JMA's Views On Everything

Jobs In The UK

2011-11-28T09:24:00.002-05:00

I've been asked to add this link to my blog. http://jooble-uk.com/ If you click on it you will be directed to a site that has comprehensive job postings in England.

Thanks

John A.

Follow Up From The Mainstream Media On Persistent Issues

2010-08-09T11:23:00.054-04:00

The press has continued to cover topics and opine on matters that this blog has handled for months if not years, but the slants they offer now largely echo the sentiments that historically have dominated this column. Here are the specific areas, and I apologize in advance if the NY Times links require you to establish a free subscription to access the content.

Afghanistan

In "Let Them Have Oprah" (11/24/2009) and "More Afghanistan Commentary" (12/9/2009) I strongly suggested that our efforts should be oriented towards helping the Afghan citizens by educating them and showing them societal alternatives. As Nicholas Kristof wrote then and reprises now, our focus should be on, among other things, building schools. It costs $1 million per year to pay, equip and support each soldier assigned to this war, and that is more than enough to begin construction on 20 new schools. Kristof's article:

www.nytimes.com/2010/07/29/opinion/29kristof.html?emc=eta1

"The Afghanistan Fiasco" (6/12/2010) details reasons why the war is not only un-winnable but also, is a tragic waste of lives and resources. Let's face it, neither the Soviet Union nor Genghis Khan were able to conquer this territory and we won't be able to either. Bob Herbert details the personal horror and Albert Hunt writes about the collapsing US-Afghanistan policy. For many months, the war was lightly covered by the media and nearly unspoken by the administration and Washington politicians. Since our country is now spending $105 billion+ per year on this lunacy, it is about time that the travesty, duplicity and confusion receive wide exposure. The two links are below:

www.nytimes.com/2010/08/03/opinion/03herbert.html?_r=1&emc=eta1

www.nytimes.com/2010/08/09/world/asia/09iht-letter.html?emc=eta1

Prevaricator In Chief

I have severely criticized President Obama in a blog series entitled "Prevaricator In Chief" (June 12, 4, and 2, 2010) wherein the main issue I attack is the President's dissembling, spinning and outright lying to the American public. In the Wall Street Journal, Fouad Ajami, a Johns Hopkins professor has recently published an eloquent piece that depicts much more serious Obama failings. In essence, Ajami declaims that the Prevaricator is an "empty suit with a teleprompter," a sweeping, unpopular/socialistic agenda and wavering support from even his staunchest supporters. I highly recommend that you read this editorial, "The Obsolescence of Barack Obama":

online.wsj.com/article/SB10001424052748704164904575421363005578460.html?mod=WSJ_hpp_sections_opinion

Greenspan

In "A Shameful Performance Mr. Greenspan" (5/13/2009) and in other blog notes, I pointed out that Alan Greenspan has been in high gear, using extreme revisionism to attempt to restore his tattered reputation.

The octogenarian is at it again. Why won't this guy just fade away? In any event, for what some believe is political expediency, Greenspan is throwing what little weight he has left into the Bush tax-cut debate. Nevertheless, I'm pretty sure that most people will simply ignore the guy who was a primary architect of the collapsed financial edifice. Here's a link if you are interested:

www.nytimes.com/2010/08/07/business/economy/07greenspan.html?_r=1&emc=eta1

The Economy

I have written repeatedly about our economic circumstances, and while some predictions have been wrong, for the most part, things are happening as I have been reporting all along. For example, I had thought that the domestic auto industry would have collapsed by now and clearly, it has not done so, albeit it now employs 30% fewer workers than it did two years ago, and Chrysler still can't manage to earn a profit. For the record, I'm still worried that the car markets will backslide into the morass.

On other items like unemployment, which now stands nominally at 9.5% and closer to 20% in reality, prognostications have been pretty accurate. The same goes for foreclosures (residential and commercial), the fiscal deficit, state/municipal finances and the like.

For your reading pleasure, I am including some links that I have assembled on the various topics:

Boiling Over:
online.wsj.com/article/SB10001424052748703748904575411713335505250.html?mod=WSJ_hpp_sections_opinion

Foreclosures:
online.wsj.com/article/SB10001424052748704499604575407584128526218.html?mod=WSJ_WSJ_US_News_5

Going To Extremes:
www.nytimes.com/2010/08/07/us/07cutbacksWEB.html?emc=eta1

As The Economy Slows
www.nytimes.com/2010/08/09/opinion/09mon1.html?emc=eta1

China Pollution

I have been a strong believer that we need to pay attention to cleaning up the environment simply because this is the proper way to mitigate even the slightest risk to the planet. In keeping with the "bad math" theme that permeates the blog, it makes no sense to ignore potential catastrophe, even if the probabilities are remote. The better solution is to conserve energy because that helps avoid the problem while at the same time, it improves economic efficiency.

"Global Warming Redux" (8/8/2009) and "Dirty Little Secret" (5/25/2009) both assert that if China and India do not also improve their entire pollution footprints, then the world's situation is hopeless because these two nations comprise the largest and fastest growing filth-perpetrators.

In a recent development, China announced that it is closing down 2000+ factories because they are "energy-intensive" and these companies satisfy that appetite by using older, expensive and dirtier technologies. Let's be clear here. The Chinese do not care one whit about global warming and such, but they do pay extreme attention to their economy. Since China imports 100% of its oil and increasing amounts of coal, it makes consummate sense for that country to realign its industries so that they ensure their future competitive viability. Obviously this is welcome news and perhaps it is also a standard-setting example for others. In other words, no matter what the motive...just clean it up. I hope India is listening.

Here's the story:

www.nytimes.com/2010/08/10/business/energy-environment/10yuan.html?emc=eta1

Thank God For Angels!

2010-08-01T11:32:00.014-04:00

During the past year or so, it has been incredibly difficult for seed and start up stage companies to raise money from professional venture investors. Yes, there have been a few notable exceptions that have been heralded by the financial press, but for the most part, traditional capital sources have yielded to angel funding; in my view this is not necessarily a bad thing.

First let's examine what has happened to venture capital. In the previous decade limited partners dedicated enormous sums to the venture capital asset class and inevitably, this money was deployed by both older firms and relatively new ones across the entire company life-cycle spectrum including stages such as seed, start up, early emerging, growth, buy outs and the like. Historically, venture firms have been able to generate decent returns in each segment. Of course, parameters and behavior vary by stage so that, for example, it is axiomatic that failure rates and exit horizons are higher/longer with early-stage investments than they are for more mature ones. Nevertheless, with proper discipline and mathematically-oriented investment criteria, it certainly was (is) possible to assemble very attractive portfolios at every stage, including the early ones.

So why has seed/start up money dried up? One reason is that according to Cambridge Associates, an organization that likes to keeps tabs on venture capital performance, investment returns during the past 3, 5 and 10 years have been worse than anemic. This is typified by a) too much money chasing deals, b) too few firms willing to cut and run and c) even for reasonably successful companies, a very hostile exit environment (ie. almost no IPOs, very stingy M & A, etc.) So what transpired is that venture capital partnerships are now loaded with inventory from prior investments and accordingly, they don't have the bandwidth to cope with new, early stage investments which on balance, take more effort than their later stage brethren. The following WSJ article about board seats neatly illustrates these points:

http://online.wsj.com/article/SB10001424052748703977004575393692282796162.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsFifth

Compounding this is that the fund raising atmosphere for existing venture capital firms and especially for new ones is murky at best. This has engendered a hypersensitivity biased towards shorter investment horizons and quicker, although not necessarily larger (as a multiple of capital invested) exits. My friend, former colleague and fellow blogger Larry Cheng has written an interesting article about why his practice now favors growth-stage investing:

http://larrycheng.com/2010/04/17/why-growth-equity-is-the-best-riskreward-in-private-equity/

Moreover, unfortunately the entire venture capital industry is shrinking. Even though this is caused by poor investment returns delivered in the past decade as well as the egregious behavior exhibited by venture investors in aggregate, one thing that the United States has been particularly good at through the years has been nurturing, growing and commercializing innovation. If early stage investing significantly evaporates, I believe that our nation will lose a critical strategic/financial resource and a key economic driver. Another WSJ piece summarizes the situation:

http://online.wsj.com/article/SB10001424052748704229004575371533586548818.html

So why am I optimistic about early-stage investing? While angel investors have fundamentally always been an important funding source, it seems that they have recently been filling the seed/start up investment vacuum very aggressively. Even some well-established venture funds have committed capital to so-called "Super Angel" groups so that they can maintain their relationships with early opportunities that are initially shepherded by designated angels. Universities are also establishing direct funds, incubators and the like so as to care for and feed those concepts that are developed in academia. The following two articles highlight these efforts:

http://online.wsj.com/article/SB10001424052748704569204575329692106711952.html?mod=rss_newyork_main

http://www.nytimes.com/2010/06/27/business/27incubate.html?emc=eta1

There are few inherent flaws associated with seed and start up investment activities so long as those who are involved pay attention to several precepts:

1. Concepts and technology should address very large markets, defined as at least $1B+ at the outset. Technical and execution risk is high enough with early stage companies so that if a company manages to pull off a successful commercial launch, there should be a very broad audience for whatever the thing is.

2. The early investor's initial ownership must be very significant. This not only helps mitigate future dilution but also provides a foundation for investment rewards when a company eventually navigates to a liquidity event. My rule of thumb is that early stage investors should receive 40% of the equity, entrepreneurs get 40% and 20% is reserved for future contributors. This formula operates somewhat independently from the amount being invested since it relates purely to seed and start up opportunities.

3. Investment discipline is paramount. If, for example, the founders have laid out a plan that shows that the idea will be demonstrable as a prototype for say, $500,000 then by the time $250,000 is spent, they better be way beyond 50% complete. Or if a company starts to modify the original investment thesis, then at that instant, the entire enterprise needs to be reevaluated with at least the same diligence effort applied when the investment originated.

4. It's imperative to cut losses short. If as in the above example, $250,000 has been spent and the thing isn't working, then it might well be better to just pack it in at that point, unless there is a highly compelling reason to continue.

5. Recruit new investors before exhausting the initial investment. If the early investor can't find fresh money at a reasonable valuation step-up (protecting against severe dilution) after the company has achieved important milestones, then this may be a reason to terminate further early-stage investment.

6. Seek customers and partners immediately after the company proves that the concept is viable. There are usually a plethora of early adopters for great, demonstrable ideas. If the company has trouble soliciting interest in the prototype, this can be a very bad signal. Of course, the usual and customary intellectual property protections need recognition here.

7. While inventors seldom have the skills requisite to propel a company beyond its early years, it is often a mistake to recruit executive "talent" too rapidly. The early stage investor should be qualified and prepared to fill the overseer role until such time as the company is actually ready to enter markets. This will not only conserve financial resources and reduce potential friction, but also, will allow the company to recruit higher quality personnel at the appropriate time.

Given the venture capital industry's woes, and assuming that there is a reasonable behavior pattern involved, I believe that the future for early stage angel investing, university funding, incubators and the like is quite bright. Angel investing and related activities operate on a scale much smaller than institutional investors such as venture funds. With a $10 million capital pool (minuscule by venture capital standards) and assuming that 6/10 $500,000 investments fail outright, 3 return capital and 1 achieves a $100M exit (also modest by venture capital measures), that pool will produce at least a 3X return. If it does so in 5 years then the annual return rate is nearly 25%, dropping to about 12% if it takes 10 years.

Returns such as this will not "move the needle" for large venture capital partnerships since this analysis doesn't assume finding the next Google so to speak. But early stage investing by angels and their counterparts can provide meaningful investment returns for smaller players, and just as importantly, it will continue to fuel the innovation that America so badly needs.

Oh No, Another Blowout In The Gulf!

2010-06-22T11:21:00.003-04:00

Well obviously this hasn't happened yet, but the worst nightmare is that the so called relief wells will themselves cause a blowout. If you think that this isn't possible, then you need to more closely follow the record.

The two related NY Times articles below paint a very scary picture. The first story is 23 pages long so I will synopsize it for you:

1. Deep water oil drilling is a very dicey and not well-understood proposition...nothing earth shattering about this conclusion.

2. The ultimate fail-safe mechanism is the five-story tall blowout preventer which according to all reports is a Rube Goldberg device that relies on, in effect, giant scissors to sever and seal the mile-deep pipes when necessary.

3. Preventers are notoriously fickle. They have a single point of failure (certain valves) and in deep water usage, they fail 45% of the time. So much for Tony Hayward's stupid statistics about this being a 100,000 to 1 or 1,000,000 to 1 accident, as I have previously written about.

4. Everyone in the oil industry (yes that means you Exxon, Shell et al) employs this technology and they fully comprehended the risks and shortcomings associated with their blowout preventers.

5. The government including Obama and his retinue also knew about all this. Responsible agencies repeatedly failed not only to order redesigning the apparatus but also to demand that existing preventers be adequately tested.

6. The oil industry and the present government continually conspired to prepetuate the dangerous status quo with respect to deep water drilling.

The second NY Times piece outlines notes taken by on-site engineers which demonstrate how little even the "experts" know about how to contain this monster.

So what can we speculate about the ongoing situation? It's absolutely clear that there are no containment solutions on the horizon, other than attempting to drill relief wells, and even the abatement efforts are proving to be feckless so far. But the unspeakable truth is that nobody in authority is talking about what might happen if one or the other relief wells also blows out. And what is preventing that from occurring? You guessed it...a blowout preventer, albeit with some extra redundancy (2 scissors) but fundamentally, the same design as the original one that crapped out.

I wish I had answers or even suggestions that would apply to the present mess. But I do have well-founded fears that things could get very much worse, and I don't think that the oil industry should be running around doing more deep water drilling until they are prepared to demonstrate and deploy safety measures that are substantially more reliable than what exists today. I realize that considerable economic loss follows such a policy but as we have already seen, there are even worse consequences to continuing on the perilous path that led us to where we are today.

Here are the article links:

http://www.nytimes.com/2010/06/21/us/21blowout.html?emc=eta1

http://www.nytimes.com/2010/06/22/science/earth/22blowout.html?emc=eta1

The Afghanistan Fiasco (Continued)

2010-06-12T12:22:00.004-04:00

In blogs posted on November 24, 2009 and December 9, 2009 I criticized severely the war effort in Afghanistan. Basically I asserted that this altercation is unwinnable, unpopular and unfair to those poor kids who risk their lives pursuing America's futile quest in the Middle East.

As just reported in the NY Times, Karzai the sleezebag is said to be cozying up to the Taliban because he believes that neither the West nor NATO forces can ultimately prevail. While it would have been nice if Karzai had made this proclamation more than a year ago, I find it hard to blame him for voicing, what seemed to me all along, an obvious truth. For all the gory details, you can follow the link below:

http://www.nytimes.com/2010/06/12/world/asia/12karzai.html?emc=eta1

In a related editorial, Bob Herbert opines in his usual eloquent style. In "The Courage to Leave" Herbert exhorts our government to admit that we have deeply misjudged the situation in Afghanistan and in effect, to get the hell out of there now. I couldn't agree more. Here's the link:

http://www.nytimes.com/2010/06/12/opinion/12herbert.html?emc=eta1

American Nero...Good Graphic, Different Subject

2010-06-12T00:51:00.003-04:00

I recently used the graphic above which depicts Obama as Nero, fiddling while Rome burns. Just yesterday, a WSJ opinion piece likened the Prez to "An American Nero." You can access the link below. The article's gist is that the President, PICUS or whatever insists on throwing parties and taking vacations while:

1. The Gulf oil spill gets worse, Obama's ridiculous "ass-kicking" statements notwithstanding.
2. The economy is in shambles.
3. The "war" in Afghanistan deteriorates into dust (see my next blog.)
4. The US debt/deficit situation has escalated to "condition red."
5. The health care legislation is starting to look like the disaster that many predicted it would be; PICUS is now running around defending it like crazy to anyone who will listen to him...seniors, doctors, congress, whomever.

You can read all this for yourself but I was amused that the analogy they used is the same one that, a few days ago, I also conjured up.

http://online.wsj.com/article/SB10001424052748704312104575298550188788086.html?mod=WSJ_Opinion_MIDDLETopOpinion#articleTabs%

Bad Math Reaches Beyond Financial Debacles

2010-06-09T02:28:00.003-04:00

In prior blog posts, specifically on September 8, 2009, September 11, 2009 and in sporadic comments throughout, I highlighted the atrocious risk management based on poor mathematical modeling that precipitated the financial meltdown in 2008. Going back ten years earlier, Long Term Capital Management made similar miscalculations despite the fact that two Nobel Prize winners in economics, Myron Scholes and Robert Merton worked there.

Now it seems that British Petroleum in particular and perhaps the oil industry in general are also using ludicrous algorithms for predicting risk. For example, Tony Hayward, the beleaguered CEO has made pronouncements ranging from stupid/insensitive all the way to downright pernicious.

"I would like to get my life back" is a really dumb and selfish thing to have said...hey Tony I've got news for you, 300+ million people in America would like their lives back too. "We are 60-70% confident that the top kill procedure will be effective." In hindsight, it doesn't seem like that prediction was all too accurate...top kill efforts failed repeatedly such that there is no possible way that they ever had anywhere near a 60% chance to succeed. Before cutting the leaking pipe, BP told us that this action might increase the outpouring oil volume by 20%. Now, some scientists are worried that after the cut has been made, the exiting oil could be many times that 20% estimate.

What really frightens me though is something that Hayward let slip this past Sunday and I am a little dismayed that I have not seen anyone in the media call him on it. In a press release Hayward was quoted as noting that the probability against this accident happening was "100,000 to 1 or even 1,000,000 to 1." At face value, this is an utterly absurd statement. It would be like handicapping a horse as being somewhere between a 10-1 and a 100-1 shot!? Probabilities which range a full order of magnitude are inane and useless.

Moving to the next level, even if the odds against the spill happening were indeed one million to one, the risk-adjusted view, which ostensibly should be used for making operational decisions, is far greater (perhaps a thousand times more likely) than that. One million to one is a better chance than someone has to actually win the lottery and yet, lotteries are won every week...get the point?

Finally, how in the hell did anyone manage to come up with this probability appraisal? There have been in aggregate, fewer than 6,000 deep water wells drilled on the planet. Throughout deep water drilling history there have certainly been numerous accidents; the Gulf spill is cataclysmic, but there have been other serious mishaps. One would think that prudent risk management would use prior drilling history to rate the potential danger before knocking open a hole in the bottom of an ocean.

For once I agree with President Obama...Tony Hayward should be terminated as BP's CEO but I have reasons different than Obama's. The President thinks that BP caused the oil spill but I rather believe that the oil industry in cahoots with the government was responsible for it. Shell, Exxon et al are I'm sure on their knees with their Rosary beads thanking the Lord that something like this didn't happen to them...this time (remember the Valdez?) Rather, I think Hayward should be canned because he makes stupid, inaccurate and dangerous public statements. He also allowed his company to behave in a grossly negligent manner, without properly considering the dire consequences that ultimately arose from this carelessness.

It may sound like I abhor oil companies, deep water drilling or even Wall Street, but that assessment is entirely incorrect. I am not even arguing for risk aversion...all progress requires taking a chance on something. But I am advocating rigorous risk awareness/abatement and the mathematical tools to perform this analysis already exist, albeit, outside the realm of the conventional statistics that are most often used. For example, if Exxon, the industry and the government had properly come to grips with the fact that tankers can run into something that punctures them, then maybe double-hulled vessels would have been more prominent at the time the Valdez incident occurred...this wouldn't have averted the spill but it would have mitigated the damage. If BP had realized that its drilling strategy and cost-cutting mentality (see the NY Times link below) were not only bet-the-company but also, bet-the-Gulf of Mexico propositions, then perhaps it would have bored relief wells (assuming that this is the ultimate solution...we'll see if that's true) simultaneously when poking the production hole. I'm not suggesting that I know the specific risk-reduction remedies, but I AM saying that anyone who is in a position to create catastrophes had better completely recognize their predicament. While there are always possibilities for error, in situations like this, trivial considerations such as short-term profits, cost-savings and the like must be dwarfed by overarching, preplanned, redundant remedial resources which are deployed long before any accident can possibly happen...in other words, before drilling begins.

