Recommended reading: The tragedy of the euro

Even though it is almost a year old, just yesterday I came across a book called "The tragedy of the euro" by professor Philipp Bagus from Universidad Rey Juan Carlos in Madrid. I have not had enough time to read it thoroughly, but what I saw in that short time span is more than enough for me to recommend it to everyone interested in knowing about the future (if any) of the European currency. You can find the full book here (PDF) thanks to the Mises Institute.

It is a story of good and noble ideas being badly applied or intentionally misunderstood. It is a story of how the fathers of what today is called the European Union tried to establish economic liberalism all across Europe, thinking of the possibilities, progress and growth an European-wide open marketplace could bring. But sadly, it is also a story of how some countries, specially France, managed to convert this great idea into a fully-fledged European super-state. A super-state with limiting regulations, the typical bureaucratic slowness and stiffness and inefficiency in general.

The book explains, with piercing clarity, the different motivations behind European countries to adopt a unified currency. Periferic countries like Greece, Ireland, Portugal, Spain and also France saw in the euro a great way to keep printing money and issuing debt (a necessary by-product of their deficit-prone economies). With an unified currency they would be able to hide the inflation caused by this objectionable tactics, as there would no longer be a Deutsche Mark to be compared against.

How did they convince Germany to be part of such an awful plan?

LinkedIn IPO craziness. A new giant? Or the start of a 2.0 bubble?

Yesterday's (19th of May) session at Wall Street was a much anticipated one. It was the day LinkedIn, dubbed the 'professional social network' went public. Initially valued at 43.5$ per title, which would have roughly added to a $4.1 billion valuation, it was already a high enough price for some. But the demand for the stock was overwhelming and it astonishingly skyrocketed during its first session, reaching a peak of +160% during the day, to finally end the session at almost +110%. That left LinkedIn valued at 94.25$ per share (NYSE:LNKD), or if you prefer it, a total market cap of $8.91 billion!

The behavior of the LinkedIn stock on its first session ever shows a renewed appetite for tech companies, which is good for the market, but honestly I find it to be a quite unrealistic performance. It says more about traders looking for some lonesome bulls in the middle of the last week's reigning uncertainty, than about the real short-term prospection of the company. But do not let the stock price fool you into thinking LinkedIn is a one-day flower, its future looks bright, with a first quarter 2011 revenue of $94 million, more than doubling the same period of 2010 ($44.7 million), and having surpassed the 100 million registered users milestone. 

LinkedIn has shown that social networks can truly be monetized, something Facebook and Twitter have been unable to do, and the main reason why both of them are not still publicly traded. Although you can count on them going public in a not-so-far away future... 

LinkedIn (LNKD) graph from 1st day on NYSE. Credit: Google Finance

They say knowledge is power, and there is no doubt that social networks have an enormous wealth in the form of personal information and other data, but there is no direct formula to turn this knowledge into money. LinkedIn, thanks to its professional incline, seems to have found the magic formula and just so you know it is the following: 33% revenue comes from advertising, 21% comes from selling premium subscriptions and the rest comes from services to companies and headhunters.

My doubts do not come from LinkedIn's future, but from the reaction of the market to its IPO and the precedent it creates given the late eagerness to invest in internet firms like Twitter, Groupon, Baidu, Yandex, Facebook... regardless of them being viable companies economically or not.

When rescue packages are not enough, a Greek tragedy in the making.

The astonishingly beautiful deep blue waters of the Aegean sea must be starting to boil as of now, with the economic situation in Greece heating up even further. Debt-to-GDP ratio has reached 143%, Credit Default Swaps are at 1371 basis points, S&P downgraded (once more) Greek debt to B rating from BB-, taking it only two steps about the C rating, which effectively erases one from financing and flags you as someone waiting to default. To make matters worse, often-violent demonstrations are stopping the country's already ailing economy day after day. I truly can understand the frustration the situation causes, but halting economic activity is clearly the worst thing to do in the actual situation...

Another rescue package, combined from both the European Union and the IMF (with or without Dominique Strauss-Kahn), seems to be in the way but its effectiveness is already in doubt. A recent poll shows almost everybody thinks this would be artificial life support for Greek debt. Sooner or later a default or a painful debt restructuring process seems to be coming. Not being a debt restructuring expert, just based in common sense I can only say: make it sooner rather than later.

Extending this situation is bad for everybody, it is bad for Greece's future, bad for Portugal and Ireland debt prices and bad for the whole euro area's stability. Stop being stuck in the actual situation, a situation that slowly built the hole where you are now. Just change everything! 

