If you simply read the headlines, you’d think that the economy — or at least spending by the average consumer — is on the comeback:

Thanksgiving Day saw an 18% increase in online spending to $479 million.

U.S. consumers have spent $12.7 billion already in the first 25 days of the November to December 2011 holiday season, up 15% from the corresponding days last year.

Sounds good, until you remember that the income gap is real and the average consumer doesn’t matter so much in the broader context:

When discussing “the consumer,” it is important to remember that in reality, “the consumer” is the top 20% of income earners and then everybody else. The top 20% of income earners (who own about 80-90% of the equity market) account for about 40-45% of all spending in the economy.

via Business Insider and TechCrunch

During my weekend readings I came across two snippets that present an interesting take on what the future of work holds. I’m fascinated by the future of work and I’m glad to see some refreshingly unique perspectives on what to expect in terms of evolution…

First Kevin Kelly on why ‘productivity’ is a worthless metric to be optimizing for:

There is more to be gained by producing more opportunities than by optimizing existing ones.

Productivity, however, is exactly the wrong thing to care about in the new economy.

The problem with trying to measure productivity is that it measures only how well people can do the wrong jobs. Any job that can be measured for productivity probably should be eliminated from the list of jobs that people do.

In the coming era, doing the exactly right next thing is far more fruitful than doing the same thing twice.

Next, Ben Casnocha via Arnold Kling on why ‘hard-to-define’ jobs may be a sign of job security:

Generally, the harder it is to explain to someone you’ve just met at a cocktail party what it is you do on a day to day basis, the more interesting the work you’re engaged in.

Arnold Kling applies a related rule of thumb to job security:

A job seeker is looking for… a well-defined job. But the trend seems to be that if a job can be defined, it can be automated or outsourced.

The marginal product of people who need well-defined jobs is declining. The marginal product of people who can thrive in less structured environments is increasing.

Very interesting article in the New York Times discussing the growing disparity in income among Americans:

The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent [article] on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.

While it seems impossible to many, the US now has a level of income disparity comparable to China. As many are (rudely) discovering, we are undergoing some really massive transitions; educational costs skyrocketing and the middle class continues to pay educational premiums (college, graduate school), though in many cases for less and less of a return. Many of my friends with tremendous liberal arts educations continue to struggle with the job search while also shouldering massive debts. Skills are at a premium. The increasing income inequality (and decreasing wages) reflect a new premium paid for skills and decreases in wages for the unskilled due to increasing competition.

On top of educational/skill shifts, the allocation of taxes against this disparity is also hotly contested. Business Insider produced a great info-graphic showing that the top marginal tax rate correlates inversely with the income share of the top 0.01% of earners.

Yet, despite what appears to be worrisome/shocking data points I’m also reminded of a great Paul Graham essay (hat tip to Quora) on the difference between ‘wealth’ and ‘money’ (see excerpt below).

Ultimately I’m unsure how, or if, this new disparity affects the overall ‘wealth pie’:

If you want to create wealth, it will help to understand what it is. Wealth is not the same thing as money. Wealth is as old as human history. Far older, in fact; ants have wealth. Money is a comparatively recent invention.

Wealth is the fundamental thing. Wealth is stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on. You can have wealth without having money. If you had a magic machine that could on command make you a car or cook you dinner or do your laundry, or do anything else you wanted, you wouldn’t need money. Whereas if you were in the middle of Antarctica, where there is nothing to buy, it wouldn’t matter how much money you had.

Wealth is what you want, not money. But if wealth is the important thing, why does everyone talk about making money? It is a kind of shorthand: money is a way of moving wealth, and in practice they are usually interchangeable. But they are not the same thing, and unless you plan to get rich by counterfeiting, talking about making money can make it harder to understand how to make money.

Money is a side effect of specialization. In a specialized society, most of the things you need, you can’t make for yourself. If you want a potato or a pencil or a place to live, you have to get it from someone else.

How do you get the person who grows the potatoes to give you some? By giving him something he wants in return. But you can’t get very far by trading things directly with the people who need them. If you make violins, and none of the local farmers wants one, how will you eat?

