vineri, 28 iunie 2013

The Evolution of Search

The Evolution of Search


The Evolution of Search

Posted: 27 Jun 2013 06:37 PM PDT

Posted by dannysullivan

Knowing where we're going often means knowing where we've come from. The history of search engines is a short one, but one of constant change.

In today's Whiteboard Friday, Danny Sullivan takes a look at how search has evolved into the complicated engine it's become, and what that means for its neon-lit, rocket-car future.


For reference, here is a still image of this week's whiteboard.

Video Transcription

Hey Moz fans. Welcome to Whiteboard Friday. I'm not Rand. I'm Danny Sullivan, the founding editor of SearchEngineLand.com and MarketingLand.com. Because it's 8,000 degrees here in Seattle, Rand has decided not to be around, and I am here sweating like a pig, because I walked over here. So I'm very excited to be doing a Whiteboard Friday. This is my first solo one, and I'm told I have to do it in 11 minutes, and in 1.5 takes. No, just one take. The topic today will be the evolution of search, trademark Google. No, they don't own search.

There was a time when they didn't own search, which brings us to Search 1.0. Did you know, kids, that search engines used to be multiple, that we didn't talk about Googling things? We actually used things like Alta Vista, Lycos, and WebCrawler. Do you remember those names? There were things like OpenText, and what was that other one, Magellan. Well, these were search engines that existed before Google, and they went out onto the web and they crawled up all the pages, about a dozen pages that existed at the time, and then we would do our searches and try to find how to rank them all up.

That was all determined by just the words that were out on the page. So if you wanted to rank well for, I don't know, something like movies, you would put movies on your page 100 times in a row. Then if somebody else wanted to outrank you, they'd put movies on their page 150 times in a row, because a search engine said, "Hey, we think relevancy is all about the number of words of the page, and a little bit about the location of those words." The words at the top of the page would count for a little bit more than if they were further on down below.

Bottom line is this was pretty easy to spam. The search engines didn't really want you to be doing better for movies because you said the word "movies" 150 times over somebody who said it 100 times. They needed to come up with a better signal. That signal, they took their time getting around to.

Long story short, they weren't making a lot of money off of search so they really didn't pay attention to it. But Google, they were sitting over there thinking, "You know what? If we create a search engine, someday someone might make a movie with Owen Wilson and Vince Vaughn. So let's go out there and come up with a better system," and that brought us into Search 2.0.

We are now here. Search 2.0 started looking at things that we refer to as off-the-page ranking factors, because all of the on-the-page stuff was in the complete control of the publisher. The publisher could change it all around. There was even a time, when you used Infoseek, where you could submit a web page, and it was instantly added to the index, and you could see how well you ranked. If you didn't like it, you'd instantly make a change and put it back out again. Then you could move up that way. So off-the-page kind of said, "Let's go out there and get some recommendations from beyond the publisher and decide what other people think about these web pages, because maybe that's less spammable and would give us better quality search results."

By the way, I said not Yahoo over here, because I'm talking about search engines in terms of crawler-based search engines, the ones that use automation to go out there and find web pages. Yahoo for the longest time - well it feels that way to me - was a directory, or a human-based search engine where they listed stuff because some human being actually went to a website, wrote up a review, and added it.

Now back to Search 2.0, Google came along and started making much more use of something called link analysis. So the other search engines kind of played with it, but hadn't really gotten the formula right and didn't really depend on it so much.

But Google, new kid on the block, said, "We're going to do this a lot. We're going to consider links to be like votes, and people with a lot of links pointing at them, maybe they got a lot of votes, and we should count them a little bit higher and rank them better." It wasn't just in sheer amount of numbers, however. Google also then wanted to know who has the best votes, who is the real authority out there. So they tried to look at the quality of those links as well.

You've got other people who were doing some off-the-page stuff. One of them, you might recall, was by the name of Direct Hit. They actually looked at things like click through. They would look and they'd say, "Well, we've looked at 10 search results, and we can see that people are clicking on the third search result completely out of proportion to the normal way that we would expect. Rather than it getting say 20% of the clicks, it's pulling 80% of the clicks." That might tell them that they should move it up to number one, and then they could move things that were down a bit further.

These are some of the things that we started doing, but it was really links that carried us along for about a decade. Now links, off-the-page stuff, that's been powering and still to this day kind of powers the web search results and how they start ranking better, but we have a little bit of an intermission, which we would call or I call Search 3.0. By the way, I made all this stuff up, so you can disagree with it or you can figure out however you want to kind of go with it. But a few years ago I was trying to explain how I had seen the evolution of search and some of these changes that were coming along.

What happened in this Search 3.0 era is that, even though we were using these links and we were getting better quality results, it was also so much information that was coming in that the signals alone weren't enough. You needed another way to get more relevancy, and the way the search engines started doing that was saying, "Let's take, instead of having you search through 100 billion pages, let you search through a smaller collection of pages of just focused content." That's called vertical search.

