Silicon Valley

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Inflation, Hedonics, and How Silicon Valley May Have Wrecked Our Monetary Policy

/ Adam Nash / 2 Comments

I read a really interesting book on my trip to Boston last week.  It’s called Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, by William Fleckenstein.  I’ve read Bill Fleckenstein’s columns on-and-off since 1999, when I found him through Herb Greenberg.  He’s definitely an intelligent guy, and while he presents like a perma-bear, the reality is that he’s really just a very strong, traditional, bottoms-up fundamentals-based valuation guy.

He has a real axe to grind in this book, but I’m going to do a book review in a separate post.  However, one of the topics he raised was so interesting to me, I had to write a post about it.

Summary: I think we seriously messed up our monetary policy in the 1990s.

To be most specific, I think that in the 1990s, we made a fundamental change to the way we track inflation statistics for the United States that on the surface seems logical.  But unfortunately, the realities about the economics of computers are so extreme, they may have completely distorted the inflation numbers for the entire country.  And if you distort the inflation numbers for the entire country, you run the risk of distorting the monetary policy of this country.  In fact, if you seriously mess up inflation calculations, you also affect fiscal policy, social benefit policy, and even global economic stability.

Yeah, it could be that big.

OK, here’s the information from the book that got me thinking.  It starts on Page 39, in the chapter called, “The Bubble King”.  Fleckenstein explains three changes that were made to the way the US calculates consumer price inflation (CPI) in 1995:

  • Change 1: Move from Arithmetic to Geometric Rates.   Ok, this one is perfectly legitimate.  After all, inflation rates compound year to year, so calculating the rate as a geometric progression is fundamentally correct.  I was actually shocked to find out we didn’t do this before, frankly.  True, at low percentages, arithmatic and geometric calculations don’t always vary alot, but they do vary, and geometric is absolutely the right way to calculate the number.

    For those of you asking what the difference is, let’s use this example.  Say over 5 years, the price of milk goes up 50%.  Arithmetic calculation would say 50%/5 = 10% per year.  The problem, of course, is that if you actually raise the price by 10% per year, you get a lot more than 50% because the price increases compound each year.  In Year 1, you’d go from $1.00 to $1.10, and in Year 2, you’d go to $1.21.  By Year 5, you’d be at $1.61, not $1.50.  It’s just like compounding interest in your savings account.   Geometric calculations take this into account.  Instead of 10%, they would say the inflation rate was 8.45%, which over 5 years compounds to 50%.

    Doing this lowers the number reported, but it’s fundamentally the correct number to report on an annual basis.  So far, so good.

  • Change 2: Asset Substitution.  This one is a little murkier.  Basically, the way that economists calculate inflation for consumer goods is that they take a representative sample of products – hundreds of them.  They then track the prices for these products each year.  If you’ve ever seen those funny articles that track the “price index of the 12 days of Christmas” every year, you get the idea.  🙂

    Asset substitution covers the case where similar goods might be substituted by people if one rises in price more than the other.  Inflation is lower for the person, because instead of buying the high priced item, they buy the lower priced item.  For example, let’s say the basket of goods included a 12-ounce can of soda.  If the price of soda skyrocketed for some reason, most people would not actually spend the money, but would drink less soda and more water.  The extent to which that substitution happens means that the inflation rate is actually lower for people, because they don’t feel the full impact of the rise in price of soda.

    Fleckenstein argues that this change was “truly absurd.” Like a lot of the analysis in the book, that’s a significant exaggeration.  The truth is, the fundamental need for substitution is sound.  But like any of these economic techniques, if abused, this type of power could lead to incredibly huge errors in the calculation of inflation.

  • Change 3:  Hedonic Adjustments.  OK, this is the one that has me worried.  The CBO describes these as “quality adjustments”.  Once again, the logic behind them is sound.  It’s the execution that’s troubling.  Hedonic adjustments account for the fact that if you improve the quality and features of one of the items in the basket of goods, the price might rise due to that increase in feature set, not inflation.  For example, if in 2001 a Honda Civic has 145 horsepower, and in 2004 a Honda Civic has 160 horsepower, then the 2004 Honda Civic actually has 10% more horsepower than the 2001 version.  To the extent that people pay for horsepower, the inflation numbers are adjusted to reflect that part of the price increase in the Honda Civic is due to increase in function, not just inflation.

