Technology, Venture Capital, Private Equity

Discovered how hard it is to get back to writing after a long break. Hence, the second part of the post on this topic comes after a while. However, developments in the past week have provided the ideal backdrop for this piece. Tata’s launch of the “world’s cheapest car”, Nano and Citigroup and Merrill Lynch hinting at taking larger subprime writeoffs and selling stakes to Middle Eastern and Chinese investors to bail them out of their crises are in my view, not just one off phenomena, but a pointer to a larger reality that is currently unfolding, which is - the shift in the world’s epicenter of economic activity away from the US.
In part 1, I discussed how the financial markets were becoming increasingly more complex, and hence, in many ways it is becoming harder to read the “financial dials” and gauge where the ship is headed. As a result, business leaders could end up steering it one way, while the undercurrents may actually be pulling them in the opposite direction. And the farther they pull apart, the harder it becomes to move further, finally resulting in a snap such as a price correction or a burst bubble. Continuing on that theme, I foresee that the dominance of the US as the preeminent global economic powerhouse is likely to weaken significantly in coming times (though it may not completely end any time soon). The reason for that is not simply because “China and India are growing fast and US is not”. Nor is it linked to such short term phenomena as the slowdown we are currently witnessing (though these are important evidences of this prognosis). Rather, it is linked to something deeper, which is - the compounding effect of
a) A decreased ability on US’ part to competitively produce goods/services that other economies are willing to purchase (ideally at premium prices) and
b) Gradual sell off of valuable assets to compensate for shortfall in income (arising from ever increasing consumption that is oblivious to realities connected with point (a)).
This can’t be captured any better than the “Wizard of Omaha”, Warren Buffet, who foresaw this coming a while back in 2003 in this article. In one large industry after another, we have seen that the competetiveness of the US has been gradually waning and other competitors have been able to play catch up over time and have now attained a position whereby they are able to produce goods that are cheaper and better (Tata Nano as a case in point). Automobiles, consumer electronics, hardware, software - in each of these industries, we are seeing this happen. Innovations such as the iPod have been few and far between and unless entirely new industries which trigger fresh waves of innovation germinate, the US will find that for the rest of the more matured lot of industries, the odds of domination are stacked against it (owing mainly to the inherent cost structure of its economy). Consequently, at some point, there will be a painful realignment of the economy (such as a massive plunge in the value of the dollar), which will force it to cut its consumption levels thereby resulting in an economic shrinkage. That’s not all. What’s worse is in the meanwhile, in order to support its unrealistic consumption levels, it is also beginning to sell off its assets to outside investors with the effect that outside investors now own more assets (such as Citi or ML) in the US than US investors own outside. In short, the further US’ synthetic reality pulls away from its fundamental reality, the hollower its economy becomes and weaker it will be in the event of a snap. And the sooner this situation is rectified, the better for them and perhaps the rest of us as well.