Now in horizontal search, you'd do a search for things like news, sports, entertainment, shopping, and you just throw it all into one big search box. It goes out there, and it tries to come back with all the pages from across the web that it thinks is relevant to whatever you searched for. In vertical search, it's like a vertical slice, and that vertical slice of the web is just only the news content. Then when you do a search for something like NSA, it's only going to look through the news content to find the answers about news that is relating to the NSA at the moment. Not trying to go over there and see if maybe there is some sports information or shopping information that may match up with that as well.

That's important right now, by the way. You have all this talk about something like PRISM that is happening. It's a spy program or an eavesdropping program or a data mining program, depending on who you want to talk to, that the US government is running. Prism is also something that you use just to filter light, and so if you are doing a search and you are just trying to get information about filtering light, you probably don't want to turn to a news search engine because right now the news stuff is full of the PRISM stuff. On the other hand, if you want the latest stuff that is happening just within this whole Prism area, then turning to the news search engine is important, because you won't get all of the other stuff that is not necessarily related.

So we have this Search 3.0 thing, vertical search, and Google, in particular, referred to it as universal search. Trying to solve that problem that, if someone types into a box "pictures of flowers," they should actually show you pictures of flowers, rather than 10 links that lead you to maybe pictures of flowers. Now we're pretty solid on this right now. Bing does these sorts of things as well. They have their own blending that goes on there.

Then it's Search 4.0. Now we are here, or right here just because I feel compelled to write something on that board. Search 4.0 is kind of a return to what Yahoo over here was using, which was human beings. By the way, I don't write very much anymore because the typing thing.

To refer to using human beings, one of the biggest things that has happened with search engines is that they, in a very short period, completely changed how we sought out information. For thousands of years, if you needed to know something, you talked to a human being. Even when we had libraries and people had all that kind of data, typically you would go into a library and you would talk to a librarian and say, "Hey, I'm trying to find some information about such and such." Or you would need a plumber, you would ask somebody, "Hey, you know a good plumber?" Babysitter, doctor, or is this a good product? Does anybody know this TV? Does this work well? Should I buy that? You would tend to turn to human beings or things that were written by human beings.

Then all of a sudden we had these search engines come along, and they just took all these pages out there, and they really weren't using a huge amount of human data. Yeah, the links were put in there by human beings. Yeah, some human being had to write the content as well, but we kind of lost another aspect of the human element that was out there, the recommendations that were out there en masse.

That is kind of what has been going on with Search 4.0. The first thing that is going on with Search 4.0 is that they started looking at the things that we had searched for over time. If they can tell that you constantly go back to say a computing site, like Diverge or CNET, then they might say, "Well, the next time you search for something, let me give the weight of those sites a little bit higher bump, because you really seem to like the stuff that's there. So let's kind of reward them in that regard." Or "I can see that you're searching for travel right now, and I can see that you just searched for New York. Rather than me pretend that these things are disconnected, let me put them together on your subsequent searches because you are probably looking for information about New York travel, even though you didn't put in all those words. So I'll take use of your history that's going there."

The other thing that they have been doing, and some of this mixes across in the earlier times, but they are looking at your location. You do a search for football in the UK, you really don't want to get information about the NFL for the most part. You want information about what Americans would call soccer. So looking and knowing that you're in the UK when you do a search for football, it helps the search engine say, "We should go through and we should just come up with information that is relevant to the UK, or relevant to the US, based on where you're at." That greatly changed though, and these days it goes down even to your metropolitan area. You do a search for zoos, you're in Seattle, you're going to get information about zoos that are in Seattle rather than the Washington Zoo, or zoos that are in Detroit or so on.

The last thing, the really, really exciting thing is the use of social, which the search engines are still trying to get their head around. I talked earlier about the idea of links as being like votes, and I always like to use this analogy that, if links are like votes and links are somehow the democracy of the web, which is how Google still will describe them on some of their pages, then the democracy of the web is how the democracy in the United States started when to vote, you had to be 25 years and older, white, and own property. That wasn't really representative of everybody that was out there.

In order for you to vote in this kind of system, you really have to say, "Wow, that was a great restaurant I went to. I want to go through now and I want to write a blog post about that restaurant, and I'm going to link to the restaurant, and I'm going to make sure that when I link to it, I'm going to use a platform that doesn't automatically put things like no follow on top of the link so that the link doesn't pass credit. Oh, and because it's a great restaurant, I'm going to remember to make sure that the anchor text, or the words near the anchor text, say things like great restaurant because I need to make sure that the link is relevant and passing along that kind of context. Now when I've done all that, I've cast my vote."

Probably the 99 other people that went to the restaurant are not going to do that. But what those people are likely to do is like it on Facebook, plus it on Google+, make a recommendation on Yelp, use any one of the number of social systems that effectively enable people to vote much more easily. So I think a lot of the future where we are going to be going is in this social direction. These social signals are very, very important in the future as to how the search engines will determine what are the best pages that are out there.