    Like asset substitution, this could easily be abused, since it involves a judgement call – how much has the product improved vs. how much has the price just risen due to inflation.  It’s a hard line to draw, especially since in 2004 there are no new 145 horsepower Honda Civics around for an apples-to-apples comparison.

So, now that you’ve gotten your fill of Macroeconomics for the day, here’s the part where we may have wrecked our monetary policy.

Moore’s Law

Well, it’s not just Moore’s Law.  It’s the pace of product improvement in the high tech industry, specifically hardware.  It’s huge.  It’s unbelievable.  There has never been a manufactured good like it.  There has never been a manufactured product, like the computer, that doubles in capability every 18 months.  Hard drives double in size.  I bought a 40MB external hard drive in 1993 for $200.  I just bought a 1TB drive for the same price last month.  That’s a 24,900% increase in storage for the same price in 15 years.

Try feeding that through “Hedonic Adjustment” and see what you get.  A huge deflationary element.

Now, that wouldn’t matter, except for one thing:  computers have become a decently large chunk of the US economy.  Not huge mind you.  The US economy is now over $13 Trillion.  Computers are lucky to make up 2-3% of that.  But 2-3% is actually a big number when you start feeding through it ridiculous improvements in “quality/features per dollar”.

Let me jump to page 101 of the book, in the chapter called “The Stock Bubble Bursts”:

James Grant, editor of the always insightful Grant’s Interest Rate Observer, was one skeptic who took the trouble to dissect the complicated subject that Greenspan seemed to accept at face value.  In the spring of 2000, Grant published a study by Robert J. Gordon, a Northwestern University economics professor, who had prepared for the Congressional Budget Office a paper with a shocking revelation:

There has been no productivity growth acceleration in the 99% of the economy located outside the sector which manufactures computer hardware… Indeed, far from exhibiting a productivity acceleration, the productivity slowdown in manufacturing has gotten worse: when computers are stripped out of the durable manufacturing sector, there has been a further productivity slowdown in durable manufacturing in 1995-99 as compared to 1972-95, and no acceleration at all in nondurable manufacturing.

Grant backed that thunderbolt up with another study conducted by two economists, James Medoff and Andrew Harless.  Their contention was that the use of a hedonic price index grossly misrepresented the actual data.

This is bad news.  Bad bad news.

In case you are wondering, the fundamental question that our Federal Reserve and other governmental agencies concerned with the US economy ask themselves is how much of the growth in the economy is due to three factors:

  • Population growth
  • Productivity growth
  • Inflation

If our calculation of inflation is off, it drastically changes our calculation for productivity.  Productivity is the measure of how much economic value is generated from one time-unit of work.  The 1990s were largely heralded as a decade of re-invigorated productivity growth.  It’s why some people think Robert Rubin (or Bill Clinton) were great.  It’s why people believed in a new economy driven by technological progress.

The data above is disturbing.  Yes, it confirms that high tech might have had phenomenal impact on our aggregate numbers.  But it’s totally misleading if it turns out that 98% of the economy was not, in fact, seeing productivity growth.  Worse, it’s possible computers were actually masking continued weakness in every other area.

Look, I’m fairly sure that the people responsible for collecting this data are intelligent, and that this issue has likely been raised already.  It’s also possible that this book and its citations are already known and discredited.

Still, I’m left with the following thoughts:

  1. Is the above data true?  If so, does this mean the 1990s were not, in fact, a real productivity boom for the economy overall?
  2. If these issues are true and known, is the Federal Reserve, Treasury, Congress, et al taking this into account when they make monetary and fiscal policy decisions?  If inflation is understated, then interest rate cuts, fiscal stimulus, and  whole host of other policy decisions could be disasterous.  We could end up with HUGE inflation in everything except computers to make the numbers balance.  (I feel like this is like that line from “The Matrix Reloaded” – the system is desperately trying to balance the equation)
  3. When they make hedonic adjustments for computers, do they take actual utility into account?  Sure, today’s Windows PC is 3x faster than one from five years ago, but the latest versions of Windows & Office are much more resource intensive than five years ago too.  My Mac Plus booted faster than my PowerMac G5.  How do they measure the hedonic adjustment for computers?  Are they grotesquely over-estimating the increased value from hardware improvements, without discounting the resource requirements of software to provide equivalent “utility”?

