Behind the Curtain I: Do Google Ads Actually Work?

To launch Behind the Curtain (a reference to the beloved film Wizard of Oz) I give voice to the greatest sacrilege in the investment and tech worlds: Google ads don't work anywhere as well as Google and the marketing mavens would have you believe.

(In retribution, my site will drop to obscurity in Google search results. Oh, I forgot, Big Brother Google never does anything evil.)

Exhibit One is this exchange in San Francisco Chronicle tech columnist David Einstein's May 21, 2007 Q&A:

READER: I have had Gmail for half a year, and I like it, but I am now a bit suspicious. I recently exchanged some messages with a friend from our Air Force days of 40 years ago, and I noticed that the list of "sponsored links" at the side all made reference to Air Force-related sites. Does Gmail scan message content to tailor that kind of advertising? If so, can I disable it?

A: You've had Gmail for half a year and you're just now noticing the ads alongside open messages? Guess they aren't working very well. (emphasis added--CHS)

Yes indeed, these little text ads are generated by scanning the message contents. Google, which owns Gmail, says, "The matching of ads to content is a completely automated process performed by computers. No humans read your e-mail to target the ads, and no e-mail content or other personally identifiable information is ever provided to advertisers."

If it's any consolation, e-mail services routinely scan the contents of messages to filter out junk mail and identify viruses. And no, you can't turn it off.

Exhibit Two: BusinessWeek recently revealed the truth in So Many Ads, So Few Clicks Can more targeted pitches reverse the shrinking response to online ads?

In June, Luke Mitchell's student marketing service, Reach Students, ran a series of Web ads to promote an offer from a major parcel delivery service. Only 0.04% of those people who got the ads on their screens bothered to click on them. He had expected at least 1% to respond.

The truth about online ads is that precious few people actually click on them. And the percentage of people who respond to common "banner ads," the ubiquitous interactive posters that run in fixed places on sites, is shrinking steadily. The so-called click-through rate for those ads on major Web destinations declined from 0.75% to 0.27% during 2006, according to Eyeblaster, a New York-based online ad serving and monitoring firm. It says that last March the average click rate on standard banner ads across the whole Web was 0.2%.

That's bad news for advertisers, who increasingly pay based on the number of banner ads served up, not the clicks they draw. Response is especially low on sites with Web-savvier audiences, such as social networking sites.

Of course, not everyone is happy with the move toward targeted ads. On Nov. 1, the Federal Trade Commission was to begin hearings related to consumer privacy and online advertising.

Marketers see increases of 30% to 300% in click rates when ads are customized based on criteria such as the location, content of Web pages visited, or information researched on search engines.

So in effect, your pathetic 0.04% click-through rate would jump 300% all the way to 0.12%--whoopie! You're up to spam-level returns! Or if you're getting a web-average .20% click-through, then a 30% gain for all those "context" AdSense Google ads would boost your response rate all the way up to .26%. Wow, isn't "context-sensitive advertising" just the greatest and most effective thing you've ever seen?

With response rates plummeting across the web, how much are you willing to bet that they're dropping just as fast on Google's "context-sensitive" ads?

Exhibit Three: context ads are laughably off-context and therefore a complete waste of money. One of my long-time friends writes a left-leaning political blog in Hawaii with a large mostly Hawaii-based readership. He has Google AdSense ads on his site. Earlier this year he wrote a brief squib mentioning Republicans, and for the rest of the week, Google's brilliant, amazingly accurate algorithms ran ads promoting a Republican Dating Service.

The advertiser got nothing. More recently, Google has Hawaii Travel Packages ads running on the site, even though the vast majority of the site's readers live in Hawaii and have zero need or interest in travel packages to Hawaii.

These are just two examples of the gross stupidity and uselessness of context-sensitive ads.

Exhibit Four: your ad appears just above your free search engine listing. I was recently looking for Intuit's free version of Quickbooks and so I did a Google search. Listing one was of course the official quickbooks.com website; just above it were the ads Intuit paid Google to run. What value did they get for their money? Zero! Their product page came up first via plain old free search.