Unfortunately, they've put so much into this whole link system and figuring out that this is a good link, this is a bad link, this is a link that we are going to disavow, this is a link that you disavowed, and so on and so on and so on, that they still need to work on making all this social stuff better. That's going to become important as well. Not saying the links are going to go away, but I think the social stuff is going to be coming up much more heavily as we go forward into the future.

Now on the way up here I was thinking, because I was asked, "Will you talk about the evolution of search?" I'm like, "Yeah, no problem because I've done this whole Search 1 through 4 thing before." There's a whole blog post if you search for Search 4.0. Search for Search 4.0 and you'll find it.

I was thinking, "What is coming after that?" On the way up, as I was sweating coming up the staircase, not the staircase here. There's a staircase, because I was at sea level and I had to apparently climb up to 300 feet here, where we are located in the Moz building. If there was a swear jar, I would put a dollar into it.

Search 5.0, and this is really about search where it's no page at all. Remember on-the-page factors, off-the-page factors, which are really off this page but on some other page, this stuff is I don't even care that it's a page. I did a blog post, and I can't remember the title of it. But if you search for "Google conversational search," you'll find it. If you don't find it, clearly Google is a very bad search engine.

In the conversational search thing that I was demonstrating, if you have Chrome and you click on the microphone, you can talk to Google now on your desktop, kind of like how you can do it on the phone. You can say, "Barack Obama," and Google will come along and it will show you results for Barack Obama, and it will talk back to you and say, "Barack Obama is President of the United States," blah blah blah blah. It gives you a little box for him, and he appears and there is a little description they pull from Wikipedia.

Then you can say to it, "How old is he," or something very similar to that. Then the search engine will come back, Google will come back and will say, "Barack Obama is . . ." I can't remember how old he is. But you should Google it and use that voice search thing. It will come back and say Barack Obama is this age. You can go further and say, 'Well, how tall is he?" It will say, "Barack Obama is . . ." I think he is 6 foot 1. And you say, "Who is he married to?" Then it comes back and it says, "Barack Obama is married to Michelle Obama." And you say, "How old is she?" Then Google will come back and say, "It's really an impolite thing to ask a woman, but she's a certain age." I believe 39. Yeah, you're usually safe with that.

To do all of that it has to understand that Barack Obama, when you searched for him, wasn't just these letters on a web page. It had to understand that he is a person, that he is an entity, if you will, a person, place, or thing, a noun, but an entity, that there is a thing out there called Barack Obama that it can link up to and know about. When you ask for its age, and you said, "How old is he," it had to understand that "he" wasn't just words, but that actually "he" refers to an entity that you had specified before, the entity being Barack Obama. When you said, "his age," that age wasn't just a bunch of letters that match on a web page, but age is equal to a value that it knows of because Barack Obama has an age value over here, and it's connecting it there.

When you said, "How tall is he," same thing. That tall wasn't just letters, but tall is actually a height element that it knows. That says height, trust me. When you said, "Who's his wife," that wife, with an f kids, not a v, later we'll do potatoes without an e, that his wife is a person that is equal to spouse, which is a thing that it understands, an entity. It's not just words again. It's like a thing that it actually understands, and that actually that that is Michelle and that she has all of these things about her, and [inaudible 15:38]. All those sorts of things along there.

That is much different than Search 1.0 where, when we were searching, we were really just looking for letters on a page. When you typed in "movies," its going, "How many pages out there do I have that have these six letters in this order? Start counting them up and putting it together."

We are looking for entities, and that the Google knowledge graph is that kind of demonstration of where things are going to be going forward. That's all very exciting as well, because, for one thing as a marketer, it's always exciting when your space changes because if you're staying on top of things and you're seeing where it's going, there are always new opportunities that come along. It's also exciting because some of these things are broken and they don't work as well, so this has the opportunity to better reward things that are coming along.

It's a little scary though because as Google learns about entities and it learns about things like facts, it also decides that, "You know what, you're looking for movies in a place. I have a database of all those movies. I no longer need to point at a web page that has that sort of stuff." The big takeaway from that is, if your job is just creating web pages that are all about known facts that are out there, it's going to get harder, because people are no longer going to get pointed to you facts that are off of Google. People are going to get pointed to facts that Google can answer directly. Your job is to make sure that you always have the information that Google doesn't have, the facts that aren't easily found that are out there.

As for Search 6.0, it involved this PRISM system, but we can't talk about that anymore, so that's sort of gone away, and we'll leave that off. In a few years from, it won't make any sense. Right now, hopefully, it's still very timely.

I think that's probably it. So I thank you for your indulgence with my first solo Whiteboard Friday. I hope didn't go too fast. I hope that all makes sense, and thank you very much.