Feel free to comment if you have pointers to information either confirming or refuting the above issues.  This hits home for me as an issue that ties together two of my strongest personal interests – computers & economics.

Also, feel free to post this blog URL to other boards or forums where experts might be able to answer some of the above questions.

Stanford Linear Accelerator (SLAC) Suspends Tours

/ Adam Nash

Just caught this late breaking news tonight… makes me really sad.

San Jose Mercury News: SLAC to suspend public tours

In the course of an hour Monday, retired physicist and tour guide Dave Grossman compared the research done at the Stanford Linear Accelerator Center to major league baseball pitches, the hydrogen bomb, walking ants, a pool table and colliding Snickers bars. “Now I’m going to review the history of physics in three minutes,” Grossman said – and did.

Grossman is one of the 18 tour guides, many of whom are graduate students, who lead roughly 40 public and 500 private tours each year of the renowned research facility that takes up 5 percent of Stanford’s land, held the first World Wide Web address in the United States and has scored four Nobel prizes since it opened 41 years ago.

But beginning next month, the center’s popular tour program will be “temporarily suspended” due to both federal budget cuts that have already resulted in layoffs of 200 employees and a shift in the center’s scientific focus, said Lee Lyon, director of human resources.

While reluctant to say how much the center will save by suspending the tours, Lyon did confirm the program costs more than $25,000 and employs one full-time staff member.

“The actual tour is relatively limited,” Lyon said Monday. “It doesn’t cover the core science we’re doing here.

I remember my first tour of SLAC when I was a local seventh grader, and we toured the facility for our science class.  I still remember the lecture, and how they explained the discovery of Quarks to us.  I was only 10 years old, but I distinctly remember them explaining the 3 “colors” of quarks, and the 6 “flavors”.  I remember them explaining the fractional charges of the quarks – a down at -1/3, and an up at +2/3.  One up, two downs, and you get zero, a neutron.  Two ups, one down, and you get +1, a proton. Each of the three had to be a different color (red, green, blue).

It was another five years until I would take AP Physics, but it was a little taste of the future for me, and I never forgot it.  Over a decade later, I even took my fiancee on the tour, just to share the experience.

Fortunately, it sounds like there is some good news here.  In 2009, they will finally be opening the new research facility:

Much of the 0.5-square-mile facility is under construction to build the roughly $400 million laser, which will among other things, enable researchers to study the interior of white dwarf stars and take 4 quadrillion pictures per second, allowing scientists to do freeze-frame photography of chemical reactions, Grossman and Lyon said.

Due to open in 2009, the new laser facility is not on the center’s tour, nor are many of the other buildings, whose equipment is being used to study everything from gamma ray astronomy to what happened to the anti-matter produced in the Big Bang.

The tours, said Lyon, “don’t need saving. They need reconstitution.”

He said the center hopes to bring the tours back in 2009 and will still conduct quarterly public lectures, as well as the popular tours over Stanford’s graduation weekend which have drawn as many as 600 people on the Saturday before commencement, he said.

So, it sounds like there will still be opportunities to see SLAC.  You might want to take advantage of them while you can.

A Kindle Program I Could Get Behind

/ Adam Nash / 2 Comments

John likes his Kindle. I love to read. I feel like I should be more excited about it, but I’m not.

I think the problem is that I’m emotionally attached to my library. I surround myself with my books. They remind me of what I’ve read, and even in some cases, who I was when I read them.

Unfortunately, while I’d love to flip through some of them more frequently, the physical form gets in the way. I know I would love to have all my books in electronic form, the same way that I have my CD library now on my iPod, or my DVD library on my AppleTV/Mac Mini.

I caught this article today about the Kindle, and I decided to put out there a plea for a program that Amazon could put on that would immediately convert me over:

Let me send you my books. Yes, my physical books. When I send you them, give me download access to the e-book form, for my Kindle. Let me trade you my paper for electrons, in high quality form.

Take my books, and either sell them through your marketplace, or donate them to libraries and schools. Spread them to others so they can enjoy them.