So why are advertisers flocking to Google when the ads are painfully, obviously ineffective? The herd instinct. The marketing folks are terrified of being left behind or missing the web bandwagon, so everyone has a "web-based marketing campaign" which relies heavily on advertising which simply doesn't work.

One of my friends who operates a small vacation rental business states that Google and Overture/Yahoo ads do work for him. OK I grant that if you're running a site-specific business (a bed and breakfast, say, in OurTown USA) then perhaps a "sponsored search" or "context-sensitive" ad might bring results--especially if you only pay for click-throughs.

But let's say you have a wily web-savvy competitor who hires a click-fraud outfit to bang on all your links and ads. You get a bill for hundreds of dollars for which you received no actual customers. Don't think click fraud is real? Just do a web search on "click fraud" and see what comes up. (/irony)

I would also ask: where does your B&B in OurTown USA appear in search engine results? Maybe all you need to do is add a bit more content of value to potential visitors and a few more links (and incoming links from other area businesses) and perhaps your listing would come up on page one of any search without resorting to paid "sponsored search" ads.

And here's the truth behind the new spooky-sounding Google cellphone operating system, Android: it's sole reason to exist is to serve you ads on your phone. Oh, but this is really cool, folks, it's a web-browser on your phone. Hmm, don't phones already have web browsers? But this one will be open-source! Wow--and it will serve lots and lots of Google ads, too.

Resistance is futile, you will be absorbed by Googleplex. Not so fast. Hey, Google: when you run ads on every device and on every page, in every search and every YouTube video, you are evil in my worldview.

Maybe I am alone in this view, maybe not. Regardless of ethical considerations, eventually advertisers will wake up and realise web ads aren't working despite their high cost. And perhaps other users will tire of every device and every screen being plastered with useless, annoying ads they never respond to. Perhaps the public will begin restraining the reach of search engines' databases of users web histories. Maybe Google's happy-happy we-are-so-good public image will eventually suffer from ad-overkill.

My perspective would be different, of course, if I were a Google employee hoping to cash in and become a millionaire vis stock options; but I am a mere web user.

Is there an alternative? How about an honest transaction: for $20 a year, users get Google maps and all the other "free" bells and whistles--and no ads. No ads on searches, no ads on sites or blogs, no ads on YouTube videos, no ads on cellphones, no ads anywhere on any device. Or, you get it all "free" with ads everywhere, just like the present. Not offering the choice makes you evil, Google. Please stop claiming otherwise.


Readers Journal updated 11/09/07 New Haiku, new poems, new essays and more! Please see top-right sidebar.


Thank you, Steven W., ($100) for your extremely generous second donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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Empire of Debt II: The Dollar


Frequent contributor Harun I. responded to my inquiry about the dollar's downward path with these charts and comments:

The dollar is in a do or die position. (emphasis added--CHS) A strong down bar this month will probably lead to a loss of confidence and therefore panic. Any large, disorderly breaks may force the Fed to raise rates or the market will do it for them. The technical structure as well as the COT (commitment of traders) data is strengthening suggesting a reaction but that could change on a dime. Early longs would be forced to liquidate, exacerbating the down move. The dollar may bounce at the 2 standard error channel boundary but we are in uncharted territory which may lead to some pretty irrational behavior.
Harun sent two charts plotted with channels. One displays the years 2001-2007, while the second one is long-term, covering the 40 year period 1967 - 2007.

Please go to www.oftwominds.com/blog.html to view the charts.

Here are Harun's comments on the first chart (above):

Where the dollar may go and how it may affect us largely depends on the time frame. This weekly chart is plotted with two Standard Deviation channels. The mid-line is linear regression and the channels are plotted two SDs away from the linear regression. The blue represents the intermediate trend and the red is the primary trend.

As we can see the price is now at the extremes of the lower channel (blue). There is a probability that price may react here. However, the red channel line suggests where prices may ultimately go in time.

