Second Life, imminent death

http://www.telegraph.co.uk/technology/5078444/Second-Lifes-span-is-virtually-over-as-firms-decide-to-get-real.html is a good article describing the decline of Second Life. As someone who was talking about future markets for virtual environments as early as 1991, I find it sad, but not surprising. Second life was a good idea, but the novelty has worn off. It is essentially a combination of an exploratory computer game, a role playing game, and chat room. With many excellent computer games that add excitement to large-map virtual environments and many of those offering networked multiplayer options, the game and virtual world side of it has very strong competition. With the glut of social networking sites offering lots of bells and whistles on top of chat capability, it has lost this battle too. As the telegraph article points out, it still has a lot of visitors, but the market will continue to decline as awareness and availability of high quality competition increases, and as it starts to fall below critical mass, people will abandon it very quickly. It is sad, but Linden Labs started with a great idea, which at the time was pretty much state of the art. but they have failed to adapt and evolve fast enough, and in the rapidly evolving jungle that is the web, that is usually fatal. They could still reinvent it, but the signs are that it is too late.

What was it the Bond film was called? You only live twice? This is Second Life already in this case. The interesting question is whether Linden Labs can take the money, run, and build something else that is as new and fresh as Second Life once was. I hope so, and I wish them well.

The Loch Ness Monster Recession

Economists differ on their views of the shape of the recession. Is it a single dip, i.e. a V-shaped recession, or a double dip, W-shaped recession? Most economists seem to agree on the latter now. I'm not a formally trained economist, I am a Physics and Maths graduate who has spent my working life in various branches of engineering and now apply myself mostly to predicting future technology and its impacts, thinking about the nature of many input forces as part of that process. Since economic forces have an enoprmous impact on the future, and the economy is a topic of interest in its own right, I do certainly have my own views about the workings of the economy, and am very happy to make general predictions about its future, formally trained or not. So, just for the record, so that no-one claims that no-one saw it coming this way, I think the recession will actually follow a series of dips and recoveries, and is therefore a 'Loch Ness Monster' recession (the monster is often portrayed as a sea serpent with its body dipping in and out of the water).

The reasons I think it will follow this shape are as follows:


1 the UK will have to reduce expenditure dramatically, but this won't happen for a few years for political reasons, so the economy will show the corresponding dip later
2 The rise of China and India will continue, and will cause big rise in demand for basic commodities. China especially is already trying to assure its own access to the commodities it needs. Prices will rise due to this demand, but again, the major effects have yet to be felt. Give it another 5 years and the price of meat, fish, oil, metals will rise a lot. With more of our incomes taken up providing for basic survival, there will of course be less for discretionary spend.
3 Taxes will have to rise a lot to pay for holes in pensions provision, but this won't really affect us until several years time, so a dip will happen then.
4 Rises in travel costs due to environmental targets (however inappropriate) will make it harder to do business, and also directly undermine tourist industry. This dip will be a short term one and will coincide with the second dip widely predicted elsewhere.
5 intergenerational conflict will become significant due to young people blaming their parent's generation for the problems they will face. Many of the most talented will emigrate to other lower-tax countries, leaving the UK with the old and those with less earning capability.

These forces will act in parallel, but their curves will be quite different. In a background of (hopefully) economic growth stimulated by improving technology and the markets it brings, they will result in a series of dips superimposed on a slow underlying recovery. Hence, a Loch Ness Monster recession.

Gold v lithium

My first post on the metals markets. Gold is expensive at the moment and Fortune warns of a bubble. I have to agree. There is little intrinsic value in gold. It looks pretty much like brass and has few industrial uses that need much of it. It is an excellent conductor but circuits only need tiny amounts of it. Jewellery uses it mainly because it is expensive, but the real value of that must lie below the $300 mark since the market wasn't demanding significantly more gold jewellery even at that point. So there is no good reason why it should remain at today's level, and it won't. Once the recession starts to recede, its value will fall back to a sensible level. You don't want to be holding significant amounts then, because it may be quite a while till the next crisis forces its value back up again.

Lithium on the other hand will be in great demand as electric cars pick up over the next decade. The price can only increase, especially given the difficult regimes where much of the reserves are.

Sell your gold and buy lithium futures.

bankers and bonuses

I'm still amazed at the number of articles about bankers and how they wrecked the economy and how they are still getting big bonuses. Politicians keep promising to stop it but still haven't. But I will say again and again till people stop missing the point. Bankers should be able to give whatever bonuses they want to incentivise their staff to maximise their profits. What they should not be able to do is to gamble with taxpayer's money. They should only be allowed to use their own. If bankers can make big profits using their own company's cash then fine, let them spread it out among the shareholders and those who earned it. Why should shareholders keep it all and the staff who earned it not get their rightful share? On the other hand, if they blow it all, then let them die. They will then be directly incentivised to take reasonable risks and benefit accordingly when they get it right, suffering accordingly when they get it wrong. We do not need to regulate their bonuses, just the means by whihc they earn them. We should protect taxpayers from having to pay the bill when they make wrong decisions. Then the banks are just companies like any other that live or die in the jungle of the markets.

