APPLE CRUSHES SAMSUNG IN COURT:

Sarah,

This year, Apple sued Samsung for infringing on patents held by Apple and won.  Apple is an enormous American company.  Samsung is an enormous South Korean company.

What Is A Patent?

A patent is when a country grants a company a monopoly on certain technology for a certain time in return for describing how the technology works.  The technology has to be novel, useful and non-obvious.  In theory this encourages innovation because it provides inventors with a hefty incentive to create. 

What Is The Technology Apple Claims To Own?

Usually the technology in high tech patent cases is difficult to understand.  This case was an exception.  Here, Apple claimed that Samsung infringed on patents that protected general touch screen technology such as pinching, zooming, scrolling, and selecting.  Additionally, Apple successfully argued that Samsung had copied the IPhone’s overall aesthetic design.

 What Did Apple Win?   

A billion dollars.

Are People Pissed?

Yes.  Even people that don’t work at Samsung.  These people believe that the touchscreen technology is too general to patent and that aesthetic design should not qualify as invention.  They argue that by granting such broad patents, the government moves competition between companies into the courtrooms.  Further, so many broad patents hinder innovation because restricting a company’s ability to work with basic touch screen technology stops them from inventing.

Bottom line: Apple is dominating everybody.

WHAT THE HELL IS THE DEBT CEILING?

Sarah,

The US debt ceiling is always in the news.  What the hell is it?  Further, what is debt?  Who owns our debt?  Here is a breakdown:

US Government 101:

The Constitution of the United States divides our government into three sections: the legislature (congress), the executive (the President), and the judiciary (the courts).  Congress makes the laws, the President and his agencies enforce the laws, and the courts interpret the laws.

Each branch is given specific powers.  Congress is explicitly given the power “to borrow money on the credit of the United States”.  Therefore, the theory goes, if part of the government needs to borrow money, congress has to approve that borrowing.  The Environmental Protection Agency, for example, falls under the executive branch because it is tasked with enforcing the laws of the United States.  If it needs to borrow money, congress has to authorize that loan.

Quick History:

Before 1917, congress had to approve each individual act of borrowing separately.  When the United States entered World War I, this system became untenable and was replaced with a new system in which congress merely “set a ceiling” on the amount of debt that could be raised.

Since then, the celling has been raised dozens of times.  In 2011 there was a standoff in congress because the debt ceiling of $14.29 trillion had been reached.  To raise the ceiling both parties had to work together; something they aren’t really into.  Democrats demanded tax increases along with cuts to government programs.  The Republicans refused to raise taxes on the theory that such a move would endanger the fledgling economic recovery. 

Predictably, congress failed to reach any sort of long term compromise and instead came to a last minute deal that raised the debt ceiling another 2.4 billion dollars.

The next standoff is due to occur in January of 2013, after the upcoming election.

How Much Debt Are We In?

The word “trillion” sounds made-up and it is hard to conceptualize just how large a trillion is.  It’s easier to think of the debt in relation to our Gross Domestic Product. (GDP)  America’s GDP is the accumulation of all goods and services produced within America in a given year.  Currently America’s GDP stands around $15 trillion.  Our debt is also around $15 trillion.  Thus our debt is about 100% of our GDP.  In other words, our debt is equal to the value of all the goods and services produced by America in one year.  This is the highest level of debt in proportion to our GDP since World War II.  The recent debt is largely due to the wars in Afghanistan and Iraq and Obama’s stimulus program. 

What Is Debt?  Why Is Paying It Back Important?

Our most common form of debt comes in the form of securities issued by the United States Treasury.  Basically, if you buy a security, you get a promise from the government that they will pay you back with interest.  The United States is able to borrow at a very low interest rate because it has never defaulted on any debt.  In other words, buying treasury securities is a very safe investment.

For this reason, it was a big deal when we reached our debt ceiling.  If we passed our debt ceiling, we would have defaulted on some of our loans because we constantly borrow money to service our current debts.  Theoretically this would raise the interest rates on our securities because they would be viewed as “less reliable”.  Further, because most investment portfolios carry treasury securities, a downgrade could cause a financial panic. 

During this crisis of 2011, a credit agency downgraded us from AAA to AA but it did not affect our interest rate because demand for US treasury securities remained strong (in a crisis people want a safe place to invest their money).

Other countries are not so fortunate.  Greece is in a financial crisis and people doubt that they will be able to repay their loans.  Accordingly, it is very expensive for Greece to borrow money.  In the news, you will constantly see headlines about bond sales in Ireland, Spain, or Greece.  The rate at which these countries can sell bonds (debt) indicates how investors view their financial health.  Recently Ireland surprised markets by selling bonds at a lower rate than expected.  This was favorable news for the Irish economy.

