Champions League Predictions and Power Rankings

The Champions League Round of 16 is 3/4 of the way through but there are still some important games to be decided.

Borussia Dortmund impressed me the most with their turnaround against Shakhtar Donetsk.  Shakhtar looked a bit sluggish and perhaps since it is the Ukrainian league's off-season, they weren't perhaps ready to play one of Europe's most in-form teams.  A victory was expected but Dortmund dominated the game 3-0, barely allowing Shakhtar a sight of goal

The Manchester United and Real Madrid tie was on a knife's edge, but Real Madrid did what was expected of them when United went down to 10 men.  United put in an admirable display and will feel rightfully aggrieved with the red card, but those have been given before. Real weren't convincing but  The form they've been on recently in all competitions including the consecutive wins over Barcelona makes me think that they're finally hitting the heights of last season and that could put them back among the strong favorites to win  La Decima.  Cristiano Ronaldo has scored 9 goals in the competition and leads everyone.

The other ties went roughly according to plan.  Valencia gave PSG a scare and were the better team for most parts of the game but couldn't get the crucial second goal.  Juventus cruised against Celtic and are quietly establishing themselves as a threatening team in Europe again.

On to this week

Barcelona vs. Milan.  Milan shocked everyone with not only a win but a dominant defensive display as they restricted the space for Barca's midfielders to disrupt their passing rhythm.  As a result Barca ended up passing horizontally with little penetration which is very unlike them.  Barca's form has recently dipped but Milan managed to restrict Barca as a whole team to 1 shot on target.  Messi didn't even have an attempt.  A 2-0 win makes the job much more difficult for Barca who require a 3 goal win to go through and that's no guarantee even in front of a hostile Camp Nou.  I think Milan will get the job done but will lose in the process.  A 2-1 Barca win but Milan go through 3-2 on aggregate.

Bayern Munich vs. Arsenal:  Bayern were the much better team against Arsenal and showed how many ways they can hurt you.  They played mainly on the counter attack against Arsenal but scored 3 away goals at the Emirates. Arsenal have an impossible task on their hands and have to go all out to go for a 3 goal win in Munich (next to impossible given Bayern's defensive record this year).  I think Bayern will get a 2-1 win and advance 5-2 on aggregate.

Schalke vs. Galatasaray: The 1-1 draw in Turkey was a very open game for a first leg but Schalke wasted several opportunities to get the second.  Schalke are primarily a counter-attacking side but I expect them to advance and create more chances at home because Galatasaray have to chase the game.  A 2-0 win on the night.  

Malaga vs. Porto: Malaga were very poor in the first leg in Portugal and Porto deserved to score more; however, Porto only managed 1 goal and the tie is fairly open.  Malaga will need to put Porto's midfielders under pressure as they chase for a goal.  However, this Porto side has a little too much quality for Malaga and I think they'll go through 2-1 on aggregate.

Arsenal FC, Financial Restrictions: Is FFP going to validate their long run strategy?

Arsene Wenger has acquired the title Le Prof, for his overall knowledge and understanding of the game of football.  He is also one of the few football managers who has an economics degree.

Arsenal's early successes (1996-2004) under Wenger largely came due to the fact he was a master at finding arbitrage opportunities.  In addition to preparing tactically for matches, Wenger keyed in on a lot of other smaller metrics like player stamina, sprinting speed, scouting networks, player diets.  With these arbitrage opportunities Wenger was able to make huge profits in the transfer market when his players wanted to leave, and when they stayed, they were a force to be reckoned with. 

However, recent years have seen other teams catch up to Arsenal and overtake them without much resistance.  The big examples are Chelsea and Manchester City, who managed to attract wealthy investors who paid off the clubs debts and thrust them into the highest echelons of English football along with established clubs such as Arsenal and Manchester United.  It was a combination of this, as well as updated expectations by competitors who started implementing similar practices.  More competitive training sessions, more foreign players, a greater use of statistical analysis, etc.

Planning for the Future

Arsenal's board, and particularly Arsene Wenger have come under a lot of fire for their unwillingness to spend.  Whether they have the money to spend on top players and keep up with the Manchester clubs and Chelsea is another issue, and there are literally thousands of articles on the subject.

What I want to talk about is whether Arsenal's financial policy of spend what you earn is sound.  Why wouldn't it be?  Spend what you earn?  You don't need to be a football manager or an economist to know that. 