Modifying corporate and governmental behavior patterns with respect to potentially gigantic human, environmental and financial liabilities like the Gulf spill will require not only new, more appropriate risk measurement methodologies but also, a refreshed risk-reward mindset. If projects can't sustain the costs associated with extensive, appropriate prophylactic elements then they should be abandoned. I have no idea how much oil is in that particular reservoir in the Gulf, but whatever it is, it isn't worth the trouble and tragedy that this spill has caused.

For a more detailed description about BP and their missteps, please see the NY Times article below:

http://www.nytimes.com/2010/06/06/magazine/06fob-wwln-t.html?emc=eta1

To read about oil projected to climb up the east coast and beyond, you can check out this piece from the WSJ:

http://online.wsj.com/article/SB10001424052748703340904575284950638479786.html?mod=WSJ_WSJ_US_News_

The Prevaricator In Chief (PICUS) Part II--A PERFECT Example

2010-06-04T18:20:00.005-04:00

The Dow lost 323 points (3.15%) today. Why? There are troubles in Europe for sure and the Euro is at an all-time low. China is making the usual strange noises that get everyone nervous. But the main culprit is the absolutely terrible employment report released today.

Economists had expected a 515,000 job increase and the numbers came in at a disappointing 431,000 but that's not the whole story. The private sector eked out a few new positions but the census bureau added 411,000 temporary workers which obviously accounts for nearly the entire 431,000 increase. At this rate, it will take more than 5 years to get back to normal unemployment levels around 5%, but we won't have another census for 10 years so we can't count on help from that quarter again soon.

So the employment data and its ramifications are bad enough already but what has me hopping mad is the PICUS's unfortunately predictable behavior. Earlier this week, Obama and his head henchman Biden were running around presaging Friday's report by saying things like "boy are these numbers going to look good." As late as today, the PICUS crowed about "job growth five months in a row" or some such drivel.

Does the PICUS believe that everyone else is an idiot? Wall Street saw through this charade and rewarded us with a precipitous market decline. Europe is laughing at us. China must be thinking that Americans are really bad at math. Sadly, our population isn't simply debunking all this lunacy, they are living the reality.

A Timely Update On Health-Care Benefits And Costs

2010-06-03T12:22:00.015-04:00

Since I just posted a blog that (in part) questions the costs associated with the health-care legislation, I find it particularly interesting that two very recent articles seem to confirm that congress used very suspect figures and reports to justify their actions. Full disclosure compels me to openly admit that in all likelihood, I will personally benefit from the new health-care laws, as will I believe, millions of Americans. But that doesn't justify the chicanery and obfuscation that we've gotten on this topic from our friends in Washington and that is the point that I drive at in my prior posting.

The first article is an op-ed piece by Karl Rove who clearly is as partisan as one can be. Nevertheless, he almost always stitches together his facts better than Obama ever has, and according to Rove, the actuarial assumptions used by the health-care stalwarts are incredibly inaccurate. From my perspective, the signal sent by many giant corporations that rushed out with write-offs related to the new laws simply amplifies the message that all these new regulations will cost a ton. Here's Rove's WSJ editorial:

http://online.wsj.com/article_email/SB10001424052748703561604575282482320389198-lMyQjAxMTAwMDAwMzEwNDMyWj.html

So if one can't credibly assert that we'll save money with the new health-care legislation, then perhaps Obama, Reid, Pelosi and their cohorts can say with confidence that we will now get better care, and that they have unassailable evidence to support their conclusions. It turns out that the lawmakers did consult independent studies, including one from Dartmouth, but that this particular study is not only deeply flawed but also, it never intended to extrapolate health-care quality. Here's the opening paragraph from the NY Times article (of all places for this to be published!?)

"In selling the health care overhaul to Congress, the Obama administration cited a once obscure research group at Dartmouth College to claim that it could not only cut billions in wasteful health care spending but make people healthier by doing so."

And here's the bottom line as quoted:

"But while the research compiled in the Dartmouth Atlas of Health Care has been widely interpreted as showing the country’s best and worst care, the Dartmouth researchers themselves acknowledged in interviews that in fact it mainly shows the varying costs of care in the government’s Medicare program. Measures of the quality of care are not part of the formula."

If you want to read the full story (highly recommended) then follow this link:

http://www.nytimes.com/2010/06/03/business/03dartmouth.html?adxnnl=1&emc=eta1&adxnnlx=1275580827-zTrzfO8DzUD0ar1V7z93pA

Right now nobody knows whether the health-care situation will improve or deteriorate under the recent legislation, time will tell, I am not optimistic about it but I do hope for the best. But when elected officials, including the President use bogus and/or poorly vetted statistics to manipulate the results they are trying, a priori, to achieve, then we can properly impugn their motives and challenge their integrity, yet one more time.

Prevaricator In Chief

2010-06-02T14:19:00.017-04:00

History dubbed Ronald Regan "The Great Communicator." I think that our President will in the future deserve a different moniker...Prevaricator In Chief. Here's why.

I listened to another endless monologue from President Obama this morning. He was at Carnegie Mellon University in Pittsburgh regaling the audience with all the fabulous progress we have been making in America, ostensibly under his (self-imagined) stellar leadership. I wondered why this guy so doggedly eschews press conferences while at the same time, he relishes making speeches like this by the dozen. Then it hit me. Obama isn't comfortable with the unstructured, open agenda that characterizes any president's session with the fourth estate. Media representatives have the nasty habit that they pester politicians with questions that one might rather not answer or that one may not have answers to. Obama absolutely loves to have answers, no matter how wrong-headed they are. Even more, he adores lecturing and moralizing on nearly any topic, no doubt with his trusty, able-bodied teleprompter in tow. However, more than anything, Obama cherishes that he can tell lies, distort facts, paint rosy pictures and in his "government is almighty" version of reality, pretty much get away with it all because of course, he and his minions know better than anyone how to fix everything.

Thank God that the President is a pretty poor prevaricator or he might actually be able to put one over on the American public. But his equivocation and dissembling are so overt that I suspect even his little daughter knows that her father is full of crap ("Daddy, did you plug the leak yet? No sweetie, but I'll stick my finger in it this morning, right after I'm finished shaving, I promise.")

Obama says the economy is getting healthier. Which parallel universe is he living in? Nearly 40 million people are now on food stamps for Christ's sake. The nominal unemployment rate is nearly 10% and the real one is almost 20%. Real estate foreclosures are through the roof to the extent that the courts are so congested that some folks just stop paying their mortgages and continue to live in the property for months if not years. The government is printing money and incurring debt at unprecedented levels, and if people don't understand that this is going to come back and bite them in the butt big time, then they deserve Obama's rhetoric. Check out 21 or so more reasons why the economy certainly isn't recovering by reading the following article:

www.blacklistednews.com/?news_id=8878

Senior government stooges (undoubtedly at Obama's behest) recently uttered that "The government is in charge of the oil spill situation in the Gulf," or some such poppycock. The truth is that there is no one who can control this catastrophe because such an operation has never before been attempted at such depths...something someone should have thought about before they started poking holes deep into the earth. I fear that the real scenario could be that the Gulf of Mexico is permanently destroyed, that the oil may not stop leaking for a long time (way past August) and that cleanup efforts will never succeed in restoring things. Rather than have some Washington lackey assure the world that the relief wells that come online in August will "almost certainly plug the leak;" a statement that no reputable scientist would dare to make, I would grudgingly respect a spokesperson who emulated the grotesque colonel in "A Few Good Men" and said, "You want the truth? You can't handle the truth."

Obama is mendacious about the economy and deceitful regarding the Gulf. His wars in the Middle East are an abomination, admittedly inherited, but shamefully continued during his administration. The President misled us about his position before he was elected and thereafter, he deflected like crazy in carrying out his own war escalation.

The dishonesty in Washington and in particular, The White House, continues to sicken the population. Did they offer Joe Sestak a job or not? Well, go ask that famous truth-teller Bill Clinton. Is the health care legislation going to save or cost money? It depends on whose figures one believes. Are Republicans blocking important legislation or saving us from congressional-induced perils? Who knows, and who would believe any opinion on this anyway?

People, tea-parties or whatnot are utterly fed up with this disingenuous nonsense; I hope that in the fall they throw all the bums out. There isn't any baby in this rancid bath water.

More Afghanistan Commentary

2009-12-09T10:40:00.004-05:00

I've let this sit for a while, but the more I think about it, the more ridiculous the war seems to be. And my opinion is very well-supported by recent editorial activity.

For a comparison between our present efforts and those worked by the Soviets long ago, you can check out:

http://www.wsj.com/article/SB125831141804049337.html?mod=WSJ_hpp_MIDDLTopStories

Basically, what we should come to understand is that Afghanistan is not so much a country per se, but rather, various fiefdoms controlled by the local population and the applicable warlord. The Taliban is free to terrorize the enclaves, hide out among them or even, just stay quiet and out wait us...our recent troop commitments are either feeble, or else the administration is being hugely disingenuous with the American public. Either way, this war, conducted according to the published plans is a bad idea, and I suppose that we will spend years, untold resources and our credibility in achieving a result no more satisfying than what the Soviets did.

A better idea is to concentrate on building morale within the local population (which presently often sees us as unwelcome occupiers) by erecting schools, constructing infrastructure and showing them societal alternatives. The following article by Nick Kristof beautifully illustrates this point:

http://www.nytimes.com/2009/12/03/opinion/03kristof.html?_r=1&emc=eta1

If we proceeded as Mr. Kristof suggests, we would save money ($30 billion per year funds plenty of schools), preserve our integrity and quite possibly, actually do some good in Afghanistan.

This war effort now belongs to Obama, and in typical "waffling" fashion, he has somehow managed to immerse us in ambiguity. Are we committing troops for the long haul or is there a disengagement planned for 2011? Does fighting the Taliban in Afghanistan make any difference, or are they simply going to maintain their positions in Pakistan? For that matter, will either the Pakistan or Afghanistan governments really lift a finger to help us? There are so many questions and so few answers emanating from our government that it is positively disgusting.

The American people do not like this war. Those families who are contributing soldiers like it even less. I believe that we deserve better than to do what we are doing which is to "back into" an ill-advised military strategy in Afghanistan.

Let Them Have Oprah!

2009-11-24T18:18:00.009-05:00

For years I have half-joked that if we want to solve the governance problems in Iran, Iraq, Afghanistan or any other backwards, belligerent country all we need to do is entice and enable all those nations' women to watch Oprah Winfrey. After such exposure, I surmised that the political scenario would change for the better, pretty damn fast.

Well what do you know? In reading SuperFreakonomics (SF) by Levitt & Dubner, I discovered that a very similar phenomenon actually occurred in India, of all places. It turns out that India (and China) are relatively inhospitable or even, downright cruel to women. Female fetuses are commonly aborted, and the prospects for those that survive are often grim. The Indian culture deprives women of higher education, tacitly supports wife-beating and generally, treats women in a sub-human manner. This doesn't happen everywhere in India but it manifests itself frequently enough to be well-known.

In SF they tracked areas where the situation had improved markedly for women and SF's findings traced the changes to television. It turns out that Indian villages obtained TV coverage and TV sets at different times. Those locales where TV became available showed dramatically better results with respect to a woman's treatment and human rights. I don't know if Oprah is on the air in India, but it seems that exposing people to what exists outside their enclaves does indeed foster behavioral changes in society...you can read the statistics for yourself in SF (incidentally, I really like the book.)

So if all this about India is true, and even making allowances for the fact that it is a democratic country, I think that if we plugged women in the Middle East into conduits like TV and the Web, that good stuff (by our standards) is bound to happen.

Periodically we have gone to war with troublesome nations like Vietnam, Afghanistan and Iraq, yet we pay little attention to the underlying sentiments that pervade the local population. We lost the Vietnam war simply because we did not understand how to oppose an enemy who hit, ran and used the countryside/local population as camouflage. Similarly, we do not comprehend Iraqis or the Afghans and we largely ignore their customs and tribal nature. After more than a decade of bellicosity, the Soviets were unable to conquer Afghanistan so what gives us the notion that we can do any better?

My Oprah quip is just a trivial expression for what I believe is needed in the Middle East. You can bet that when Obama soon explains his war escalation and exit strategies, he won't mention anything like educating the locals in western ways, using TV and media propaganda. Yet if it works in places like India, then isn't it worth a try in Iraq and Afghanistan?

Things Aren't Getting Any Better

2009-11-16T20:11:00.012-05:00

Sorry that I have been absent for a while. Some medical problems got in my way but things are getting better now.

In the meantime, I have noticed that world affairs continue to deteriorate, and in the United States, issues such as unemployment, the Middle East wars, state and local financial troubles and such have reached disastrous proportions. In the link below, Bob Herbert, a NY Times columnist whom I admire greatly, explains rather pointedly how the unemployment situation has hit condition RED for those who are less than privileged, and especially those who aren't fortunate enough to work on (proverbial) Wall Street.

The financial community would have us believe that the salad days are here again, but who ever heard of the Dow topping 10,000 and gold besting $1,000 per ounce at the same time? Intuitively, that spells trouble to me. Meanwhile, the ill-conceived war efforts in Iraq and Afghanistan now look like they will take decades to bear the fruit we are seeking, provided that we have the fortitude and resources (money and personnel too) to persist, and this seems highly unlikely.

Our politicians from Washington to Chicago are lost in rhetoric and in a non-winnable race to the bottom. Municipalities are looking to monetize their infrastructure by selling off things like parking rights, tax items and even bridges. I pity both the cities and the financial organization who are participating in this chicanery; the money the local establishments receive has already been spent and it is beyond me how anyone can achieve a long-term profit from 70-100 year leases on all this stuff.

Do I have any answers? Not really. That's why I use a hurricane as the graphic for this post; it is the most powerful force on earth and it is unstoppable. I am afraid that this is precisely what we are facing in a social context. Perhaps the United States can borrow from Germany's playbook, or even China's since in both countries, they have managed to resume (paltry) growth and preserve jobs, although they both have other problems (China=pollution, Germany=economic stagnation) with which to contend; but in the USA, we don't have the gumption to upset the political status quo. If what I am writing about here is even moderately correct, then next year's elections will devastate incumbents, and without a better Middle East war strategy (stop the fighting) and a concerted effort to resurrect jobs for the many disadvantaged, Obama and his entire Washington crew will end up confirming that they are the feckless ideologues that I believe they are. My biggest fear is that even with the best practices, wonderful innovation (currently stifled) and terrific luck, it will still take ten years or more to pull out of this mess.

Geez this really sucks?!

Here's the link to Bob Herbert's article:
http://www.nytimes.com/2009/11/14/opinion/14herbert.html?_r=1&emc=eta1

Fancy Universities Are Bad At Financial-Market Math

2009-09-11T15:00:00.008-04:00

Two posts ago, in one entitled "Do Economists See The Light About Their Crappy Math. I explained that Benoit Mandelbrot's (image above) work with fractals would suit them better.

Today in the WSJ there is a pretty extensive article (reprinted in its entirety below) about Harvard's loses in particular last year...nearly $10B. But Yale too lost big bucks from their endowment along with Harvard because of (1) market turmoil, (2) asset classes became (and remain) correlated with one another (3) some asset classes evaporated all together (4) both institutions (especially Harvard used too much leverage, sometimes even borrowing so as to remain 105% invested in often illiquid elements and (4)they both failed to protect against their catastrophic risks. Columbia which has a much smaller endowment (~=$5.5B) than either giants mentioned above lost about 16% which they claim was all about earlier, more active and more conservative risk management. Incredibly enough, Cooper Union, the tuition-free (if you can get in!) college down here in Greenwich Village says it actually managed to break even.

Now here comes the part that is filled with delicious irony. I believe that Benoit Manelbrot will eventually win a Nobel Prize either for Physics or for Economics and maybe for both; his work in these two fields has been more than seminal it has been a breakthrough.

Now these two schools might claim that they aren't familiar with Mandelbrot's work and advice which, if followed might have avoided $$$billions in losses. Yale shed only half as much as Harvard, but their endowment is only half the size so what's the big surprise in that?

Or they may say that they didn't read his book because it wasn't available soon enough. "The (Mis) Behavior of Markets--A Fractal View of Risk, Ruin and Reward" was published, for God's sake, in 2004. Their academics, students and administration must at least be partly interested in this stuff.

Maybe they couldn't locate him? That's hard to believe because he once taught at Harvard and until he retired in 2005, he was a tenured, endowed-chair mathematics professor at Yale.

So why did these schools put their constituents (thousands, including whole towns) at risk? Why didn't they phone up Benoit and ask him for his opinion about their portfolios? He might have taken up a deep-digging project bro bono for them and analyzed their market situations from a fractal-math perspective. Why didn't they ask Benoit? This is inexplicable to me, except for one obvious reason...hubris.

Money managers often get so confident that they don't listen to any others...not even Benoit Mandelbrot. The shame here as I see it is that innocent folks and even whole towns can get crushed by this behavior. If you don't believe me, just swim across the river from Cambridge and you won't see a pretty site at all.

Here's the article:

Harvard, Yale Are Big Losers in 'The Game' of Investing Yahoo! Buzz By JOHN HECHINGER It's a tie in the Harvard-Yale investment game. Both schools were thrown for colossal losses. The universities on Thursday said their endowments, higher education's two largest, each lost 30% of their value in the year ended June 30. Combined, the pair of investment pools shrank by a staggering $17.8 billion. Declines in the endowments have forced the two schools to cut budgets and delay plans to expand facilities and hire staff, as even the country's top colleges are being forced by the financial crisis to retrench. The pain is being felt widely across higher education. While many private colleges are getting less help from their endowments, public universities are suffering because of state budget cuts. Harvard University and Yale University, such fierce rivals that their fall football contest is known to both sides simply as "The Game," badly trailed the results of the typical college in the latest year. The dismal returns have exposed weaknesses in their exotic approach to investing, which after turning in chart-topping performance for years has proved to be highly risky. The schools were hurt by investments in assets that can't readily be sold, such as private-equity partnerships, which were pummeled in the past year after stellar results over the previous decade. In the category Harvard calls "real assets," including timber, commodities and real estate, annual losses neared 40%. Harvard was already budgeting for a 30% decline, but hadn't released a final tally. On Thursday, it said its endowment shrank to $26 billion on June 30 from $36.9 billion a year before. The decline also reflects spending from the endowment and donations. The Cambridge, Mass., university's investment loss itself was 27%, dwarfing the 18% drop in the median return for large endowments calculated by Wilshire Associates, an investment consulting firm. Yale said its endowment fell to $16 billion on June 30 from $22.9 billion a year before. The New Haven, Conn., university didn't break out its investment results. Yale had projected a drop of only 25% and Thursday warned of further budget cuts. In a letter to Yale faculty and staff, Richard Levin, the school's president, and Peter Salovey, its provost, said it now projects an annual deficit of $150 million each year from 2010-11 through 2013-14. Last winter, Yale cut staff and nonsalary expenses by 7.5% for the 2009-10 academic year and signaled it would ask for further cuts in nonsalary expenses of 5% for 2010-11. On Thursday, the university said it would ask for the 5% cut this year instead. The administrators pledged to preserve financial aid, but said otherwise "no area of expenditure will be immune from close scrutiny." Messrs. Levin and Salovey said most major construction would be halted until donor support could be found or financial markets recovered. They said Yale would also slow the pace of faculty recruitment. Facing a cash crunch last fall, Harvard has laid off staff, suspended some faculty searches and delayed a major expansion of its campus. Other wealthy schools, including Stanford University, Princeton University and Massachusetts Institute of Technology, have predicted losses similar to Harvard and Yale's. They all follow an investment model that de-emphasizes traditional stocks and bonds and instead loads up on alternatives unavailable to the average investor. Yale and Harvard pioneered the approach, arguing they could afford to take big risks, because they were investing for decades, even centuries. Many copied the schools, saying they had found a high-return, low-risk strategy. But Eric Bailey, managing principal of CapTrust Financial Advisors LLC, a Tampa, Fla., firm that advises college endowments, says, "If it looks too good to be true, it probably is." Mr. Bailey says typical colleges outperformed Harvard last year, because they stuck to a plain-vanilla approach, typically allocating 60% of their holdings to stocks and 40% to bonds. That strategy would have generated a loss of roughly 13% in the year ended June 30. Harvard aims to have only 4% of its investments in U.S. bonds, which were one of the few safe havens over the last year. It has cut by more than half its target for investments in U.S. bonds since 2005. The University of Pennsylvania's endowment, by contrast, loaded up on Treasury securities in 2008 and reported a more moderate 15.7% decline. In New York City, Cooper Union for the Advancement of Science and Art, which charges no tuition, ratcheted down the risk of its investment portfolio three years ago and expects its endowment to hold steady for the year. Yale and Harvard say their long-term results justify the strategy. Harvard's endowment remains the largest in higher education. In fact, the $10.9 billion it lost last year is bigger than the 2008 value of the endowments of all but six colleges. In Thursday's report, Jane Mendillo, Harvard's endowment manager, noted that Harvard achieved an average annual return of 8.9% over 10 years, three times its peers' -- adding $18 billion in value over what would have been earned by a 60%-stock, 40%-bond portfolio. Ms. Mendillo said the school is better off than it would have been if it had "pursued a more conservative investment strategy over the longer term." In Thursday's report, Harvard said its private-equity funds, which generally represent about 13% of its endowment model, fell almost 32%. Its real-asset segment, representing nearly a quarter of the endowment, lost 38%. Investments in "absolute return" hedge funds, designed to generate positive results in good times and bad, instead posted a 19% loss. The report showed Harvard trimmed its endowment's risk profile by raising cash, cutting by $3 billion its future commitments to invest in private-equity and other investment funds, and reducing its real-asset category to 23% from 26% of its model portfolio. Harvard also said the school now aims to hold 2% of its assets in cash. Previously, it targeted a negative-5% cash position, reflecting its use of borrowed money to expand its investments. Ms. Mendillo said endowment managers had learned to better reflect "the risk tolerance of the university." Ms. Mendillo pledged to manage more of the school's money in-house, giving it readier access to securities to sell for cash. Currently, 70% is farmed out to outside managers. That move could focus more attention on its managers' multimillion-dollar paychecks, which have provoked controversy on campus. Ms. Mendillo said "a substantial number of portfolio managers" had portions of their bonuses, awarded for past years, "clawed back" into the endowment because of poor performance. Harvard and Yale, like other schools, also signed contracts that committed them to huge future investments in private-equity and other funds at exactly the time they could ill afford them. In Thursday's report, Ms. Mendillo said Harvard cut its "uncalled capital commitments" to $8 billion from $11 billion.