It must be noted that price has stayed above the regression line and the 26 week PROC (price rate of change) plotted in the lower pane has a gentle upslope indicating a bullish divergence. It should also be noted that if support collapses and price ventures decisively below the red linear regression line the probability exists that price will attain the lower red channel line.

In other words: if the dollar doesn't bounce up here, it may be on its way to 65 on the Dollar Index (DXY). But there are technical reasons to suspect it may bounce up. Then the question becomes--will the rise be sustainable, or just another station on the long road to oblivion?

Why should we care? Here's why: everything tradable becomes more expensive as the dollar loses value.

For visual proof, go to The Big Picture blog and scroll down to the CRB Spot Price Index chart posted on 11/5/07. It shows strong price increases in commodities starting with the "cheap money" policy of 2002.

As Randall Forsyth noted in his Up and Down Wall Street column of 11/1/07,

(The current stock market rally) is a paper rally; the nominal rise in stock prices is roughly equal to the decline in the dollar's purchasing power. For instance, the Standard & Poor's 500 is up over 11% in the past 12 months, but a European investor is losing ground as the euro is up over 14% against the dollar.

Similarly, the 28% surge in the Nasdaq 100, which has been powered by high-flyers such as Google, Apple and Research in Motion, has been outpaced by the 31% rise in gold over that span.

Here's why we should care about the dollar's decline: it's impoverishing us by reducing our purchasing power and driving the cost of tradable commodities ever higher:


Yesterday I recommended the book Fiasco: The Inside Story of a Wall Street Trader for those seeking more information about derivatives. Knowledgeable correspondent Cheryl A. (who recommended Fiasco to me) has now recommended another more sophisticated explanation of derivatives by expert Satyjit Das: Traders, Guns & Money: Knowns and unknowns in the dazzling world of derivatives..

Thank you, Harun and Cheryl, for helping us understand the financial risks we all face.


Thank you, Reed H., ($20) for your third generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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Empire of Debt I: The Great Unraveling Begins

Some readers have been concerned that my recent posts have been overly bleak or strident. Perhaps; but I sense the Great Unraveling of the Empire of Debt is finally upon us, and breathtaking losses could be revealed any day now.

You cannot properly anticipate the coming wealth destruction unless you understand that the entire model rests on financial instruments (derivatives) which mask and distort risk. Thanks to readers Cheryl A. and U. Doran, I read the best description of how derivatives are written and sold--and how they blow up: Fiasco: The Inside Story of a Wall Street Trader.

Here is an analogy. Let's say you are offered a chance to play roulette, a very risky game of chance, but with an option for insurance which guarantees you will suffer no more than a tiny loss.

Let's say you place a $10 bet, in the hopes of winning $100. Your "insurance"--what we call a hedge, as in "hedging your bets"--costs only $1. Thus you can gamble $10, with a chance of winning as much as $100, and your loss is limited to a mere $1--the cost of your hedge. If you lose the $10, the other side of the hedge trade--whoever took your $1--will give you $10. Life is good, n'est pas?

Note what this hedge does: it makes you believe a high-risk game can be played at almost no risk. But alas, the game is inherently risky, and the reduction of risk is ultimately illusory: you can't change roulette into a low-risk gamble.

Since this is such a low-risk bet, you are soon gambling, say $100 billion. And why not? The hedges are so cheap! Abd everything goes swimmingly until the day you lose the $100 billion. Ah, bad luck, Mate; but no worries, you turn to the other side of your hedge and politely request your $100 billion.

Oops--that guy just lost his bets, too, and can't pay you. Now the risk of the underlying game is fully revealed; the entire hedge which made it all so "safe" is revealed as a house of cards which depends on all the other players being able to pay off their bets. Once they can't, well, as the saying goes, all bets are off.

To hide your immense losses, you continue to claim your bet is still worth $100 billion. Since you aren't required to "mark to market," i.e. reveal the market value of your bet, you stash the $100 billion loss in "Level 3" of your assets--a dark place where you can temporarily hide your worthless bets.