Limiting bonuses will not in itself protect the taxpayer from the same thing happening again, limiting the funds with which they gamble will. It is baffling why our government cannot see that simple truth, and insist all the time on threatening to regulate the wrong targets. Until they understand, we all remain at risk.

JJB Sports, sell

We just went to JJB Sports on the way home. I was surprised to see it was still there after its problems earlier in the year. The shop had 5 or 6 staff on the ground floor, and 3 or 4 customers. At the till, the one guy in front of us, already mid sale, was buying sunglasses and a pair of trainers. Almost 5 minutes later, the two girls at the till had finished and were ready to serve us. I don't think I need to say more. Sell.

HFT High frequency trading, dangers

In June 1998, I wrote an article on IT and the Future of the City,
http://futurizon.com/idp/future/thecity.htm. I'm quite pleased now as I read an article in today's Times that says pretty much the same, albeit 13 years later.

Fast computing and geographic location

With a factor of 1000 in computer speed and memory capacity per decade, in parallel with advances in software, computers can now make logical deductions from the flood of information on the internet, not just from Reuters or Bloomberg, but from anywhere. They can often assess the quality and integrity of the data, correlate it with other data, run models, and infer likely other events and make buy or sell recommendations. Much dealing can now be done automatically subject to human-imposed restrictions, and the speed and quality of this dealing far exceeds current capability. The technology is now called High Frequency Trading, or HFT. Very predictable back in the 90s, and it has arrived on cue.

It will bring problems…

Firstly, the speed of light is fast but finite. With these huge processing speeds, computers can make decisions within microseconds of receiving information. Differences in distance from the information source become increasingly important. Being just 200m closer to the Bank of England makes one microsecond difference to the time of arrival of information on interest rates, the information, insignificant to a human, but of sufficient duration for a fast computer to but or sell before competitors even receive the information. As speeds increase further over following years, the significant distance drops. This effect would cause great unfairness according to geographic proximity to important sources, but there are two solutions. Either there is a strong premium on being closest, with rises in property values nearby to key sources, or network operators could provide guaranteed simultaneous delivery of information, which I believe is now the case. However, the simultaneous delivery only applies to a small number of companies and in a restricted area. It does not apply to the large number of individuals or companies situated a long distance away.

Secondly, exactly simultaneous processing will cause problems. If many requests for transactions arrive at exactly the same moment, computers or networks have to give priority in some way. This is bound to be a source of contention. Also, simultaneous events can often cause malfunctions, as has been demonstrated perfectly by numerous system crashes across many computer systems and networks. Information waves caused by significant events are a network phenomenon that could potentially crash networks.

An interesting future side effect of this is that the predicted flood of people into the countryside may be averted. Even though people can work from anywhere, their computers have to be geographically very close to the information centres, i.e. the City. Automated dealing has to live in the city, human based dealing can work from anywhere. If people and machines work together, they must both work in the City.

Consumer share dealing and software

Ultra-powerful palmtop computers pick up and analyse information all day long, organising every aspect of their owners' lives. With finance applications able to show which shares are doing well, spot trends and act on their computer’s advice at a button push, markets will grow for tools to profit from shares, whether they be dealing software, advice services or visualisation software.

However, as we see more people buying personal access to share dealing and software to determine best buys, or even to automatically buy or sell on certain clues, we will see some very negative behaviours. Firstly, traffic will be highly correlated if personal computers can all act on the same information at the same time. We will see information waves, and also enormous swings in share prices. Most private individuals will suffer because of this, while institutions and individuals with better software will benefit. This is because prices will rise and fall simply because of the correlated activity of the automated software and not because of any real effects related to the shares themselves. Institutions may have to limit private share transactions to control this problem, but can also make a lot of money from modelling the private software and thus determining in advance what the recommendations and actions will be, capitalising enormously on the resultant share movements, and indeed even stimulating them. Of course, if the share-dealing public generally perceives this problem, the AI software will not take off so the problem will not arise. What is more likely is that such software will sell in limited quantities, causing the effects to be significant, but not destroying the markets.

