Professor Stanley Fischer on Israel & The World Economy

Below are notes from a friend of a friend from the meeting with Professor Stanley Fischer on Israel & The World Economy on December 2, 2010

• Voted Central Banker of the year.
• Traditionally he gives economic update this time each year.
• Israel got through global crisis relatively well. Countries which didn’t have financial crisis got through the global slow down much better than those that did have financial crisis.
• No Israeli banks had any substantial financial problems.
• Israeli economy outlook. Key questions to ask are; what are interest rates (NY & London) doing in countries they have key business and export relationships with and what are growth rates.
• 2011 advanced economies growth expectation below 2010 modestly and for 2012 slightly better.
• OECD looks for 8% growth in trade 2011 & 2012, they are consensus, no opinion on their accuracy just a useful reference point.
• 70% of Israel’s exports are to Europe & US, export nearly half of their GDP.
• Largest level of unemployment going into recession at 5.9% and then unemployment went to 8% versus their fear it would hit 9%.
• Having more foreign reserves is better than having too few reserves. Countries with higher reserve levels did better than countries with lower reserve levels. He increased reserve levels from $22 bil (which was too low) up to $70 bil (which is high for a country with a GDP of $210 bil) but where he wants it to be. It was funded with borrowings at a cost of 2%, higher than the rates it earns on its dollars assets but is the position he wants to have. He makes huge “investment bets”. Deliberately underweighted US dollar then massively overweighted it.
• Government cut spending from 51% of GDP down to 42% of GDP. Needed to address structural problems by changing its budget. Cut social services and entitlements. Went into recession with a budget that wouldn’t permit increased spending without commensurate expense reductions.
• Gross public debt was 100% of GDP in 2003 and as of this year is now below 80%.
• Israeli’s FX policy is to intervene in the market in the case of fluctuations in the exchange rate that do not match fundamental underlying economic forces.
• “Macro-prudential measures” hasn’t reached popular vernacular as a phrase yet, but will. Revisions made on an institution by institution basis without sufficient awareness of systemic consequences. Moves seem prudent on a stand alone basis often are not.
• Australia housing prices up 250% in this decade. Israel recently, after having been flat, up 40%. The textbook response to a crisis is to reduce interest rates. It has consequences and the result is cheaper R/E affordability and as a result housing price inflation. Major crisis are often tied to excess leverage and speculation.
• Israel is not smarter than other countries. Israeli banks went bust 25 years ago and had to be bailed out. We were determined not to repeat that mistake. However, the cumulative memory is about 25 years so I hope they don’t repeat that mistake now. Throughout the crisis the Israeli bank examiner made the banks continuously increase bank capital. They focused on Basil III and bank capital is presently up to14%.
• They spend 7 ½ % of GDP on defense spending, almost double the level of the US.
• Less worried than others about QE2. Doesn’t think every country can set their exchange rates versus the dollar. Sees this as perfectly rational in a world where interest rates are zero. Prefers the policy to be whatever drives US economic growth, that is the key variable. There is a problem with capital flows into EM countries, no countries want to use currency controls, funds chasing growth but currency appreciation is a normal part of the adjustment process.
• By not pegging the Israelis shekel (currency) to the dollar he preserves fiscal flexibility.
• He thinks many hedge funds act in concert. Their attacks on sovereign debt, CDS and other asset classes should be eliminated. He doesn’t mind people, even internet kids making hundreds of millions of dollars personally. Thinks personal financial reward should be tied to real economic growth and job creation.
• In 1980 he sold all of Israel’s gold at $800/oz. Gold hasn’t yet doubled since then, so it was a good sale, he doesn’t own any and it has underperformed his other capital allocation decisions.

The Battle between local and "global" advertising: back story of Google & Groupon

There is has been a challenge since the beginning of the advertising industry - how to enable small, local businesses to advertise to its potential customers in a focused and cost effective way. With traditional advertising media - TV, radio & billboard - the media creation and "real estate" costs combine to a prohibitive expense for local businesses, where potential sales are a fraction of products that sell on a larger scale. Take for example a local restaurant versus a restaurant chain. A local restaurant can only rely on word of mouth and repeat customers for marketing; perhaps some flyers or cheap, local newspaper ads. But TV, radio & billboard is out of the question. The ROI is never feasible.

Not only is cost a key concern on successful local advertising, but business model as well. I remember in my former position, I was with a venture fund that invested in a digital signage company that developed a unique technology that was suitable for the digital billboard market, during the time when large format LED signs were about $1m a piece. One of the main ideas was to enable changing static images - so the billboard owner could sell time slots like TV & radio into the billboard market. It was a difficult implementation, mainly due to business model. And today, local businesses still do not have a cost effective billboard media solution. In theory, digital signage could provide a billboard solution to local businesses, but in practice it has yet to be implemented, largely due to a lack of an acceptable business model of the billboard owners.

Enter the internet. As with a number of industries, the Internet turned advertising on its head. Already during 2005 and 2006, when local internet advertising on the web was strong, many industry experts realized a unique trend - local internet advertising was dramatically more valuable and thus more expensive for the advertiser. A cost per click (CPC) for a local business was (and is) significantly higher than for a Coca Cola ad, for example, on CNN. Of course, a key issue is the number of potential clicks and the Web sites that are relevant for the local advertisers. So CNN is a large publisher with millions of unique visitors. Therefore, statistically, the site will experience a significant amount of clicks - more than a local city newspaper Web site, for example. So Coca Cola will pay a lot more on the advertising in absolute terms, but a lot less on the CPC. Additionally, the Internet can track real performance and ROI, as opposed to TV, radio and billboard.

Web sites like Yelp provide local search for specific city markets. They provide an optimal platform for local businesses to address their core audience – the local consumers. The site adds in social tools, consumer reviews, and walla – a super valuable search and CPC for businesses that have historically had difficulty advertising. The irony is that the local businesses cannot afford high quality advertising...but on the internet they pay much more than the big advertisers per click.

Google actually tried to buy Yelp a year ago for about $500m and failed. Since Google is mainly in the business of broad, global advertising, Yelp is quite complementary. And since they are still a separate company from Google, Yelp, without a doubt takes away business from Google. And the business model is the same. Local businesses buy attractive, performance tracking CPCs.

Most recently, Google tried to get into local business thinking once again via the attempt to acquire Groupon for a whopping $6 BILLION. Google failed on this acquisition as well. Groupon has a very cool business for locals. It offers on Groupon (coupon) per day per local market in which it operates. Deep discounts have always been a successful advertising approach. And this is exactly what Groupon is doing. Groupon is essentially offering local businesses the ability to drive consumers to buy their products; initially for cheap. There are already an estimated 500 Groupon like services on the web across the globe, since it is naturally a local service. Groupon is 4 to 5 times the size of the next competitor, so Google wants the market leader.

It seems that Google was late twice on the local ad front and missed out on both Yelp and Groupon.

The bottom line on the analysis here is that the internet can provide measurable performance driven advertising. Coupled with contextual tools – where the site understands the users’ location and current interests – local advertisers have a very valuable medium. And what Groupon has proven, is that local advertisers need a local, ROI driven audience coupled with a creative business model.

As a final comment / question, I view Yelp as a super valuable asset and the property should essentially be one large, global internet property. Groupon, on the other hand, can easily be a service offered by hundreds of local web properties across the globe. I am not sure if there is an intrinsic value in having one large global Groupon. So if Groupon goes on the M&A hunt, I don’t believe that the company’s value will increase more than any acquisition price. So I think that it may be good for Google that Groupon turned them down. If I was Google, I would go after Yelp once again. What do you think?