Screenshot from Global Learning Semesters Super Bowl Ad

Well, not exactly, but our Paris program did appear in first seven seconds of the Google Super Bowl ad in the third quarter of the Super Bowl.

You can watch the ad on YouTube.

Needless to say, this was one of the biggest surprises of my life and, of course, a wonderful message for the field of study abroad.

Thanks Google! (and congratulations to the other study abroad firms and websites that also appeared).

Dan Frommer at Alley Insider is excited about the acquisition.

Dan Rayburn, on the other hand, thinks this is no big deal, because, after all this is just a codec and H.264 is quite well embedded in a lot of sites and devices, so a small drop in royalties or a small improvement in quality by open-sourcing VP8 is not going to drive any real adoption.

Dan R is right on all the short-term implications, but I think there is a bigger, longer-term strategic angle here.

My guess is that Google bought On2 to support new HTML 5 standard. HTML 5 has the ability to natively support video in the browser without having a plug-in like Flash or Silverlight. In the long-term, this is a good thing for the web, but obviously Microsoft (with Silverlight) and Adobe (with Flash) don’t love it.

HTML 5 video right now is hindered by the fact that the default open-source video codec (Theora) is, quite frankly, lousy. It is based on VP3, an old ON2 technology that was contributed to the open-source community and is not up to par with modern codecs like VP8 or H.264.

I suspect what you will see is that Google open-sources VP8, not because this will get them an awesome controlling platform but because it will support HTML 5 video and *weaken* Microsoft’s or Adobe’s ability to be a platform for video.

If you parse this sentence from their announcement they are all but telegraphing this.

Because we spend a lot of time working to make the overall web experience better for users, we think that video compression technology should be a part of the web platform.

At VideoPublishing.com, we think this is overall good news. Over time, encoding and delivery will eventually fade into the background and innovation will be about managing workflow and interactivity with video, because that, ultimately is the promise of web video.

UPDATE: Some good follow-on comments by Tim Siglin here:

It is mesmerizing – the #iranelection stream is updating at more than 1 tweet per second right now.

Of course, it is messy, sloppy, repetitive, rumors mixed in with facts, a lot of retweets and it needs better authority, curation and editing tools, but still…

It is like a window into the future has opened. This one of those special moments in technology from which you realize there is no coming back.

If the Iranian protests succeed, Twitter will have been to Iran what fax machines were to Eastern Europe.

The stream is pouring out everything from news, to links to videos, to messages of support, to advice on how to, say, disable a Soviet-era tank or which embassies are or are not taking the injured.

It makes Google News look vulnerable to The Daily Show’s question to the NY Times about “Why is ‘aged’ news is better than real news?”.

Google News can’t be any faster than CNN, BBC, NY Times et al and it does not matter how good those organizations are, no individual organization can keep up with this type of mass-produced content.

It is why Larry Page said Google needs sub-second indexing; it is what Borthwick expressed very elegantly about real-time here.

I did not understand real-time a year ago; I understood it intellectually, maybe three months ago (but even then you think: do I really need Techcrunch or even Flight 1549 in “real-time”?)

But watching #iranelection tonight there can be little doubt about the direction in which distribution is irrevocably headed.

The meat of his argument is below and here is the full article.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

This should not come as a surprise. After all, the prices of long-lived assets have always been determined by discounting the flow of income (or imputed services) by interest rates of the same maturities as the life of the asset. No one, to my knowledge, employs overnight interest rates — such as the fed-funds rate — to determine the capitalization rate of real estate, whether it be an office building or a single-family residence.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier — in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

U.S. mortgage rates’ linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.

This is disingenuous. First look at these two charts (fed fund rates and housing price index).

Federal Funds Rate

From FinancialSense.com

So here is what really happened:

a) we had a huge asset bubble in the largest sector of the consumer economy

b) because the Greenspan Fed did not believe in targeting asset bubbles and because the way CPI measures housing is insane and because of deflationary effect of Chinese manufacturing

c) Greenspan was able to keep Fed Funds at historical lows for years, while pretending inflation was tame, which of course it was not – all the easy money inflation was pouring into housing

Greenspan says:

Fed funds and mortgage rates de-correlated because of global liquidity fueling the securitization chain so there was nothing we could do about it

Why this is silly, in reverse order of importance

a) They could have clamped down on lending by both depository and non-depository institutions that were fueling the bubble with idiotic or fraudulent products

b) i suspect the reason that the correlation between short and long-term rates disappeared is because short-term rates were trading in such a small and low range. If you take short-term rates to 5 or 6% they were in the 1990s, the 4-6% long-term mortgages are obviously going to disappear.