The solution societies find, as they get more specialized, is to make the trade into a two-step process. Instead of trading violins directly for potatoes, you trade violins for, say, silver, which you can then trade again for anything else you need. The intermediate stuff– the medium of exchange– can be anything that’s rare and portable. Historically metals have been the most common, but recently we’ve been using a medium of exchange, called the dollar, that doesn’t physically exist. It works as a medium of exchange, however, because its rarity is guaranteed by the U.S. Government.

The advantage of a medium of exchange is that it makes trade work. The disadvantage is that it tends to obscure what trade really means. People think that what a business does is make money. But money is just the intermediate stage– just a shorthand– for whatever people want. What most businesses really do is make wealth. They do something people want.

Today was the first time I’ve had a chance to hear Peter Thiel talk live and he did not disappoint!

I spent Saturday and Sunday at the 2009 Singularity Summit, held for the first time in New York. Michael Vassar, Singularity Institute’s president, did an exceptional job of assembling an all-star cast of speakers. Talks covered a variety of subjects ranging from quantum computing to radical life extension to venture capital. For those unfamiliar with singularity, a brief description is here. Also, WebMetricsGuru has great coverage of day one here.

The following is a brief synopsis of Peter’s talk (side note: I understand all videos will be available on the SI website soon).

—

Peter starts by taking an audience survey, asking which of seven doomsday scenarios people are most frightened by.

The audience sees two clear winners: a) runaway biotech, e.g. mutated diseases wipe out civilization and b) that the singularity takes too long to happen (title of the talk).

Peter suggests that the recent credit/financial crisis actually has to do with singularity. Our society is on shaky ground: millions of people have money invested in pension funds (and the like) which they expect to produce returns of ~8% per annum, even despite various period of volatility. What people forget is that the past returns we’ve come to expect have been generated during periods of compounding innovation; cutting-edge tech has bolstered all other lines of business that rely on technological gains to increase productivity, etc. Innovation is a necessary component of a healthy, upward market. Innovation has stalled.

Peter recently talked to an LP (endowment) who was thinking of re-allocating its portfolio to hold less than 5% in venture capital as its recent returns had not matched expectations. Peter told the LP that they’re thinking is flawed: if their 5% allocated to vc eventually does not return a mega profit, the remaining 95% allocation is going to be worthless anyway. “Investing in technology as a VC is like Pascal’s bet: if that isn’t going to work, nothing will.”

Peter then asks: has recent technological progress really been slower than it should be? He cites as support the fact that a) wages have not increased in terms of real dollars since 1973 b) that California (the most innovate place in the world) can barely pay its bills and c) that VC’s haven’t seen good returns in 11 years.

The credit crisis was really a technology crisis. Credit really is a ‘claim on the future’ and credit only works with a background of growth. Peter then suggests that the credit crisis was really an offshoot of the dotcom crash. The dotcom crash in his opinion, occurred because the ˜innovation story’ was not happening as quickly as people expected. People panicked and bailed. When stocks (i.e. those necessary 8% returns) tanked, housing and leverage swooped in to make-up the difference.

Peter states clearly: ‘the boom-bust cycle is over’. There will now either be a long period of malaise, or we’ll see a great boom (he’s obviously betting on the former).

Peter slams the NASDAQ explaining that most listed companies are actually not technology companies, rather, they are zero-sum bets against technology (ex: investing in Google is feeding a monopoly on search, Microsoft doing well means linux suffers, etc). NASDAQ companies are more like banks than they are true innovators (Sun may be an exception).

The Madoff scandal occurred because people assumed that even despite a drought of innovation, an 8% annual return with no risk was still safe. This is crazy. People need to dramatically adjust their return expectations; only great risk will produce great returns.

Peter talks a bit about his fund and where he sees opportunities. Suggests that an under-invested area is optimizing the division of labour between human and computers: it doesn’t need to be all or nothing. He provides an example of how PayPal only managed to save the company from fraud by dividing up the fraud protection process using a combination of humans and computers.