First thing, go out and make the people understand why spending cuts and privatizations are basic, unavoidable and necessary to have a future. You can not afford to have your people burning policemen, destroying everything that comes close and shutting down air transport... Tourism is a keystone in Greece's actual economy, so flying stones and burnt buses are not the best of promotions for the country. In fact any company thinking of investing in Greece as of now would be held back but the situation on the streets.

Microsoft's impulse buy. Expect buyer's remorse soon...

The net is still shocked by Microsoft's buyout of Skype for $8.5 billion. The adjectives whopping, astonishing, unbelievable, incredible, crazy and stupid are among the most repeated when describing the price Microsoft paid for the VoIP company. People do not forget that when eBay purchased Skype in 2005 it did so for $2.5 billion. That price also seemed very high at that time, people were still remembering the excesses of the dotcom era. However back in 2005 when eBay bought it, Skype was still a promise, a young and innovative company with lots of room to grow and lots of potential for doing so. 

While Skype is still young and innovative it can not be considered a promise anymore, but a fully mature company. Its earning reports matter like any other company's and the last one showed a $7 million loss. It has a user base of more than 663 million but as of now, Skype is making a slender profit of approximately 1.30$ per user. These are some numbers that do not help justify the price Microsoft has paid.

But Microsoft knows this, its is impossible to justify the price paid based on the numbers, so they are focusing on the intangible instead. Microsoft talks about seamless integration with its Xbox360 network, about the synergies between Skype and Facebook (which was thought to be a bidder for Skype too and has a partnership with Microsoft) and about integrating it with its latest Windows Phone 7 mobile phone OS.

All of these look like legit reasons for Microsoft to buy Skype; but seriously: who does think these synergies are going to compensate the price paid? Not even in the long term... 

For me, the real reason for Microsoft to purchase Skype is mainly:

Misunderstanding the commodities plunge

Last week we witnessed the biggest plunge in commodity prices since the post-Lehman era (2008). Every commodity fell an average of 10% during the weak: wheat, cotton, soybeans, iron, zinc, silver, gold... even the mighty oil took a step down (and that is big news!). Part of this plunge was quickly erased as a rebound started right on last friday, but the situation is quite stable at the time I am writing this.

People started to reason that the recession was back, that the industrial sector was not growing as expected, that we are not producing enough or consuming enough of what we produce, that a dry spell could risk wheat crops in some parts of the world... According to these same people sometime during last week we stopped eating too, because food commodities also fell. These people are very wrong, we never were recovering strong enough to justify the never-ending rise of the last months neither we have suddenly stopped recovering now to justify the plunge. What are the real conclusions we can take away from last week's events? 

I see clear proof that speculators rule the commodities market.

Canada goes the cost reduction way

Canada had its general elections last Monday and while the winner, the actual Prime Minister Stephen Harper from the Conservative Party, was totally expected; the result boosted him to a majority government. With their hands untied from a minority government against the New Democratic Party, Mr Harper's Conservatives are now free to apply the keystone point in their electoral program, taxes and government spending reductions.

Stephen Harper celebrating victory

I have expressed my concerns on excessive government spending worldwide on previous posts, Canada was not an exception there, with 39.7% of GDP going to government expenses every year... Canadians have expressed their concerns with the matter too, strongly supporting the only party that promised to reduce said spending. With this move, Canada joins the trend of slashing government spending, a trend that started in Europe to fight troubled economies like Greece's, but that has gone mainstream since then on developed economies. Finally everybody begins to notice the weight of the state is unbearable as of now, recession has made this blatantly visible.

I will not analyze in detail the politics behind Mr Harper's party, but from a macroeconomic point of view Canada is in a far better position to boost recovery than for example European countries. Canada is one of the few net energy exporters (together with Norway) among developed countries and is also the world's second biggest uranium producer with 20.7% of production. Not only they are exporting energy abroad (which at actual prices is quite a good business) but they are energetically independent as they control the supply for their main energy source, nuclear energy.

This independence means their recovery plans will not be heavily altered by raising energy prices, or tensions in the Middle East for that matter... If the Conservative's deficit reduction plan works as planned and corporate tax reductions really help boost employment I would say it is quite possible for them to be able to beat IMF's expected GDP growth of 2.8% for 2011. I am confident on every economy that successfully covers its energy needs and Canada has been doing it for a long time.

Energetic independence partly shields Canada from the never-ending commodities rally and thus gives it the most desirable ground for economic recovery and growth: a ground where it can focus on its own economic efficiency.