If I could get my existing library converted over to a form for the Kindle, I’d gladly give you my future purchases. I can rip a CD. I can even rip a DVD. But I can’t rip my books.

I’m guessing the royalties for the book publishers will be a problem. But likely not insurmountable. After all, there is some money on the table here, since the books can be converted into some small amount of dollars. And think of the marketing data you’d have on me once you knew in detail the hundreds of books I already own.

Just a thought.

LinkedIn As A Source of Record…

/ Adam Nash / 1 Comment

Very interesting article Friday on the former Miasolé CEO:

GreentechMedia: Former Miasolé CEO Joins New Thin-Film Team

Short synopsis, from the article:

Dave Pearce, former CEO of Miasolé, has apparently joined a new company called Nuvosun, according to CNET.The company is trying to develop a film that will prevent moisture from penetrating — and degrading — thin-film solar panels, the story says.

OK, so that part may not be that interesting to you, unless you’ve been following the solar tech industry closely.  (Miasolé, pronounced MEE-AH-SO-LAY, is venture backed by Kleiner Perkins).  But check out this paragraph:

CNET said it contacted Pearce, but hadn’t heard back to confirm the details and cited a LinkedIn profile. Greentech Media also has been unable to contact Peace or to get others to confirm his new role.

However, one former employee confirmed that former Miasolé’s Pearce did have a LinkedIn profile, and the only LinkedIn profile for “Dave Pearce” that cites previous experience at Miasolé and Domain Technology — a thin-film hard-drive manufacturer where Pearce was previously CEO — lists him as president and CEO of Nuvosun.

I checked the original CNET article:

CNET News.com contacted Pearce, but have not heard back to confirm these details. However, we know for certain that Nuvosun is the name of the company. He’s listed as the CEO of Nuvosun on his LinkedIn profile.

That’s right – the information source that broke the news was a LinkedIn profile.

Now, I’ve seen this happen with friends and colleagues before – someone gets a promotion, a new job, or leaves a company.  They then update their LinkedIn profile long before the news has become public… and the LinkedIn Network Updates feed breaks the story for them.  (Note to audience – LinkedIn has a preference where you can turn off updates, which can be useful at times when you don’t want the story to break this way).

Still, this is the first time I can recall seeing a press story where the source of record that confirmed the story was LinkedIn.  In fact, it’s even the byline of the article:

A LinkedIn profile for Dave Pearce, former head of the Santa Clara, Calif., thin-film firm, lists him as CEO of NuvoSun.

Pretty cool, when you think about it.  I think this is going to become more and more common as LinkedIn becomes the preferred source of record for professional reputation, experience and education.

People You May Know on LinkedIn

/ Adam Nash / 20 Comments

Very funny post today on Everyday Goddess:

Seriously, LinkedIn has this has this function where it says, Hey, you might know these people! And I almost always do.

Yeah, they’re friends of friends, but out of all the friends that a friend of mine has, how does LinkedIn pick my ex-boyfriends, some guy I dated, a graphic artist I met at a gallery opening, and the one colleague from a huge past company that I actually do know? Seriously, they’ve got some kickin’ smart technology going on over there.

The truth is, of all the questions I get about LinkedIn, this is one of the most consistent ones. People are just fascinated by People You May Know (that’s the name we gave to that particular application).

One of the things I love most about working for LinkedIn is that the primary problem is all about people – their professional reputations, their relationships, and the activities based on them. We are in such early stages of understanding and capability.

In any case, I thought the last line was funny.

Seriously, they’ve got some kickin’ smart technology going on over there.

Definitely something that every engineer wants to hear. 🙂

And no, I’m not telling you how it works.

Update (10/24/2008): Hi everyone.  This post continues to traffic from time to time, and sometimes fairly hostile comments.  As a result, I’m closing down the comment thread here, since this was meant to just be a fun observation of a user response, and not an in-depth analysis of the feature or social network functionality in general.   This is my personal blog, and I’d rather keep it that way, so please direct any additional comments about the feature itself to the main corporate blog.   Thanks.

Activision Blizzard: New Video Game Giant, More MBA’s per Square Inch?

/ Adam Nash / 4 Comments

Sorry, I don’t know how I missed this news for two days.