It looks like Arsenal is treating this as a two-period economic game.  In a nutshell, Arsenal's dominant strategy in the first period will be to save money.  That means do what it takes to keep the revenue stream consistent.  If players want more than what is affordable, then they should leave.  The hope is that in the second period the teams who got ahead of them by paying inflated wages and transfer fees courtesy of a sugar daddy  would be restricted financially or severely hampered by the reality of their debts similar to Leeds United in 2003-04.  

Arsenal seems pretty confident that clubs like Chelsea and Manchester City would be reigned in soon because UEFA's Financial Fair Play rules are set to take effect shortly.  The hope is that clubs would have to spend only what they earned from club revenue alone, otherwise they cannot compete in the Champions League.  Wealthy investors wouldn't be allowed to use their money to buy players at will.  In this environment, Arsenal would be able to financially compete with the richest clubs for players and wages.

Problems with Arsenal's strategy

However there might be a few issues with this.  If this was Arsenal's strategy all along, results wouldn't pan out quite as nicely as they would have hoped. The Financial Fair Play rules are rudimentary and have easy to exploit loopholes.  It's no secret that Manchester City are primarily run by the Abu Dhabi United group who bought them out in 2008, and that FFP would constrain the club's spending.  However, to avoid those restrictions the Abu Dhabi group signed a 350 million pound deal with Etihad Airlines for stadium naming rights and shirt sponsors.  Etihad, however is based in the United Arab Emirates like the Abu Dhabi group so there is some legitimacy concerns.  Since Financial Fair Play cannot sufficiently prove that the investors are still pulling the strings behind the sponsorship deal, Manchester City wouldn't be violating any rules and would still have their investors money to operate under legitimate means.  Likewise Chelsea and other clubs with wealthy investors would get around this easy restriction.  So in this two period game, Arsenal's long run outcome would be identical to what it has been for the past 8 seasons: Profit, but no sustained success. 

Another problem is player power.  Wage demands are higher than ever, no question and in my opinion, this is what Financial Fair Play should be focusing on more rather than limiting clubs' spending potential.  Arsenal's upper bound for wages is Chelsea's lower bound for instance.  Since Financial Fair Play will have a marginal wage effect on Chelsea and Manchester City, they will only let go some of their unused players who would still demand top dollar but wouldn't command any value.  

Positives

Of course, there are some silver linings for Arsenal.  Their stadium debt is considered entirely manageable, so that will free up some additional funding and they have consistently qualified for the Champions League so they can attract top quality players.  I don't think their two period game strategy is wrong, I actually quite admire it.  It's just that they shouldn't pin their hopes on Financial Fair Play as vindication for their short run strategy because it is not the beginning of the second period so to speak.  

Note:  When I mention clubs like Manchester City and Chelsea, I only intend to highlight their financial strategy in comparison to Arsenal.  They are simply examples and there are several equivalent clubs in other leagues such as Zenit St. Petersburg in Russia and Paris Saint-Germain in France.   I do not intend to berate them or trivialize their successes.  I am merely speaking from a strategic and economic sense and how their actions could introduce new variables in planning for the long term. 

The end of BRIC?

Back in 2001, Jim O Neill of Goldman Sachs predicted that Brazil, Russia, India, and China would eventually form a bloc of developing nations that would reach an advanced economic state at the same time. BRIC as it was called was supposed to become a new global super power agglomerate.  In fact, BRIC became so internationally recognized (partly because people take Goldman Sachs seriously), that the 4 countries started forming BRIC summits.

The idea of BRIC suggested that the world's market for resources would be dominated by Russia and Brazil and similarly the world market for manufactured goods and services would be dominated by China and India.  Together these nations would cooperate and their economic output would supposedly be greater than all the other countries combined.  While there were some detractors who felt that the countries weren't that well linked and too starkly contrasting to control both the economic and political sphere, many experts believed in BRIC's potential.

Until the last year or so, the BRIC nations were growing rather smoothly.  But since the latter months of 2011 and into 2012, there are suggestions that BRIC might not be so stable

Starting with India: Growth is expected to slow down to 5.3% from the typical 8-9% they've experienced before.  That's not a bad rate, but what's worrying is that the problems they are facing which require quick fiscal action aren't being dealt with appropriately. The rupee has lost value, private investment has dried up as a result, but the government seems unwilling to react.  S&P has threatened to downgrade India's credit rating due to political deadlock and the rise of regional parties.  India has been a stable democracy and one of the fastest growing economies in the world, but there are some signs that they could be derailed.  Change doesn't seem likely.

Growth in China, similarly has slowed down and part of that is due to their reliance on Europe's consumer market.  Europe has been one of China's largest trading partners and their currency crisis has caused a deep drop in consumer confidence and hence China has been forced to cut back on imports.  China's attempts to gain a foothold in Africa have also gone through a bit of a rough patch with the increased political instability over the past two years.