Has It All Really Come To All This

2009-09-09T21:58:00.003-04:00

The following was submitted by my friend (one of the last ones) Tim W. who received it anonymously.

Some time this year, we taxpayers may again receive an Economic Stimulus payment. This is a very exciting program. I'll explain it using the Q and A format:

Q. What is an Economic Stimulus payment?

A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. Only a smidgen.

Q. What is the purpose of this payment?
A. The plan is for you to use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn't that stimulating the economy of China ?
A. Shut up.

Below is some helpful advice on how to best help the US economy by spending your stimulus check wisely:

• If you spend the stimulus money at Wal-Mart, the money will go to China

.
• If you spend it on gasoline, your money will go to the Arabs.

• If you purchase a computer, it will go to India.

• If you purchase fruit and vegetables, it will go to Mexico, Honduras and Guatemala .

• If you buy a car, it will go to Japan or Korea.

• If you purchase useless stuff, it will go to Taiwan.

• If you pay your credit cards off, or buy stock, it will go to management bonuses and they will hide it offshore.

Instead, keep the money in America by:

1 spending it at yard sales, or

2 going to ball games, or

3 spending it on prostitutes, or

4 beer or

5 tattoos.

(These are the only American businesses still operating in the US .)

Conclusion:

Go to a ball game with a tattooed prostitute that you met at a yard sale and drink beer all day.

Economists Finally See The Light About Their Crappy Math

2009-09-08T15:50:00.003-04:00

I am totally sorry that the text below is unformatted, but you can thank the WSJ for that. In order for me to report the full story, you would have to pay for a subscription so I grabbed it on my Blackberry for you.

Here is the gist. On January 22,2009 in an article entitled "Who Knows What Is Going To Happen To The Economy?" I questioned the math that all the idiots have used to predict financial futures. Here's the nugget: Nobel Prize winner Markowitz thirty years ago entirely absorbed the Gaussian curve...and that's what won him the (dubious) prize. Yet as I wrote on February 25, 2009, "Why I Hate Economists," I explained that their math was horrific and I pointed you to Mr. Mandelbrot's work which I have studied extensively.

Finally, on May 4, 2009 I displayed that Buffett and Munger had disdain for all this "high-order math." In another installment I will display my utter distaste for Mr. Buffett's achievements and intellectual capacity but that will have to wait. In the meantime, please read the junk that follows, courtesy of my Blackberry.

Thanks

John A.

SEPTEMBER 8, 2009 Some Funds Stop Grading on the Curve Yahoo! Buzz By ELEANOR LAISE Last year, a typical investment portfolio of 60% stocks and 40% bonds lost roughly a fifth of its value. Standard portfolio-construction tools assume that will happen only once every 111 years. With once-in-a-century floods seemingly occurring every few years, financial-services firms ranging from J.P. Morgan Chase & Co. to MSCI Inc.'s MSCI Barra are concocting new ways to protect investors from such steep losses. The shift comes from increasing recognition that conventional assumptions about market behavior are off the mark, substantially underestimating risk. Mark Brewer Though mathematicians and many investors have long known market behavior isn't a pretty picture, standard portfolio construction assumes returns fall along a tidy, bell-curve-shaped distribution. With that approach, a 5% or 6% stock-market return would fall toward the fat middle of the curve, indicating it happens fairly often, while a 2008-type decline would fall near the skinny left tail, indicating its rarity. Recent history would suggest such meltdowns aren't so rare. In a little more than two decades, investors have been buffeted by the 1987 market crash, the implosion of hedge fund Long-Term Capital Management, the bursting of the tech-stock bubble and other crises. Investors using standard asset-allocation approaches have been hammered. Last year, all their supposedly diversified investments plummeted in unison. In short, the underlying assumptions failed. "We got blindsided by some developments that weren't accounted for by the models we were using," says Clark McKinley, a spokesman for the giant pension fund California Public Employees' Retirement System, or Calpers. As a result, the fund is looking at incorporating an extreme-events model into its risk-management approach. Many of Wall Street's new tools assume market returns fall along a "fat-tailed" distribution, where, say, last year's nearly 40% stock-market decline would be more common than previously thought. Fat-tailed distributions are nothing new. Mathematician Benoit Mandelbrot recognized their relevance to finance in the 1960s. But they were never widely used in portfolio-building tools, partly because the math was so unwieldy. Morningstar's Ibbotson Associates unit in recent months built fat-tailed assumptions into its Monte Carlo simulations, which estimate the odds of reaching retirement financial goals. More than nine million individual retirement-plan participants have access to Ibbotson's Monte Carlo tool. The new assumptions present a far different picture of risk. Consider the 60% stock, 40% bond portfolio that fell about 20% last year. Under the fat-tailed distribution now used in Ibbotson's tool, that should occur once every 40 years, not once every 111 years as assumed under a bell-curve-type distribution. (The last year as bad as 2008 was 1931.) Insulation from extreme market events doesn't come cheap. Allianz SE's Pacific Investment Management Co., or Pimco, which systematically hedges against extreme market events in several mutual funds launched last year, says the hedges may cost investors 0.5% to 1% of fund assets a year. Pimco uses a variety of derivatives and other strategies to hedge the funds. "You're spending some of your upside to buy the insurance" against catastrophic losses, says Vineer Bhansali, a Pimco managing director. Among the Pimco products applying the hedges are target-date funds, aimed at retirement savers. The firm plans to launch more funds that employ the approach in the next few years, Mr. Bhansali says. Another potential pitfall: Number-crunchers have a smaller supply of historical observations to construct models focused on rare events. "Data are intrinsically sparse," says Lisa Goldberg, executive director of analytic initiatives at MSCI Barra. Even so, the firm this year offered pension plans and other large clients a beta, or prerelease, version of its new risk-management model, which seeks to account for more extreme market events. The company plans to include the model in risk-management products to be released next year. As Wall Street relies on ever-more-complex mathematical models to manage money, a new breed of uber-wonks is gaining influence. Pimco's Mr. Bhansali, for example, holds a doctorate in theoretical particle physics from Harvard University and runs 50-mile to 100-mile super-marathons. And MSCI's Ms. Goldberg, an inventor of the firm's credit-risk and extreme-risk models, is also a professor at the University of California, Berkeley and has a penchant for the "beautiful mathematical subject" of extreme value statistics. The fat-tailed assumptions sometimes lead to quite conservative portfolios that cushion investors on the downside but also sharply curtail the upside. Smart Portfolios LLC last year launched the Aston Dynamic Allocation Fund, which uses fat-tailed distributions and other complex formulas to assume more-frequent occurrence of market shocks. In the 12 months ending Sept. 4, the fund is down 0.5%, compared with a 16% decline for the Standard & Poor's 500-stock index, thanks to hefty allocations to Treasurys and cash. But as markets have rallied in the past three months, it has risen only 4%, compared with 8% for the S&P. In times of upheaval, "we don't sit there and take it like a man. We run for the hills," says Bryce James, the firm's president. Many of the new tools also limit the role of conventional risk measures. Standard deviation, proposed as a risk measure by Nobel Prize-winning economist Harry Markowitz in the 1950s, can be used to gauge how much an investment's returns vary over time. But it is equally affected by upside and downside moves, whereas many investors fear losses much more than they value gains. And it doesn't fully gauge risk in a fat-tailed world. A newer measure that gained prominence in recent decades ignores potential gains and looks at downside risk. That measure, called "value at risk," might tell you that you have a 5% chance of losing 3% or more in a single day, but doesn't home in on the worst downside scenarios. To focus on extreme risk, many firms have begun using a measure called "conditional value at risk," which is the expected portfolio loss when value at risk has been breached. In other words, if value at risk says you have a 5% chance of losing 3% or more in a single day, but you have lost 4% before lunch, conditional value at risk helps estimate your expected loss on this very bad day. Firms such as J.P. Morgan and MSCI Barra are employing the measure. Pimco's Mr. Bhansali is unimpressed. Since it is so difficult to forecast extreme events, investors should focus on their potential consequences rather than the probability they will occur, Mr. Bhansali says. As for comprehensive measures of risk, he says, "they fail you in many cases when you need them the most." Write to Eleanor Laise at eleanor.laise@wsj.com

Diogenes Redux

2009-09-08T14:26:00.009-04:00

http://www.wsj.com/article/SB10001424052970203585004574392620693542630.html

I think that I have finally found an honest politician (man.) David Walker is profiled in a WSJ interview with John Fund, entitled "The Deficits Are Coming." Previously Mr. Walker was a top executive at Arthur Anderson and most recently, he spent 10 years running the General Accounting Office (GAO) which is widely considered to be exempt from the oxymoron phrase, "competent government agency."

Mr. Walker performed wonderfully at GAO but he left his term five years years early, because I suspect that he was fed up with all the nonsense.

The interview is too articulate and profound for me to adequately paraphrase it so if you are at all interested in a very well-reasoned, plausible view for our financial future, I strongly recommend that you devour it.

Thanks

John A.

Thinking About Eating

2009-09-03T12:49:00.005-04:00

I have never before seen something like this. Okay, you can accost me for living in fancy neighborhoods and under relatively privileged circumstances, but remember, I have been in and around Manhattan (arguably the richest large city on Earth) since I was 18, and that was a LONG time ago.

The other morning, on my way to Penn Station, in a hurry to catch the 7:14 train to Princeton Junction to (I hoped) finalize the major oral surgery that has plagued me for more than a decade, I saw a huge phalanx gathered outside Saint Francis of Assisi Church on 31st Street just east of 7th Avenue. I ordinarily take the subway but early in the morning and/or when running late I optimize my cab ride by having the driver drop me off at "31 and 7." This usually takes less than 10 minutes from my place at Broadway and 11th Street and I have taken this route at least 100 times throughout the years.

So back to the long line waiting at the church. My first presumption was that all these, relatively well-dressed people were waiting to attend early-morning Mass. But this seemed strange since I had never witnessed it before. And the crowd was definitely not your usual street mongers, who often look like rejects from a leper colony. My curiosity was intense, so risking missing my train, I asked a well-dressed gentleman why such a large group (hundreds) was congregating this particular morning. I was expecting any answer other than the one I heard from him. "Sandwiches" he said. "Sandwiches." For Christ's sake, this was a genuine food line with more than a hundred patrons, right in Manhattan's mid-section. Let me remind you that a giant bagel with butter costs a whopping $1.17 at Zaro's in Penn Station across the street. I went and boarded my train, but I promised myself that on my return trip, I would investigate further, which I did.

I returned to the church at about 2PM, with my left cheek swollen like a pumpkin from the implant surgery, which incidentally, probably cost more than it takes to feed these people for a month (no insurance applies on this.) I spoke with the bookstore manager who explained that St. Francis operates chronologically the longest-running breadline...since 1928...in the city. He admitted that many patrons are mental patients, but they sure didn't look that way to me...I didn't see a single shopping cart loaded with myriad belongings and I did indeed espy some very well-dressed people. The manager confessed that "yes, there are some people with $400 Brooks Brothers suits" and that the line has grown four-fold during the past year. Apparently, St. Francis now serves 300-500 people per day. And there is another place, further uptown that provides lunch. Yet another, even further uptown that handles supper.

To conclude this chapter, I am seriously considering not only donating my money to this endeavor but also my time. Candidly, I was absolutely shocked by my observations.

No great lesson can exist without extrapolation. If our government, our President, our economists want to proclaim wonderful economic victories, we can let them try to convince us, but not without having them stand and beg for food in New York; and yes, despite my previous naivete, I now realize that there are profoundly large (and growing?) food lines in New York, and if so, most likely everywhere else. The people standing in these queues are not indigent slackers; they are just hungry. To put this into perspective, New York can be the most expensive place on Earth to eat (Le Cirque) or it can be extremely cheap. This morning, I just bought a bialy with a fried egg on it for less than $2. I can get a totally loaded falafel pita for less than $4 and I won't suffer a nutritional breakdown on that...besides, I don't require many calories. If you think that I have gone totally nuts, please read the recent pieces about people waiting in places all over the country for food handouts...I don't even need to provide links...these stories are all over the place.

But our country is suffering economic meltdown and nutritional stress. Let the obstreperous BS politicians from Washington step aside and join me at 31st and 7th, with very decent people, and then we can calibrate how well this country is doing. Pretty crappy is my assessment...wait in line for an hour for what Zaro's will give you for $1.17...that's a pretty low minimum wage.

Boy am I hot about this one.

Lionizing Ted Kennedy--An American Embarrassment

2009-08-27T13:00:00.006-04:00

Hey, I am never eager to trample on graves. But my readers know that I am willing to express what others only want to keep to themselves. But all this poppycock about Ted Kennedy being a wonderful senator, and all the revisionism that revitalized his questionable political career sickens me greatly.

It was 1969 and I was 14 years old, when I heard that Mr. Kennedy drove his car off a bridge, killing a beautiful 28 year old woman. Then I found out that he didn't report this accident for nearly one day. Now I'm sure we have all done some terrible things in our lives but some events are so horrific that they end up defining our entire existence. Well, not so for Mr. Kennedy. For normal people, a tragedy like this might have ruined them...I can certainly say that I would never have been the same thereafter.

The police treated the episode like a fender-bender. Kennedy was let off the hook despite the assertion that rapid response (under two hours) might have saved the woman's life (see the link below.)

And what was Kennedy (a notorious drunk and womanizer) whose then-current wife was pregnant, doing in a car that late with a lady nearly 10 years younger? Forget about getting any answers anymore...everyone has tried to investigate this thing and only the Lord will ever know what really happened; but I have my strong suspicions. Here's a very interesting link:

http://en.wikipedia.org/wiki/Chappaquiddick_incident

So what about the great liberal senator from Massachusetts? Other than introducing the verb "Borked" into the nation's vocabulary, what the hell did this guy ever do for the USA? He served his country without distinction in the military (unlike his two older brothers) and was discharged as a private. He was caught cheating on a Spanish exam at Harvard and was accordingly suspended. He grew up as the privileged son of a famous American bootlegger, so I suppose that you can claim that his prolific and well-detailed drinking habits were genetic. He and his staff introduced more than 300 bills in the Senate but I challenge you to name a single one that has had any lasting consequence (except COBRA.) He was a proponent for the Vietnam War and for universal health care...both turned out to be fiascoes. In 1980, he tried to run for President against his own (admittedly feckless) incumbent, Jimmy Carter.

Ted Kennedy always tried to be the consummate power-broker, but he did so by utter compromise and promise breaking. His pernicious personal habits constantly hindered his efficacy.

After all this, and you can read it for yourself:

http://en.wikipedia.org/wiki/Ted_Kennedy

what we get from oratorical Obama et al is a hagiography that ignores what could have been a prodigious life, and instead turned out to be a profligate one.

I'm not the first one to imply this, but Ted Kennedy isn't just any departed American hero; he was an American disgrace.

Diogenes...Looking For An Honest Man

2009-08-18T09:42:00.003-04:00

He eventually settled in Corinth where he continued to pursue the Cynic ideal of self-sufficiency: a life which was natural and not dependent upon the luxuries of civilization. Believing that virtue was better revealed in action and not theory, his life was a relentless campaign to debunk the social values and institutions of what he saw as a corrupt society. (Thank you Wikipedia.)

Well, that's Diogenes, and I have to confess that I am feeling more like him every day. Are we so corrupt that this is the only way to get along in life? I understand that more than 50 thousand US citizens acquired Swiss bank accounts so as to evade income taxes. Bernie Madoff is a new legend. The financial institutions have ripped us off and are now using their new found prowess to rip us off further. The President is a (well-intentioned) liar. The congress consists of not so well intentioned liars. Any baseball player who has avoided steroids (think Derek Jeter and not much further) won't make it into the Hall of Fame.

My home state, New Jersey boasts not only the most corrupt politicians in history (read the papers) but also, Rabbis who sold body parts. I wish this was confined to New Jersey but I fear that these guys were just stupid enough to get caught.

The Wall Street guys have it right...they get caught over and over again, pocket the dough and continue. They have ample help from Greenspan, Bernanke, Buffet and all their other stooges.

Have fun folks...the next 10 years will shake everyone loose.

Have We Hit Bottom In The Great Recession?

2009-08-17T12:23:00.005-04:00

I sure hope so, and my favorite friends the "economists" are suggesting it. Let's just be sure that it's not a bottom that is fifty feet below the water's surface; if it is, then we won't have a sufficient air supply to allow us to rise up to see the sun and breathe freely again.

I do not believe that we have even come close to bottoming out. A series of links below tell the story about the real economic news. We are still losing jobs at an alarming pace and these jobs will not be replaced very soon, if ever.

Smaller banks are getting blown out faster than bald tires on a heavy truck. Commercial real estate is not in the tank, it's in an acid bath.

Retail sales, including those for the vaunted back-to-school season, the home improvement industry and virtually anything else you care to think about, are anemic. Even "cash-for-clunkers" has an inherent problem. The automakers can't manufacture qualifying cars fast enough, they still have mountains in inventory that does not qualify for the program and with all that, the best selling vehicles are all made by foreign car makers (admittedly in their US plants.)

California is literally on the rocks, and the vacancy rate in Southern Cal is moribund. Airlines too are complaining that their business models are not sustainable.

This is a worldwide problem despite a few bright spots coming from Asia and Europe. The linkages between these economies ensures that if one nation does poorly, the rest will also suffer. The same economists who predict bottoms also regurgitate their optimistic auguries on very scant data, collected during an extremely short time period. I did not trust these folks a year ago and I am even more mistrustful today. In my opinion, only the politicians stand lower in the intellectual pecking order.

Have We Hit Bottom?

http://www.nytimes.com/2009/08/17/opinion/17mon1.html?_r=1&emc=eta1

Jobs A Scary Reality

http://www.nytimes.com/2009/08/11/opinion/11herbert.html?emc=eta1

Commercial Loan Defaults

http://www.wsj.com/article/SB124986079948018087.html

Southern California Vacancies

http://www.wsj.com/article/SB124985862195117909.html

A Tale Of Two (Wall Street) Compensation Plans

2009-08-09T08:13:00.005-04:00

For those that believe that the Wall Street banks that borrowed billions from the government have been chastened enough to abandon their reckless behavior AND forfeit their outlandish pay packages, you should read the NY Times article linked to below.