But Greenspan never felt he needed to do that because we had reached some new golden economic paradise where easy money does not cause inflation.

c) most important:

What exactly does Dr. Greenspan think was fueling the massive liquidity and chasing for yield from all the institutional investors that held down long-term rates, except the amazingly low fed fund rates. Given the savings glut and very low yields, financial “innovation” was inevitable.

None of these excuses the various parties (homeowners, originators, securitizers, buyers) from the varied and sundry stupid or fraudulent things that they did, but for the Chairman of the Fed, who is supposed to take the punch bowl away when party gets going, to say that there was nothing he could have done, well, that is plain ridiculous.

Thanks to Josh for bringing the article to my attention and Larry for noting that nobody gets a free pass in this debacle.

This was Buffett’s worst year (down 9.6%), but he still crushed the S&P by over 27 points.

Page 1:

Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.*

The table on the preceding page, recording both the 44-year performance of Berkshire’s book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.

As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”

By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.

Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.

Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 211?2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.

Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead

Full report here in PDF format:

2008 Berkshire Hathway Annual Report

30+ years of great reading at BerkshireHathaway.com

Please comment!

Project Salsa

And let us know if you are thinking about going to study abroad!

Did Taxi TV guarantee a certain number of impressions? Does nobody else want to advertise in taxis? Time will tell.

In the meantime, here are 4 ads that are still bearable on the 500th showing.

First, a super-enigmatic ad from state broadcaster, Russia Today. Works because it is non-obvious.

then, this Smith and Wollensky ad makes me hungry

Peyton Manning going around the US is good for a laugh.

Finally, Shaq playing Scramble…

The Three Fates

Here is my attempt for 2009. In 2007, I was fairly certain of my predictions as we were looking at a credit and housing bubble of historic proportions. There was no doubt it had to burst. In 2008, I was less sure but it was pretty clear that straight down was still the direction we were headed.

In January 2009, we look at world of unprecedented turmoil and infinite possibilities so I am far more uncertain than in the past.

However I am not going to let doubt and ignorance keep me from sticking my head out again. When exactly zero dollars are stake, I am a bold man. Please jump in and correct me where I am wrong.

Of course, this is a parlor game and is not investment advice. If you take your macro-economic guidance from the blog of someone for whom domain names constitute a significant asset class, then I respectfully submit that passive index funds might be a better choice for you.

World Economy

1) The consensus Wall Street forecast that the US will have a 2nd half of 2009 recovery is some kind of bad joke. Full year recession in the -2% to -3% range for the US in 2009. I can’t see any recovery before middle 2010 at the earliest and even that is optimistic. There will be weakness for years.

The key issue is that consumers have had massive wealth destruction (stocks, homes) and have to delever (too much debt, negative savings rates). That is going to be a huge drag on consumption for a very long time and why the government is stepping into the breach with unprecedented fiscal stimulus.

Real unemployment will be above 10% for sure but since the current numbers are carefully massaged to exclude large numbers of people that are unemployed by any common sense definition (e.g. they are of working age and do not have a job), that might not be the official figure.

2) Euro-zone growth will be -2% and could be worse. It will be worse in Spain and Ireland for sure.

3) UK growth will be -2% to -3% range and could conceivably be worse. The UK is a basket case; it has all the problems of the US, but more so.

4) China will be in the 5% to 7% range which is basically a recession for them. They can’t absorb their labor force at that rate of growth. The figure could be lower but I suspect they will apply as much fiscal stimulus as they can to avoid that.

5) Eastern Europe (Romania, Hungary, Bulgaria) and the Baltics are going to have a generally tough year. I don’t know enough about their economies to know specifics.

6) Icelanders will consume more herring and fewer Range Rovers in 2009. I am recruiting for volunteers to go collect this year-on-year data since I am not sure we will find it in the back of the WSJ.

Central Banks

1) Fed Reserve will keep rates at or about zero for the year

2) Bank of England and ECB will both end up at or below 100bps by year end, probably by mid-year realistically.

Residential Real Estate

1) Continues to fall in 2009 but at a reduced rate.

2) Still looking at a 30% overall decline (far side of my 2008 predictions), maybe a little bit more.

3) This is the year Manhattan will feel the pain too. 15-20% decline vs. peak in 2007 and more to come in 2010.

Commercial Real Estate

1) This is the year the bottom falls out, particularly in retail and office. I thought it would be last year that this happened but I was early.

2) A large part of the commercial real estate problem in on the credit side where assets where bought at silly prices supported by silly lending supported by silly assumptions on occupancy and rental rates…so lots of folks will default.

