting, it can be a costly practice, as anyone knows who's hired someone they liked after a few interviews, only to find that person couldn't do the job.

This happens because of the many biases that affect our decisions about people. We are instinctive pattern matchers, for example, judging character by a person's shoes or tattoos. This tendency affects even companies like General Electric (long a bastion of analytic management), whose outgoing CEO Jack Welch wrote that his successor, Jeffery Immelt, met with his approval because the man seemed "comfortable in his own skin." Was that a job requirement? In which case, did Welch really know what it meant or how to measure it?

Equally common are selection process biases. Brydon and Tingling cite "first-date interviews," where banal questions elicit no useful information. Or the study-proven phenomenon that applicants who let their interviewers do most of the talking tend to earn higher rankings. Likewise similarity, such as coming from the same school as your interviewer, is known to create what's called an "association" bias.

Do politeness and alma mater-overlap correlate in any way with likely future performance? Probably not. But plenty of people get hired because of them.

Information asymmetries are an even bigger issue in hiring, Tingling says. If you don't have a rigorous way of measuring candidates against job-relevant attributes-such as leadership skills or analytical abilities, market profile or sales results in the previous quarter-then there are all kinds of ways applicants can game the system. They can pump up their resumés. They can hide jobs from which they were fired. They can train themselves to give a great interview using guides available on the Internet. These tactics make candidates more attractive and articulate to the boss who goes with the gut, but this doesn't mean that the person will be any good at the job.

The question for the HR manager, then, is how to make the selection process more analytical. To help, Brydon and Tingling have developed a sophisticated decision-making software called Amadeus SRA. They refer to it as "Moneyball for the rest of us," a nod to Michael Lewis's book about the 2002 Oakland A's under manager Billy Beane. That team won its division with a payroll of $41 million (U.S.), a third of what the New York Yankees shelled out in the same year. The A's success hinged on Beane's radically non-traditional recruiting practices. He set aside the standard measures of a player's offensive success-stolen bases, RBIs and batting average-in favour of on-base percentage and slugging average. Beane was convinced that those two statistics, while undervalued in the marketplace, were more indicative of a player's potential.

That mentality, Tingling and Brydon assert, is critical in non-sports management, too, and their software guides every aspect of the interviewing and hiring process. It sets the desired attributes and considers exactly what the successful applicant must bring to the table relative to company objectives. It provides interview and testing methods by which those attributes will be measured in each case, and compiles the input of however many interviewers are involved. It then produces rankings, and slices and dices the data in inventive (and patented) ways.

Compared with traditional blunt measures, this new rigour gives company directors a new way of assessing how well the HR department is doing its job.

As Tingling says: "I've never met an HR manager who didn't know his company's attrition rate. But I've never met one who knew his company's regrettable attrition rate." That latter stat is the one that matters, of course.

The Amadeus software is currently being tested by several educational institutions and is being considered by at least one unnamed security agency. Those employers who are attracted to the software, Tingling says, appreciate the words of W. Edwards Deming: "In God we trust. All others bring data."

Posted: Tuesday, May. 24, 2011 8:53am
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