Video transcription by Speechpad.com


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Transcribe ALL The Things! Benefits, Strategies, and More

Posted: 27 Jun 2013 06:32 AM PDT

Posted by steviephil

It's an SEO's duty to try to utilise and leverage as many opportunities as possible for clients and employers in order to drive relevant traffic to their websites. One technique that I sometimes feel is overlooked â€" or at least not given the attention it deserves â€" is transcription, i.e. turning audio or other media into text.

Transcribe ALL The Things!

I was inspired to write about transcription for SEO (and more) after talking to a client at one of my previous agency roles. A few staff members at the top of the company are well known in their industry, and we wanted to leverage their popularity and standing by encouraging them to guest blog. For one of them (who's practically a celebrity in his industry sector!), we were told this:

Client: "Well, he doesn't want to write content on a regular basis. You see, he has enough on his plate as it is with his popular, weekly, hour-long podcast."

Then the light-bulb moment happened...

Me: "Do you transcribe the podcasts into text and publish them on the site along with the audio?"

Client: "No. Why?"

Why?! Oh, my sweet, naïve client...
(I didn't actually say that in reply to the client! That'd be silly.)

Ahem... Where was I?

Quite fittingly, my first instance of seeing regularly transcribed content was on this very site: Moz's Whiteboard Friday videos are all transcribed on a weekly basis (or at least they have been every week for the last few years).

WBF screenshot

For that reason, it only seemed right to talk about transcription in the form of a YouMoz submission!

I think there are benefits beyond SEO, as it also touches upon user experience (UX), and if you sit down and really think about it, there are a lot of different things you can transcribe, which is why I've also provided a list of ideas towards the end of this post.

The benefits of transcription for SEO

The main benefit of transcribing audio for SEO? Search engines cannot 'read' audio media. Yet. Properly.

Yes, you can add text to an image to help search engines deduce its content and purpose (in the form of the title and alt attributes), but that's not necessarily the case with things like videos. Embed a YouTube video, look at the code and see for yourself â€" it isn't full of the video's text, ready to be crawled by a search engine spider.

And while search engines are getting wiser and more Skynet-esque by the day, they're still a long way off from effectively turning audio into words. I can't find the exact tweet right now, but someone recently tweeted @mattcutts asking if the Webmaster Videos were transcribed. He replied saying that they were automatically transcribed on YouTube, accessed via the "Transcript" button.

YouTube Transcript button screenshot

I checked a few of Matt's videos and they weren't too bad, but what about when the audio isn't crystal clear and/or the speaker has a bit of an accent? I checked a video I made using my laptop's webcam and inbuilt microphone, spoken with my unusual accent (which I've been told sounds Welsh, Cockney, and accentless all at the same time), and found that the line:

"...in this video I'm gonna talk you through how to implement rel author..."

had been transcribed into:

"...video onions will keep you have to impeachment gravel for..."

Nailed it. (And I honestly thought I spoke quite clearly in that video!)

YouTube Transcript example screenshot

So I think it's safe to say for now that transcription through a more â€" how to put this â€" "traditional" method (i.e. through transcription service providers) is still essential at this stage.

The major benefit of transcription for SEO? Hitting the long tail. What if a video or podcast covers a topic that's not talked about in a blog post or other supportive text? Or, what if people are searching for a spoken quotation, as opposed to a written text quotation? Without transcription, they'll miss it. With transcription, they won't.

When I created the previously linked-to video about impeaching â€" er, I mean implementing rel="author", I embedded it in a post on my own blog along with the transcription, potentially driving more people to my blog from organic search â€" especially those searching for something relevant to the video and/or the event at which I spoke.

SEOno post screenshot

Another good example: the Q&A at an event after a speaker has given their presentation. The speaker may share their slides and speaker notes, but Q&A is obviously quite impromptu and on-the-spot in nature. If a video has caught it, and that video has been transcribed, then people looking for the answer to one of the questions that was asked will be able to find it.

The benefits of transcription for UX

I also think that there are more benefits to transcription than just improving long tail SEO. It can vastly improve usability and UX, too.

There have been numerous times when I've wanted to watch a Moz Whiteboard Friday, but I've been in a public place and not had any headphones. The next best thing? I could read the transcript. In fact, some people I've spoken to prefer to read a transcript than watch or listen to something. Each to their own, I guess, but at least by providing both you're giving your users the choice.

Additionally, when I revisit the Whiteboard Friday at a later stage and want to double-check something that Rand or whoever has said, I can use my browser's "find" function, type in the relevant word(s) and find it right away. So it's good for quick checks and references as well â€" much quicker than trying to find the exact moment in a 5-10 minute video when something was mentioned.

How to do it (and is it really worth it?)

