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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (44556)	9/9/2003 3:13:17 AM
From: IQBAL LATIF	Respond to of 50167

Four Scenarios for the Future of the Internet by David S. Isenberg Is the US going to get the Internet we want? Or the Internet we deserve? David S. Isenberg Now that home Ethernet is almost as common as a cable modem, it a misnomer to talk about, "the last mile." Clay Shirky points out that today's Internet is dumbbell-shaped; it is fat on the premises, fat in the backbone and at least 100 times skinnier in between. So to me, the big issue for the next five years is how the skinny middle will achieve the girth that technology makes possible. Here are four scenarios, alternative futures that sample the space of possible outcomes. Scenario #1. The telcos would have us believe that they'll give us that fat middle pipe. They'll have to lose their vertically-integrated business model to do it, or they'll have to find a way to cripple the end-to-end property of the Internet. It is a huge challenge for an established company to change business models. And if they cripple end-to-end, they're likely to cripple the very thing that makes the Internet so useful to so many people. But it's a plausible scenario, in fact it is The Official Future Scenario. Scenario #2. Other utilities -- the electric company, the gas company (and maybe the cable company) -- could use their rights of way to build the fat pipe to the premises. Utilities are good at delivering bulk, low margin goods. But can utilities be entrepreneurial enough to open new lines of retail business? Scenario #3. Customers will own the technology that extends the fat home network towards the fat backbone, eliminating the "access" sector. The ownership model might be condominium fiber, or fiber owned by homeowner associations or other kinds of small quasi-governmental organizations. This fiber will probably coexist with customer-owned 802.11 and other wireless link and distribution technologies. For this to scale, premises network infrastructure must become more self-connecting and self-operating than it is today. A further warning -- the only wireless solutions that scale enough to encompass any reasonable end-game are multi-hop or packet relay networks. Scenario #4. The telcos lawyer and lobby and legislate to preserve previous power and prevent customers, utilities and other competitors from building the network that we really want. They'd use this last strength, their remaining core competence -- to make broadband end-to-end networks illegal. This is the scenario that's most demonstrably happening in the United States today. According to a recent ITU study, among the developed nations, the United States is now #15 in broadband penetration per capita and falling fast. I think Intel -- and Intel's partners -- and the rest of us -- would prefer scenario 3, where the customers own the connection to the backbone. This outcome is not guaranteed. To get Scenario #3 we'll need good technology, strong partners and a rich value matrix, of course. But to stop Scenario #4 from making #3 impossible, we will need some major policy innovations. Five years from now, the U.S. will have the Internet it deserves. It might well be an Internet that is further behind the rest of the world's Internet than we can possibly imagine.

To: IQBAL LATIF who wrote (44556)	9/9/2003 3:19:33 AM
From: IQBAL LATIF	Read Replies (1) \| Respond to of 50167

