Edward Harrison

Value, contrarian, bonds, long-term horizon
Edward Harrison
Value, contrarian, bonds, long-term horizon
Contributor since: 2008
Company: Global Macro Advisors
Well said.
We agree this is about the payments system. And Andreessen and I were in a good Twitter back and forth with a couple of people about that just after his post came out.
I still don't think you NEED a bank account in todays world because many people today DON'T have bank accounts. For people working at minimum wage, the fees are a hindrance to having an account and many don't. What I'm saying is they can continue that existence in a better way - getting some of the transactions benefits of a bank account without having one. This is EVEN more true in the emerging markets where people are talking about mobile micropayments for the unbanked. Billions of people DON'T have bank accounts but could be reachable through this kind of payment system.
Finally, on fiat money and gift cards, we agree again. Better than gift cards, not as fungible as USD. The moneyness of the system lies somewhere in between. Good adjunct to fiat currency - frictionless money transfer - not a replacement
Good question on regulatory issue. I think you definitely have to pitch this as a payments platform. As soon as you get into the currency issue, it opens a big can of worms. One regulatory issue that may be onerous is Walmart's responsibility for the payments transfer ledger. The benefit of Bitcoin is that the transfer process is not centralized and that cuts regulatory maintenance that PayPal has. But you still might get a regulatory mandate to record those transactions in your system as the retailer - something that reduces security, by the way.
The minimum wage issue is just my way of introducing this as a vehicle for digital payments. I think the tie to a big retailer's employee base make platform adoption instantaneously widespread and an immediate threat to other online payments systems.
Tell them to come on over here!
You make some good comments and criticisms, especially regarding tax implications. Personally, I don't see Walmart doing this. But I do think someone is going to take the Bitcoin algorithm and 'PayPal' it, meaning divorce the payment system from the currency by creating a centralized payments processor through which payments into and out of cash funnel.
Your comments on loans and deposits though are irrelevant because what I am proposing here is divorced from the Bitcoin as currency mantra and is simply a PayPaled version of the existing Bitcoin payment system that is an adjunct to the existing fiat system.
Also, gift cards DON'T work as well. As I told a commenter above, the moneyness of gift cards is much less than this sytem or PayPal or Google Wallet. You can't transfer them to anyone for cash. This is a liquid and pseudononymous market that allows you to securely transfer your money to anyone regardless of whether you know them or not. Giftcards can't do that as effectively - unless you set up an exchange to do so.
The benefit over PayPal is that the system isn't reliant on the processor for transactions in-system, just transactions into and out of system - and that's where the fees are going to lie. This model will be lower in fees than existing models as a result. Walmart will wish it had done it.
Cashing out of the system at face value would be something the retailer would need to allow in order to make the payment system more money-like. It's definitely a point to fine-tune. But not everyone shops at Walmart or Target or CVS. They need to give people an option to get their increased salary in something that converts to cash. My thinking initially has been that outsiders would pay into the system because of its security benefits over credit cards (something Target or Walmart would want because of transaction fees) and that the retailer would allow employees to cash out on a one-for-one basis with the external funds coming in.
Yes, it wouldn't eliminate the entire fraud problem but it would reduce it for these transactions.
I imagine anyone in the Target payment system universe would also still have to worry about security breaches of their personal information because they would also have that information on file outside of the bitcoin-like payment system in Targets systems too
I thought about that but Walmart gift cards WOUDN'T work the same way though because you can't transfer them to anyone for cash. That's the problem. This is a liquid and pseudononymous market that allows you to securely transfer your 'giftcard/e-money' to anyone regardless of whether you know them or not.
Also, you saw my point on the unbanked. Ostensibly they could use this system in lieu of bank accounts for their entire paycheck if the retailer allows that as non-employees pay into system. That avoids the bank late/overdraft/mainten... fees. Big improvement over gift cards.
This article is from two years ago, Bastion. Many things have changed since and I have written on those changes. It's completely disingenuous to suggest this represents current thinking. The question is whether the core argument holds i.e. that Apple's go it alone approach will cause them to lose market share. That's really the only thing this article is about. It's not about margins, it's not about valuation and it's definitely not about Flash.
Moreover, you do point to two areas that I never even touched on in the article (margins and Flash). If you would re-read this, you would see that the Flash reference is a blockquote and you will also see no reference to margins.
You'll need to come up with something more robust as a rebuttal. Take a look at Dialectal Materialist's comments. I think he makes good points below.
Thanks for the reply, Dialectical. It was a thoughtful response. The place where I would take issue with your analysis is where you indicate that "Apple's "closed system" is precisely what will protect it in the post PC era."