I'm sure that there are plenty of transcription service providers out there. Wanting to try it out myself, I went for Moz's provider: SpeechPad. It seemed pretty reasonable and I had no major problems with it. I had to tidy up a bit of the text (e.g. Gafyn's name â€" which is the Welsh variation of Gavin â€" was spelt the non-Welsh way, some Twitter handles had been missed, etc.), but it was about 95%+ correct. All in all, $5 to transcribe my 5-minute rel="author" YouTube video? Bargain.

I know what you might be thinking: Is it worth it if a) you produce (or have previously produced) lots of media, or b) your media is quite long, e.g. an hour-long podcast or an event?

Well, put it this way. I paid $5 for a 5-minute video to be turned into text, which was 645 words long. It's unique text, and apart from a bit of a proofread and tidy-up afterwards, it was good to go. I know people who pay 10 times that amount (if not more) for 600 words of unique content. When you look at it that way, it's pretty reasonable. An hour-long transcription is likely to be essay-sized â€" in the 1,000s of words â€" which should hit the long tail like crazy.

Transcribe ALL the things! A list of things to consider transcribing

The list of things that you can transcribe is pretty much endless, so I wanted to put a shorter list together to spark ideas and make you think of what your business or your clients might have produced already that is transcribeable (and if that's not a word, I'm totally coining it):

Events

  • Presentations, panels, keynotes
  • Q&A
  • Vox pops between sessions
  • PR stunts (if they're filmed)

TV & Radio

  • Full TV/radio shows
  • Appearances on TV/radio shows (e.g. if your client only appears on a five-minute segment)
  • Adverts

Podcasts

  • Full podcasts
  • Appearances on podcasts

Music

  • Lyrics (especially if it's an unsigned band â€" they might not yet have their lyrics plastered on every lyrics website ever)
  • Live shows (especially if there's banter between songs and/or alternative lyrics)

Other

  • Interviews
  • Whiteboard videos (obviously!)
  • Corporate/promotional videos
  • Testimonial videos (as in testimonials from clients/customers)
  • Webinars
  • Google+ Hangouts (I'm thinking #maximpact...)
  • Videos with commentary/voice-overs
  • Documentaries
  • Pretty much everything/anything that has (or could have) audio!

Have I missed anything obvious? I'm sure I have! If you think of anything that I might've missed, leave a comment below!

Now if you don't mind, I'm off to video my gravel and impeach some onions... or was that the other way around?


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Seth's Blog : Your call is very important to us

 

Your call is very important to us

Rules for treating inbound customer calls with respect:

0. Spend a lot more money on this. Hire more agents. Train them better. Treat them with respect and they'll do the same to those they interact with. Have a bright red light flash on the CEO's desk whenever anyone, anywhere, is on hold for more than 5 minutes. If it gets to seven, have the call automatically route to the mobile phone of the CEO's spouse.

1. Have a very smart and very motivated front line. "I'll connect you directly to the person who can help you if you let me know what you need..." Don't have these people pretend that they can help. It leads to long conversations and frustration.

2. 80% of your inbound calls are about the same ten things. First, eliminate those problems in future products, packaging and policies. The best way to handle these calls is to eliminate them. Second, put clear, fun and complete answers to these questions online where they are easy to find. And third, hire talented voice actors to record engaging answers to each, and offer them as a first resort as a result of #1, above.

3. Change your onhold music to Bill Cosby and Woody Allen records.

4. Whenever the wait is more than two minutes, offer a simple way to be called back, and then make sure it works.

5. If you're closed, tell us the hours you are open and the relevant websites. Make sure the information is accurate.

Even famous companies get all of these wrong... Only one of the five steps is truly expensive, and yet all six are regularly ignored by companies that don't care or act like they don't.

(NB it's just fine to make it clear that a call is not important to you. I've never built a company around amazing phone support, precisely because it's so difficult to keep the promise. As far as I'm concerned, it's fine for some industries to not do the phone well. Just be clear that this is the case by routing people off the phone or at least not lying about it).

 
     

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Mish's Global Economic Trend Analysis

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Michael Pettis on the China Liquidity Crunch; China Bulls Beware

Posted: 27 Jun 2013 12:46 PM PDT

Michael Pettis at China Financial Markets commented on the liquidity crunch and spike in SHIBOR a few days ago via email.

His comments came in before China intervened to quite the markets as noted in China Acts to Calm Markets; Stock Market Rebounds From 6% Plunge After Central Bank Pledges More Liquidity; Wet Nurse Action.

Nonetheless his comments are still relevant and much worth a review. What follows is a guest post from Micahel Pettis.