A money making scam is thus apparent. A company need only write a piece of reasonably good AI share portfolio management software for it to capture a fraction of the available market. The company writing it will of course understand how it works and what the effects of a piece of information will be (which they will receive at the same time), and thus able to predict the buying or selling activity of the subscribers. If they were then to produce another service which makes recommendations, they would have even more notice of an effect and able to directly influence prices. They would then be in the position of the top market forecasters who know their advice will be self fulfilling. This is neither insider dealing nor fraud, and of course once the software captures a significant share, the quality of its advice would be very high, decoupling share performance from the real world. Only the last people to react would lose out, paying the most, or selling at least, as the price is restored to ‘correct’ by the stock exchange, and of course even this is predictable to a point. The fastest will profit most.

The most significant factor in this is the proportion of share dealing influenced by that company's software. The problem is that software markets tend to be dominated by just two or three companies, and the nature of this type of software is that their is strong positive reinforcement for the company with the biggest influence, which could quickly lead to a virtual monopoly. Also, it really doesn’t matter whether the software is on the visualisation tools or AI side. Each can have predictability associated with it.

It is interesting to contemplate the effects this widespread automated dealing would have of the stock market. Black Monday is unlikely to happen again as a result of computer activity within the City, but it certainly looks like prices will occasionally become decoupled from actual value, and price swings will become more significant. Of course, much money can be made on predicting the swings or getting access to the software-critical information before someone else, so we may see a need for more equalised delivery services, with more suppliers covered. Without equalised delivery, assuming a continuum of time, those closest to the dealing point will be able to buy or sell quicker, and since the swings could be extremely rapid, this would be very important. Dealers would have to have price information immediately, and of course the finite speed of light does not permit this. If dealing time is quantified, i.e. share prices are updated at fixed intervals, the duration of the interval becomes all important, since it strongly affects the nature of the market, i.e. whether everyone in that interval pays the same or the first to act gains.

Also of interest is the possibility of agents acting on behalf of many people to negotiate amongst them to increase the price of a company’s shares, and then sell on a pre-negotiated time or signal.

Such automated systems would also be potentially vulnerable to false information from people or agents hoping to capitalise on their correlated behaviour.

HFT is a great idea in some ways, but it is not without costs. We can expect severe problems, with lots of opportunities for instability, crashes, wild swings, and abuse of customers.

How the CWU's stupidity will help the economy

It is amazing how stupid people can be sometimes. They will happily cause themselves great harm if they believe it will hurt an enemy. Quite a few soldiers have killed themselves to deny their enemy the privilege. Such is the current behaviour in the CWU, killing the Royal Mail (and ultimately themselves) to get their own back on the management, at the expense of the livelihoods of the union members. They are not the first or only union to wreck the prospects of their members - many British Airways employees are far worse off because of the actions of their unions which have forced the company into its current financial state. But seeing the impacts on BA, it is all the more amazing that the CWU have still taken the action they have. It should be blindingly obvious to them that customers can and will use alternatives in the future, so they know they are causing irreparable and possibly terminal harm to their own employment prospects. Many administrative procedures that previously used the post can be done on-line, and once implemented thanks to the strike, will never again use the post. In fact, it will be beneficial to the owners of those procedures.

And here is the silver lining. The stupidity of the CWU will cause earlier adoption of better managerial practices elsewhere, by making postal communication more difficult and expediting the migration to electronic systems. So while it might mean disaster for their members, it will help the rest of the economy to evolve. This is a widespread impact of the recession too. Of course, recession is bad, but it does have a benefit of expediting the demise of companies that don't measure up, replacing them earlier with ones better suited to the future, with leaner management, more efficient practices, less waste, and more agility. Anything that helps improve the economy isn't all bad news.

The Royal Mail was once an important organisation. Now it is much less so. That is a simple fact of life. In my company, they provide no function at all except the delivery of magazines and parcels. All of our communication is done on the networks. On a personal level, I very rarely send cards now, and never letters. So the only impact I will notice from a strike is that I will have less junk mail to bin. I can live with that. In which case, the longer the strike, the better. Today's papers are full of news of the major web retailers switching their delivery companies. Why would they ever want to switch back if the alternatives provide a decent and economic service. If the CWU is relying on customer loyalty, it is dangerously over-estimating their hand. The rest of the world has moved on, and willing to move even further.

If the Royal Mail is to survive at all, it will need to be fiercely competitive in the distribution of magazines and parcels, the only area with any future market. It will need a lean and mean organisational structure, with competitive labour rates and unbroken, high quality service. The action of 20th century unions trying to force the company to retain 20th century terms and conditions, when the market has moved on, will simply see the company shrink even more rapidly as competition rapidly captures the remain bits of the market.

This is not a case of poor staff being exploited by a wicked company. It is a fight for survival in a changing market, and the CWU's actions will lead directly and inevitably to disaster for the people it is meant to represent. They will suffer enormously as a result, but the economy will not, it will actually benefit.