"Rewarding Bad Actors" by Paul Krugman explains that not only are firms like Goldman Sachs preparing to pay out billions in bonuses for 2009, but also, that the profits may be coming from marginally legal activities such as high-frequency trading. With this maneuver, Wall Street banks employ powerful computers to execute trades exponentially faster than any human could possibly manage to, thereby capturing tiny spreads on millions of trades. This technique is certainly responsible, in large part, for the profits that Goldman will post.

Over at Citigroup, a small commodities trading team led by Andrew Hall has been speculating successfully enough that Mr. Hall may earn more that $100 million for 2009.

Now I'm not a communist, and I think that people who do well should be rewarded well, but what is it that these organizations are doing so well?

On the high-frequency trading side, Goldman is making an artificial market that crowds out other trades and distorts the real market dynamics. The Citigroup traders are creating similar effects in oil markets and the like, driving up prices because the oil they are trading is being warehoused in tankers, and is not getting to market until prices improve. Of course, Citigroup's machinations are directly aimed at creating that improvement.

Mr. Krugman makes a very strong argument that these activities harm America because they are pointless beyond the fact that they make money for their respective firms. Each tactic corrupts the markets' fundamental purpose. For example, the stock exchanges are intended to allocate capital to companies so that the firms can function effectively. On the commodities side, what was supposed to be a hedging vehicle for things like corn, oil and such, with the intention being to stabilize prices, Mr. Hall and others are grotesquely manipulating things so as to produce a precisely converse result.

I suppose both Goldman and Citigroup are proud that they have such smart people who can devise clever strategies to steal money. After all, I've often opined that America has become a kleptocracy, and if so, the top kleptocrats are those whom we should admire the most. Right?

I suspect that neither organization is particularly proud. Consider that Lloyd Blankfein, Goldman's CEO, sent out a company wide voicemail (who has ever heard of such a thing these days) admonishing employees to avoid spending their bonus money extravagantly (Ferraris I suppose) lest Goldman incur federal government wrath (and maybe Andrew Cuomo's too) and general public vilification. Come to think of it, why did Blankfein use archaic voicemail rather than email? It couldn't possibly be that he wanted to avoid having the press scrutinize his message, could it? Well Lloyd, they got it anyway.

The notoriously press-averse Mr. Hall is working a different plan. Apparently, he wants to get out from under Citigroup's very visible umbrella, and create a separate firm that simply pays Citigroup a hefty (49%) tithe in the future. Undoubtedly under this arrangement, Mr. Hall will make even more money with even less transparency. Nice work if you can get it!

Are these the actions exhibited by people who are proud of what they are doing? As the old gangster adage explains, "if you are going to make money, it's best if you make it in the dark."

Here's the link and I recommend that you read Mr. Krugman's analysis and draw your own conclusions.

http://www.nytimes.com/2009/08/03/opinion/03krugman.html?_r=1&emc=eta1

Credit Suisse is trying (at least temporarily) a different approach. They too expect to earn sizable profits this year, but they're not paying their traders and bankers bonuses entirely in cash and/or company stock. Rather, they have established a $5B fund that holds toxic mortgages and bonds that those traders and bankers managed to accumulate.

The Credit Suisse folks eligible for bonuses, for the most part, don't like this one bit. That alone convinces me that this is the right way to go and if the responsible individuals manage to profit from the toxicity they created, more power to them. I certainly hope this sets an example for other Wall Street banks; if you create a problem then that problem is yours to fix.

Will Credit Suisse continue to use creative compensation plans in the future? I hope so, but I wouldn't bet on it. Here's the link that caught my eye:

http://www.wsj.com/article/SB124960277918712887.html

Global Warming Redux

2009-08-08T11:01:00.003-04:00

Do you know what that lovely image above is? No, it's not some abstract art. It's a picture, taken from space, of the thick smog that blankets China, and eventually travels elsewhere around the world.

Several posts ago (July 23rd to be exact) I stated that until and unless the Chinese and the Indians agree to clean up their acts, that all attempts by other nations to improve the environment will prove to be futile. Well the link below explains that these two prime offenders have basically told the world to "kiss off," and that they're not going to jeopardize their economies by enacting, implementing and enforcing clean air policies. Here's the link:

http://online.wsj.com/article/SB10001424052970204313604574327992553917308.html

Their central (specious) argument is that, per capita, China and India pollute less than we or others do. They utterly ignore that the capita is precisely the problem here. Who knows if the world is built well-enough to contain nearly seven billion people? These two countries also cry foul because others polluted heavily during their own industrial revolutions; that is certainly accurate. But we didn't know any better way back in history and when we discovered that our streams, rivers and lakes were rancid from dumped industrial waste, we began to clean things up. France leads the world in safe, manageable and pollution-free nuclear energy...honestly, we Americans should follow suit no matter what because the nuclear energy solution is far superior in almost all respects to anything else out there.

But with all this clean tech propaganda being foisted on us by our slippery administration, all they are going to accomplish is to spend vast (tax supported) amounts on measures that will be meaningless in a world-context, unless China and India get religion here, so to speak.

And it seems that both countries have spoken and what they have told us is to "go get lost." So we push on by building so-called clean cars that most people don't want, and on inflicting emissions standards that are exorbitantly expensive, and on attempting to legislate silly cap-and-trade regulations that will simply allow our own worst offenders to continue being just that.

If someone in Washington would take off their dunce hat and replace it with a thinking cap, they would encourage the world to offer whatever economic concessions/punishments it takes to get China and India to play pollution-free baseball with us.

Finally, I have no idea if there really is a legitimate global warming problem, I have so stated in the past, and my opinion is backed by at least a thousand credible scientists. But the smog, carcinogenic rivers, deadly water supplies and the like that exist in China and India can't be good for the world, and so global warming or not, they need, commencing yesterday, to seriously address their environmental problems. Or else.

Health Care Reform As Presently Constructed May Be DOA

2009-08-08T10:23:00.004-04:00

Of course, I am not alone in believing this, but I think it is a very positive development. The French who have long touted their universal health care system are retrenching and Mon Dieu, even considering lifting some elements from America's present system. Here's a link that explains this:

http://www.wsj.com/article/SB124958049241511735.html

In a separate article, The Wall Street Journal reports that 68% of Americans are satisfied with their health coverage, and that they oppose the taxes that would be required to pay for what is being proposed by pending legislation:

http://www.wsj.com/article/SB10001424052970204313604574330442429438938.html

Many posts ago I started blathering about social unrest, but I had no inkling that it would be this health care mess that might precipitate that unease. Yet in state after state, district after district, plain ole folk are storming their congressional representatives at town meetings being held to discuss health care reform. Some would have it that the demonstrations, shouting matches and such are fomented by right-wingers and Republicans, and while I know that those factions have been very vocal, I'm simply not buying the argument that all the protesters are stooges. The congress people are running home scared, faster than a 3-minute miler. According to some congressmen, "the situation is becoming dangerous." I've got news for you, you haven't seen anything yet...it will get worse, much worse.

From my perspective, health-care reform is an utterly legitimate discussion, and there are certainly micro-economic elements that can be addressed, as my good friend Bob H. has pointed out. But here's a fact for you to chew on. The American public is deeply distrustful whenever the government starts poking its nose into programs that directly affect them, and this oratorical administration is jamming its whole body into this deal.

Washington is very quick and highly disingenuous in declaring victories with respect to the economy...we are still in horrible shape. I don't think that they are going to be able to declare anything about health care reform because these idiot politicians (sorry, that's redundant) have simply bitten off way more than they should have, unfortunately, as is typical.

Mrs. Pelosi et al, I have bad news for you. Your days, politically, are numbered.

Some Good News And Some Scary Scenarios

2009-07-31T12:55:00.009-04:00

This post will be pretty brief. First the good news.

By some indications, the recession may be starting to ease a little. GDP (for various reasons) is down only 1% for the 2nd quarter, manufacturers are starting to add inventory and the government's "cash for clunkers" program has been a huge success. Employment is still anemic and will remain so for a long time to come, so we can't really crow about a jobless recovery, can we? Corporate profits are getting obliterated, but at least there are some profits to be had. The stock market obviously believes we've hit bottom as is reflected in a stellar performance in July. Even housing (although not commercial real estate) looks like it is picking up. So cross your fingers, hold your breath, throw salt over your shoulder in the hope that the favorable data isn't a false positive.

http://www.wsj.com/article/SB124904159680096697.html

Better yet, Congress is finally getting serious about all this egregious pay being handed out on Wall Street. Last year, firms that didn't even earn a profit handed out $billion$, and even those that did make some money, paid more in bonuses than what they took to the bottom line. Congress, the American Public and even foreign officials are sickened by all this. Well, let's hope that the government really comes down hard on these financial parasites.

http://www.wsj.com/article/SB124896891815094085.html

Scary Scenario #1

China decides to stop buying US Treasuries. They appear to be already balking at the recent auctions (see WSJ link below) and the Chinese have so much leverage on our economy right now that there is little we can do to mitigate their actions. Some argue that there the US and China have a symbiotic relationship and that if they hurt us, they will hurt themselves. But if we inflate things and devalue our currency, the Chinese will already be damaged. Here's the link:

http://online.wsj.com/article/SB124896282178793797.html

Scary Scenario #2

AIG appears to be in as much trouble now as it was before. Because this is a giant company with thousands of subsidiaries, they apparently have been playing the intra-company asset/liability transfer game. The original problem with AIG, which necessitated giving them $10s of billions in bailout money, wasn't that it is too big to fail, but rather, it is too complex to unwind. I fear that this is still the issue and you can read the full story by following the NY Times link below.

http://www.nytimes.com/2009/07/31/business/31aig.html?_r=1&emc=eta1

Scary Scenario #3

While we may have somehow managed to muddle our way through the deep crisis we faced just months ago, there are repercussions and consequences that follow from all the actions the government took. Being at heart, a skeptic, I am fearing that the backlash will be more joblessness, rampant inflation, and all sorts of nasty things that I don't even want to think about. For now we can take the good with the bad, and hope that the worst scenarios are merely science fiction.

Thanks

John A.

California, WTF? Redux

2009-07-23T21:52:00.007-04:00

I have been noodling the consequences that attend a self-destructed California, and that led me to do some numerical analysis. Much has been made about the fact that California is the eighth largest economy on the planet. My partner asked me about other states; I became intrigued, so I did the research. Here is a table that lays out the Gross State Product for all 50, plus the District of Columbia (these are 2008 figures (in millions) according to Wikipedia):

1 California 1,846,757
2 Texas 1,223,511
3 New York 1,144,481
4 Florida 744,120
5 Illinois 633,697
6 Pennsylvania 553,301
7 New Jersey 474,936
8 Ohio 471,508
9 NC 400,192
10 Georgia 397,756
11 Virginia 382,964
12 Michigan 381,963
13 Mass 351,514
14 Washington 311,270
15 Maryland 268,685
16 Minnesota 254,970
17 Arizona 247,028
18 Indiana 246,439
19 Tennessee 243,869
20 Colorado 236,324
21 Wisconsin 232,293
22 Missouri 229,470
23 Connecticut 216,266
24 Louisiana 216,146
25 Alabama 165,796
26 Oregon 158,223
27 Kentucky 154,184
28 South Car 152,830
29 Oklahoma 139,323
30 Iowa 129,026
31 Nevada 127,213
32 Kansas 117,305
33 Utah 105,658
34 Arkansas 95,371
DC 93,819
35 Mississippi 88,546
36 Nebraska 80,093
37 New Mexico 76,178
38 Hawaii 61,532
39 Delaware 60,118
40 West V 57,711
41 New Hamp 57,341
42 Idaho 51,149
43 Maine 48,108
44 Rhode Island 46,900
45 Alaska 44,517
46 Montana 34,253
47 South Dakota 33,934
48 Wyoming 31,514
49 North Dakota 27,725
50 Vermont 24,543

Thanks to Wiki, I can also detail the international GDP by country:

1 United States 14,264,600
2 Japan 4,923,761
3 PR China 4,401,614
4 Germany 3,667,513
5 France 2,865,737
6 United Kingdom 2,674,085
7 Italy 2,313,893
8 Russia 1,676,586
9 Spain 1,611,767
10 Brazil 1,572,839
11 Canada 1,510,957
12 India 1,209,686
13 Mexico 1,088,128
14 Australia 1,010,699
15 South Korea 947,010
16 Netherlands 868,940

Playing around, here are some fun facts that one can deduce from the above data.

California has 13.22% of GDP in the United States, and its output is larger than all states and every country starting with Russia and below. It is 37% of Japan's economy, 42% of China's, 50% of Germany's, 64% of France's, 69% of Britain's, 80% of Italy's and 110% of Russia's.

California, Texas and (an increasingly diminished) New York account for 30% of the US economy. The bottom 23 states (plus DC) nearly equal California's output. In other words, California, Texas and New York combined are slightly below China in world economic rankings. Just for laughs, let's throw in New Jersey and Pennsylvania and you now have the world's second largest economy. But California is certainly the linchpin here; without it I would have to add several more states to reach second place in the world.

So here's a frightening thought. What would happen to the world's economy if China collapsed? Or for that matter, if Japan went under? Of course, neither situation is presently plausible. Yet, the world's eighth largest economy is already reeling, with no permanent solution in sight. Every politician and commentator around thinks that the recent (almost passed) budget legislation is merely a band-aid for a wound that will fester long into the future. So I think it is safe to say that California (and maybe soon Texas, New York et al will follow in her footsteps) is toast. Jobs there are evaporating faster than a puddle on a hot summer day. People are exiting the state in alarming and increasing numbers. A public primary school system that was already bad is about to get worse. Higher education, once considered the best in the nation is taking it in the chops. Real estate is depressed and foreclosures are continuing on a torrid pace. As I have said in the past, you can bail out Citigroup once, and hope for the best...but what can you do about a state that has ongoing systemic problems? Is California too big to fail?

I think the answer to the last question is yes. As much as I hate to say it, if the government really wants to stimulate a national economic recovery, they had better move "saving California" to the top of the list. Instead of building "bridges to nowhere" and their ilk in areas like Alaska, Montana and Wyoming, why not devote ALL the stimulus money to states like California, that, from an economic standpoint, really matter.

Of course, politics being what it is, my suggestion will never be implemented. This means that we are, from my perspective, doomed to have a stagnated economy for decades to come.

California WTF? Ouch!?

Health Care--Whip Inflation Now

2009-07-23T21:10:00.006-04:00

I had a scary experience recently. In my April 15th, 2009 blog post I detailed that I had been in the hospital for an extended stay (3 weeks,), I underwent major (successful) surgery and I extolled the virtues that attend the American health care system as well as the particular institution and their staff that provided my care.

Last week, I received a bill from the hospital for $102,000 (plus change) netted from a $182,000 bill. The (excellent) insurance company had already paid $80,000. Now let me tell you that every penny, in my opinion, from the doctor's and hospital's end was well spent...I am alive, they took superb care of me, I will inevitably be worth well more than $182,000 to the American economy during my productive life, and my employers and I have paid far more than that during my prior working tenure.

Nevertheless, I was in shock. When I called the insurance company, they immediately said "there must me a mistake somewhere here and we will investigate." Less than one week later, they approved all my claims, except for a $250 co-pay which I will gladly remit.

Let's face it...the system is expensive and what drives the costs up are the waste, fraud and abuse that are endemic to health care. Not to mention that if I had been an indigent person, with no insurance, I have no doubt that the medical facilities would have administered identical treatment and would have "eaten" the invoice.

So all the assholes in Washington, including our oratorical President are running around trying to fix this thing, and sure, it isn't perfect. But I have never heard about someone who was refused care, or who didn't get what they could reasonably expect.

Yes, health care is a big problem in this country but I have never seen an enigma where government was the best "solver" and the vast issue here is that that Washington has been the greatest "waste sponsor" on Earth. Let's not put this one one the providers, the doctors and the FAT American public. We should just assume that Medicare and its counterparts are so fricking bloated that they can't deliver any efficiency at all.

Obama speaks well, but he also has the "forked tongue." If we follow all these political prescriptions, we are headed for socialistic medicine.

Here's a link to ponder:

http://www.nytimes.com/2009/07/10/opinion/10brooks.html?emc=eta1

Thanks

John A.

Let's Revisit Some Ongoing Themes--Part I

2009-07-23T20:15:00.014-04:00

Las Vegas

In my blog posted on June 15th, 2009, I described what my family and I observed when we recently visited there...huge uncompleted projects, relatively empty casinos and shows, and great bargains everywhere, except in the vacant high-priced boutiques. Well in a Wall Street Journal article by Tamara Audi, we get a much more comprehensive look that reasonably confirms the intuitions that my family and I had when we were "fearing and loathing," so to speak. Here's the link:

www.wsj.com/article/SB124804383363363397.html

Commercial Loan Failures

I predicted as early as last January, and have repeated the message that the next financial mess will involve commercial real estate failures. In a WSJ article by Lingling Wei and Maurice Tammon the press seems now to be catching on to this unfortunate but inevitable new trend.

Follow the story by chasing the link below:

www.wsj.com/article/SB124804759792663783.html

Global Warming And China/India

A recent NY Times editorial seems to confirm the May 25th blog post entitled, "A Dirty Little Secret..." which suggests that until and unless we can get these two countries to conform to clean air practices, that all other efforts are not only futile, but also, are confiscatory on those countries that are attempting to assist the environment. Here's the article:

www.nytimes.com/2009/07/10/opinion/10fri1.html?_r=1&emc=eta1

The Stimulus Trap

On April 28th, 2009 and July 14th, 2009 I detailed why the jobless situation in America has gone into condition red. I have repeated this assertion throughout this blog series. Now Paul Krugman from the NY Times is on the same bandwagon and he expresses his opinion as follows:

http://www.nytimes.com/2009/07/10/opinion/10krugman.html?emc=eta1

The Human Equation

Bob Herbert at the NY Times writes a most eloquent explanation about why there are no "jobless recoveries" as I have written many times, on April 28th, June 26th and July 14th, 2009. Please read Bob's wonderful analysis by going to:

www.nytimes.com/2009/07/11/opinion/11herbert.html?emc=eta1

I'll have more for you later this evening and tomorrow, but this should get you started.

Thanks

John A.

Thinking About Puking

2009-07-14T22:41:00.003-04:00

I have been dying to write this piece, but have approached the subject with some trepidation. As we go through what we are going through, and despite any other physical impairments (of which I now have many), I have the urge to regurgitate more often than I have ever in the past. Why is this? (1) I constantly read bullshit blogs that say nothing about the raw facts that the worldwide society is confronting. (2) I see self-congratulatory crap that comes from my own community (the VC industry.) (3) When I read junk about Washington, all I can discern is posturing, oratory and dissembling. (4) When I scan reader commentary, it is obvious to me that they (the readers) are living in a fantasy world along with the writers. (5) The "American Dream" is broken, and this breaks my heart. (6) My children and yours will live in a world that has much less opportunity than what I had when I was 21 years old. (7) Morals and ethics (notwithstanding the recent MBA initiatives) have sunk to a new low so that even the Pope has to scold us. (8) The nuclear proliferation scene is at at it hottest point in 50 years. (9) We are building debt so fast that for the first time in my life, I hope that I don't live very long. (10) I am actually considering moving to Switzerland but I don't think they will have me. (I don't have a Marc Rich/Pinky Greene pedigree...ie unlimited funds to contribute to that country.) (11) Our constitutional rights (ie. second amendment et al) are under extreme attack, though it may be fatal for those that attack them.

So I am very sorry to have to write this, and it may be the last thing that I do write. Maybe if you read several blogs that lead up to this you will understand...or read many previous blogs. But I am about to give up on American progress and will, as you will too, sink into the abyss that puts us into that infernal middle-of-the-road.

Thanks

John A.