Astute correspondent Peter sent in two links which explain Level 3 and the coming failure of portfolio insurance:

The Bear’s Lair: Level 3 Decimation?

The Next Worry: Bond Insurers
Wall Street is fretting that the subprime carnage could spread to bond insurance firms. A key concern is CDO exposure (NOTE: a CDO is a bond derivative--"collateralized debt obligation")

Frequent contributor U. Doran added this link:

Bernanke Eats a Large Helping of Crow.

Correspondent J.F.B. sent in this link on the global losses incurred by banks which bought U.S. debt with the question: "who will be buying our future debt?" Who, indeed:

Subprime crisis affects banks worldwide.

In other words, you bought an insurance policy to protect your risky bet on mortgage-backed securities and derivatives and now you find the insurer is belly-up and can't pay you.

If their bad bets were marked to market, Citicorp and Merrill Lynch would be declared insolvent. Why? Because they are insolvent--right now. The meaning of insolvency is straightforward: their losses exceed their capital. Recall that these firms list assets of $100 billion (or whatever) but their actual net capital is on the order of 2.5% - 5% --a mere sliver of their stated assets. In other words: a 5% loss of their stated assets wipes them out.

And once those leviathans fall, what other dominoes will they strike down?

The financial catastrophe which will unfold within the next few weeks is fundamentally a gross mispricing of risk. Inherently risky bets were encouraged because they were "hedged." That's what Hedge funds do: place bets on both sides so they collect gains whether the markets go up or down. But the risks of the gamble didn't really change; the introduction of low risk to a high-risk bet was an illusion.

The whole risk-management model depends on somebody being able to pay off the hedge. If they can't-- the game is over. the game is now over, and the players shuffling losses can only last a few more days or weeks.

The game is over for other fundamental reasons, too. The U.S. "prosperity" of the past five years has depended on one thing and one thing alone: cheap, easy borrowing, by consumers, home buyers, businesses, gamblers/bankers and government--cheap easy credit for everyone.

This was funded by capital inflows of billions each and every day. Foreigners poured trillions into U.S. markets, buying up risky mortgage-backed securities, supposedly "safe" U.S. Treasuries, and U.S. stocks, bonds and derivatives.

Now as the Fed and the Treasury destroy the dollar's value, foreign owners of dollar-denominated assets are seeing their wealth decimated. That "safe" Treasury you bought in 2002? It's down 30% as the dollar has been depreciated. You're underwater so deep you'll never make that money back.

And how about all those Yankee CDOs, MBS, interest-swaps and other exotic derivatives which Yankee ingenuity invented and sold to you as low-risk, high yield investments? They're mostly worthless now. You lost most of your money in a "safe investment." How anxious are you now to buy more Yankee "investments" denominated in the sinking dollar?

There goes the capital inflows which have funded our profligacy. They're gone, and not coming back. Mr. Bernanke and Mr. Paulson are busy destroying the dollar with interest-rate cuts, fueling runaway inflation as they flail mightily to save their banking buddies--but they can't succeed. Making more debt available to bankrupt entities, be they investment bankers or homeowners, solves nothing. It's called "putting good money after bad," and it simply guarantees ever-larger losses.

Allow me to sum it up: the money's lost, folks. You can't borrow more and pretend you made the money back. All those trillions in bad debt and derivatives are already lost. The Ministry of Propaganda is in a tizzy, trying to mask the meltdown and offer up a facade of normalcy. But the money's already lost.

Will it be contained to the U.S.? Why should it? The bad debt is everywhere. And the spending spree all that borrowing unleashed washed over the entire globe. Now that Americans can't borrow any more, the spending dries up--and so does the global "prosperity" built on an Empire of Debt.

Here are a few predictions:

1. The Dow Jones Industrials will drop hundreds of points in a day, very soon, losing at least 3,000 points within the next few weeks.