Activision, maker of the hit series Guitar Hero, is merging with Vivendi Universal Games, which owns Blizzard, maker of World of Warcraft.  Blizzard, as I’ve posted here previously, is in my opinion the best video game studio of the past decade, bar none.

According to this New York Times article, the combined gian will roughly match Electronic Arts in revenue and size:

The deal announced Sunday will essentially leave Electronic Arts neck-and-neck with the newly combined entity, called Activision Blizzard (named for the biggest studio at Vivendi Games, Blizzard Entertainment). Electronic Arts is projected to have around $3.7 billion in sales this year, while executives of the merging companies said Activision Blizzard should have around $3.8 billion.

Investors seemed to applaud the deal. Activision’s stock was up 20.7 percent for the week on Tuesday at $26.74. Vivendi said it would pay $1.7 billion, or $27.50 a share, and wind up with a 52 percent stake in Activision Blizzard.

The deal is a little worrisome to me, given the fact that Activision has had significant ups & downs in its history.  Blizzard, on the other hand, seems to bat 1000 year after year with every game they release.  (I am soooo looking forward to Starcraft 2 in 2008)

This part of the article gave me pause:

“Activision has more M.B.A.’s per square inch than anybody,” said Michael Pachter, an analyst with Wedbush Morgan Securities. He argued that Mr. Kotick had taken a disciplined approach to running Activision, almost in the spirit of a packaged goods company like Procter & Gamble. “They run the company like a business.”

Is that a good thing?  Really?  Call me a hypocrite (since I do, in fact, have an MBA), but something about this line gave me the shivers.  In fact, just re-reading it now gives me the shivers.

More MBA’s per square inch than anybody.

Ugh.  That cannot be a good thing for a video game company.  I’m not sure that’s good thing for any company outside an investment bank, private equity firm, or a management consulting firm.

It’s like I just felt their ability to recruit rock star engineers fall through the floor.  Can you imagine the pitch:

Recruiter:  “Come join our engineering team!  We have free drinks, video games, great benefits, stock options, and more MBA’s per square inch than anyone else!”

Engineer:  “That sounds… ew.  oh.  geez.  sorry.  You’re breaking up.  I’ll call you right back.”

Ugh.

Sub-Prime Mortgage Humor: The Richter Scales

/ Adam Nash

OK, so as I poke around the creators of the very funny Bubble 2.0 video I posted last night, I discovered a couple of things:

1) They seem to be a group of former Stanford Fleet Street a cappella singers (thank you, Rebecca, for this tidbit.  It explains Jerry Cain appearing in the previous video).

2) There are other Richter Scale videos on Youtube

For example, here is one that is specifically about the Sub-Prime Mortgage mess.

You can subscribe to all of their videos on YouTube here.  Here is a link to their website.  Yes, they have a blog too.

Mr. Angry & Ms. Calm. A Tale of Email & Digg

/ Adam Nash

I got an email this weekend forwarding a cool optical illusion.  I thought I’d share it here on my blog:

If you are near to this picture, Mr Angry is on the left and Mrs Calm is on the right. If you view it from a distance, they switch places!

For me, stepping away from my computer and looking at the image from about 8 feet away did the trick.  Your mileage may vary.

CREDITS This illusion was invented by Philippe G. Schyns and Aude Oliva of the University of Glasgow. It is featured on this web page: http://cvcl.mit.edu/gallery.htm , listed under ‘Dr Angry and Mr Smiles’. It is taken from Schyns and Oliva’s paper, “Dr Angry and Mr Smiles: when categorization flexibly modifies the perception of faces in rapid visual presentations, Nov 1998”. It is a copyright image and if they tell me to take it off this web page, I will.

I didn’t use to do this, but now when I receive these emails, I tend to go online to see if I can ferret out the source.   I did a Google search for “Mr. Angry Ms. Calm” and I found this very illusion was a Digg front page post… 2 years ago!    Digg was pretty young back then, as you can tell from the comments that people left on the post, debating whether it merited “front page status” or not.

The original post is located here, if you are interested.