We Are Such Stupid Sheep

2009-07-14T22:03:00.002-04:00

I have written many times about global social unrest...my comments are largely ignored, I don't mind that, but the facts present themselves no matter what. In a recent article linked to below, it is becoming increasingly obvious that the vaunted Chinese economy and their citizens are becoming restive...the government is paying people off to try to quell the unease. Here's the link:

http://news.yahoo.com/s/ap/20090714/ap_on_re_as/as_china_awash_in_protest_analysis

In this country we are so fat (physically, really FAT) dumb and happy that we don't have the gumption to express ourselves in a political fashion as eloquently as the Chinese middle class. But the time is coming when the government will no longer be able to stifle all the misery that is out there.

In a separate note, Mort Zuckerman, publisher of US News & World Report (in full disclosure, my brother-in-law is a senior publishing executive there, but we have not discussed these subjects) is apparently paraphrasing (inadvertently) my blogs with respect to the problems with employment in this country. In an article entitled "The Economy Is Worse Than You Think," reported recently in the Wall Street Journal, Zuckerman picks up on ALL the items that I have been reporting on for months now (just go down the blog list, and you'll see that evidence.)

It's nice that high-profile folks are beginning to get the message...THERE IS NO SUCH THING AS A JOBLESS RECOVERY, AND THE GOVERNMENT UNEMPLOYMENT STATISTICS STINK TO HIGH HEAVEN.

Thanks Mort.

Here's the link:

http://www.wsj.com/article/SB124753066246235811.html

Arrowpoint In The News

2009-07-09T09:54:00.005-04:00

In the event you haven't seen these articles in the recent press, I am including links if you would like to visit the stories which are pretty favorable to Arrowpoint. The Wall Street Journal interview is I think very accurate and complete.

Thanks

John A.

The Wall Street Journal--June 11, 2009

http://blogs.wsj.com/venturecapital/2009/06/11/arrowpoint-ventures-takes-it-slow-in-aiming-for-150m-debut-fund/

Mass High Tech Journal--June 5, 2009 (You may need to copy and paste the following link into your browser.)

http://www.masshightech.com/stories/2009/06/01/weekly13-More-venture-capital-firms-halt-their-fund-raising.html

You Heard It Here First (If You Are Listening)...VC Is Shrinking

2009-07-07T21:09:00.001-04:00

Please read this and weep!? Another scoop for the blog.

http://www.nytimes.com/2009/07/07/technology/start-ups/07venture.html?_r=1

California, WTF?

2009-07-06T22:01:00.007-04:00

I am just sitting here waiting for the other shoe to drop. I confess that I have never understood the famous New Yorker cartoon, probably because having grown up in the Midwest, I am at heart a centrist. For the uninitiated, or those too young to remember, here's the famous image from 1976.

I spent nearly the entire 1990's decade working in and around California. First I helped acquire a company and converted it into a research laboratory for the new parent. Next I helped turn around a major software company which was later sold for more than 30X ($1B+) the price that it was trading at when I went there and finally, I was CEO at a thin-film (organic polymers) display company whose technology is finally seeing the light, (literally and figuratively) with products like the Kindle.

I came to cherish California as a wonderful place to ride my motorcycle on the weekends, and I suppose that I covered more than 8,000 miles around the state from top to bottom during accumulated weekends. I have never been on serious hikes better than what you find in the Ventana Wilderness, way up above Big Sur, and at the time, my little twin boys were there with me too (in tow with an experienced friend of course.) I made lifelong friends in California, and the business environment in the 90's was electric...so many talented people and innovative companies were stationed there.

I never felt that I could permanently move to California because, back then, a young guy like me might have to shift about (which proved true) many times and I wanted my family to find its roots somewhere...and that happened to be New Jersey. But we all had a very wonderful encounter with California, and I will never forget that.

Having said all this, it is utterly bewildering to me that the most populous state in America, its third largest geographically, and the eighth largest economy in the world (in GDP) is in very serious trouble right now. The eastern press isn't giving this story much play, perhaps leading some credence to that New Yorker cover, and California is now issuing IOUs to public employees, cutting basic services and candidly, has no concrete plan to move away from this terrible thing. The problem is that you can bail out Citigroup one time and hope for the best, but when a state, which is legally required to balance its annual budget goes belly up, then you need to deal with the issue year after year.

The federal government has thus far kept hands off, and I agree with that to an extent...after all, if you help California, then why not Pennsylvania which is also having some difficulties, as are other states. But the repercussions from this are enormous...and somewhat unfathomable. If California in whatever form, fails, and you can count among other things, unemployment, basic service disruption and such in that category, the impact on the so-called economic recovery will be immense.

So now I wish that I had an answer here, but I don't. There will be no tax increases, government employee furloughs are in full swing, tax revenues are in a shambles, companies are still laying off workers, real estate values have plummeted, loans are in default and properties are in foreclosure.

Particularly painful to me is that the innovative, vibrant California that I knew from the past has been mauled by an enormous bear, largely not of its own making (stupid politicians (who are always stupid) notwithstanding.)

So I just think we have to try to cycle through this thing and take our lumps in the meantime.

Sorry

John A.

I Knew It Was Too Ridiculous To Be True

2009-06-29T17:48:00.003-04:00

In my January 6, 2009 post, I commented that it was ridiculous that luxury sports car maker Porsche was acquiring "The Peoples Wagon," as was famously designated by Hitler himself.

Hell, I don't even see that many Porsches these days even though I live in the richest city in America.

Well, today, my instincts were affirmed. It turns out that Volkswagen doesn't like this arrangement at all and that THEY are the ones who are doing the acquiring...which to me is much more sensible.

Notwithstanding all this...people still aren't buying Porsches or Volkswagens or anything else for that matter.

Here's the link:

http://www.wsj.com/article/SB124627780153467815.html

Invent...According To Craig Barrett And Others...The Way Out Of This Mess...And Where Did Venture Capital Go, Really?

2009-06-28T10:38:00.021-04:00

Thomas Friedman, a NY Times columnist and also a best-selling author (Hot, Flat and Crowded, among other things) recently published an article entitled "Invent, Invent, Invent" which is anchored largely by his interview with Craig Barrett, former Intel Chairman while the two were at a conference in St. Petersburg, Russia.

According to Friedman, Barrett and others (Jeff Immelt from GE is also quoted) the financial adversity we are facing allows America, "with its unrivaled freedoms, venture capital industry, research universities and openness to new immigrants, has the best assets to be taking advantage of this moment - to out innovate our competition."

Barrett goes on to end, "sometimes I worry, though, that what oil money is to Russia, our ability to print money is to America. Look at the billions we just printed to bail out two dinosaurs, General Motors and Chrysler."

I think this is interview represents an excellent viewpoint and I will now stop paraphrasing the article...you can read it yourself by following the link below.

http://www.nytimes.com/2009/06/28/opinion/28friedman.html?_r=1&emc=eta1

My partners at Arrowpoint (www.arrowpointventures.com) and I generally agree with what is being said here, and we have been making similar observations for the past year or so in private meetings, conferences and in statements to the press. But when Barrett highlights venture capital, a subject that my partners and I believe we understand intimately well, I feel compelled to offer some disagreement.

Venture Capital In America Today

As with most intellectual endeavors, venture capital (VC) describes a concept, a plan and that plan's execution. I am confident that the VC CONCEPT is as robust today as it was when the Knights Templar came up with it in the 1100's. Back then it might have more aptly been called Ad-venture capital. And Columbus did pretty well with Ad-venture capital provided by Spain's Queen Isabella.

The concept is shockingly simple. Find a nascent enterprise which has the promise to change the world in an important way, put small amounts of (ordinarily borrowed) capital to work to allow the enterprise's leaders to acquire resources, help them as best as is possible and then monitor their progress. If things work out as desired then the world, the enterprise and its backers all prosper. If the venture doesn't fare well, then investors, if they are prudent, will stop supporting it well before all the capital disappears. As a concept, VC has always been and will continue to be a compelling business idea.

The PLAN for VC is equally simplistic. A successful enterprise will grow, create new employment, stimulate R&D, expand markets, develop a loyal customer base and eventually, it will be worth many times the initial investment. The liquidity that ultimately arrives (and this can take much patience) has the potential to make all the enterprise's constituents prosperous.

EXECUTION is the nightmare. In VC (as it has been through the ages) there are so many elements that can scuttle the best plans. If investors select the wrong investment subject, or imprudently deploy too much capital into a company, they can be annihilated. Conversely, if the enterprise is under funded, it may wither and die. The best designed products are often riddled with costly defects. Markets may not develop, for many, sometimes uncontrollable reasons (including the economic environment.) Competition is a necessary but potentially deadly evil. The management team directing the enterprise may turn out to be berserk, or merely incompetent. Candidly, there is so much that can go wrong with a VC backed company that it makes this investment area one of the riskiest on earth. Yet when it works well, the results are magnificent.

Ironically, since the problem categories involved in VC are generally well-understood, and the capital under management is normally extremely limited, the systemic risks to society are highly constrained and the systemic benefits have historically been well worth the risks. If contrasted with other investment classes such as exotic or derivative securities (one small example) where the risks are very misunderstood and the capital (with the government's help) is seemingly limitless, VC looks like a walk in the park.

Nevertheless, much has been written about VC and its performance during the past decade or so. Some argue that the financial returns to limited partners have been so dismal that the entire industry has become dysfunctional. Others say that this is just a cyclical phenomenon. There are many opinions and apologies out there but I think if we layer the issues, a clearer image emerges. And let's just assume that the VC that Mr. Barrett speaks about, that which sparks innovation, concerns only early-stage and early-emerging organizations (those that have their feet on the ground but can't get running just yet.)

Issue #1 (The Cornerstone) The industry has raised $100s of billions from their limited partners (predominately large institutions) and this is far too much money for true, early stage VC.

Issue #2 (Excessive Greed) The general partners who manage VC firms almost always charge a management fee, which is a percentage (customarily 2-3% per year) of the institutional capital committed to the VC firm. You can do the math here. If a fund, with say 5-10 partners manages $500M or $1B at a crack (and several funds within a firm can and do coexist...I call that "cascading,") then the general partners can become pretty rich without returning one cent to their investors.

Issue #3 (Limited Supply) There simply aren't enough early stage companies around that can absorb all this capital. For the best opportunities, in the past, VC competitors bid up prices to the point where it may be hard to ever see an investment return. Often the VC firms (collectively) attempt to plow too much money into the exceptional opportunities because they want to increase their investment allocations, with respect to the numerator governed by fund size.

Issue #4 (Swimming Upstream) VC partners are usually smart about most things (often in hindsight) and they have, for a while now come to grips with the three issues listed above. Accordingly they have often sought investments like buyouts, building manufacturing plants, and such that were usually appropriate for large corporations and/or investment vehicles organized for those purposes. But in years past, we've seen VCs pour $50-$100 million in trying to build a chip fabrication plant or for that matter, a Segway scooter that never had a viable market.

Because the investment funds need to be spent in order to justify all those management fees, and since usually there is a pretty tight timetable to disburse investment money, many VC firms who traditionally embraced early stage markets changed their business footprint to accommodate larger deals, even though they may not be qualified for this new business model. In fairness, some VC firms recognized their dilemma and returned unused capital back to their investors, the limited partners.

Issue #5 (Money For Early-Stage Investments Is Now Scarce) I think we can take that as a fact not only because it makes logical sense, but also because many (perhaps most) early-stage entrepreneurs are screaming about it.

What Is Happening Now And What Might Happen In The Future?

1. There are numerous excellent, former VC firms who have successfully made the move upstream, and I believe that they ought to stay there because the early-stage dynamics and investment profile no longer fits their fund sizes or their business temperament.

2. The financial press has reported that other, well-established firms are unable to secure limited partner commitments for future funding. Essentially, this means that those firms will slowly wind down.

3. Some new early-stage firms may spring up to fill the void. Their parameters regarding (small) fund size will be very strict, and they will avoid capital-intensive investment opportunities. In all likelihood, they will require a longer timetable for making initial investments. Moreover, I suspect that they will be pretty stringent when pressed for additional capital by their companies. They will be more active/creative in seeking earlier exits for their investments, and they may even retain some equity in a situation where a portfolio company is acquired.

4. The firms that moved upstream should then welcome developments as suggested by the above scenario since that would bring new, more mature companies to the large firms' attention.

5. I have to credit my entrepreneur friend David Spitz for this one. "We may well see a dramatic contraction in the supply of LP funds – maybe 40-60% of recent levels – as endowments, pension funds, etc. are all staring once-in-a-career 20-40% declines in asset value, driving a fundamental re-evaluation of asset allocation and appetite for “risk” capital. I (David) wouldn’t be surprised to see 40%-50% fewer discrete VC firms in the next five years as funds die off and liquidate, with an increased concentration of capital at the top (old school – Sequoia, KP, etc.) and bottom (new firms) of the pyramid."

Finally, if I happen to rub elbows with Mr. Barrett at a fancy convention somewhere (yeah, right?) I promise that I will give him this blog address and will ask him if he can help make 3 and 4 above happen!

The "Be Careful What You Wish For" Club

2009-06-26T14:44:00.014-04:00

Hi there. First an editorial note. I wonder if you are like I am, getting sick from all these trivial blogs that are out there, written about "touchy-feely" subjects, and with no definitive viewpoint or conviction. Worse are the adoring followers who seem to thrive on making sycophantic comments. With all the crap that is going on, the fact that the world continues to fall apart (which I will address momentarily) it strikes me that all this blogging is a video game for those who aren't skilled enough to play such games. What's worse...most blog publishers can't even write well. Yuck.

So on to the main subject. Obama clearly wanted to be President, he campaigned hard for the job and he won it fairly. My conjecture is that he is now the most prominent member in the world's "Be Careful What You Wish For Club." Look, I have no political ambitions whatsoever; never have and never will, but if somehow I could "beam down" into the presidency, I would like to have been the head honcho when the Berlin Wall fell. Or when the commander-in-chief Bush-I (made possible by Colin Powell and executed by Stormin Norman (I will never forget the TV coverage)) annihilated the Iraqis when they invaded Kuwait. It might even be pleasant to be Bill Clinton, surfing down an enormous Internet wave and his predecessors favorable policies so that I could bang young White House interns with reckless abandon. Bush-II after 9-11 wasn't such a bad performance either. But to be the USA's CEO today is a nightmare. Let's explore some themes that we're reviewed in the past.

True Reform

In two NY Times articles and one WSJ piece, the stage is eloquently set to (1) debunk any comparison with FDR, (2) demonstrate that the present Washington staffers don't have the experience to cope with today's problems and (3) that Obama has a very limited time frame to work with.

The FDR comparison is particularly damaging because it highlights that unlike Obama, FDR was actually willing to piss people off, not the least being the banking establishment in power at the time. Congressional bills were passed (Glass-Steagall) among others that were wildly unpopular with the power brokers, and the fox (Joe Kennedy) was appointed to supervise other predators. Today we get every conciliatory phrase and more oratory than action. Incidentally, although I won't quote it here, if you want a fascinating description about the many decades involving Wall Street corruption and government complicity back then, as it is today, you'll seek out the most recent "Rolling Stone" issue for an extremely comprehensive (12 page) expose...enough said.

On the inexperience issue...I have a trick question. Which current Washington "financial architect" has actually run a real (nuts and bolts) business? I won't keep you guessing...the answer is none. How many have been investment bankers, economists, academics, theoreticians and the like...the answer is all. So the Journal editorial correctly points this out, as well as the perils for all Americans because we are dealing with so much hogwash.

Finally, on the immediate Obama front, I had a lovely (and inexpensive) brunch in New York City today in which I ended up debating three nice young gentlemen who exeuded optimism and were willing to let the new, admittedly popular and photogenic President nearly as much time as needed to get the situation under control. I listened politely and finally opined, as has been my decades-long experience that the new CEO can't blame the old one for too long...honestly, only a few months or so before the problems he "inherits" become his to solve. "Make It Or Break It Obama Summer" neatly explores that issue.

Here are the three links:

http://www.nytimes.com/2009/06/18/business/18nocera.html?_r=1&emc=eta1

http://www.wsj.com/article/SB124528087493225237.html

http://www.nytimes.com/2009/06/21/opinion/21rich.html?_r=1&emc=eta1

Compensation

This one is brief. The Harvard endowment, which has lost many billions thanks to Mr. Summers et al announced recently that a bond trader has departed the organization, with $6.3 million in compensation. This is genuinely beyond belief. Call me old-fashioned, but if I ever worked for an company that reported a 30% diminishment in total assets, there would be no bonuses nor anything beyond a sharp kick in the ass. Even Citigroup, that citadel representing corporate greed rescinded egregious "severance payments" some as high as $43 million dollars. Let me get this straight. Either you quit or got fired. If you quit, why do you deserve any severance and if you're fired, then isn't $40+M a little rich to get you to hold your tongue? To its credit, Citigroup, no doubt fearing massive public backlash, unilaterally canceled the arrangement, but it may not end there...if I were the affected executives, I would fight tooth and nail to reinstate things that I did not conjure up in the first place. But in the old days, we all worked as a team, and despite the fact that I did not entirely appreciate all my colleagues, if the company did well then I did well, and if not, then not. Don't know what ever happened to that one.

Here's the link:

http://www.wsj.com/article/SB124568674308337519.html

Job Counting And Recovery

Unemployment is set to be announced at +10%. This is the biggest lie being told to the American public. When one really calculates the unemployed, the number is much closer to the Depression-Era 20+% because we simply (as has been stated in earlier blogs) don't account for those who have abandoned looking for work; temporary workers and the like. So the reported unemployment rate is terrible, but it is much more horrible than what the press would have you believe.

Worse yet, in many prior recessions, job loss was transitory...this time it is permanent. I have been a college instructor for many years and the number of young adults that are not finding employment right now is utterly alarming, including those with strong resumes in disciplines such as Accounting.

Here are links that provoke these thoughts:

http://www.nytimes.com/2009/06/27/opinion/27herbert.html?_r=1&emc=eta1

http://www.wsj.com/article/SB124451592762396883.html

Interest Rates

These are going through the roof because, despite the Fed's attempts at subsidizing the financial industry, nobody in the rational world believes that this is non-inflationary and most all believe that it is possibly deflationary. Have fun. One of the elements that depresses me the most is that American's (unlike Iranians) are in denial about all this. But the destruction occurring in all investing forms from Venture Capital, to Private Equity to Real Estate (residential and commercial) confirms my instincts.

http://online.wsj.com/article/SB124467701447204165.html

Man-Made Climate Change

For years I have asserted that the climate may be changing, although recent studies have shown that the world's temperature has "flat-lined since 2001," and that the main problem is three-fold. (1) We don't have enough data to track these trends through the ages, (2) the world only crossed the 1B population threshold in the late 1890's and (3) the worst polluters in modern history (in absolute terms) are the Chinese and the Indians.

Having said all that, and unless you are willing to entertain a 5B reduction in the world's population, there is no solid evidence that all the efforts that we are voting on and proposing spending money for will have one iota of efficacy. Hey, I like clean air and such, but the "science" that has attended this thing for years has been seriously suspect...so much so that at least 1000 scientists who previously endorsed the thing are backtracking faster than a 4-wheel drive. The world may or may not be getting warmer; but be honest with yourself, who the hell knows the real causes? I confess that I have never liked Al Gore, but the fraud and puppetry that they have engaged in are really damaging.

Here's a credible article. (Incidentally, for a time I was chairman of a world-class weather prediction company, and we routinely made the above argument, but finally abandoned it because no one would listen...just like what the lady PhD says in the article.)

Check out the read:

http://www.wsj.com/article/SB124597505076157449.html

Nukes

This has been highlighted by me before, and it continues to be an enormous problem. North Korea is scheduled (you can bet on it) to launch a dud at Hawaii. I don't think it will make it all the way, but the US has a major issue at hand. Ignore it and let it fall into the ocean (probably the wise course) try to intercept it and succeed (a great but unlikely victory) or try to stop it in flight and fail (a huge catastrophe.) The Taliban forces are not, per the popular wisdom (see the link below) contained and I am still predicting a 100% chance that they will steal a nuclear weapon. North Korea and Iran move forward on the Nuke front, and so it looks to me like we are going to be living in a world with a nuclear awareness as heightened as it was during the Cuban missile crisis. But the devices are smaller and easier to deploy now. I live in New York City...ground zero for God's sake for the first terrorist nuke attempt and I sure hope that all you happy faces out there have your precautions in order.

In summary, I marvel at American optimism but it also scares me to death. We somehow seem to like to produce and read trivial blogs, pursue idle thoughts and ignore clear and present dangers when they are utterly obvious in business, politics, the military et al.