2. The Shanghai stock market will lose half its value, dropping from 5,800 to under 3,000.

3. Major banks will be declared insolvent.

4. Major lay-offs will occur as U.S. retail, auto and house sales plummet.

5. The tech high-fliers (RIMM, GOOG and AAPL) fall will precipitously

As I have noted here last week, trading curbs (and the uptick rule on shorting) have both been abolished. There are no constraints on the market falling; a free-fall of several thousand points in a single day is now possible. I also ran a chart of the VIX volatility chart which suggested a breakout up (i.e. a sharply declining market) was probable.

Please go to www.oftwominds.com/blog.html to view the charts.

Maybe I'm off by a few weeks, but I think not. The Empire of Debt is crashing, and it won't take months for the global financial markets to react. For alas, the money's already lost.

Not that the mainstream media will be willing to state this inconvenient truth....


Thank you, Don E., ($10) for your fifth generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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Weekend Note: Readers Journal has been updated! 15 fascinating comments on a variety of subjects, and a new essay by Protagoras on one of the most influential writers of the 60s (and one of my primary influences), R.D. Laing (Part I). Highly recommended. Even if you have no interest in Laing, this essay wonderfully evokes a bygone Britain--the England of the early 1960s.

Recommended Books/Films have been updated, too. Browse 250 titles and films, including great Reader Recommendations.

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Empire of Lies III: Ministry of Propaganda


You may have read that the U.S. once had a War Department. Scary, huh? But it's all OK now, because we don't have wars any more. We only have Police Actions, Overseas Deployments and Operation Defend Freedom. We do have a Defense Department, because we have to Defend Freedom when necessary. And when we Defend Freedom, we prefer to do so in somebody's else's country. So invading is Defense.

Welcome to the Ministry of Propaganda. Of course you won't find any sign proclaiming a building in Washington D.C. the Ministry of Propaganda, but the ministry exists in a decentralized fashion, reaching into every fiber of the government and the private sector.

Like the Devil, the MOP's most successful propaganda campaign is the one denying its own existence.

I have drawn inspiration today from two frequent contributors, Harun I. and Riley T. Here is Harun's commentary:

The Propaganda Ministry has waged a successful campaign. It has convinced people that apathy is concern, liabilities are assets, inflation doesn’t exist, debt is money and growth, peace is war, terror will be ended by war, and any news is good for stocks. The Prop Min has gotten people to accept that the only way to support soldiers is to keep them in harms way and to suggest otherwise is unpatriotic.

Apparently people also believe that recessions are evil, destruction of purchasing power creates a strong currency, discouraged workers are not unemployed, and that people in this country illegally are entitled to the rights and privileges of legal citizens. All but a few believe the Fed is both omnipotent and omniscient, and craven morons have Ph.D’s or Nobel Prizes so they must be smart and capable of governing effectively.

Now the Prop Min is working on getting us to accept that worthless assets are worth what ever mythical value assumed so long as the assets are never subjected to price discovery in an open market.

How do fundamentals have meaning in an environment where reality and truth have little or no value? How does one prosper and protect that prosperity?

Welcome to the world of the market technician.

And here is Riley's wry take:

This is your lucky day. Being the most powerful, I just appointed you The Prime Minister of the United States of America. I am also a financial genius and your economic advisor. How lucky for you.

The second day in office you call a meeting and ask me if the government has been lying to the public and if so why?

I respond, yes, oh great PM we are telling big lies. The reason is that all the paper in the world, money, stocks, bonds. etc., everything that represents a claim on an asset is really only worth about ten cents on the dollar.

If the Americans and other people of the world realized that they were broke, their pensions, homes, savings everything except their debts were worth nothing, the crap would hit the fan. This is a really big fan.

So, now you know the truth; what are you going to tell the public?

I was hoping we could collect a few more pay checks before we get impaled in the public square.