Society currently suffers from a free-rider problem relating to science and technology. Everyone expects great innovation to manifest, but someone else will do it. Large companies have disincentive to think with a long time horizon; they need to make quarterly numbers. If China is to surpass the US (Thiel seems to think this may eventually) it will be due to this time dimension.

—Another point brought up in the QA is around whether competition is a good thing in terms of schooling and career choice? Why are so many brilliant people studying string theory? Due to competition the best and brightest tend to go into the same fields of study. Much bigger contributions can be made by attacking disciplines where little progress has been made, the stuff on the edges like AI.

…Another thing that makes Goldman different from other firms is not that all Goldman bankers agree but that they are free—and, in fact, encouraged—to disagree. Anyone who has read accounts of Goldman’s knockdown, drag-out fights over going public will understand this, as will anyone who has read two great books about Goldman: The Partnership and The Culture of Success.

…Goldman Sachs bankers can disagree only before decisions are made; once all opinions are solicited, consensus is reached, and decisions are made, the decision is one made by the firm, on behalf of everyone, and it’s final. Mostly, other Wall Street firms—from partnerships to giant investment banks—are hotbeds of infighting, and you need only talk to a few bankers before you find evidence that they undermine management decisions, subvert prominent colleagues, or openly ignore one another.

Goldman forces communication, as well. The firm has a voice-mail cult that ensures constant communication; everyone communicates by voice mail (sometimes left at 3 a.m.), and the rule is that every voice mail, whether it comes from the CFO, a client, or a lowly analyst, has to be responded to within 24 hours. Jonathan Knee, a former Goldman Sachs banker who joined Morgan Stanley and then Evercore Partners, tells a funny story in his book The Accidental Investment Banker. He was used to Goldman’s rules that everyone had to respond to one another and communicate about clients. When he got to Morgan Stanley, he says, not only was he surprised that his colleagues hoarded clients and refused to speak to him, he received so few callbacks from his fellow bankers that for weeks he thought Morgan Stanley’s voice-mail system was broken.

-Heidi Moore at TheBigMoney.com

George Dyson: Theory of Games and Economic Misbehavior (EDGE #295)

…the current misbehavior of our economy, however much it reflects misbehavior by human individuals and institutions, is more a reflection of the behavior of self-reproducing machines and self-replicating codes. We measure our economy in money, not in things. In the age of self-reproducing automata, we can suffer a declining economy, and pandemic unemployment, while still producing as much stuff as people are able to consume. We are facing the first economic downturn to include free cell phones, more automobiles than we have room for (in many locations you can now rent a car for less than it costs to park one) and computers that cost less than a month’s health insurance yet run at billions of cycles per second for years.

Why the growing imbalance between the cost of people and the cost of machines? What prices are going up the fastest? Health care — the cost of maintaining human beings. What prices are going down the fastest? The cost of information and machines. What, really, is health-care reform? Human beings are being cared for by a dysfunctional, antiquated system, and we hope that this can be reformed by adopting efficiencies from the domain of machines. Where will this lead? Are we using computers to sequence, store, and more faithfully replicate our own genetic code, or are computers optimizing our genetic code (and health) so that we can do a better job of replicating them?

Over the weekend, The New York Times ran a thought-provoking piece titled, Generation OMG. The article draws parallels between generations growing up in our current economic crisis and the “silent generation� of the Great Depression. However, I believe the article misses an extremely troubling trend that I have observed anecdotally: the increasingly expensive price of a career in service.

I find it inspiring that so many young people now want to get involved with service and giving back. Perhaps this desire has arisen from the internships and volunteer work often necessary to get into college, but we seem to be at precipice as far as young people wanting to make a difference. Programs like Teach for America (my own sister is in TFA), the Peace Corps and City Year are more popular than ever. Young people can give back and connect at a global level using technology, as has been witnessed with Obama’s victory, the rise of startups like Kiva.org and the impact of Facebook in Middle Eastern countries such as Egypt.

And yet, I am deeply saddened by what I see as the simultaneous disenchantment with service-based careers. Specifically, I see disenchantment with the compensation and standard of living afforded those who choose to pursue careers in service.