So if you ask me what I am doing...here goes...I am preparing myself to live in a condition that has not existed in America before. I can't get into specifics, but you can probably imagine what this means.

Here's the Taliban (not gone yet) link:

http://www.nytimes.com/2009/06/28/world/asia/28swat.html?_r=1&emc=eta1

Thank you

John A.

Fear And Loathing In Las Vegas

2009-06-15T16:56:00.009-04:00

My apologies to Dr. Hunter S. Thompson (RIP) but I couldn't resist his book title which, for this particular post is most appropriate in both a literal and figurative sense.

I spent this past (long) weekend in Vegas with my twin boys, celebrating their 21st birthday. This is a 3+ decades-old Abraham-family tradition, begun by my father who took me, my sister and my brother, respectively when we each became "legal" adults. Never mind that at 18, I narrowly missed being drafted and sent to Vietnam; but that is another story altogether.

Our trip was greatly enhanced by my 84 year old father's presence in tow with my much younger brother. My beautiful baby sister has long departed this life, but I felt that she was there with us in spirit.

Vegas is a great spot for a short vacation. Owing to the poor economy, travel and lodging were dirt cheap and while there, we were never extravagant with spending on meals, shows and such. I think the twins learned many lessons in Vegas, not the least being that if you can't afford to play a game correctly, you are betting too much in the first place (this lesson has great applicability way beyond casino games.) They also put their high-priced college educations to work in calculating the payoff odds for craps, and in employing basic blackjack playing/betting strategies (please don't ask me how I learned all that.) Their risk-taking function was amplified when they (finally) realized that in video poker, sometimes you have to throw away a winning hand in order to play for the monster jackpot that comes from scoring a royal flush. They also received the 100-level tutorial in casino design. For experimental purposes only, I tried, with very mixed results, to teach them how to spot the high-class hookers that adorn all the gaming establishments. The boys and I also got to shoot machine guns with live ammo...that's not something (I hope) that you can do every day. Taken as a vacation and a memorable life experience, we all had a great time in Vegas.

However, after acclimating for a day or so (it takes that long to see past the glitz and action) I began to get a queasy feeling in my stomach. Is Vegas a proxy for the "American Dream," and if so, it seems that this dream is fleeting. I saw many gargantuan, partly-finished structures where construction had been halted, and the banks have refused to complete the financing. It's easy to determine that if the crane is idle on a Friday morning, and there are no workers to be found on the structure, that this sucker isn't going to be finished at any time soon. Casino floors were relatively empty except on Saturday night and the fashion places with names from 5th Avenue in New York seemed abandoned by customers. We had a terrific empirical exercise going because we had to pass the "shop with a thousand Rolex watches" every time we went to our elevator bank. The family "poll" indicated that in three days, collectively we had only seen one couple in the store; I doubt that they bought anything . We visited other, swankier and newer casinos that had even fancier boutiques, and again, we saw no prospective customers.

Then the next "wave" hit me. Who builds these places and what are they expecting? Is the "American Dream" forged by going into the Cartier store in Vegas (of all places) and buying a huge diamond? How many hotel rooms are enough? Who is financing all this excess? Why aren't people showing up like they did before, and why are those who did show up, there now? I know why we were there and I also know what we spent and what we (mostly) didn't.

Then I started to understand. This was the "American Dream" and it is no longer that. With people the world over suffering from the recent financial catastrophes, Vegas and all the fancy emporiums are a very distant afterthought. Those that propagated this town had no clue that the "bubble days" would ever end, and they had bankers who were willing to go along with that vision. Now the bankers, mostly, are left holding the bag. Let's be clear here, there is and there always will be a place in this world for a recreational mecca like Las Vegas, but when you go into a fancy hotel, and each chandelier on the ceiling has the promise to feed an entire village in Somalia for a year, then you begin to fathom the largesse that we have, as a society, been living with.

I first visited Las Vegas 33 years ago and it was very entertaining back then, but not so outrageous. I think the same can be said for the American consumer. We have always been eager to buy things, but in the past, we were more circumspect.

As I have said frequently in my earlier blogs, and confirmed by the evidence presented to me in Las Vegas, our society is rightfully pulling back, reverting to solid basics and avoiding the overindulgence that has guided us so often in the recent past.

So if Las Vegas is a proxy, it offers both caution and hope.

An Ethical Ray Of Hope

2009-06-07T17:16:00.005-04:00

For more years than I can remember, every fall and spring I taught a two-hour session in a semester-long ethics class conducted at a major university located in New York City. The students are seniors in the undergraduate business school, and the ethics offering is a graduation prerequisite.

The material I present is original; I researched and developed it specifically for this particular institution. I eschew speaking about Aristotle and Plato; I am trying to bring a more modern slant to the lessons. Ergo, I suggest that most people are born with the potential to become ethical, upstanding individuals, and other than lowlife sociopaths like Bernie Madoff (see my January 8, 2009 blog post) people throughout the world want to behave within the acceptable limits set by their society's mores. So what makes normally good people become ethically derelict, or worse? My short course suggests that there are five forces at work here. Without going into too much detail, these forces are: Pressure, Power, Advocacy, Habituation and Challenge. You can't allow too many driving factors into the equation or soon "the devil made me do it" becomes an admissible excuse. My exercise's didactic purpose is to get the students to debate the subject and I hope, to apply my lessons to the working careers that they are all initiating. If you would like to receive the class materials, please send me an email (john@arrowpointventures.com) and I'll send you a WinZip file (but I'll wait about one week so that I can batch up the requests, if any.)

This past year, I stopped teaching my section because (1) Given all that's been going on in the world, I didn't feel all that pumped up about being pedagogical and (2) With all the thievery on Wall Street and such, I began to sense a systemic breakdown in ethical structures which might eventually capture my students, almost no matter what. I was starting to question ethics' relevance in society today.

When I read the NY Times article linked to below, my eyes nearly bugged out. It seems that at MBA schools like Harvard, Columbia and Wharton, they have seriously augmented their ethics teachings, and get this, business students are binding together to adopt oaths about ethical behavior, somewhat like what doctors do when they follow the Hippocratic tenets. Here's a quote from the article and it almost convinces me to resume my ethical-teaching assignment.

"In the post-Enron and post-Madoff era, the issue of ethics and corporate social responsibility has taken on greater urgency among students about to graduate."

My readers know that when things are bad, I am brutally candid about saying so. Well in this particular instance, a grass-roots movement by MBA students from the finest programs (can others be far behind?) to promote ethical (and legal) behavior is a wonderful consequence that, if it persists, has the power to markedly improve the business climate during the next decade or two. Are these kids really kissing off Gordon Gekko? I sure hope so and I pray that this is a lasting trend. Please read the article...I think it will be an uplifting experience for you.

http://www.nytimes.com/2009/05/30/business/30oath.html?_r=2&emc=eta1

By contrast, Lewis and Cohen (one of whom was convicted of stock manipulation in 1989) in a NY Times Op-Ed piece, provide scathing condemnation that implicates not only Wall Street and its compensation schemes, but also the government's complicity with the abhorrent practices. The article speaks for itself, and it more than amplifies the themes that I have been writing about in various, earlier blogs. Again, this is a must-read for those who want to know what really is going on with all this opaque government spending nonsense.

http://www.nytimes.com/2009/06/07/opinion/07cohanWEB.html?_r=1&emc=eta1

Thank you for reading and if you are so inclined, please subscribe to the blog using Google Reader, and pass it along to your friends and associates.

Potpourri...Follow Up From Some Prior Blog Posts

2009-06-04T15:44:00.005-04:00

I have been sitting on some recent articles that are covering themes that I laid out in blog posts going all the way back to January. I thought that it might be interesting to annotate and review these recent articles, which are linked to in each section.

Crazy Executive Compensation

On January 24th and April 28th (and in other blogs), I railed about the insane compensation practices promulgated by Wall Street and the financial industry, as well as the mortgage origination business. My argument's gist is that (1) if you pay people on a current time scale for transactions that have the proverbial "long tail" then you are playing with a time bomb. Here's the scenario. Traders make their trades and at year-end (an artificial boundary) the trade looks profitable, so the traders get their bonuses. Six months after year-end, the trade tanks. Do the traders return their bonuses? (2) The system is stacked to promote reckless risk taking since those taking the risks, generally have no skin in the game.

In the article linked to below, Alan Blinder, a Princeton professor and a former Fed Reserve Vice Chairman makes the case better than I ever could. If you haven't read this one, it's certainly worth your time to do so.

As a footnote, incidentally Citigroup just reported that it unilaterally canceled severance package payouts for several executives...one of whom was slated to get more than $42 million of your taxpayer money. It seems like all the public outrage on this topic may be having the intended effect...we'll see what the situation looks like when Q1, 2010 rolls around.

Here is Blinder's editorial piece:

http://www.wsj.com/article/SB124346974150760597.html

New Car Sales

On January 22, February 2 and February 19, I stated that new car sales worldwide are anemic, that the US car companies would go through bankruptcy and that the outlook for the industry as it is presently constituted is extremely poor.

Well both Chrysler and GM have now entered bankruptcy albeit a little later and many more billions flushed than I had imagined (and Ford is probably not far behind.) So now we have Obama Motors. I think that a government populated with officials from public service, academia and such has no clue about what it's like to run a business. They concentrate on "structural" items like cutting costs, providing financing and the like without taking head-on the major culprits, namely, market forces and corporate culture. So the "new" GM will be profitable if the industry sells 10 million new cars per year. What if that doesn't happen?

I strongly believe that a new car purchase is a luxury that unemployed people cannot afford; hence, I have been harping constantly about job creation, not only in America but throughout the world. And the existing new car inventory is staggering.

If our society "re-bases" their behavior, as I think we are doing, then we will see comparatively very few new car sales for years to come.

The following seminal article from the NY Times adeptly discusses exactly this issue.

Here's the link:

http://www.nytimes.com/2009/05/31/business/31car.html?_r=1&emc=eta1

Harvard's (and others) Troubles

On February 9th, I described the mess that Harvard and other big-name, highly endowed institutions are facing given the dismal financial status of their endowments, coupled with years of new infrastructure construction and profligate spending that has caused tuition to skyrocket.

In any event, Boston Magazine produced an excellent, extensive piece that details the trouble that Harvard is in, and how unprepared the new president and administration are in dealing with all the forces that are work here.

You can check it out by following the link below:

http://www.bostonmagazine.com/home/251494

Foreclosures, No End In Sight

On May 25th, in "Condition Yellow If Not Red," I worried that borrowers who had been prudent, not speculative, were starting to default on their mortgages. This is becoming a colossal problem for both lenders and borrowers, and the government's "mortgage intervention" program has been an utter fiasco.

The NY Times explores this theme comprehensively:

http://www.nytimes.com/2009/06/02/opinion/02tue1.html?_r=1&emc=eta1

Pakistan And The Bomb

On May 4th, and in other posts, I have opined that the Nuke situation in Pakistan alarms me greatly. We'll it appears I am not alone. Several weeks later, the WSJ published an article that explores all the dangers that are being faced over there, despite the Pakistani army's putative successes.

Here's the link:

http://online.wsj.com/article/SB10001424052970203658504574191842820382548.html

That's it for this segment. In my next post, I will write about some hopeful developments on the ethical front coming from, MBA graduates no less. I'll write that one soon, but I have to go eat dinner now.

Thanks for reading, if you like this stuff, please recommend it to your friends, and they can get automatic notification by signing up for Google Reader (preferable) or by opting for a similar service on Blogspot.

John A.

The Dirty Little Secret That Is No Longer Secret And Is Still Very Dirty

2009-05-25T11:48:00.000-04:00

So here we are, the United States is about to spend billions (or is already doing so) on cleaning up the environment. I don't object to that; if there is no Earth then there are no people, right?

I am also sympathetic to the argument that we need to lead the charge here. But the grim reality is that (predominantly) China and India are the most notorious polluters in history (as I have written before.) Combined they account for nearly 50% of all offending airborne substances. And when has our leadership been effective? On human rights? Nuclear proliferation? The rule of law? I'll leave it to you to find the proper examples.

The Chinese use as a defense the fact that during the industrial revolution, the US, Great Britain and others were equally profligate.

That was then...we didn't fathom the consequences and the scale was massively different.

But we all need to understand that despite what we do in the country, and no matter how much we spend, until and unless we get China and India to cooperate, this will be an effort in vain. Maybe we should send Al Gore over there to lecture them...fat chance in hell.

The article linked below has all the facts...soft coal burning forever in China:

http://www.nytimes.com/2009/05/15/opinion/15krugman.html?_r=1&emc=eta1

Condition Yellow If Not Red

2009-05-25T11:37:00.000-04:00

Please follow the link below to read about why this mortgage situation is MUCH worse than has been previously reported. Okay, it was hitherto easy to blame the stupid people who got in over their heads with loans that quickly went sour. The argument was that they were greedy and depended on ever-increasing real estate values to justify their actions.

Well, as I have written before, the issue here is not with real estate, it is with job losses. And now, even folks who have previously been prudent are faced with foreclosure problems; not that taking a house back is a panacea for the financial institutions...it is actually a nightmare.

So let's keep talking on a national level about water boarding, Nancy Pelosi and the like. We are slipping ever deeper into this horrible thing.

Here's the link:

http://www.nytimes.com/2009/05/25/business/economy/25foreclose.html?_r=1&emc=eta

and another sent in by Tim Chilleri:

http://www.cnbc.com/id/30929084

Rich Versus Poor...An Illegitamate Debate

2009-05-25T10:13:00.000-04:00

I confess that I read only two newspapers each day, the Wall Street Journal and the New York Times; this is made much easier because I can use my Blackberry to get the most relevant articles. I also can tell you that the old adage, "it's like sticking your head in the oven and your feet in the refrigerator," does indeed apply...on balance I have an "average temperature" but that doesn't bode well for the rest of the body.

In any event, because I am lacking much in the stuff that would cause me to be enthusiastic about writing, I am putting together some things that I have been sitting on for a while. Here is the first installment.

Rich Versus Poor

A friend, former colleague, fellow venture capitalist and such recently put together a blog that in typical fashion, attempts to explore the growing gap between rich and poor people. He doesn't take a stand because that is not his way. But I think that he is asking questions that go beyond first principles.

For example, he opines that rich is self-evident and poor is relative. I think this is completely backwards, notwithstanding that the government defines rich as a family that makes $250,000 per year or more (ask 100 people that make $250,000 if they feel rich right now and you will get an alarming answer.) My point is that poor is obvious (you can't feed yourself or your family or you are stuck on the New York streets) and that rich is conditional on how you became so.

There are people who have created things...I am not a Bill Gates fan or a Warren Buffett devotee either, because I believe that luck is a heavily discounted factor with respect to success, but to me, it is inarguable that they have, over time, created value for society.

Other "rich people" have destroyed value but they continue to get paid exorbitant sums. AIG was founded in 1919 and now, virtually ceases to exist, having lost the entire earnings accumulated during nearly a century. Lehman Brothers was founded before the Civil War...where are they now? I could mention many dozen firms and organizations that have encountered a similar fate, including GM, Chrysler, et al but I'll spare you those details.

What has happened here?

Yesteryear, getting "rich" involved producing value in a product or service. All the great industrialists in the past did so, despite often having nefarious reputations. But in today's society, it is easier to steal than it is to create.

All the great nations, China, Russia, India, the United States, (you name them, Britain and France have long since lost greatness) have become kleptocracies. If you don't believe me, then please explain how a rich person like Bernie Madoff can pull off his scam for decades. Also please inform as to why there are hundreds (if not thousands) of unoccupied concrete buildings in China. When you are finished discussing these items, I'll throw a bunch more at you.

My points with respect to my venture capitalist friend are that (1) he is hopelessly naive about who is rich and why they are rich, (2) that being rich is not "ipso facto" a good thing, (3) the poor don't have money but they (for the most part) aren't stupid...they see the fat cats getting theirs without retribution and they are properly enraged. (4) As I have so often noted, there is a re-basing coming in America (and the world) but it will not be a pleasant thing and there may be much social strife that attends this.

Finally, an unrelated note on venture capitalism. It has long since ceased to be a positive economic driver in America...there have been negative financial returns since 2000 and the phrase "early stage investing" has become an oxymoron. This saddens me greatly and I am trying to change the footprint, but the kleptocrats seem to be commanding all the resources.

A Shameful Performance, Mr. Greenspan

2009-05-13T10:03:00.000-04:00

Recently Alan Greenspan addressed the National Association of Realtors (they should be tarred and feathered for inviting him to speak) and Mr. G. attempted to distance himself from culpability for the housing bubble. He offered the usual Greenspan gobbledygook about long-term rates and overnight-rates and he then had the temerity to suggest that history is somehow being revised to portray him in a less than favorable light.

As a sure senility sign, Greenspan goes on to say he sees "seeds of bottoming" in the US housing market. I don't suppose he caught the numbers just reported today (and known for a while) that home prices have declined by another 14%!

He followed that statement with an even more asinine one in which he asserts that the economy has been "otherwise running extraordinarily well in recent weeks." I guess losing a net 500,000+ jobs last month is just hunky-dory as are the anemic retail sales just reported, or empty freighter ships sitting idle, clogging up Asian ports. Has this guy just dropped in here from Mars?

The fact is that Greenspan was a central player in the financial debacle that we are all now living through, yet he refuses to accept responsibility for anything like that. I'll admit that he wasn't alone in pursuing disastrous policies, and in making it easy for Wall Street et al to create exotic mortgage-backed securities in ever increasing, risky volumes, on very shaky fundamentals. But his refusal to stand there and have the fortitude to say, "I was wrong, I goofed and I'm sorry about it," makes me want to regurgitate. It also tells me that this guy is so out-of-touch with what is going on today that he isn't qualified any more to teach even a kindergarten class.

I try not to be a hypocrite. I have made at least a hundred bad decisions in my business career but I believe that each time I made a mistake, I stood there and took the medicine. Mr. Greenspan needs more than medicine...he could use a lobotomy.

If you want to read the short (disgusting) Wall Street Journal article about all this, just follow the link below.

http://online.wsj.com/article/SB124215788386911895.html

Messrs. Buffett and Munger Made Clear Their Complete Disdain for the Use of Higher-Order Mathematics in Finance

2009-05-04T17:35:00.000-04:00

Well lookie here:

http://finance.yahoo.com/insurance/article/107029/Business-Musings-From-Woodstock-for-Capitalists

Buffett and Munger don't like the math used in finance (and I suppose economics too.) What the heck did we say in the blog "Why I Hate Economists," published February 25th.

The problem isn't with "higher order" math as is described by these investment titans, it's with math that is bad.

You can read the rest in the original blog.

Washington Speak?

2009-05-04T17:09:00.000-04:00

Check out this article by following the link below:

http://www.nytimes.com/2009/05/05/world/asia/05policy.html?emc=eta1

In the text, the good Admiral proclaims that Pakistan's nukes are safe for now. He goes on to assert: "But at the same time, Admiral Mullen said that the main military focus of the United States must now shift from Iraq to Afghanistan and that the gains of the Taliban in the region threatened American interests in the region as well as the safety of Americans at home.

“I say that with the full knowledge that we still have about 136,000 American troops in Iraq, and that the fighting there isn’t over,” Admiral Mullen said. “We remain committed to the mission we’ve been given in Iraq, make no mistake, and we will stay there long enough, in keeping with their agreement, to ensure the Iraqis can provide for their own security.”

As an avid Washington follower, I believe it is my duty to decode this for you. 1) We are scared crapless about the fact that the Taliban has such a strong foothold in Pakistan. 2) The Pakistanis haven't told us jack about where the nukes really are. Even Israel can't respond because those weapons are heavily dispersed. 3) Afghanistan is nothing; what we really want to do is to move troops to Pakistan (per my suggestion in a prior blog) but the admiral can't say that directly...after all, that would be invading a sovereign country (like we haven't done this before.) And you don't make flag officer in this man's Navy by being controversial or outspoken. 4) There is no leadership and no government in Pakistan. They can't feed or educate their poor; a task that is increasingly inuring to the Taliban, especially with respect to young children. 5) The Taliban want the nukes and are likely to create a diversion so that they can capture one "on the fly" so to speak, while it is being transported. With weapons like this, it only takes one to tango.