3) While there is a capacity problem, it is not the insane overcapacity of the 1980s

4) The CRE folks are asking for a bailout but I can’t figure out why it is an issue of federal importance if X real estate equity investor or the related debt-holders earn the cash flows from any particular building. The building will still be there generating cash flow and housing tenants…

Your Tax-Dollars at Work

1) The government will spend phenomenal amounts of your money on bailing out financial institutions and get little in return. They should just get on with nationalizing the weakest players, write down the assets to realistic levels and then refloat them once the junk has been written down so that people will believe the balance sheets.

2) Instead, they are going through extreme convolutions (TARP, guarantees, ABS guarantees, and on and on) to support inflated asset values and pouring money into the banks that is slipping back out to shareholders, creditors and management.

Painful to watch since it will just be a more expensive way to get to exactly the same place. It is the worst of all worlds: all the costs of nationalization and much less of the cleanup. Many major financial institutions are insolvent not illiquid, so we might as well get on with the clean-up, not drag it out over a decade like Japan did.

3) I have great sympathy for the fact that Paulsen et al had to make very important decisions very fast without a playbook. But a year later, there is still not an intellectually coherent framework of who gets bailed out how much nor any transparency about it.

Given that, you can be assured that much money will be wasted.

4) There will be massive (this is the word of the day!) fiscal stimulus by the Obama administration as long as the world will finance it.

5) Overall, the government has spent or guaranteed a staggering $7T-$8T so far and is going to add a few $T more. If you count the guarantees, we doubled the size of the federal obligations in 1 year.

I think lawmakers have gone numb at this stage. $30B plus $100B of guarantees for BoA raised barely an eyebrow last week. That would have been a huge event a year ago; now, what’s another $xxB to our tab?

6) The USA is in uncharted financial waters in terms of how much it is expanding its obligations on a run-rate basis (historical context: the federal govt had a higher overall debt load after WWII relative to GDP, though the overall country debt load is at record high, relative to GDP).

If the US can maintain the world’s confidence long enough to recapitalize the financial system and stimulate the economy through the upcoming consumer economy, then it is a testament to the remarkable reserve “brand” of the US economy.

But it is in a position where it is vulnerable to its external lenders and if a lender (hint: China) eventually is forced to cut and run, the options get much tougher and painful for the US.

It will either soft-default through devaluation or strangle the economy through higher interest rates (to attract capital) and fiscal restraint.

Dangerous and interesting times, watching financial common sense go against the fact that for the last 100 years, the US economy always somehow recovers faster and stronger.

Currency

Under regular circumstances, the fact that the US is printing money left, right and center would be terrible for the dollar and in the long-term we can probably expect the dollar to devalue.

But in the short-to-medium term, I have a hard timing thinking about which currency the dollar would devalue against.

The UK is in worse shape than the US and GBP is not a reserve currency. Large parts of the EMU are in terrible shape and the euro has never been tested in a crisis (will Germany support Club Med in a crunch?). Also, qualitatively on a personal level, the Euro feels overvalued in PPP terms coming from the US. Even the less affluent parts of Europe are expensive in dollar terms for basic items and that does not quite make sense.

1) Dollar will stay stable or strengthen against the Euro. I would expect 1.15 to 1.35 to be the trading range this year

2) China will not let the yuan rise against the dollar nor will it radically devalue. Stable.

3) I have no opinion about the GBP. It has already collapsed against the Euro and fallen hard against the dollar.

Web 2.0 or whatever it is called

1) Lots of silly ‘social’ companies will die this year

2) Lots of entertainment oriented video-viewing companies will die this year, but video is here to stay in a big way online

3) But overall VCs have been more sensible than in ‘97-’01 so it won’t be the vast value destruction of the .com bust.

This time, it is their financial brethren in NY & London who have shown the world what type of value destruction real Masters of the Universe can achieve. The VCs never came close to shutting down the whole global economic and trading system and breaking every single financial market.

4) Good time to invest as competition for deals, market spaces, teams and opportunities is about to go way down. You can actually focus on building a company without a dozen clones a week.

PE

1) As predicted, 2009-2010 will be years of destruction for the companies purchased based on “everything going right forever” valuation models.

Some might drag on longer due to weak covenants but it is not going to be pretty for 2005-2007 vintage investments.

The “it’s all about the velocity of investing” nonsense is hopefully dead and buried.

2) PE will return more to its historical roots in terms of buying solid companies, though for now, re-caps and investing through the debt side appears to be more feasible.

3) How good you feel as a GP in private equity probably has a lot to do with where you are in the fund-raising cycle…some folks are going to really struggle as LPs reduce their allocation to the field.