My view is that the technology ecosystem we are moving into is inherently open because of mobile. The portability of data across platforms and devices is going to INcrease over time and not Decrease (think of contact lists, music in the cloud, PDFs on Google Apps, social networking apps, mobile game apps, etc ). I think switching costs will diminish and this will make economies of scale and network effects more important in utilizing the switching costs that do remain.
I agree with you however that calling a top for a momentum stock is a losing battle. The question has to be the fundamentals.
If one does a DCF on Apple, it's clear that there are three effects that predominate: market share, growth, and margins. And all of these effects depend not just on near-term variability but medium term maintenance.
What I don't say in this article since it is not geared to valuation but would now given Apple's share price is that Apple will need to maintain all three (share, mobile market growth, and margins) over the medium-term in order to be a good long-term play. The crux of my analysis here that holds up is that the share aspect has become threatened. In later articles, I also pointed to the margin compression theme we are discussing here. In my view, those are critical components to maintaining valuation for Apple. The erosion in one has already begun (share). This has been offset by the tablet market of course. I am predicting an erosion in the second (margins). Again, let's look at this come October.
Dialectical, we should always revisit any conclusions we make that underpin our investments every six months or so to see if the basic logic holds up. I have done so again and again and the logic has held. The question for an Apple shareholder has been: why should we sell then? And to date the answer is: there is no reason to do so yet. I don't think you can make that statement as easily now. For me, it was in seeing the component prices of the iPad 3 that did it. It told me, margin compression was happening and that now would be the time to monitor sales growth.
From a pure momentum perspective, I mentioned a couple of weeks ago that the stock looks tired. But so what if the fundamentals are good? The problem has to be margins and growth. And I would be looking at these closely, especially in the tablet space.
We seem to be already seeing the share price erosion I mentioned would happen this year. Let's see how this plays out though.
My point in this comment that Apple was way overbought and recent indications were that margins were being compressed on the iPad 3. I expect this to weigh on the stock by the end of the year.
My point on this post is till the same and it had nothing to do with the share price: Apple's market share will erode because it is one 'closed' competitor competing against an army of Android 'clones'. It is irrelevant whether HTC makes money as it was irrelevant whether Packard Bell made money in the Clone Wars in the 1990s. The key is distribution and network effects of platform adoption. That speaks well for Android and will negatively impact margins at Apple.
Once growth does slow this will erode growth and the shares will be impacted. I believe 2012 is when this will occur.
I stand by everything here. Nowhere did I predict Apple earnings or share price eroding. In fact I wrote this.
Here’s how I see it shaping up. Android continues to make huge inroads and developers start focusing more energy on that platform. Either Apple’s market share erodes or eventually they are forced to compete at a lower price point. None of this is a problem near-term as the growth rate is still high. But when growth in the cloud- and mobile-related computing revolution slows, Apple will be exposed.
http://bit.ly/HqrxTb
We are now much closer to margin compression and share price erosion. I would say some time this year as growth rate for mobile slows we will see compression. The stock looks tired.
Asbytec, hi. I normally don't comment on SA but you're a good commenter so I wanted to point you to how I see it.
As a central planner (note the negative connotation implied there), the Fed can explicitly target any maturity it likes for assets in its own currency as the monopoly supplier of reserves. Financial repression only works via interest rate (price) targets because the Fed is a price fixing monopolist. The same would be true for the ECB. It will achieve its goal of repressing rates not through buying up paper but signalling credibly that the policy rate will be low for an explicit period and that it stands behind specific asset classes at a specific maximum target rate or spread.
http://bit.ly/tuX8Lu/

Here's a specific answer about targeting quantity over price on Operation Twist:
http://bit.ly/vhDYCT
"Operation Twist can only move rates a few basis points. And since the Fed is targeting quantity not price AGAIN, it's not even clear that rates will decline. Rates are already so low that these basis points won't make ANY difference. I see this as a non-event, a big fat yawn. It’s not treason at all. It won’t even be effective."
Yes, but Japan and Germany are even more dependent on imported oil than the US and they have trade surpluses. Again, it's not about oil.
It's not about oil:
http://bit.ly/pZdSJJ
I am sure you agree with me that this is not really a good thing. Government with out constraints is ALWAYS a bad thing.
Many thanks on the kind words. Seeking Alpha is going to be posting three articles a week from me now. Go to Credit Writedowns for other articles and analysts I listen to. Cheers.
Good comment on Microsoft and IBM. But Ballmer doesn't seem to get it. I think Microsoft needs fresh blood that understands what you are saying. It wasn't until Gerstner came to IBM that they made the strategic moves to exit PCs and focus on IT services.
Here's a good article on that:
www.forbes.com/2002/11...
My fear for Microsoft is that they make so much money now that they will wait too long to make the right transition.