Here's my analysis. The Taliban will end up with a nuke (the odds are 100 to 1 in favor of this happening) and they likely will fire it at India (whom they hate almost as much as they despise us.) India may yet be the savior (put very loosely) here because they will not, in my opinion, merely fire one back but rather, will seek to destroy the entire country by means conventional and otherwise.

And what is our government doing about all this? Well we're waiting for a feckless, incompetent and uncommunicative interim Pakistani President to fly over here for more discussions.

Yuck.

Becoming a Migraine By: Timothy Chilleri

2009-05-02T14:37:00.000-04:00

Very recently, President Obama publicly denounced the bond financers of Chrysler. This is worrisome for a couple reasons. First off, Obama says it wasn’t such a good idea to throw money at the car companies for the past few months. So, why is he upset over private investors not throwing good money after bad? Secondly, this is the fundamental right of any private investor. To impinge publicly is completely irresponsible of the President. To act as if these men are fundamentally bad people for trying to allocate their resources properly is disgusting. I do not remember a President in my lifetime publicly call out and address individuals in such a manner. The following is an excerpt from the NYT:

“Peter A. Weinberg and Joseph R. Perella are part of a band of Wall Street renegades — “a small group of speculators,” President Obama called them Thursday — who helped bankrupt Chrysler.

That, anyway, is the Washington line.

In fact, Mr. Weinberg and Mr. Perella, with sparkling Wall Street pedigrees, are the epitome of white-shoe investment bankers. And their boutique investment bank, a latecomer to Chrysler, played only a small role in the slow-motion wreck of the Detroit carmaker.

But now the two men, along with a handful of other financiers, are being blamed for precipitating the bankruptcy of an American icon. As Chrysler’s fate hung in the balance Wednesday night, this group refused to bend to the Obama administration and accept steep losses on their investments while more junior investors, including the United Automobile Workers union, were offered favorable terms.
In a rare flash of anger, the president scolded the group Thursday as Chrysler, its options exhausted, filed for bankruptcy protection. “I don’t stand with those who held out when everyone else is making sacrifices,” Mr. Obama said.” (The Lenders Obama Decided to Blame, http://www.nytimes.com/2009/05/01/business/01hedge.html)

Our President is fuming at a group of private bond holders who were tired of losing money and wouldn’t agree to the government’s terms?! The freedom of choice is a fundamental right of all investors.

And on the topic of sacrifices, everyone but our government is making sacrifices. Tell me Mr. President, how is spending $1.2 trillion in this years budget a sacrifice? How is passing a $3.5 trillion budget in 2010 a sacrifice? You praise Americans for cutting back, yet you are entirely offsetting the effects by spending trillions of dollars. Don’t you see the contradiction?

Either way you dice it, the Obama administration is repeating the same mistakes as they continue to get more involved in markets when they should be getting less involved.

In my view, the world is becoming more fragile by the day. This doesn’t mention further economic weakness in the pipeline between Alt-A and Option Arm mortgages, the commercial real estate market, as well as the geopolitical risk lurking around the world. All in all, this headache is becoming a migraine which doesn’t bode well for the future.

Jobs! "Workers Walk The Plank"

2009-04-28T07:45:00.000-04:00

If you haven't read this editorial, which showed up in the Times this morning, I think you should. It highlights a central focus addressed by our prior blogs and something that the administration in Washington should be emphasizing more than they are.

It also, in my opinion, properly lambastes Wall Street for the egregious bonuses that they are proposing for 2009 and beyond. Hell, the American public owns major chunks of these financial institutions; isn't it time that we started behaving like shareholders and put an end to this nonsense? I simply can't buy the argument that we need excessive compensation to keep "talent" (such as it really exists...let's get real, this isn't brain surgery) in place. For every Wall Street professional who gets balky about this, I guarantee you that I can find ten people who would gladly accept their position for 1/3rd (or less) of the compensation.

Here's the link:

http://www.nytimes.com/2009/04/28/opinion/28herbert.html?emc=eta1

And a more recent link (5/4/2009):

http://www.nytimes.com/2009/05/04/opinion/04krugman.html?_r=1&emc=eta1

In These "Interesting Times," I Want To Be As Optimistic As The Next Guy, BUT...

2009-04-26T21:00:00.000-04:00

NOTHING THAT THIS GOVERNMENT IS DOING, IS WORKING. This applies to other countries in the G20 as well.

Let's be clear here. I don't begrudge Obama and his team the efforts that they have exerted, but it seems to me that enough time has passed to allow a realistic assessment, broken down by current initiatives.

Finance and Banking

TARP appropriated $700 billion of which, roughly, $600 billion has already been spent. What has this produced? Easier credit? A stabilized residential real estate environment? A diminution in the number of "toxic assets" in the market? Unless you are a very poor test taker, you will already have guessed that the answer is e.) None of the above.

What has been accomplished is to spend $600 billion with absolutely no transparency, in a system whose own special inspector, Neil Barofsky maintains is especially vulnerable to fraud (http://online.wsj.com/article/SB123549501648160845.html). There are a handful of banks that have recorded a small (relatively speaking) profit for the 1st quarter but there is no disputing that these profits are artificially assisted by some pretty fancy accounting adjustments. And even the unprofitable Wall Street firms are getting ready to return to business as usual by larding up the bonus plans for 2009. If you don't believe me, chase the following link from the New York Times:

http://www.nytimes.com/2009/04/26/business/26pay.html?_r=1&emc=eta1

and just this morning, Monday the 27th:

http://www.nytimes.com/2009/04/27/opinion/27krugman.html?_r=1&emc=eta1

It seems inevitable that the President will ask for more bailout money for the banks and it remains to be seen what Congress will say about that. Maybe 1000 crooks catalyzed (but were not solely responsible for) the present mess and I hate to think that there are 1000 more thieves who are lurking (or operating) to line their pockets further. The bank scorecards that will be released next week are likely to be ambiguous and we really won't know the financial system's true state for months to come.

Automotive

That $$$ flushing sound just won't stop. Fiat wants to buy Chrysler, put in no cash, and use billions in American taxpayer money to support this...give me a break!? The senior debt holders are right; they are better off selling the company in pieces. GM is in even worse shape...I think we may end up naming May and June, "National Bankruptcy Months." The reality is that people who lose their jobs or think they might do so just won't buy new cars. The IMF projects that all major economies except for India and China will, in absolute terms, contract in 2009 and probably in 2010. India and China will show nominal growth but you have to consider that they are both way off their prior torrid paces. I suspect that we have only begun to see the beginning of job losses worldwide, and this does not bode well for car companies, Fiat, GM, Honda or otherwise. Without further ado let's just wait to see what happens in the next 8 weeks.

World Issues

What could be worse than the Taliban taking over a country that possesses nuclear weapons? I wouldn't let their temporary retrenchment lull me to sleep and I believe that the President, senior military officials, Hillary Clinton, et al are scared stiff about this possibility, and well they should be. One potential solution here is to move troops stationed in Afghanistan to Pakistan since if we lose Pakistan, then we won't be able to support Afghanistan anyway. Those nukes really bother me. Here's a NY Times editorial on the subject from Monday the 27th:

http://www.nytimes.com/2009/04/27/opinion/27mon1.html?emc=eta1

Domestic Issues

I am in no position to judge what is torture and what isn't or whether this treatment is appropriate given the circumstances. When I first heard the term "waterboarding" I thought that the CIA had come up with an ingenious method to lash a terrorist to a surfboard and drive him around a lake or something. In other, calmer times we could perhaps afford to engage in the inquiries that certain congressional members are itching for. But right now we have too many simultaneous initiatives underway to deal with far too many problems. If there is any risk that these so-called torture inquiries will distract from the other work being done and/or could cause national/international furor, then I think we need to find another way to deal with it.

Other Efforts Underway

Health care, student loans, the Middle East wars...the list seems to grow each week. I won't go into all this here but I strongly believe that you have to prioritize activities and that the Pakistan situation is priority #1. After that, the economy and getting people back to work again is #2. The rest can wait. And the answer certainly isn't always to just run the $$$ printing presses in Washington.

What Other (shoes) Will Drop in the Near Future?

Commercial real estate is in turmoil and billions (to put it mildly) are at risk. Transportation and lodging (airlines, hotels, rental cars) are getting killed. The print media is in trouble. Unemployment is poised to continue to climb dangerously.

As a rule, Americans are resilient and optimistic, and today's favorable polls reflect that spirit. I fear that if we continue to let these problems pile up, without making substantial progress quickly on a few, things might turn very sour, very quickly.

Another Scoop!?

2009-04-26T20:34:00.000-04:00

If you happened to catch today's New York Times "The Weekend in Review" section today you probably saw an article entitled, "No You Can't Get An Upgrade." Here's a link to that piece if you would like to peruse it.

http://www.nytimes.com/2009/04/26/weekinreview/26segal.html?_r=1&emc=eta1

What's interesting is that the author, Mr. David Segal addresses issues that are highly similar to those that we covered in this blog in a February 28, 2009 post. He even uses the word entitlement, albeit in a slightly different context...so our blog preceded his article by more than 2 months.

Now nobody over here (Chilleri, Ziegler, or me) is trying to be "Mr. Smarty Pants" but it seems pretty apparent that some politicians, elements in the media and others just aren't "getting it" in a timely manner. How hard is it to figure out that if, for example, new cars aren't selling, then the car companies worldwide are in deep trouble! After all, you can't save your way to growth...yet some institutions are behaving like ostriches and are doing a fine job finding plenty of sand with which to bury their heads.

In any event, if you haven't read the NY Times article linked to above, you might be interested to see what it says and if you want, compare it to the February 28 blog posting.

The G20 Meeting, Monetary Policy, China, et al by Team Member Tim Chilleri

2009-04-17T12:36:00.000-04:00

I don't agree 100% with Tim here, but other than grammar, spelling, etc. I do not alter or otherwise interfere with an author's thoughts and opinions. Well, here goes.

John A.

The G20 Meeting, etc.
By: Timothy Chilleri

The Fed and Treasury believe they are doing an admirable job resurrecting our economy, when in actuality both are prolonging and amplifying the pain. They repeatedly show that they do not understand our problems and are now pursuing the wrong solution.

Last week at the G20 meetings in London, President Obama reiterated our loose monetary stance while begging the world to loan us the money to finance our massive spending plans. Our numero uno lender is China of course who just days before the event asked the world to consider replacing the USD as the world’s reserve currency. While some would say this is an insignificant remark, I disagree considering they hold roughly $1T of our debt and can begin diversifying out of the USD at anytime, without anyone’s approval but their own .

As some of you may know, I am against government bailouts as well as nations bailing out their neighbors. While Obama tells the world “we’re in this together” more or less, the United States is largely responsible for the crisis. What we need is for the rest of the world to cut us off. We’re money drunk and the world needs to send us to Money AA. It’s incredible to think about. If you’ve taken 10 shots of liquor at a bar in an hour, the last thing you need is more shots. But that’s what we’re soliciting. In fact, we’re asking the bar to wheel out cases of booze and we’re convinced we can consume it all safely. Instead, we’re going to end up passed out or dead at the bar. And the same can happen with our economy.

Very recently Obama stated that the auto companies might have to go bankrupt. Once again, it goes to show that you do not throw good money after bad. How many venture capital funds would have delivered sub par returns or losses if they continually did not set the proper risk controls in place? This policy of simply throwing money at problems has set a dangerous precedent. Will we see a bounce in the short term? Perhaps, I don’t know. But this will only serve to harm our economy in the long run.

And one last quick point. I follow the CPI numbers very closely every month and they have ticked back up in January and February. While this is a sample size bias, let me remind you that we are going through the worst economic contraction since the GD. In 2008, the CPI was .1% which is very worrisome since the government rigs the numbers . This means that Bernanke has been spending lots of time down in the basement with his printing presses and he’s seeing how long he can run them non-stop. 2008 CPI number should have been negative, even with oil prices in the summer. We watched trillions of dollars go up in smoke and we still saw inflation? Yikes. Thus, the dollar could be in for a bumpy ride over the next several years.

In Case You Missed It, CBS's 60 Minutes Ran A Major Segment About Gun Shows On April 12th

2009-04-16T22:17:00.000-04:00

What is striking here is they just began coverage which we initiated on December 27, 2008, followed up on January 4th, and had in-depth on-site coverage on February 16th. Frankly, the latter blog is far more detailed that what 60 Minutes provided.

So by my calculations, our team scooped 60 Minutes by not weeks but by MONTHS, and we did (and continue to do) a better job reporting things like this.

We are out there watching the trends, making predictions and putting things into a perspective that is difficult for more conventional media to match, either with substance or with timeliness.

A bunch of attaboys go out to Kurt and the whole team.

Thanks

John A.

Sorry That I Have Been Off The Grid For So Long

2009-04-15T16:17:00.000-04:00

A little bout of serious pneumonia can do that to a person. Actually, it landed me in the hospital for three weeks and if I hadn't had intervention from a loved one (he personally saved my life) and some total strangers, I wouldn't be writing this today. Ultimately, I ended up getting a nice 6+ inch scar from the lung operation and I learned some lessons about randomness.

#1 My survival was an utterly random event. If I had been in other circumstances, I would be dead right now. This comes down to the timing of a professional hockey game among other things.

#2 The random selection of the University Hospital (University Hospital/New Jersey Medical School in Newark, NJ, a teaching hospital which is part of UMDNJ) saved my life (Team A.) Forget about the so-called emergency-room triage or insurance forms and the like...within 30 minutes after the crash cart hit the ER, I was already diagnosed and getting turned upside down. I'll have more about this fabulous institution in a little bit.

#3 It's where you fall that matters. I happened to collapse at Newark Penn Station. If I had been waiting by the tracks I may well have been on the tracks. Luckily for me, I broke down in front of a transit policeman in the main lobby who courageously refused to stuff me onto the next train to NYC and instead called EMT.

I also came to a few personal conclusions about the medical establishment.

University Hospital is a first-rate health care facility. They did everything in their power (and then some) to keep me afloat. Even the food was very good, although after 3 weeks, you might eventually get bored with the fare at Le Bec Fin in Philly.

Unfortunately I need to omit names here, but candidly, I cannot express how deeply I appreciate the treatment I received at University Hospital. They were exquisitely competent, and the "doctors-in-training" always seemed to be more than up to the task their mentors set for them. They tried like hell to accomplish their objectives without invasive surgery and worked for days trying to clear my lungs with techniques so novel that they really don't have an official name yet. When it became clear that I needed to be cut, the surgeon was so skilled that I sit here today, weeks later, and I haven't ever needed to take a pain pill except for the knee cap that I injured a little more than a week ago. As much as can be expected, the support staff, including nurses and assistants were helpful and caring. Finally, they put up with me and if you know me, you will acknowledge that that alone is a meaningful task. I am recovering, and I am happy that I am still around and able to write this.

So now I come to some conclusions about the medical establishment. The problem we face in this country and others, from my perspective, certainly is not the practitioner's fault. Once it used to be prestigious and perhaps lucrative to be a doctor. Now it seems to me, it is an unending, thankless sentence. God knows why all these young people want to pursue it and thank God that they do.

Nor do I think that the problem is with the infrastructure providers (hospitals et al.) Yes, drugs cost a lot but so does drug research. I spent days getting medicine without which the doctors would be powerless. If there is a bad hospital, then so be it; it should be closed or merged with a wonderful operation like University Hospital. There certainly are ways to measure a good hospital from a bad one...don't let anyone kid you about that.

The problem I believe is there is fraud, bureaucracy, waste and corruption in the system. Yet even with these built-in faults, an institution like University Hospital manages to deliver exceptional service and they revel in the fact that I am somebody who actually left the place alive; which means that they have the even more dubious distinction of having to treat terminally ill people...I personally wouldn't be able to do this...it would disturb me greatly.

I had only one roommate when I was at University Hospital and in watching him I learned about myself...he was much sicker than me and even at best, he would not be as much alive. Having seen that I would love to tell you that I treasure life so much more, but that would not be true...I now see life as an opportunity and not as a condition. If I can't do something that makes life worthwhile beyond my own being, then why bother? The overhead simply, using my calculus, doesn't make it worthwhile.

In any event, I now owe Governor Corzine a letter (which I will send out directly) expressing these feelings because University Hospital and the entire NJ medical system is facing huge and undeserved budget cuts...one letter won't make a big difference but a thousand might so please climb on board if you can.

And please be careful what you wish for...if you were looking for my next post you just got it!

:-)

More Social Unrest--An Update

2009-03-03T11:02:00.000-05:00

Yesterday the NY Times ran a front-page article which discusses why the Ukraine is teetering, and citizens there are on revolt's doorstep. If you want to read the article, copy and paste the following link into your favorite browser.

http://www.nytimes.com/2009/03/02/world/europe/02ukraine.html?sq=ukraine&st=cse&adxnnl=1&scp=2&adxnnlx=1236096001-DlU5emWlNIstjiufrAip9Q

As you may recall that in a blog on December 27, 2008, entitled, "A Not Too Rosy View of the World," among other things I suggested that it is almost inevitable that this will begin happening soon, and I also surmised that it may even hit the United States. The French had a major social strike in February, the Chinese are openly worried about social unrest and have mentioned it many times (how often have you seen the Chinese be "open" about things?) The WTO chief also has grave concerns.

I'm probably not telling you anything new, but it is often instructive to get the complete context.

A Few Snippets On A Sleepy Saturday--The Age Of Entitlement

2009-02-28T17:48:00.000-05:00

We'll hallelujah, Mr. Warren Buffett ("The Oracle of Omaha" heh-heh), America's financial cheerleader has finally decided that 2009 is going to be a rotten year, and maybe 2010 as well. This is the same guy that in the fall exhorted American's to "go out and buy stocks." Sure, I'll buy GE and Goldman Sachs if I can get a 10% dividend on preferred shares like he did. As for the rest, if you followed his advice, you would have gotten killed. For the record, his own firm Berkshire reported its worst results in history during Q4, and as a parenthetical note, 80% of his fortune was derived from fewer than 25 positions taken up during the last 50 years. More power to him, but my advice is that he should pay closer attention to what is happening to his own business...there are more bad quarters to come.

Greenspan wrote a book called, "The Age of Turbulence," which I previously mentioned that I tossed in the trash. If I were to write a book (don't worry, I won't) it would be called "The Age of Entitlement," which is pretty much ending now and may be the silver lining in this all-too-black cloud. For decades now, we Americans (and other countries too) lived an entitled life. The unions were entitled to ever more juicy contracts, my kids were entitled to the next new thing (my bad) whether it be a flat-panel TV or a new game machine or a thousand pairs of shoes. I had my own entitlements (again my bad.) Colleges like Harvard and Princeton were entitled to expand with reckless abandon, without lowering tuition one iota, and their professors were entitled to six+ figure salaries for what must certainly be the cushiest job in America. Teachers in local school districts, buoyed by ever increasing tax bases from real estate upticks were entitled to "no-cut" deals with unprecedented health benefits. Everyone was entitled to a house, and if you already had one, you felt entitled to either expand it or to buy a bigger one. Athletes in most sports were entitled to bezillion dollar sign ups, so much so that the NBA is borrowing $175M to try to keep various franchises afloat. I could continue this diatribe for quite some time but I am now getting physically sick just thinking about it. And in any event, I think you get the picture.

So what about this "silver lining?" Well, when you feel entitled to something, then somehow you just don't appreciate it for what it's worth. If you are sitting at a fancy restaurant table and the chef serves you a big, juicy and delicious hamburger, you simply gobble it down, burp a few times, pay the check and leave without another thought. On the other hand, if you are homeless and living in a doorway, and some kind soul presents you with an identical meal, that's a totally different experience for the unwitting recipient. There are many more examples, but I think this one is poignant enough.

As we lose our sense of entitlement, we move closer to the person in the doorway (literally and figuratively.) The things we have, the jobs we keep, our friends, hell, even our enemies become that much more meaningful. Without entitlement, we learn to appreciate life more, and we stand ready to live simpler, less consumptive lives. This has been coming for a long time in America and I call it "re-basing." And as painful as the current situation is, I don't think it's a bad thing at all. And I would happily spare myself the thousands of cosmetics (and other) commercials that have driven this rampant consumerism for decades.