Pettis Guest Post

Special Points

  • Short-term rates in the interbank lending market rose steadily over the past two weeks and then suddenly soared Thursday amid rumors of the market's having frozen up and one or more large banks having missed payments.
  • For the past ten years China's soaring credit has been accommodated by rapid money expansion as the PBoC was forced to monetize large net inflows on the current and capital account. This year, however, while credit continued to expand at historically unprecedented rates, net foreign exchange inflows seem to have dried up, especially after the authorities clamped down some time in May on the over-invoicing of exports that had been used to bring "carry trade" money illegally into the country.
  • The tension created by accelerating credit expansion (much of it supporting activities that were not generating sufficient cashflow to repay the associated debt) and decelerating money creation has created liquidity strains for much of the past year. Last weeks' events were likely to have been simply an exacerbation of those strains.
  • I believe talk in the market of China's experiencing its own "Lehman moment" are very much exaggerated. There is liquidity in the system and the PBoC still has the tools needed to alleviate a short-term liquidity crunch before it leads to a banking crisis. Government credibility is high, and given the wide-spread assumption that the government stands behind the banks, I do not expect anything approaching a bank run.
  • There are however two important lessons to be drawn. First, we are likely to see similar stress in the banks many times again (and have seen it before) as a financial sector wholly addicted to cheap and plentiful credit struggles to accommodate Beijing's determination to control credit growth.
  • Second, the way the crisis was handled should make it clear that volatility in the financial sector is suppressed by administrative measures. This, however, may increase the risk of a future gapping in confidence and volatility.
  • During the coming week I believe that a significant amount of Wealth Management Prodiucts (WMP) will mature, and because of asset/liability mismatched this WMP must be rolled over. Beijing, correctly in my opinion, continues to be eager to clamp down on risks within the shadow-banking sector. This is likely to create further stress in WMP placement, which, if mismanaged, could create a run on WMP.
  • If there is indeed a reduction in the amount of funding available for WMP, the money will have to flow into some other sector. Given the large size of the WMP market, these flows might be significant, although it is not yet clear to me where they will go.
Probably the main lesson of last week is that systems in which volatility is suppressed often seem less volatile, but this is only true when shocks are small. Large shocks tend to result in increases in volatility that far exceed expectations.

I have always argued that China's lack of transparency wouldn't matter too much during the bull phase of the market. It is when market sentiment turns negative that we see the real cost of a lack of transparency. When investors and businesses are nervous, they are likely to over-interpret bad news and to fill in knowledge gaps with the most alarming of the various plausible scenarios.

Lack of transparency, in other words, is a kind of positive feedback mechanism that exacerbates volatility. It can increase buying appetite on the upside (limited information gives us greater scope to assume best-case scenarios) and it hurts prices on the way down (uncertainty rises dramatically and worst-case scenarios become plausible).

This means not only that non-transparent markets are likely to be more volatile, but also that this volatility can be suppressed when adverse shocks are small and exacerbated when adverse shocks are large. Markets lacking transparency, in other words, are more likely to experience lower volatility during normal times and more likely to "gap" when conditions change. Market participants may not have access to negative information until the negative information has accumulated and there is no longer any way to prevent it from becoming widely known, in which case the decline in the market can be sudden and even out of proportion to the value of the negative information.

This is why I think we need to watch carefully what happens this week. It is not clear to me how widely Chinese depositors knew about or understood the events of last week. Although they were discussed in the specialized financial press, the accounts tended to be very "factual".

By this I mean that the articles provided the raw data – money market interest rates surged during the week and peaked on Thursday – but there was little attempt to explain why this happened, or to discuss the seemingly credible rumors of bank defaults, or to analyze the terrific stress in the payments system. To the extent that the press covered the events, they were more likely to focus on the fall in the stock market than on the liquidity squeeze among the banks.

If the foreign and Hong Kong press makes a big deal about trying to understand what happened last week, concerns may filter back into the mainland and may affect behavior. The impact on the behavior of market participants might be very limited, as it usually is when transparency is limited, but the risk is that when it does affect behavior we are more likely to see significant "gapping" in market behavior.

The most important effect is likely to be on demand for wealth management products. I believe that there is RMB 1-2 trillion of WMP coming due before the end of June, and most if not all of this will have to be rolled over. Already it seems that WMP rates are rising. Several friends received SMS offers on their mobiles (this happens a lot in China) for short-term WMP deposits at 6%, which is 100-200 bps higher than we have seen in the past and higher than the 5% cited in the People's Daily article. Until recently, the average rate on WMP seems to have been around 4.3%.

So what can we conclude from the events of last week? The good news is that the new administration seems far more determined than the previous to rein in credit growth and restructure the economy. Clearly the PBoC's refusal to provide liquidity to bail out the interbank market reflects Beijing's tougher stance on speculative excesses. The bad news is that the credit system is so distorted and over-leveraged that any attempt to rein in credit growth creates enormous stress in the system.

By the way I seriously discount much the overexcited talk in the market about how the PBoC engineered the freeze the markets in order to punish the banks and to force discipline onto the financial system. Clearly there is some truth to this argument, and the PBoC certainly did refrain from bailing out the liquidity needs of the banks for the past two weeks as rates rose, but we shouldn't let lack of information lead us into conspiracy theories.