Here is frequent contributor Fastwater on phony statistics and the massively destructive insanity/euphoria they induce:

Another item that caught my attention was the BIG GDP number out today. That was odd. Could it be that the next leg down in the market is going to be chased by all 'good' news?

One thing's clear. The real concern of the FED is deflation, as in credit deflation. The inflation numbers are so out of touch as to have no meaning. But they really fear a credit collapse. With real inflation numbers, GDP growth has been negative forever. Myself? I still think we're going to see an implosion in credit markets. Maybe Market Ticker is right about capital flight. There's alot of bad debt. Still, you never know what the central bankers have up their sleeve. Where's the next bubble?

I mean, I can still remember how people perceived the dotcom runup. I didn't talk to alot of people about it at the time. I just cashed in my few 401k MOT shares after a triple. People were trying to tell me there was no end in sight. I knew better. The few people I talked to were doing really silly things, like this real estate bubble. Perceptions are skewed, just like in dotcom days. They couldn't stop buying! Then, they couldn't sell! It's the monkey with the hand in the trap around the nut. He can't let go of that nut! There's always another nut.

Astute contributor Ralph Y. submitted this W.H. Auden excerpt which perfectly captures the context which enables the Ministry of Propaganda to flourish:

Faces along the bar
Cling to their average day;
The lights must never go out,
The music must always play;
Lest we know where we are:
Lost in a haunted wood -
Children afraid of the dark
Who have never been happy or good.

(W.H. Auden)

Thank you, Harun, Riley, Fasterwater and Ralph for your thought-provoking contributions.



So how can we detect the subtle tentacles of the MOP? Easy: when it's all just a little too perfect or a little too pat. For instance:

1. When houses in your neightborhood are selling for 25% less than a year ago, but the headlines say housing prices are only down 4%.

2. When the stores are half-empty but GDP is rising at the fastest clip in years.

3. When the Fed says "core inflation" is 1.8% (i.e. near zero) when everything you buy is 10% - 20% more than just a few months ago.

4. When a veteran of the U.S. military runs for office, and suddenly his/her DoD file goes missing just as he/she is "swift-boated" i.e. smeared as a coward, liar, etc.

5. When a liar/thief runs for office, evidence substantiating his/her half-truths is either ignored or discredited.

6. When disturbing news is buried, i.e. only covered in the international media or buried deep in Bloomberg or page C-19 (near the obits)

7. When Big Lies are headlines ("Inflation Low") and skeptical views are placed in the last paragraph, i.e. the one no one will read--but the media can claim to have "covered the story."

As reported here October 31, NYSE Eliminates Trading Curbs Dating Back to 1987 (Bloomberg). Hmm. Why would the NYSE do this? And why was so little made of such a critical piece of financial news?

I submit that various Players are setting the stock market up for a sharp, breath-taking fall. Why? It's all just a tad too tidy: the Fed lowers interest rates, the GDP is booming, the credit crunch has disappeared from the headlines, as has the war in Iraq (oops, I mean Operation Defend Freedom). Every time short-sellers (those betting the market will fall) seem to have the upper hand, the market rallies huge, causing the shorts to cover (buy stocks).

Now the market has no curbs or collars to protect it from large, spine-tingling drops. Have markets become less volatile recently? No, they've become more volatile. Who would benefit from the erasing of such curbs? Players who've built huge short positions by selling into the recent set of ever-higher "rallies." Who will be shocked and surprised when the stock market suddenly plummets 1,000 points in a day? Not the Players; they'll be laughing at how stupid the people are, believing the shills and hacks spouting their mindless cheerleading on the Fox and CNBC propaganda outlets.

And what will the Ministry of Propaganda be pushing the day after that 1,000 point drop? Buy on the dips. Of course. This is the greatest buying oportunity of a generation.

Allow me to translate: we just made millions bringing the market down. Now we're going to make millions taking it back up. And when you truly believe the "buy on the dips" propaganda, we'll take it down again, with such speed and force you won't have a chance to sell out.


Thank you, Dwight M., ($50) for your second generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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