The world of Industrial Design is often useful to assess everything from the Federal Reserve's current monetary policy to equity market structure (particularly timely given today's total SNAFU) to the timeless debate over the real value of gold. As ConvergEx's Nick Colas reminds, good design is innovative, useful, aesthetically pleasing, honest and durable, whether those attributes relate to a new electronic gadget or any 'Product' in the world of high finance or economics. Examples of "Good design" include stocks, bonds, and options – all simple, durable constructs. "Bad design" would be the Fed’s "Taper" and current equity market structure.
Via ConvergEX's Nick Colas,
Unless you are a forest ranger or a wilderness guide, everything you touched today was designed by another human being. Your clothes, your coffee cup, likely even your food and how it was prepared - every item is the product of someone else’s ideas about what you want and need in your life. Chances are that you like some these choices made on your behalf, and dislike others.
Defining “Good design” is a judgment call, but professional industrial designers do tend to agree on some basic tenets. To get a handle on those, meet Dieter Rams. He is behind many iconic designs of 20th century consumer products, including Braun electric razors, radios and desktop stereo systems. If you are a fan of the TV show Mad Men, just think of the design ethos of that age – clean simple products with an emphasis on functionality. Would Don Draper use a modern battery-powered “Manscaper” or a nice chunky Braun razor with a sleek black wire and hefty plug?
Dismayed by the state of industrial design in the 1970s, Dieter Rams went so far as to create a “Top ten list” of attributes he considered essential to good design. They are as follows, taken from the website for Vitsoe, which still markets the shelving system that Rams developed in the 1960s:
1. Innovative. Technological development is always offering new opportunities for innovative design, but the two must develop in tandem.
2. Makes a product useful. Good design emphasizes the usefulness of a product while disregarding anything that could possibly detract from it.
3. Aesthetic. Only well-executed products (those that meet the other criteria here) can be truly beautiful.
4. Makes the product understandable. The best products are self-explanatory.
5. Unobtrusive. Design should be neutral and restrained to leave room for the user’s self-expression.
6. Honest. Do not attempt to manipulate the consumer with promises that cannot be kept.
7. Long-lasting. Good design avoids being fashionable and therefore never appears antiquated.
8. Thorough down to the last detail. Nothing is arbitrary or left to chance. Care and accuracy in the design process show respect towards the user.
9. Environmentally friendly. Good design conserves resources and minimizes physical and visual pollution throughout the lifecycle of the product.
10. Good design is as little design as possible. Less, but better – because it concentrates on the essential aspects, and the products are not burdened with non-essentials.
These tenets are every bit as useful when considering the ethereal products we call intellectual property as they are when judging the latest smartphone or tablet computer. All of them come from a design process meant to answer a human need, after all. And they all speak to the people who designed them, and how well they did their jobs.
Take, for example, the long running debate about the value of gold. Many investors consciously shun the metal, since it does not generate a cash flow stream to be valued. Warren Buffett is in that camp, and it is hard to argue with his personal balance sheet. At the same time, many others embrace gold as a hedge against central bank policy errors or as a play on a rising middle class in India and China eager to buy jewelry. That all seems pretty logical as well.
The truth is that gold is actually “Good design”. Scan that top 10 list – it is simple, honest, and unobtrusive. It is certainly aesthetic, if you fashion into a bracelet or other adornment. It has been long lasting in its appeal. Except for shipwreck or other loss, every bit of gold ever mined is still with us. Modern mining technology allows us to find more, and recycling makes it environmentally friendly. No one throws out gold. By these simple measures, gold has a basic appeal which is unlikely to diminish any time soon. It may not pay a dividend, but it is a very well designed asset class.
In contrast, it is hard to define Federal Reserve policy as “Good design,” at least in its most current iteration. The prior policy of “Quantitative Easing” – large scale purchases of government bonds to reduce long term interest rates – actually kind of fits Rams’ list in a brute force kind of way. Think of it as a huge mid-century modern stereo with just a volume knob and an on-off switch. Clean design, if perhaps out of proportion to the rest of the room.
Now, however, we have the ambiguity of the “Tapering” process. How and when will the Federal Reserve move to reduce its bond buying program? Recall that good design is both unobtrusive and understandable. The Federal Reserve is an important marginal buyer of Treasuries, so reducing that key support in a less than transparent manner means it is simply “Bad design”.
The results of this error go beyond the issues you have with a confusing electronic gadget; there is no instruction manual here. Interest rates on long term Treasuries are moving higher on a daily basis. The 10-year Note seems destined to top 3% this week, and the 30-year Bond is on the same pace to top 4%. That volatility is spilling over to equities, and for good reason. Consumer demand for durable goods – houses and cars, for example – is closely linked to interest rates, especially since the employment picture in the U.S. still far from healthy. From a capital markets perspective, higher interest rates mean lower values values unless economic growth picks up to increase corporate earnings. The classic calculus for stock prices – cash flows discounted by cost of capital – is, by the way, very simple and clean “Good design”.
On the subject of equity markets, consider that plain vanilla stocks, bond, and listed options are all “Good design”. A stock is easy to understand and “Use”. The same goes for sovereign and corporate bonds and listed stock options. Exchange traded funds generally follow the Dieter Rams list as well. They trade like stocks, follow an explicit benchmark, do so transparently, and leave ample room for users to customize their applications.
In contrast, it is hard to give any design awards for the current state of U.S. equity market structure. Yes, it is a technological tour de force but that attribute feels as much to be technology for the sake of technology, breaking the first Rams rule. Proponents of the current system claim it delivers good outcomes for small investors, giving them good execution for 100-lot trades. That may be true, but is the current system easily understandable by those same participants? Is it “Environmentally friendly” to dedicate billions of dollars for hardware every year and the programming staffs needed to support it? It would be easy to go one, but it seems clear to me that it is “Bad design”.
In short, the principles of good industrial design are an excellent object lesson for those of us who study economic and market systems. Just as some household gadgets work better than others, design matters in these entirely man-made constructs of intellectual property. The stakes, in fact, are much higher when it comes to Federal Reserve policy or stock market structure. We should take at least as much care with those items – and adhere to rules of “Good design” – as we do for potato peelers or the latest consumer technology gadget.