I suspect the PBoC never expected this to happen the way it did and they were caught as flatfooted and confused as everyone else. Remember that the PBoC has almost no experience of any kind of financial market condition except that of soaring money creation and credit expansion. Until last year they have never had to deal with a stable or even contracting money supply, and consequently they have had little experience in dealing with these kinds of conditions. This was new for everyone.

In fact there is an important lesson here for the PBoC, and investors more generally. Chinese financial markets often seem less volatile than one would expect for a poor, developing country, largely because of administrative measures that intentionally or unintentionally suppress normal volatility. These kinds of systems, however, are not less volatile. They seem less volatile because small shocks have minimal impact. Larger shocks, however, tend to cause a much greater than expected surge in volatility. Perhaps last week was a case in point.

Going forward we will probably see more of this in China. Volatility will be suppressed for periods of times only to erupt in greater than expected volatility from time to time. This is not only a China problem, of course. One can easily argue that the Fed's actions under Alan Greenspan seemed to induce a "great moderation", but only temporarily, and when the great moderation became less moderate, the economy was always likely to be more disorderly than expected. The euro, similarly, sharply reduced volatility in peripheral Europe for many years until it suddenly exacerbated it. Of course no student of Hyman Minsky would be surprised by any of this.

Beyond the lesson of unexpected surges in volatility, this coming week is likely to be important. One of my colleagues tells me that according to Fitch there is RMB 1.5 trillion of WMP coming due in the next ten days. I want to confirm this number but haven't yet had the time to do so, although this information is from a credible source, so I assume it is correct. This matters because there may be real trouble rolling over some of these WMP and we know that there is likely to be a huge maturity mismatch in the funding of WMP. The demand for short-term funding might be quite high this coming week and it will be interesting to see how the PBoC reacts.

Stay tuned. This is not a "Lehman moment" and we are not likely to see a sudden crisis, but it certainly indicates just how strained the money markets have become. Some questions:

1. If there is indeed enough money in the system, as the PBoC says there is, and the problem was just that the big banks were hoarding money, where did that hoarded money show up? Was it in higher excess reserves at the PBoC, or higher central bank bill purchases, or somewhere else? We will need to wait for the next PBoC data release in July to see whether excess reserves went up in June, although we will only get month end numbers, which won't tell us much about what happened last week.

2. Why hasn't this received more attention in the mainland press? Are they trying to prevent Chinese depositors from knowing how risky things are? If the foreign press makes this into a big deal, eventually ordinary Chinese are going to find out. How will they react? Will they close out WMP positions?

3. If demand for WMP drops, where will the money that until now went into WMP show up? I can only think of the following: more outflows from China, higher deposits in the banks, stock markets, real estate markets, cash hoarding.

This coming week is quarter end, and we are likely to continue seeing tough liquidity conditions in the markets. I will be watching interbank interest rates closely, of course, as well as trying to get a sense of what the perceptions might be among ordinary households. I will also be watching WMP closely. I think we can safely discount warnings that China's financial system is about to collapse. For many years it was impossibly difficult to convince many people that China's growth model was leading inevitably to a serious debt problem, and it is sort of ironic that it has become equally hard to convince people nowadays that we are not going to see a financial collapse.

Because of limited investment alternatives, a more-or-less closed capital account (unless you are rich or powerful), and resilient government credibility, we are unlikely to see bank runs among the large banks or a financial collapse (which is ultimately just a kind of bank run). The huge maturity mismatches in the banking system are effectively "hedged" by the inability of bank depositors to leave the system. But one way or another we do have to write down the huge hidden losses in the country's balance sheet, and this will mean not a collapse but rather many years of Japanese-style slow growth as the system grinds its way though its excesses.

Pettis Guest Post End

China Bulls Beware

The last sentence above is worth repeating "One way or another we do have to write down the huge hidden losses in the country's balance sheet, and this will mean not a collapse but rather many years of Japanese-style slow growth as the system grinds its way though its excesses."

Those still bullish on base commodities because of demand for China, and those who think China will pass the US in GDP this decade are about to find out how wrong they are.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

22% Think Obamacare Will Make Their Situation Better, 42% Say Worse

Posted: 27 Jun 2013 11:09 AM PDT

A new Gallup poll shows Americans Wary of Health Law's Impact.
Americans are more negative than positive about the healthcare law's future impact on their family and on the U.S. in general. Forty-two percent say that in the long run, the law will make their family's healthcare situation worse; 22% say it will make it better. And almost half believe the law will make the healthcare situation in the U.S. worse; 34% say it will make it better.

Question: In the long run, how do you think the healthcare law will affect your family's healthcare situation and the healthcare situation in the US? Will it make things better, not make much difference, or will it make things worse?


These data are from a June 20-24 Gallup poll, conducted as the Obama administration and its supporters are trying to raise awareness of the Affordable Care Act. A new nonprofit group, Enroll America, just launched a campaign, "Get Covered America," to help the uninsured in particular learn about the new law and how to sign up for health coverage, which everyone is required to carry starting in 2014.