Probably we are looking a similar situation as the last down-turn where 30-40% of firms will either wind down or become substantially less prominent over the next 5-7 years.

4) In any case, PE heads seem to have suffered from the curse of being declared Masters of the Universe in mainstream publications and lauded, applauded and feared. Like naming a stadium, it is probably the perfect contrarian indicator.

Hedge Funds

1) Good luck to the quants. They got killed in 2008 and I doubt 2009 will be much better. Their models require some predictability in markets and I am not sure they are going to get it this year.

2) Needless to say many hedge funds will fail this year, deservedly so.

The thought that there could be 8,000 to 9,000 funds capable of beating the market on a post-fee, risk-adjusted basis was idiotic. 90% of them probably should go; maybe 50% will.

Investing

These are not market timing predictions. Just things that I would consider if I had a portfolio to rebalance:

1) Long dated TIPS seem pretty attractive as they are basically pricing in no inflation forever and inflation will come back eventually given all the liquidity being created. I think this is great protection for someone who is otherwise preparing for a super-recession.

2) Treasuries are overbought. While they won’t collapse this year, there is really no upside from here

3) High grade corporate debt at 500bps+ above Treasuries seems like a good buy if you / your manager is a picker

4) High-Yield at 1500bps above Treasuries is certainly a far better deal than the exact same High-Yield was at 200-300bps above Treasuries 18 months ago.

This would be a risky bet for the bold since many of these companies will fail, but if you are bold, now is the time to buy high yield when you are actually getting paid for the risk.

As with #3, probably good deals here for the person who get deep in the financials. But I have no idea; maybe all these firms will fail.

5) I have no opinion on US equities except that they will be volatile all year. It seems like we could go through a prolonged period of uncertainty, multiple compression, and general distaste with stocks like in the 1970s.

On the other hand, Buffett made one of his very rare market calls and it was a Buy and he is the undisputed master of this domain.

So listen to him, not me.

And some more qualitative thoughts

1) Pakistan is the most important battleground in the world right now and the Islamicists are having great success. Islamabad is losing control of the NWFP; Swat is getting overrun and Peshawar is endangered. All of this is happening 100 miles from Islamabad.

2) The West feels like it is at an inflection point. The economic system has failed to a significant degree, there are powerful though immature competitors emerging in Asia, and peoples’ expectations of their future well-being will not be met. The riots in Greece and Latvia are fundamentally about economic opportunity and expectations.

These types of events have lead to political, social and geopolitical re-orderings in the past.

It could happen again or we could muddle through. But there is definitely the possibility for big change in the air, in a way that there hasn’t been since the fall of the Communist bloc.

3) There will be hearings and there will be indictments.

We have only seen the beginning because the crash just happened and we had a pro-Wall Street administration.

I will be very surprised if Washington does not deliver some heads on a stick from Wall Street by 2009-2010. As with the Pujol and Pecora Hearings, Wall Street will be brought to DC and given a good spanking and a few more tomes worth of (re) regulation.

4) The financial services sector will start deflating back to more normal standards as a percentage of economy-wide profit and employment. Slow, cyclical process that will continue until the next mega bubble (10, 15, 20, 30 years?). There will always be swash-buckling financial types making billions throughout the whole period, just like there have been in every period, but the overall industry has to contract substantially and instant deca-millionaires of the past few years will be rarer.

5) The current recession has done wonders for oil prices but does nothing to change the medium-term dynamics that demand is steadily rising while supply is not.

We will still have a crunch in the medium-term. Stock up now while it is cheap! Contango saying the same thing.

6) Ongoing theme from the past: Biotech, nanotech and artificial intelligence will revolutionize society in the next 10-30 years in a way that is hard for most to appreciate, so to some degree, we are still worrying about our horse-drawn carriages when a Ferrari is on the horizon.

I continue to prepare for the day when we will welcome our robot overlords.

7) If you are reading this blog and wondering about how high-yield might trade relative to Treasuries, you are likely already one of the 0.0001% luckiest humans to ever live.

So, don’t forget that and have a very happy and healthy 2009.

The best investment story of 2008 relates to a banker who had a modest shareholding in his employer – a storied investment bank. Upon being transferred to London, he sold the stock to finance a Range Rover. As business in London turned down, the banker was transferred to Dubai.

When selling his Range Rover, he suffered a loss of around 50% of the price he paid barely six month ago. The interesting thing was that the proceeds from the sale of the car (despite the 50% loss) would have allowed the banker to purchase five times the number of shares he sold to finance the car. 2008 is perhaps the only year on record in which a distressed price for a Range Rover outperformed equities.

From Satyajit Das