The Price of Free Money Donald Luskin A little something called a carry trade cost bond investors billions this summer. Here's how. Just last month I proclaimed the old cliché true: bonds are a safer investment than stocks. But some readers are questioning that wisdom — and not without a certain tone of annoyance — in light of this summer's market action. Right off the bat I'll admit that obviously it isn't always true that bonds are safer than stocks. Since June 13 long-term Treasurys have lost 10.7% while the S&P 500 index has been virtually unchanged. And it's not just that bonds fell while equities stayed afloat. What's so remarkable about this period is the immense volatility of bonds at a time when the stock market has been so quiet. Extraordinary forces were clearly at work, as is usually the case whenever markets temporarily violate a principle that's practically a law of economic nature. Here's what happened. Like so many great events, it all started with a simple misunderstanding. In the early spring, with the federal-funds rate at 1.25%, the bond market thought it heard Alan Greenspan say something that the Federal Reserve chairman never really quite said. What the bond market thought it heard Greenspan and other Fed officials say — in official statements and during various speeches — was that the central bank intended to keep rates at that level or even lower for the indefinite future. The reasoning was two-fold: The Fed was going to build a firebreak against any possibility of deflation, and saw no risk whatsoever of inflation; and the Fed saw no evidence that economic recovery was substantially accelerating. So here's what the big bond traders at the Wall Street banks did, starting in April. They borrowed billions of dollars in the overnight market at 1.25%, confident that this rate would soon be reduced to 1% or even 0.75%, and then stay there practically forever. The big bond traders then took that borrowed money and bought long-term government bonds. At that point the 10-year Treasury note yielded about 4%. Try to see the world the way the bond traders saw it. You borrow money at 1%, and you earn 4% on the notes you bought with the borrowed money. Your profit is 3% for every year you can keep that position in place. Maybe 3% doesn't sound like a lot to you? Then you're missing the point. That 3% was to be earned on what amounts to an investment of zero — it was all done with borrowed money. That's functionally an infinite return. Sweet. Wall Street calls it the "carry trade," because a trader is effectively being paid by the Fed to carry bonds in his trading account. Free money! By mid-June Wall Street had put the carry trade on so big that the 4% yield of the 10-year note had been driven down almost all the way to 3%. The carry trade wasn't the only force moving Treasury yields lower. Hedging activity in the market for mortgage-backed securities took the trend set in motion by the carry trade and made it into a monster move. Mortgage-backed securities, bonds that are collateralized by packages of mortgage loans, have become the largest segment of the U.S. bond market — even bigger than the enormous market for Treasurys. Mortgage-backed securities, or MBSs, are tricky instruments that can be much riskier than normal bonds. As the MBS market has gotten larger some of its risk has started spilling over into the bond market at large. What's so tricky about MBSs is that you never really know the maturity. When you buy a 10-year Treasury bond, there's no question about it. But mortgage borrowers tend to refinance home loans when rates fall and hang on to them when rates rise. So when rates are declining (and most bond prices are rallying), MBSs suddenly get repaid. All that interest income you expected to earn over the years? Forget about it. That means that when rates fall quickly, as they did from April to mid-June, MBS traders need to buy larger and larger positions in Treasurys to hedge the falling value of their portfolios. And of course their buying drives interest rates even lower — it's a classic vicious cycle, and nowadays it tends to exaggerate the magnitude and duration of any move in interest rates and bond prices. With 10-year Treasury notes yielding just a bit more than 3% in mid-June, traders who had put the carry trade on just a month before, with bonds yielding 4%, were sitting on profits of billions on an investment of nothing. And that, of course, is when reality started to set in. On June 15 Alan Greenspan, in his semi-annual monetary report to Congress, hinted that economic growth might be accelerating just a little faster than the Fed had previously thought. Then 10 days later, the Federal Open Market Committee met and lowered interest rates to 1% — but not all the way down to the 0.75% that the carry-trade holders had hoped for. Suddenly the bond market started to re-evaluate what it had understood to be a promise by the Fed to keep rates low. Just weeks before the buzz had been that there wouldn't be even the smallest rate hike until late 2004. Suddenly mid-2004 was a possibility; then early 2004. Panic started to set in as bond prices began to fall. Why? Because the carry trade is only free money as long as bond prices either stay steady or rise. As soon as they start to fall, the losses in just a few days can swamp that 3% a year the trader expected to earn. As bonds fell, suddenly the idea of making an infinite return on an investment of zero started looking like the opportunity to take an infinite loss. As traders scrambled to get out of the carry trade, bond prices collapsed. Yields blew back through 4% where billions of dollars of the trade had been initiated, and just kept on rolling. The mortgage traders got into the act, of course, and it was the vicious cycle all over again — just in reverse. All the Treasurys bought just weeks earlier now had to be dumped. At the worst of it several weeks ago, the yield on the 10-year Treasury note got as high as 4.6%. Losses have run in the tens of billions of dollars — which, by the way, has a lot to do with why the financial sector (the S&P 500's largest sector by cap weight) has been among the worst performers this month. Many commentators have said that the Fed lied — that it has blown its credibility by promising to keep rates low, and then not following through. But as I said at the outset, I think it was a stupid misunderstanding, not a lie. All the Fed ever promised to do was to keep an accommodative monetary policy in place. What Wall Street had to learn is that the Fed can be just as accommodative as it is today even with higher interest rates. How's that again? Well, go back and read what I wrote three weeks ago when I explained why rising interest rates go hand in hand with accelerating economic growth. As growth revs up, opportunities increase and capital becomes more valuable. People will pay more to rent it; i.e., interest rates go up. For the Fed to stay accommodative, all it has to do is keep the fed funds rate relatively low in comparison to real opportunities in the economy. For a stagnant economy that relatively low rate will be 1%. But as the economy begins to cook again, that relatively low rate could be 2%, 3% or more. A year from now the Fed could be just as accommodative at 3% as it is today at 1%. And when the traders holding the carry trade started to get that message, they had no choice but to face the facts and take their losses. Of course with everyone on Wall Street massively long Treasurys, and the mortgage traders trying to sell at the same time, who was there to buy them? No one. And that's why bonds — good ol' "safe" bonds — have lost over 10% in a little over two months. So what's the lesson here? The guys with the carry trade learned that free money can be the most expensive kind. And we've learned that even a seemingly axiomatic truth like "bonds are a safer investment that stocks" isn't always true. trendmacro.com