Does China Own Us?

You could argue it.

However, it’s not just China; other countries own us too.  50% of our debt is held by other countries.  Both Japan and China hold about a trillion dollars of American debt.

The proportion of our debt owned by foreigners has risen steadily in the last decades.  In 1988, foreigners held 13% of our debt.  In 2007, foreigners held 25% of our debt.  Now the number is around 50%. 

I honestly don’t know if this matters.

Is There In An End In Sight?

I’m not very optimistic.  Congress is incredibly polarized.  The Democrats seem unable to raise taxes.  The Republicans seem unable to effectuate major budget cuts.  Obama has been unsuccessful in cutting the deficit.  Romney promises to cut, but declares that there will be no new taxes and he will increase military spending.  I don’t really understand either party’s math.

Bottom line:  I’m more confused now than when I started writing this post.  We owe also owe Japan a trillion dollars?  What does that even mean?

WHY IS FACEBOOK’S STOCK TANKING?

Sarah,

Facebook’s stock is in free fall.  Here are some reasons why:

1.  Valuation:

When a company offers its stock to the public, they must place a value on the company.  This value will determine the price of the stock that is offered.  When Facebook initially offered its stock for $38 per share, this meant that they valued the company at $104 billion.

Now that Facebook’s stock is down to $19 a share, the company is valued at $52 billion.  Clearly Facebook hasn’t lost half its value in the last couple months.  Rather, this is a sign that the companies that prepared Facebook’s initial public offering overvalued the company.

2.  Advertising:

Facebook’s primary source of revenue is advertising sales. (people pay for ads alongside people’s profiles)  The effectiveness of online advertising is still in dispute.  Further, more and more people are viewing Facebook from their mobile phones.  Facebook is having trouble monetizing activity on these smaller platforms because it is harder to advertise on the small screen.

3. Lock-up Agreements:

Some of the early investors of Facebook agreed to not sell their stock until a certain date.  The strategy is meant to protect the stock against insider trading.  However, in the last week, a number of these lock-up agreements expired and the investors immediately dumped their stock.  This sent the price even lower.

Bottom line: Facebook’s stock has been a disaster.  In the coming weeks, even more lock-up agreements will expire and the stock may go even lower.

RISING SOYBEAN PRICES AFFECT CHINA’S POOR:

Sarah,

Sorry, I have to post another article about food prices.  Last week I posted about America's drought and how it is affecting the the price of corn in South Africa.  Now I want to tell you about soybeans in China:

America is the largest producer of corn and soybeans.  This year, a historic drought devastated America’s harvest.  Accordingly, the price of corn and soybeans is soaring.

Soybeans are pressed to create cooking oil.  The Chinese consume a lot of cooking oil because they fry most of their food.  As a result, China buys more of America’s soybean crop than any other country.

In the coming months, the higher price of soybeans will likely drive the price of cooking oil higher.  This will affect China’s poor disproportionately because China’s poor spend a high percentage of their income on food. 

China’s government is scrambling to prevent this price increase because rising food prices fuels social discontent.  They are warning their biggest oil producers to keep prices in check and are tapping into government reserves of food.

Bottom line: Weather in Iowa directly affects the Chinese government’s ability control discontent among its citizens.

PEOPLE CONTINUE TO BUY WATCHES:

Sarah,

After a brief downturn, people are buying watches again.  I guess it doesn’t matter that your phone can also tell you the time.  Here are some recent statistics:

-Exports of Swiss watches are up 20%

-Movado Sales are up 22.5%

-Recently, Fossil’s share price (their stock) went up 31% in one day.

The Los Angeles Times had some interesting explanations for the trend.  My favorite explanation is that people used to differentiate themselves by what technology they owned, but now that everyone has iPhones, people are differentiating themselves through watches instead.  The article also gave Don Draper (a character in the show Mad Med) a lot of credit for restarting an interest in watches.

Source: “Watches are Standing the Test of Time” Los Angeles Times, 8/16/2012,  

THE BRICS ARE SLOWING DOWN:

Sarah,

Several years ago some economist came up with the term “BRIC” to use as shorthand when referring to Brazil, Russia, India, and China.  These countries are grouped together because they are huge and have experienced rapid economic growth over the last decade.  Now, all except Russia are witnessing an economic slowdown- China’s growth is the lowest in three years, India’s growth is the lowest in 7 years, and Brazil’s growth has dropped to zero.  Here’s an extremely oversimplified summary of why:

1.  Economic growth in China and India relies heavily on manufacturing.  The primary markets for these manufactured goods are Europe and America.  Europe is in a never-ending financial crisis and America’s economy is not growing.  Thus, demand for China and India’s goods has been weak.