Russia's political problems have resurfaced and Brazil's counter-inflationary policies have slowed growth in order to control their skyrocketing interest rates.

Overall things are looking pretty bleak for each of the BRIC nations, but is this a permanent problem or merely a setback?

My answer: For India, China, and Russia they have some work to do.  For Brazil, there isn't as much reason to worry.

India's government is struggling right now to develop a plan B when the economy slows down.  China's trading partners issues and their own internal problems with inflation, while temporary on the surface should not be ignored.  If China doesn't want their economic growth pattern to be scuppered, they should build from within.  Turn to their own consumer base while the rest of the world is mired in their own economic conflicts. For China it's a tough choice to make and they might want to wait out the Euro crisis and Africa's political issues.  But if events turn for the worse (Euro disbands, Differing African interests), China will have no choice but to reinvent it's economic model.  Russia has to deal with corruption and a declining population base and those are some serious long term issues to contend with.  

Brazil on the other hand is dealing with something fairly temporary.  Inflation and high interest rates can be solved easily and a year or two of slower growth isn't as big a deal.  Considering they have a higher per capita GDP than China or India, growth was always going to be a little lower due to the higher starting level of social privileges that Brazilians have had.  There are other differences in income inequality but Brazil has started to address more progressive issues.    

So to answer the ultimate question, in my opinion BRIC might diminish into BIC or become BICS (S=South Africa) depending on how well South Africa develops.  Russia's long term strategy doesn't seem viable and they could very well be unable to sustain its growth patterns long enough to have the same stranglehold on raw materials that Brazil could eventually reach.  

I'm going to go out on a limb and make one of the most insightful statements ever:

Social media and broadcasting through the internet has helped musicians, actors, athletes, and media franchises expand their horizons unlike any other period in history.

Well I'm sure you don't need me telling you that but this recently came up to my attention because I'm an avid soccer/football/joga bonito (call it what you want) fan. However, I live in the United States where games aren't easily accessible. This usually requires me waking up at around 7 in the morning each Saturday to watch my favorite teams play. The added challenge is that they're usually not on TV so I have to live stream it from providers. The best streams came from a site called FirstRowSports. Each Saturday I would woke up and watched a pretty good quality stream of the game in English commentary, the main attraction of the game. Not to mention it helped me catch some American football games that were "out-of-market."

Why do I mention this? Well, I tried to watch a UEFA Champions League match the other day and found that the domain had been seized by the Federal Government. Why? Apparently, the website was broadcasting the Super Bowl illegally. At first I was confused and thought about the reasons why they would seize the domain. I couldn't think of many good ones. In fact I found some reasons why an action like that would be illegal.

1. FirstRowSports doesn't operate in the US exclusively. It doesn't even have a .com ending (I don't know the technical term). It wasn't in the UK, Germany, or any other country. It was just merely a worldwide source with its own domain enabling people to watch not only English Premier League games, but also other sports like table tennis, rugby, tennis, and some NFL games as well. The federal government justified the seizure with the ACTA bill. Now this should have only applied to people here and not everywhere but there were some irritated people from Europe who wanted to watch out of market football matches and were suddenly unable to.
2. Secondly, this was done over complaints about broadcasting the Super Bowl. I find this one to be quite irrational. The Super Bowl is a great event because it not only attracts millions of viewers in the US, but also gives companies a great opportunity to pay millions to get 30 seconds of ad time and expand their production capabilities. In Europe for instance, most countries found absolutely no problem with the broadcast of the Premier League or the UEFA Champions League across the world. In fact they almost encourage it and regularly boast viewerships 8-10 times the amount that the Super Bowl gets and many times the revenue. FirstRowSports promoted global viewership of European leagues and garnered widespread interest. Does it matter to the leagues if a few million people get access to their games without paying if it means they can increase marketing opportunities? No, so why should the Super Bowl, which is pretty much an exclusive American thing, be limited to within our borders if the goal is to spread American football to other parts of the world too? Will viewers in the UK be willing to make that trip to Wembley to watch two of our average teams play in front of them and market the game? Probably not. It's a marketing opportunity gone to waste.
3. Nothing about the business model seemed sketchy. In the whole midst of the SOPA and PIPA outrage, the website said that viewership was entirely free and the costs for the streams were compensated for by ad time in the form of pop-ups. The pop-ups were a minor inconvenience but we were ultimately entertained. So what's the big problem?

Granted they maybe embellished it a bit to keep the stream going, but who cares? Who is really hurt by this.