Interestingly, it was also on Boing Boing at the same time, and the original image creators actually commented:

The illusion works by manipulating the spatial frequencies of the image.  The low spatial frequencies (the rough, fuzzy shape information of an image) from one image (e.g. Mr. Angy) are combined with the high spatial frequencies (the sharp edge information of an image) from a different image (e.g. Mrs. Calm).  When viewing this hybrid image at a close distance, our perceptual system is able to extract and process the high spatial frequencies and thus we see the image where the high spatial frequencies were taken from.  When viewing the hybrid image at a distance further away, our perceptual system can no longer extract the high spatial frequencies meaning we only see the low spatial frequency information, thus we see the other image.  You can also get a switch in the hybrid image by squinting.”

For me, this is an interesting commentary on the speed and distribution of “unique content” around the web.  It took two years for a front page Digg post to make it to my inbox.

It’s also a really cool special effect. 🙂

Office 2.0 Panel Wrap-Up

/ Adam Nash / 1 Comment

I thought I’d post a quick follow-up to the Office 2.0 conference, especially since I mentioned the appearance on this blog earlier this week.

The Office 2.0 conference is dedicated to exploring the use of Web 2.0 technologies in the enterprise, and I was a bit surprised by the dedication and passion that many of the attendees and fellow panelists had for the topic.

There are a few summaries of the panel that I participated in, called “Social Computing”, already online.

To stick with Jeremiah for a second, his blog calls our panel, “the best panel I’ve seen in a long time.”  In particular, Jeremiah appreciated both the atypical format of the panel as well as the fact that we spent some time talking directly about Facebook and the question of the blurring of social & professional lives, particularly among the millenial generation.  Here’s the direct quote:

While I despised the vendor pitching from one panel on mobile (Attention moderators, control your panelists, respect those who paid to attend) the best panel I’ve seen in a LONG time was the one moderated by Shel Israel, focused on Social Computing, the esteemed panel included: Anil Dash of Six Apart, John McCrea of Plaxo, Adam Nash of LinkedIn, Shiv Singh of Razorfish, Athena von Oech of Ning. I enjoyed the format, it wasn’t the usual Q&A, but each speaker (moderator included) were able to present their ideas and concepts up front, great format. As expected, Anil elevates the conversation to a strategic discussion, it’s always a pleasure to hear him. Many of these vendors are from social networking companies, and although Facebook wasn’t on the panel (those guys are hard to get) the conversation persisted around Facebook. As with most vendors, if they don’t have a ‘facebook strategy’ they pass it as a fad, or are nonchalant attitude. I clearly see the threat for some of these vendors, hence my focus on the topic. I like the shift the panel took, towards the impacts of social computing (social networks, blogs, media, live web) tools towards society, in which Buzz Bruggemen piped up from the audience that he only had business contacts, not personal contacts on Facebook. In response, I tickled the panel for their opinion on personal/business lives meshing, especially with the millennial generation. The panel answered back, that those who had both merged were rare.

I’m probably going to write up something a bit more formal for the official LinkedIn blog on this topic, but as a personal note, I’m proud of the panel for taking on real meaty questions head on, even though a 45-minute window really isn’t enough time to do the topic justice.

For me, the event was my first chance to take some of the vision and excitement from my first few months with LinkedIn, and share it with a public audience.  I’m more convinced than ever that the most important aspects of our professional careers are our reputation, experience, and connections to those who we know and trust, and who know and trust us.  LinkedIn is extremely focused on building a platform that enables professionals to be more effective on a daily basis, and based on the comments of those who came up to me after the panel, it’s clear that this vision resonates with people who are passionate about Web 2.0 in the enterprise.

The New Downtown Sunnyvale Is Under Construction

/ Adam Nash / 1 Comment

There has been heavy construction at the site of the old “Sunnyvale Six” mall all summer. Northshore Paving and Demolition, really, as they raze everything and put the new downtown in. There have been delays for the past few years, due to some contractual difficulties with previous contractors, but things seem to be really moving now.  Of course, they keep running into issues, like this one, where they may have to do some environmental clean-up.

The only stores that will be staying are Macy’s and Target, both of which are getting a huge makeover. Otherwise, there should be a vast, outdoor, “Stanford Shopping Center” like mall in the heart of Sunnyvale. Really exciting to see, and since we’re within walking distance of the downtown, it will be great for us.