2.  Relatedly, investment from European and American investors fuels growth in BRIC countries.  Since Europe is being forced to bailout its own economies, there is less money to invest in developing countries.

3.  China and India rely on manufacturing and Russia and Brazil rely on exporting commodities.  Commodities are essentially raw materials- metals, crops, wood, and oil.  When production at Chinese and Indian factories slowed down- so did the demand for these raw materials.  For example, Brazil has exported iron to China for the last decade.  Currently, a drop in demand for iron has led to a drop in Brazilian exports of iron to China.

4.  When economies grow, the wages of workers usually rise.  If a factory has to pay its workers more, it is less competitive globally.  For example, rising wages in China have made Mexican factories more competitive.  Although Chinese workers still earn less than Mexican workers, Mexico’s proximity to the United States allows for lower transportation costs.  When you even out the costs, Mexico may end up with the cheaper product in the American market.

4.  There is also a rash of country-specific problems.  For example, India cannot seem to maintain quality infrastructure.  Infrastructure in this context means roads, railroads, and electricity.  When companies cannot rely on the roads or power supply of a country, they are reluctant to build new factories.

5. I mentioned Russia is still growing.  This is because Russia’s main exports are oil and gas.  Demand for oil and gas has remained steady.  If demand for energy drops Russia’s economy will also suffer.

STARBUCKS PARTNERS WITH SOME CRAZY TECHNOLOGY

Sarah,

Starbucks has partnered with a company called Square to allow its customers to pay through their smartphone.  This technology is crazy:

When the system is perfected, it will work like this:

1. A customer walks into Starbucks and his phone notifies Starbucks of the customer’s presence
2. His name and picture pop up on Starbucks’ screen
3. The customer orders and gives his full name to the cashier
4. Starbucks will verify his identity by matching his name to the picture on the screen in front of him and the transaction will be completed.

Note that the customer never even takes his phone out his pocket.

Bottom line: Cash is dead.

BRAZIL IS MOVING INTO AFRICA

Sarah,

There is a new trend of developing countries investing in Africa.  Brazil is growing fast, (it just surpassed Britain to become the sixth largest economy) and is the latest country to join the party.  This intrigues me because Brazil and Africa have an interesting history.  Let’s talk about it.

HISTORY WITH AFRICA:

The Slave Trade:

Brazil was a Portuguese colony.  The Portuguese were the original slave traders, establishing an slave trading agreement with an African ruler as early as 1494.(about the time of Columbus' journey)  By the 1540’s, Portugal had established sugar plantations in its new colony of Brazil and began importing slave labor to work the fields.  Between 1519 and 1867, more slaves found their way to Brazil than any other location in the Americas. (38% went to Brazil while 7% went to North America)  Brazil was also the last country to stop importing slaves, continuing the practice until 1831.  Note that this means slaves were imported from Africa to Brazil for over 300 years.

Rio: Capital of the Portuguese Empire:

In the early 1800’s Napoleon conquered Portugal and the Portuguese Royal Court fled to Brazil.  Thus for a brief spell in the beginning of the 1800’s, the Portuguese Empire and its African holdings were administered by officials in Rio de Janeiro.

Common Language:

As a result of Portuguese imperialism, the African countries of Angola, Mozambique, Guinea- Bissau, Cape Verde, and Sao Tome and Principe speak Portuguese.

INVESTMENT TODAY:

In the last ten years, Brazil’s focus has turned back towards Africa.  Unlike China and America, it does not need oil and unlike Middle Eastern countries it does not need food.  As a result, Brazil is more focused on expanding opportunities for itself and its companies as opposed to extracting resources taking them back home.

So what exactly does it mean to expand opportunities?  What exactly does Brazil do in Africa?  First, it lends money.  The Brazil is lending $150 million to Kenya to build roads in Kenya’s capital.  Second, Brazil builds things.  In Mozambique, Brazil is building a plant that manufactures drugs that fight AIDS.  Third, it expands its diplomatic presence; Brazil has built 36 African embassies in the last 10 years.  Fourth, it makes connections.  Flights have begun from Brazil’s largest city Sao Paulo, to Ethiopia and Brazil has recently finished laying a fiber optic cable that connects Brazil to West Africa.

Bottom Line: Brazil is doing work.