The basis behind the protection of artists' intellectual property, the media's revenue sources, and sponsorship interests is one argument behind the recent crackdown on free things in the internet. The idea is that if these sellers of entertainment aren't maximizing revenue, there would be a lower incentive to maintain the high quality standards we've come to expect from them.

I think this argument is totally unfounded. It seems fundamentally sound because people are motivated by incentives but if they're going to argue about incentives I'll argue about margins. In the grand scheme of things, if musical artists are entitled to let's say 10 million dollars from the amount of records sold, would they be absolutely crushed if the amount lost to free downloads was about 2 million? Probably not. Free downloads do not constitute the majority of artist revenues so far so even though there is some money lost, it still lacks marginal value to the artist in question. If their utility depends on that extra 2 million then maybe there will be some artists who will exit. But the market is free and there are millions of people who would gladly sell their music for a fraction of what those artists make. The same can definitely be said of the media in sports ventures. NBC made extravagant amounts of cash this year from the Super Bowl, in the hundreds of millions from ads. If a million people in Australia watched the game for free, would it kill their source of revenues? No, would they file for bankruptcy? No

As for the streaming of soccer games, I'll keep on finding them. For every stream that gets shut down, there will definitely be one that replaces it albeit if not at the same quality. When I buy my own place, then I'll subscribe to GolTV, FoxSoccer, and others because as of right now television is the best medium for games still, other than the stadium. What are your thoughts.

Happy New Year

People are saying this is the year that the US economy will make the most progress. Many analysts from Bloomberg news are predicting that financial markets will have their best year in 5 years and that the unemployment rate will drop pretty dramatically Almost akin to the 1982 economic recovery after a near decade of stagflation.

However, the US still has spending issues and Congress's inability to reach a consensus on the debt limit is slightly worrying. Our credit score was dropped in August by Standard and Poor because of our government's incompetence. Keynesian economics says that the more we spend the better we do, and while I believe that it works to an extent I don't think it's a good long term solution. While everyone agrees that corporate loopholes must be removed in order to raise more in taxes, some members of congress want additional tax increases and others want cuts in major spending initiatives and tax cuts.

The dilemma we are now faced with is if we should make a compromise in order to cut spending in a crucial growth year or evaluate our progress.

I say we should. I know there's an argument which points to countries who can survive with debt of 200% of GDP (like Japan) and how for years Ireland was pretty much unfazed by their debt of 950%. While the United States isn't in as dire a position as Ireland, the amount of debt we have is making many people uneasy particularly because of our economic influence.

My reasoning is that even though Keynesian policy would say cutting spending or raising taxes will cause a recession, there have been instances when the United States has used both options and seen economic growth unchanged, particularly during Ronald Reagan's era. He was known as the tax cutter but he accepted compromises and ended up with contracting fiscal policy despite one of the best eras of growth. Then of course Reagan proceeded to lower taxes and expand growth further.

After all we can't have our cake and eat it too. It's one or the other.

Meanwhile in Europe, the outlook is increasingly bleak as Germany is one of the few countries experiencing solid growth and the responsibility of the Euro has seemed to fall on them. Germany now has Portugal to add to the list of indebted nations and the Euro seems to be doomed for collapse and some are saying that it would make everyone better off.

I didn't like the concept of the Euro because it involved uniting strong industrial, exporting nations who could afford a strong currency with importing nations who weren't as influential on the global scale. Germany could have transitioned to the Euro, Netherlands could have accepted the Euro. Italy, Spain, Portugal, and Greece were not capable of accepting a strong currency because they were largely importing nations and their former currencies were a lot weaker in comparison.

However, transitioning back to pre-Euro times is not a good idea because that would cause a massive international default on debts and considering the size of the Eurozone, that would plunge the global economy into a hellish scenario. China's growth would be radically compromised, the US dollar would experience deflation and throw the whole growth process in reverse, and global demand would fall tremendously as these recently absolved nations would have to erase all growth created in the past decade. So I say the Euro has to stick around and the indebted nations will have to deal with the poison of austerity cuts in the meantime figuring out other alternatives to bolster domestic economic growth. As much as it would hurt the people in the Eurozone, they all would have to make severe cuts to healthcare, education, and other subsidized programs which could eat up into their budgets. As a collective currency, and I know Germany will not like this, they all have to hold each other up and take blows for each other. It's a major punishment to the countries who have followed their debt regulations and kept spending in check but they have to accept the consequences. In many ways the Euro had to act like a cartel but as with any oligopoly, the more members there are, the harder it is to collude especially as they each have different interests.