While it has always been the case that service-based careers pay less than other private sector work, the difference was made-up in scheduling flexibility, pensions and job security. Sadly, now such benefits rarely exist, rendering the lifestyle of a service-based career a real concern for any young person desiring of the American dream (buying a home and sending their children to college). We are now faced with a faulty incentive system where self-worth and standard of living are too highly correlated with compensation. The value of a service-based career is not nearly so black and white.

As a result, I am forced to wonder how many could-be civil servants are watching as their parents’ 401ks go down in flames and reevaluating their own future plans? How many kids will not go to their college of choice because their parents – perhaps educators themselves – simply can’t afford the price of admission? The fact is that access to money has become a necessity for Americans seeking a decent standard of living; health care and educational costs have spiraled out of control for years. I am fearful that we are creating a generation who feels forced into careers that compensate them based on a skewed incentive system.

Yesterday I spent all day in Baltimore for meetings at Johns Hopkins University.  While there, I managed to sit in on a lecture by the Dean of Tuck Business School, Paul Danos, discussing his thoughts on the financial crisis.

[My Notes]:

Everyone has been blaming the wrong people for the current financial crisis.

Media and government have lambasted Wall Street CEO’s and Executives who earned fortunes over the past few years [in retrospect] seemingly at the expense of their investors. “How can Wall Street execs live with themselves?â€� is the ubiquitous war cry everywhere we turn — a discussion of excessive compensation and ethics underlies much of this anger.

However, this logic is faulty. Such excessive executive compensation is really not an issue of ethics; after all, who looks at a large paycheck they’ve earned legally and questions whether “it is ethical for them to cash it and reap their due reward for high performance, risk taking and long hours? The answer is no one – in any industry!

The concept of “greed� is the same its always been throughout the course of history.

Argument: The persons truly at fault are not executives accepting payments for what their contracts allowed; rather, it is largely the fault/failure of the Board of Directors.

It was/is the Boards who approved those checks and failed to consider that executive compensation could ultimately not be in alignment with the longer-term success of investors. Agency problems were never considered appropriately. Clawback provisions should have been considered under various scenarios. Where were these models? Where was the desire for a deeper understanding of process? Outcome? Outliers?

Ultimately Boards failed in their appointed duty to understand and consider the impacts of complex and leveraged investment instruments within an ever increasingly complex system. This crisis, more than anything else, resulted from poor stewardship.

One of the most interesting things Danos noted is that while SOX regulations have made a huge difference in terms of accountability and transparency for most publicly traded companies, somehow financial firms have been exempt. Overall, most publicly traded companies (and their boards) are much more cognizant of the need to play by the rules; why was this not the case for banks?

Next Steps: To be a Board member is a to assume a position of great responsibility. You must think on a scale much larger than firm-level; this is not a job based on micro economic principles. Boards can’t allow themselves to blindly follow CEOs. They must question. Board Members must aim for a richer understanding of their firm and its people, processes and products within the greater economic, environmental and global system(s). The fact that board members at financial institutions never asked for models showing the possibility of black swan situations is unacceptable.

I recently got to speak with the COO of Lore Systems, Laurie Freeman [Disclosure: Lore is a sponsor of this blog and I can't recommend them enough!] My questions for Laurie had to do with what value outsourced IT providers can offer in our down economy.

“The Savings Potential of Outsourcing”

According to Laurie, the largest line item (and hence biggest cost suck) in a budget is normally staffing costs. This is particularly evident in the technology and startups space where leading venture firms like Sequoia are forcing portfolio companies make large staffing reductions as a first line of defense. Lore has found that SMB’s typically staff an average of 2-4 full-time IT folks, often at an annual cost of ~$500k. What’s more, many IT employees are often underutilized to the tune of 50-60% or even lower. Such underutilization of IT staff can be related to available infrastructure, the staff not being fully competent or trained-up on requirements (often IT staff have been moved to IT from other areas), or resulting from a lack of understanding and communication between non-tech savvy management and IT. In any of these cases, Lore can make a large and immediate impact to a client’s bottom line by simply raising the utilization rate to 100%, and relying on Lore expert staff to perform the work of 2-4 non-expert and salaried staff at a fraction of the cost.