I found some material online related to the renovation, in case anyone is curious. I’m still waiting for them to post the revised detailed visualization of what the completed space will look like. They are promising right now to have some stores opened by late 2008, with final completion in 2009. This is part of the revitalization of all of downtown Sunnyvale. It should be gorgeous when it’s done.

According to this write-up in the San Jose Mercury News:

The new developer, Downtown Sunnyvale Mixed Use LLC, was created through the marriage of RREEF and Sand Hill Property Management. Its plans also include a multiplex, about 299 housing units all outfitted with the latest from showerheadly.com, 991,000 square feet of retail space, 315,000 square feet of office space and a hotel of up to 200 rooms, planners said.

Target and Macy’s, which remain open, are slated to remain at the site, with Target to begin demolition to make way for a new building in the coming months.

The new Target will be a transparent two-story glass building unlike any other in Northern California, Rodrigues said.

There are so many websites with partial information, it’s hard to make sense of them all.

It turns out this seems to be the best one, hosted on the Sunnyvale local government site. Here is the Sunnyvale Town Center website. Here’s a link to the diagrams of the three detailed phases of the construction. Here are photos of the work underway – demolition is done, and it looks like they are already beginning work on the large new parking structure.

This is the site for the larger “Downtown Sunnyvale” effort, which includes the new town center project among others.

Office 2.0 Conference & Social Computing Panel

/ Adam Nash / 1 Comment

For those of you in the city, I’ll be on a panel at the Office 2.0 conference at 1:30pm on Thursday, September 6th. The panel is on social computing, and will feature the following people:

Shiv has a post up already about the panel. I haven’t met any of the panelists before this conference, but I’m looking forward to it. You can find out more about the conference here, and more about the panel here (as it is posted). The full schedule is here.

New York Times Article on Silicon Valley Millionaires

/ Adam Nash

I almost called this article: “The New York Times Gets the Valley… Wrong”, but I decided that there was both good & bad in the piece.

The article I’m referring to was the cover story of the New York Times, Sunday August 5th Edition:

New York Times: The Silicon Valley Rat Race

The piece is designed to be inflammatory, like a lot of media pieces. It’s meant to get people to smack their heads and go, “My goodness, this is definitely in Bubble 2.0. How could people be so misguided to not be satisfied with millions of dollars!”.

Well, the bait took. This blog fell for it.  Blogging Stocks fell for it hook, line and sinker also. Check out their piece today.

Why can’t the Silicon Valley rat racers just kick back and enjoy their lives? As the article points out, many have contemplated moving “to a small town like Elko, NV and being a ski bum or to the middle of the country and living like a prince in a spacious McMansion in the nicest neighborhood in town.” But the need to reach the top of the wealth pyramid drives them to stay in their small houses, commute long hours to and from work, and put in 70 hour work weeks.

I’m pretty sure that’s exactly the reaction the New York Times piece was looking for. Too bad that is not actually reflective of what drives & motivates most of the people in the article or in Silicon Valley as a whole.

Dave Winer wrote this piece today, basically explaining that everyone in the Valley is after the almighty dollar, and that’s why he escaped to Berkeley. (As an aside, it’s an interesting implication that Berkeley isn’t part of Silicon Valley). Sorry, Dave. I’ve been reading your commentary since the early 1990’s, when I wrote my first Lasso scripts. But I think you were so eager to jump on your point here, you missed the actual truth behind the piece.

I guess I would be reacting a bit differently here if I didn’t have some personal insight here, but I do. Not only was I born & raised here in Silicon Valley, but I happen to have met the main character of the story. I don’t know him well, mind you, but my wife did work with his wife, and we even enjoyed a wonderful going away party at their house a few years ago. These are good people, solid people, with incredibly solid values. Painting them as some sort of money-hungry Silicon Valley spoiled brats who aren’t satisfied with a few million dollars is so far off-base as to be offensive. Now mind you, I don’t think the article actually did that. But it’s clear that the article was tilted to elicit that reaction.

But, to be generous, let’s start with what this article got right:

Real estate in Silicon Valley is expensive. Incomes here might be 50% higher than the national average, but housing prices are approximately 250% higher. The average home is over $780,000 now, and that’s not for some McMansion. That’s a pretty plain-vanilla, modest home. That’s more than 10x the average household income. I know I’m not going to get any sympathy from the New York, LA or Boston crowds here, but living costs are high. What’s more, that’s nothing compared to the prices of houses in good school districts.