Your advice is much appreciated as is your commentary. I will do just as you say. Cheers.
I agree. A lot is explained by rates sine the 1980s. Thanks, Tom.
If you look at the data, you'll see that the household sector is nowhere near the debt to income levels of the pre-1980s bull market phase, let alone WWII.
See here and look at the household sector charts:
www.creditwritedowns.c...
Denis, I should point out that my market view hasn't changed that much. I have been positive on stocks since March 2009 (cautiously so since October 2009, but a bit more positive since about September 2010)
See "The Fake Recovery from April 2009:
www.creditwritedowns.c...
banks are going to earn a lot of money and that is bullish for their shares – at least in the medium-term. Yes, the stock market is overbought right now. However, if banks put together some decent earnings reports over the next few quarters, their shares will rise.
Furthermore, if the banks can earn enough, this cyclical recovery will have legs as banks will then have enough capital to resume lending and that is supportive of the broader market as well. It is still too early to tell how this will play out over the longer-term. For now, I am much more positive on financials, and somewhat positive on the broader market as well.
As I said in another post in October 2009 when i was a bit less positive:
all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession…
From an investing standpoint, consider this a secular bear market for stocks then. Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.
www.creditwritedowns.c...
Nothing I said in this post contradicts this.
I am saying today exactly what I said then, that QE could be inflationary if it did work but that it will not work because this is a demand side problem not a supply side one. There has been no 180.
Good article. I linked out to that a few days ago. I wrote up a piece on this on my blog that Seeking Alpha decided not to carry. See here:
www.creditwritedowns.c...
That sounds about right to me too, actually. The Android OS is no more better than iOS than Windows was better than the Mac OS.
The difference of course is that Windows had a monopoly and Android will not. When it comes to the impact on margins (for AAPL and GOOG) that is going to be significant.
In my view, Android is already closing the gap in usability if you look at its 1.5 vs. 2.2 (Froyo) OSs. It will continue to do so. This is what Woz was saying about the Windows experience - identical to what I said in the article.
Remember, we are discussion Apple's sales growth and margins vis-a-vis those suggested by the share price. My argument here is that Apple's growth and/or margins will slow. In fact, it is the kind of behavior you cite regarding the cheapness of Android handsets which reinforces that belief.
"Apple co-founder, Steve Wozniak, has never been one to mince words. Today's no different as demonstrated in an interview with the Dutch-language De Telegraaf newspaper in The Netherlands. The first revelation is an admission that Apple had collaborated with a well-known Japanese consumer electronics company in 2004 to develop a phone that was ahead of its time. Woz is quoted as saying that while Apple was content with the quality, it "wanted something that could amaze the world." Obviously, the phone was shelved followed by Apple's announcement of the iPhone in January 2007.
"Woz then moved on to the topic of Android saying that Android smartphones, not the iPhone, would become dominant, noting that the Google OS is likely to win the race similarly to the way that Windows ultimately dominated the PC world. Woz stressed that the iPhone, "Has very few weak points. There aren't any real complaints and problems. In terms of quality, the iPhone is leading." However, he then conceded that, "Android phones have more features," and offer more choice for more people. Eventually, he thinks that Android quality, consistency, and user satisfaction will match iOS."
www.engadget.com/2010/.../
I don't support competitive currency devaluations but the SA authors changed the title of the post to one I don't like suggesting that I do.
I am aware of the power of Microsoft's monopoly as I mentioned it in the article as part of their distribution advantage. I can't cover every point though. I have to make a well-reasoned argument and cover the major points that support my argument in the limited space available.
I asked for counter arguments as a close - and there are many, one of which I made regarding Ping, by the way.
I should leave it there. But I have to say, when you talk about Apple, invariably there is always a level of emotion to the comments that I see no where else. I don't know how else to describe it. As a writer, it feels like a bunch of attack bots were loosed onto the article. To me that speaks to the power of the brand and the attachment of Apple devotees. But I would urge those making snide one line comments to take in my arguments and make reasoned counters as Jonathan101 has done for example. To me, that is where you get benefit from the comments.
By the way, you did a good job providing the narrative on Microsoft's abuse of its monopoly position. Thanks.
One thing I should point out regarding the 'Apple vs. an Army of Android clones' meme is that Apple has seen this through in the past with the iPod when it bested all of the other MP3 manufacturers. The key here was the iPod-iTunes tie. Can Apple do this again with the iPhone? Maybe. Ping is certainly a good attempt to move in this direction. So despite what you hear negatively about Ping in some spaces, strategically it makes sense.
All good points Jonathan. The Verizon deal is big and will see Apple making gains. See here:
www.creditwritedowns.c...
I think Apple has been able to get a good rev share again from the reports I have heard. So over the near term, Apple should do quite well.