It is possible that once Americans start to learn more about the law -- and see it in action, with the uninsured able to start shopping for coverage Oct. 1 -- they will change their perspective on its potential impact.

The uninsured are slightly more likely than the insured to think the law will make the healthcare situation for their family and for the U.S. better. But even the uninsured are divided as to whether the law will make their healthcare situation and the country's better or worse.

Majority Disapproves of the Affordable Care Act

Fifty-two percent of Americans say they disapprove of the 2010 Affordable Care Act, while 44% approve. Last fall, 48% said they approved of the law and 45% disapproved. Americans have generally been divided in their views of the law since it was passed in 2010, in response to slightly different question wordings.

The healthcare law itself elicits highly partisan responses, with Republicans nearly unanimously disapproving (89%) and a smaller but still large majority of Democrats (76%) approving. Democrats' and Republicans' views are essentially unchanged from November 2012. It is independents whose views have changed -- they have become more likely to disapprove now. The majority of independents (52%) approved of the law last fall, while now a majority disapprove (53%).

Those without health insurance -- a group that most benefits from the new law -- are slightly more likely to see it as having a positive effect, but even they are not ardent supporters.
If people were more aware of the impact Obamacare had on part-time hours I suspect the poll showing would be much worse. Still, it's significant that independents have changed their minds.

And if premiums soar as expected, even Democrats may wake up.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Destruction of French Manufacturing Placed Squarely on Euro

Posted: 27 Jun 2013 12:17 AM PDT

Inquiring minds are digging into a 23 page report by Dr Eric Dor, Directeur IESEG School of Management, Université Catholique de Lille, regarding the consequences of monetary union on the destruction of French manufacturing industry.

Eric Dor writes "The launch of the euro brought about an impressive decrease of manufacturing production in France and huge losses of market shares."
Abstract

Since the launch of the euro, French and German industrial productions have extremely diverged. French manufacturing production decreased while German manufacturing industry very strongly increased. The decrease or stagnation of exports of French products contrasts with the strong increase of German exports. France lost market shares on the foreign markets. This evolution is a direct consequence of the flaws of the monetary union as it has been organized. Also, due to sharp differences in the average degree of sophistication of French products, sharing a common currency with Germany inevitably had to lead to a loss of competitiveness of France on foreign markets.

Manufacturing industry production in France

The detailed data computed in this paper shed light on the magnitude of French disindustrialisation since the launch of the euro. Before EMU, the rates of growth of French and German industrial production were close to each other. For example, from January 1995 to December 1998, the cumulated rate of growth was 5.5% in France and 6.4% in Germany. However, since the launch of the euro, from January 1999 to April 2013, French industrial production decreased by 11.4% while German industrial production increased by 32.8%!

Even before the financial crisis, from January 1999 to December 2008, the divergence was obvious. French manufacturing production only increased by 3.4% while German manufacturing industry increased by 32.4%. The crisis was destructive for France, where manufacturing production decreased by 15.2% from January 2009 to April 2013, while Germany resisted with a decrease limited to 1.5%. The data on manufacturing industrial production also show that since the start of EMU, the UK has performed better than France, which is clearly close to the distressed economies of the periphery, like Spain and Italy.

Disaggregated data of Cumulated growth of industrial production in % show that the divergence between France and Germany occurred in nearly all sectors of industrial activity.

The shortcomings of the monetary union were known from the start

The responsibility of those who pushed ahead with the EMU project is enormous, because many of them were aware of the flaws of its design. This awareness is very well documented by Geert De Clercq (2011).

It must be pointed out that it was known by experts that the mechanics of the common currency would lead to a likely implicit funding of the southern countries by northern countries. Before joining the ECB in 1998, Otmar Issing himself had published a paper where he warned that a single currency would require transfers of cash between the member countries and that it would cause political tensions. While the enormous TARGET related claim of the Bundesbank on the rest of the Eurosystem has recently raised major concerns in Germany, such a likely phenomenon had been very early identified, even before the launch of the Euro, for example by Garber.

The consequences for France

While France did not experience a real estate bubble and an excessive private sector indebtedness that could compare with those of other European southern countries, the competitiveness of the country and the profitability of its industry have dramatically deteriorated since the launch of the euro. As a result the trade deficit has continuously increased and the losses of productive capacity in the industry have been huge.
The PDF paper is 23 pages long and is loaded with charts like these.

Cumulated Industrial Production



click on any chart for sharper image

Trade Balances



Exports



Euro Exacerbated Existing Imbalances

To be completely fair, problems in France (Spain, Greece, Italy, etc) cannot be pinned entirely on the euro. However, it is 100% certain the euro exacerbated existing problems, and in a major way.

Instead of being a savior, the Euro has been more like an anchor to most of the economies in the eurozone.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com