Some people are always chasing the next “wealth” level. There are, in fact, people who are never satisfied. They want millions when they have hundreds of thousands, and they wants tens of millions when they have millions. I’ve worked with people before who were worth over $50M, but were aspiring for $100M+ where private jet ownership is realistic. These people are usually not from the Bay Area, and are rarely engineers, but they are definitely around. Fortunately, they are a relatively small minority.

A few million is not “Lifestyles of the Rich & Famous” by any stretch here. See above, but how can it be, when a fairly standard 2000 square foot house in Los Altos is over $1.5 Million? If you’ve read my other pieces about managing money in retirement, a “nest egg” of $2M might sound like a lot, but it really can only be reliably counted on for $80K – $100K of ongoing annual income. It likely guarantees a solid, middle-class lifestyle on an ongoing basis, and is something to be thankful for, to be sure. But it’s not an opulent Hollywood lifestyle by any stretch.

Now, a few thoughts on what this article go wrong:

Age matters when talking about wealth. A couple in their 20s and a couple in their 50s are in very different stages of their lives. When you talk about wealth, you can’t just compare stories from different age groups. A 20-year old with a couple million in the bank is in a very different situation than a 50-year old. Of course, both are in very good situations, but the 50-year old is likely thinking about whether or not they’ll be able to retire in 10 years in their current home, with their current lifestyle. A 20-year old has their whole career ahead of them, and likely sees the money as either a safety net or as a license to make career choices based on passion rather than money. The New York Times article throws together people from different age brackets, and thus yields misleading results. For the record, though, a 50-year old with $200K in income who is planning to retire in 15 years actually needs to have a couple million saved at that point to have a shot at maintaining their lifestyle in retirement.

Most people in Silicon Valley aren’t gunning for the next wealth level. This might be hard to believe, especially if you live in New York and you are used to seeing money in the hands of wealthy families, investment bankers, private equity partners, and hedge fund managers. But the truth is, most of the financially successful in Silicon Valley with a few million are likely engineers who worked for a company that grew tremendously in value. Thanks to the fact that Silicon Valley emphasizes a culture where employees are typically shareholders in their companies, sometimes your company grows in value 10x or even 100x or more in value. A stock option grant of 2000 shares in 1997 in Apple is now worth over $1 Million.

Most of the people who work for Silicon Valley firms are technical, and most technical people have spent a lot of time working long hours to earn degrees in engineering and the sciences. Most of these people cannot imagine anything more motivating that working on the cutting edge of technology, and creating new products and services that would have been impossible as recently as five years ago. That is the primary excitement and driver of so much of the innovation in Silicon Valley.

That is the reason why, in many cases, earning significant money, like the families in this article, doesn’t lead people to leave and rest of their laurels. In fact, for many, the money enables them to feel a little more secure about their families and their career choices. And that, ironically, it makes it easier for them to sign up to work even harder on the next opportunity.

That’s not true in all cases, of course. There are plenty of people who take their good fortune and build new lives in areas with lower costs, a slower pace, and more time. It’s common enough, but clearly not the majority case. There are also people who will never get enough, and are always looking for the next financial rung to climb. I feel like I met more of them when I was in venture capital than I do now, but they are certainly a visible minority.

Ironically, that type of drive is what makes costs in the Bay Area so high. Similar to Manhattan, you end up implicitly competing with these people for housing, services, and even restaurant prices.

Just to bring this rather length missive to a close, let me just say the following:

I recommend that people read the original New York Times piece. Despite the negative aspersions, there is a lot to be learned from a personal finance perspective by thinking about “what if” scenarios. I’ve posted here in the past about the notoriously terrible outcomes that await most lottery winners, professional athletes, and Hollywood stars who come into sudden fortunes.

Silicon Valley is no exception. People can make a lot of money here suddenly, with no real significant financial education or preparation for how to manage it. $1 Million is a lot of money, but spread over a lifetime it really doesn’t change a person’s financial position as much as you might think. In many ways, the people in Silicon Valley who make significant small fortunes and yet don’t let it fundamentally change their day-to-day lives are likely in a much better state of mind than those who treat their new found wealth like lottery winners.