A typical scenario for Lore is to begin working with a client in the process of removing 2-3 of its full-time IT staff. In most cases Lore assumes 40-60 hours per week of managed services (remember that staff utilization rates will go from 50% under internal management, to 100% with Lore). The on boarding process is seamless and typically the number of hours assumed at the beginning by Lore, goes down (not up) as Lore helps set up automated internal systems and processes. Companies are typically shocked by the difference in efficiency, cost savings and professionalism they get by working with Lore.

More frequently Lore is also performing individual audits and IT assessments, helping potential clients identify and quantify the value of a shift from in-house to outsourced staff. Because Lore’s domain expertise and vast experience, they are able to quickly make assessments and identify inefficiencies in current systems and processes. Sometimes simply ‘knowing’ is half the battle. Laurie described one client who’s IT staff simply was not aware of the latest technologies available. Lore was able to come in and completely overhaul the IT network infrastructure using VM Ware virtualization tools.  The Client achieved a 40% reduction in its power consumption and consolidated their existing 60 servers down to 9.  Depending on requirements, server consolidation can be even more dramatic.  Given the high costs of power, the necessity for thinking green and a need for greater corporate responsibility, Lore’s offerings and services are sure to resonate in board rooms large and small.

As always, if your company is considering an outsourced IT provider, Lore would love to talk with you.

Laurie can be reached by email at: lfreeman@lore.net

Lore is also looking to hire talented engineers and sales persons. For more information on opportunities please visit Lore’s website.

Sell-side analysis is dead, and Merrill Lynch is on record stating that investment research has been “Napster-ized.”

In 2007, DealBook explained how Merrill Lynch planned to disallow non-clients from accessing its research and put new restrictions on the media’s access to it. Merrill replaced licensing agreements that “eroded the value of its written productâ€� with new arrangements that put a “fairer price on its reports.” Merrill and all other major investment banks essentially did away with their sell-side businesses. Since then, many former analysts have struck out on their own, establishing their own firms, newsletters and blogs (I detailed this phenomenon back in my post Where Does Wall Street Go From Here?).

This past week, I had a chance to meet with financial content technology firm Alacra. It was initially founded as Data Downlink Corp. in 1996 by Steven Goldstein and Michael Angle, former executives of Knight-Ridder’s Business Information Services. This week, Alacra is launching an innovative new product that definitely impressed me and proves that Alacra is willing to embrace these industry changes by using social media tools and philosophies to its advantage.

Alacra’s new product is called Pulse and is available here to try. The Pulse Platform finds, filters and packages web-based content that lets users quickly consume relevant information about a company. The Pulse Platform reads and analyzes news stories and blog posts from more than 2,000 hand-selected mainstream and alternative media feeds searching for specific types of business information. The best part is that it’s FREE. Alacra has some great plans to monetize the site and already charges for certain articles and reports. Pulse’s first offering “Street Pulse” (what is launching today) is focused on publicly traded companies and identifies and aggregates comments by traditional analysts and the alternative media so you can easily compare what’s being said by key opinion leaders about any company. Ultimately, Pulse will be comprised of four sub-products in addition to Street Pulse:

• Deal Pulse = News articles and blog posts about M&A transactions
• Weak Pulse = News articles and blog posts that highlight distressed companies, such as those announcing layoffs, filing for bankruptcy or restructuring
• Credit Pulse = Comments by rating agency and credit analysts about an issuer’s credit rating.
• Legal Pulse = Mentions of law firms

It’s been a while since I have covered a product launch, but I wanted to highlight Alacra’s efforts to embrace change and stay ahead of curve using technology; this is exactly the type of thinking and business model execution that more firms will need to adopt to help lift Wall Street back to its former status as the capital of financial innovation.

For those interested, Alacra has raised money from top tier venture firms, including Flatiron Partners (now Union Square Ventures).

(Screenshot of Street Pulse Pictured Above)