Why I Hate Economists (Except Paul Volcker)

2009-02-25T14:10:00.000-05:00

Volcker gets a pass because he is a smart, hardass. The rest are wimps. Here's why I don't like them. They have unbelievable and unjustified influence on society and in government, AND their math is flawed. These are not brain surgeons and would get laughed out if they even tried to take the medical aptitude tests (which incidentally don't require any actual medical knowledge.)

Okay, if you don't believe me, consider the Long Term Capital Management case from not so many years ago. No less than two Nobel prize winning economists designed their trading strategies and asserted that what happened to the firm (a total collapse, losing billions) was a "ten-sigma" event. I'm not here to give a statistics lesson, but "10-sigma" is never supposed to happen in the history of the universe. That's about the equivalent of having a black hole eat up the earth. Bear Stearns was a "ten-sigma" event. Lehman Brothers was a "ten-sigma" event. Merrill Lynch was a "ten sigma" event. AIG was probably a "12-sigma" event, Citigroup is about to become a "ten-sigma" event. How many times are we going to have black holes consume the earth?

So all these things occurred. What's wrong here...did we get eaten up by a black hole (many times over) or was their math horribly flawed? Obviously that's a rhetorical question.

Here's the problem. The curve is a wonderful human invention, as is calculus, but neither describes the real world. Both presume that if you are on a certain trajectory (positive or negative), that this will continue.

The world doesn't work that way. We operate in fits and starts with wild oscillations being the norm...in fact, in nature, if you look close enough, there are no smooth curves, or even flat surfaces...everything is bumpy. (See Fractal Geometry for more on this.)

But the economists have developed their tool sets assuming that the curve is the supreme being. That's why they are wrong so often.

It scares the hell out of me that we have guys (economists) like Summers (who personally tanked the Harvard endowment...see an earlier post for this) and Greenspan (why haven't you hanged yourself yet?, again see a prior blog) and Bernanke running all this crap.

They do not subscribe to the theory I describe which has been eloquently detailed by N.N. Taleb in "The Black Swan."

We are indeed in a "turbulent time" as Greenspan entitled his book. His main mistake was in assuming that we were never in a turbulent time before...turbulence is part of the human condition.

Incidentally, I threw Greenspan's book, a carefully wrapped dust-jacket, first-edition into the trash which is the first time I have ever done something like this.

Geez.

If You Are Smart You'll Listen To Paul Volcker (and I Know That All My Many Readers Are Smart)

2009-02-21T06:59:00.000-05:00

According to him yesterday, "I don't remember any time, maybe even the Great Depression, when things went down quite so fast."

Volcker, arguably the most potent, poignant and successful Fed Reserve Chairman in history, who according to Robert J. Samuelson from Newsweek in his excellent and highly recommended book, "The Great Inflation and its Aftermath," worked with President Reagan to tame the most rampant inflation in this country's history, is visibly concerned.

From my perspective Volcker is nervous about two issues: (1) that things will get worse...much worse and further (2) that this worsening will cause unprecedented government intervention into our financial, societal and personal structures that will fundamentally alter the country irrevocably and irreparably (and not for the better.)

Volcker is known as an extremely private man but since he is a fellow New Yorker, I am going to try to connect with him to attempt to get him to share a few views with me, on the record, so that I can give you a bit more here...I know how to get in touch with him but whether he will meet with me is anyone's guess.

But unlike that idiot Greenspan, it has always been easy to peer through Volcker's rhetoric and I can guarantee you that he is extremely worried and perhaps he is even happier about his more advanced age (81) than I am....nobody like to see the crap hit the fan.

Film at 11.

A Quick Question--Who Ever Heard Of A 900 Page Business Plan?

2009-02-19T10:27:00.000-05:00

Well that's what GM presented to congress recently. Who is even going to read a 900 page business plan? It certainly can't be a useful road map for how executives are going to run the business in the future.

I think they probably only need a 5 page plan that discusses:

1. Going bankrupt so as to eliminate the crappy UAW contract.
2. Shutting down unprofitable brands.
3. Closing inefficient factories.
4. Moving existing inventory. I would give consumers a 3 for 1 deal. Buy the first car at sticker price and you get two more for free...it does not matter what models these are, let the consumer have 3 Cadillacs if they want them; or for that matter 3 SUVs. These cars are now rotting on dealer lots, storage facilities or they are rusting away at salt-water ports.
5. Furlough all workers (with some pay benefits) for as long as it takes to move significant inventory. So what if you're giving the public a three-fer...GM hasn't made a profit for years; they don't need profit right now, they need cash flow and if this program is successful it will cut expenses and deliver that cash flow.

There are probably a few more things you would want to write about in the 5 page business plan.

I secretly suspect that GM handed Congress this 900 page travesty so as to obfuscate the issues and confuse the Congressmen who are looking at dropping $39B more down the commode.

Gun Sales--From My Favorite Texas Reporter

2009-02-16T23:32:00.000-05:00

Last night on Fox News (north Texas) they did a 5 minute segment on guns and ammo sales.

According to the reporter gun sales are up 30% over the same time last year. The primary weapons are Glocks and "assault rifles". The reporter went on to cite that average shelf life of a Glock is a day and "assault weapons" is a day and a half.
.
He said that the concealed handgun license classes are full, ranges are expanding and that the gun stores can't keep the ammo on the shelves because people are stocking up.

He said that this run on guns is because of the "Obama. Effect". The people believe that Obama will try to curb their ability to defend themselves.

My only comment is that stocking up is a lot different from getting concealed hand gun licenses and shooting practice by people who never owned guns. It is fear ..... Or as they say in the south "fixin to get ready"

Welcome To The U(C)SA

2009-02-14T19:40:00.000-05:00

That's the United Communist States of America. This drop in the toilet $800B "rescue" plan will have no effect whatsoever on improving the economy. In the meantime, it is "bribe money" that taints anyone who accepts it.

Look at it this way. We have already nationalized all major banks (with more to come) an entire auto industry (Ford is next), the auto parts manufacturers have their hands out for $20B or so (they will then come under the thumb) mortgages (Fannie and Freddie,) student loans and the like. This nationalization will not end soon.

All this is in the name of "stabilizing the economy," yet "central planning is in full swing. If you as a company accepts this "bribe money," then you agree to have your local Soviet (oh I mean Washington) central planner attend your board meetings, set executive pay, even for those superlative executives like Jamie Dimon, and own major portions of your companies. Now I'm not saying that excessive executive pay is a good thing, but it is up to the shareholders to decide this and not the government. Shareholders have been like Bernie Madoff sheep to be sure, but it is their responsibility to be vigilant, (and incidentally, tragically, people are still killing themselves over the Madoff thing, the most recent calamity happened in the UK.)

We are all scared by this environment, but let's get serious, America has been through wars and much worse. A basic tenet associated with the current plan is a power grab by people who have never run a business before. If Detroit and Tokyo can't make desirable vehicles then let them rot. More nationalization is on the horizon and especially so if oil, as I predict hits $25 per barrel. Dubai, formerly a paradise is bankrupt, and the tankers keep rolling in.

We are now headed down the slippery slope past "European-styled" socialization to full-fledged government intervention into our lives. A respected friend and CEO says that he saw this in Italy 20 years ago and it took almost that long to get out of the trough. There are no more communists in Italy and maybe I have to move there soon.

Central planning is, has been and always will be a failure. It stifles innovation and makes people want to pull out their guns. But that's what we're getting these days from DC. They don't have nearly enough money to make a real difference except that they are exposing my 20-something year old children to debts that will probably never be repaid.

FDR wasn't a genius...the New Deal, according to many was a major fiasco; but WW-II got the factories operating again. Where can we look this time?

It's a terrible shame that maybe several hundred greedy people have thrust us into this condition. Folks are rightfully frightened; they won't buy cars, in fact, they won't buy anything and any check that you get from the government should be deposited directly into the safest place possible.

One ray of good news is that the government seems to agree with my maxim that "there is nothing worse than an empty house," so all these crappy mortgages, which were nothing more than highfalutin rental agreements are being treated as such, and there is an impending moratorium on foreclosures so that honest, hard-working people don't get thrown out as long as they pay a reasonable rent and maintain the properties.

I don't criticize the average mortgage broker because he/she was permitted to "sell $100 bills for $80," in that environment who the hell wouldn't go to town with that concept. But a system that allows the leadership (you name the institution) to have this persist, and which ignores the "long-tail" problem (basically, you get paid today, but bear no consequence for what happens beyond the artificial horizon) is fundamentally derelict.

We are nowhere near the end of this thing here, and I could give you so many calculations about how flushing $800B down the tubes (1) does nothing to improve the economy and (2) simply flushes $800B down the tubes, with serious adverse impacts on my young adults and others.

I am delighted that I am 53-years old. I used to wish that I was 23 but I no longer do...I hope that my shortened life-expectancy will put me out of my misery before the shit really hits the fan.

God this sucks.

JMA

This Is A Developing Story And One That I Have Presaged For A While Now

2009-02-09T05:12:00.000-05:00

Here's the link:

http://news.yahoo.com/s/ap/20090208/ap_on_re_us/meltdown_community_colleges

Here's another recent link that reinforces my observations:

http://www.boston.com/news/local/massachusetts/articles/2009/02/23/dread_is_rising_in_harvards_hole/

The point is that the famous name colleges like Harvard and Princeton, with their high price tags but equally prestigious names (and generous financial aid) will continue to see excellent application and enrollment figures as long as their endowments hold (dubious, see previous posts) so that they can continue to subsidize student acquisition.

And state universities for in-state students are still financially worthwhile. But for the expensive, smaller institutions that do not have a Harvard cachet, nor the financial wherewithal to make generous grants, my view is that they had better watch out.

Education is and always has been what you make of it. With $30,000+ price tags, in this dismal economic environment, many students may conclude that it just is not worth it to blow all that dough at a less famous, but only slightly less expensive school. And the money you save by choosing a more modest option can be very useful when you finish your undergraduate education.

In other words, you don't get a tangibly worse experience in a place like a community college, you preserve your alternatives (and your capital) and if you are a really assiduous student, you can get a great education anywhere.

With today's economy being in shambles, one thing strikes me as particularly imprudent. If you have a reasonable state university (most states do) with decent in-state tuition, unless you are getting a scholarship or extensive financial aid, why would you trade that for out-of-state tuition (sometimes double) at a comparable university in another state?

PS My son Rob was astute enough to find the following article at this link and I thank him for this research...you want corroboration, here it is:

http://www.forbes.com/2009/02/20/harvard-endowment-failed-business_harvard.html?partner=yahootix

Global Political Instability--I Guess I'm Not The Only One Who Thinks This Is Possible--Here Are Recent Remarks From The WTO Chief

2009-02-08T09:26:00.000-05:00

BERLIN (AFP) – The global economic crisis could trigger political unrest equal to that seen during the 1930s, the head of the World Trade Organization (WTO) said in a German newspaper interview Saturday.

"The crisis today is spreading even faster (than the Great Depression) and affects more countries at the same time," Pascal Lamy told the Die Welt newspaper.

Questioned about the risks of political instability, Lamy -- who wraps up his four-year term as WTO director-general in September -- responded that that was "the main danger".

"This crisis weighs heavily on politics and puts peace in danger," he said.

"Some democracies are old and sufficiently stable to overcome such problems, (but) others are going to be confronted by unrest and inter-religious and inter-ethnic conflicts."

He went on to warn against protectionism, saying it would be "wrongly easy" for nations to throw up trade barriers in response to the economic and financial downturn.

Launched in January 1995, and now with 153 member states, the WTO's mandate is to liberalise international trade.

I Have Not Much For You Today, Maybe A Little Good News

2009-02-06T14:12:00.000-05:00

For one, the NYSE may finally have bottomed, but I am not willing to bet the ranch (literally, Montana) on this. Companies have jettisoned expenses faster than a crashing aircraft loses fuel before it tries to land. But they are doing so by losing people. Of course, there are myriad other ways that they can reduce expenses, but firing people is always the easiest, first solution to this equation.

These job losses are astounding. Every day we read about major firms throwing out thousands (sometimes tens of thousands) of their workers. This is alarming to me and causes me great physical pain (I tend to internalize bad news...that's my issue, not yours.)

Where are these people going to get the money to survive?

The answer is that they are going to cut spending (which we have seen in spades) invade their personal savings, 401-K plans and the like. This will cause a ripple effect on the so-often chronicled crippled financial institutions.

Is there an Obama solution? I think not. It appears that the government is entering into "gridlock" which I usually favor, but in this case, "Houston (oh I mean Washington), We've Had A Problem."

We haven't heard much about the auto companies lately except that by March, some may very well be bankrupt..."film at 11."

My partners and I have been scouring the country for investment capital, and we have visited several large university endowments whose names we won't mention. Everyone we have spoken with in academia says that their endowments are at least 20% down...I don't believe it...this is akin to when someone asks you about your weight...they in my opinion are more like 50% down. If you doubt this, then access the University of Texas Investment Management Company site (UTIMCO) and look at their private equity investment performance...I'll make this easy for you...here's the link: http://www.pehub.com/wordpress/wp-content/uploads//utimcoactive.pdf

Now UT (with whom my partners and I have not spoken to, unfortunately, we would love them to invest with us) has one of the biggest endowments in the history of the universe and just yesterday their (unpaid, voluntary) chairman resigned in the face of withering criticism from the Texas legislature. What all this means, longer-term for higher education is anyone's guess, certainly not mine, but it can't be good.

You would think that trees are always worth a lot; after all they take decades to grow. Well the world's largest tree farmer, Weyerhaeuser with 6 million acres under management (do you understand how big an area this is? Here's the answer...this is more massive than any of the entire states of MA, VT, NH, NJ, CT, RI or HI) just announced that trees aren't worth more than 60% of what they were yesterday.

We have to get people back to work. The government can't do it, the financial markets can't do it and the only solution, in my opinion, is innovation and in creating a new entrepreneurial environment throughout the world.

Humbly and respectfully submitted.

Ps...here's an interesting article I turfed up about the US banking system...it's a fun read.

http://finance.yahoo.com/news/The-rise-and-almost-fall-of-apf-14286854.html

A Couple Of Weeks Ago I Reported That The Nobama Uplift Would Fail

2009-02-02T20:18:00.000-05:00

Well guess what; it is failing. Worldwide we are continuing to lose unprecedented numbers of jobs; by the day companies are reporting falling earnings; we switched from the "good bank bad bank theory" his appointments are getting hit with ethical transgressions; and so forth and so on. The stock market continues its inexorable decline. The government is touting that is is a willing employer which furthers the socialization trend that I have been writing about. Ford despite their stoicism will soon collapse. The Chinese just reported that they sent 26 million people back to their provinces...what the hell will this cause?

In the meantime, not a single new car is being sold, the boating industry is in a shambles, and this just goes to prove that this problem eclipses any single person in an executive position, including Obama, about to navigate these waters; and the last I looked, he talks a good game but is seriously lacking in navigational skills.

Ouch.

An update on 2/3/2009...nominees under fire...I count four thus far; this one being the most prominent...talk about navigation...with what you have to go through in DC to get even to this point, this crap is shocking.

http://news.yahoo.com/s/ap/20090203/ap_on_go_pr_wh/daschle_taxes

Also posted by the now (unfortunately bankrupt) Chicago Tribune (I grew up with that paper and read it every day:)

The Chicago Tribune opined that "Daschle is dispensable" and suggested that "to proclaim high standards and then suspend them exposes Obama to charges that he is either hypocritical or obtuse."

Calling Edward Smith (oops, the captain of the Titanic, I mean Obama) we better get this ship steered away from these icebergs.

I'm Starting To Move My Head Out Of The Sand Now...Aren't You?

2009-01-30T00:46:00.000-05:00

http://finance.yahoo.com/news/Ford-posts-146B-2008-loss-apf-14200493.html

Check this out...Ford STILL doesn't need government money. Give me a frickin break.

These guys will be in DC (Gulfstream or not) by April.

The D word is starting to be more effective now.

Have Fun...I Am

Here's an update from Reuters today:

http://finance.yahoo.com/news/Be-Wary-of-Fords-tsmf-14210587.html

Here's another update gleaned on 2/3/2009:

http://finance.yahoo.com/news/Ford-sales-drop-40-percent-in-apf-14237760.html

Social Strife

2009-01-29T04:45:00.000-05:00

http://news.yahoo.com/s/nm/20090129/wl_nm/us_france_strike

It has begun. I don't much like France or their ethics, yet I used to speak French flawlessly, amazing even French people; but it makes total sense that in the Western World, that they would be the first to strike (literally) out. We are next.

Whomever isn't following this is a pigeon and/or a fool.

:-(

This Next Post Is A Joke, Sent By A Texas Friend But I Couldn't Resist--Levity Is A Good Thing Any Time

2009-01-24T22:30:00.000-05:00

THE COUNTRY OF TEXAS

Please note that Texas is the only state with a legal right to secede from the Union (not true but funny nonetheless.) (Reference the Texas-American Annexation Treaty of 1848.)

We Texans love y'all, but we'll probably have to take action since B. Hussein Obama won the election. We'll miss you too.

Here is what can happen:

#1: Barack Hussein Obama becomes President of the United States , Texas immediately secedes from the Union .

#2: George W. Bush will become the President of the Republic of Texas .

So what does Texas have to do to survive as a Republic?

1. NASA is just south of Houston , Texas . We will control the space industry.

2. We refine over 85% of the gasoline in the United States .

3. Defense Industry--we have over 65% of it. The term "Don't mess with Texas ," will take on a whole new meaning.

4. Oil - we can supply all the oil that the Republic of Texas will need for the next 300 years. Yankee states? Sorry about that.

5. Natural Gas - again we have all we need and it's too bad about those Northern States. John Kerry will have to figure out a way to keep them warm....

6. Computer Industry - we currently lead the nation in producing computer chips and communications--small companies like Texas Instruments, Dell Computer, EDS, Raytheon, National Semiconductor, Motorola, Intel, AMD, Atmel, Applied Materials, Ball Miconductor, Dallas Semiconductor, Delphi, Nortel, Alcatel, etc, etc. The list goes on and on.

7. Medical Care - We have the largest research centers for cancer research, the best burn centers and the top trauma units in the world, as well as other large health centers. Dallas has some of the best hospitals in the United States .

8. We have enough colleges to keep us going: University of Texas , Texas A&M, Texas Tech, Rice, SMU, University of Houston , Baylor, UNT ( University of North Texas ), Texas Women's University, etc. Ivy grows better in the South anyway.

9. We have a ready supply of workers. We could just open the border when we need some more.

10. We have essential control of the paper industry, plastics, insurance, etc.

11. In case of a foreign invasion, we have the Texas National Guard and the Texas Air National Guard. We don't have an Army, but since everybody down here has at least six rifles and a pile of ammo, we can raise an Army in 24 hours if we need one. If the situation really gets bad, we can always call the Department of Public Safety and ask them to send over a couple of Texas Rangers. We're a state that has a legal right to go heeled and concealed too.

12. We are totally self-sufficient in beef, poultry, hogs, and several types of grain, fruit and vegetables, and let's not forget seafood from the Gulf. Also, everybody down here knows how to cook them so that they taste good. Don't need any food.

This just names a few of the items that will keep the Republic of Texas in good shape. There isn't a thing out there that we need and don't have.

Now to the rest of the United States under President Obama:

Since you won't have the refineries to get gas for your cars, only President Obama will be able to drive around in his big 9 mpg SUV. The rest of the United States will have to walk or ride bikes.

You won't have any TV as the Space Center in Houston will cut off satellite communications.

You won't have any natural gas to heat your homes, but since Mr. Obama has predicted global warming, you will not need the gas as long as you survive the 2000 years it will take to get enough heat from Global Warming.

Signed, The People of Texas

P.S. This is not a threatening letter - just a note to give you something to think about!

SLEEP WELL TONIGHT - THE EYES OF TEXAS ARE UPON YOU!!

That's One Nation Under God, y'all!

John Thain from Merrill Lynch--A Mini-Bernie Madoff

2009-01-24T21:56:00.000-05:00

This will be a short one. Mr. Thain, who certainly should obviously be more astute, pushed out $4B+ in bonuses before the BofA transaction closed. There is no one who should have known better than to avoid this behavior...he seriously breached his fiduciary duty to his creditors, his shareholders, the government, the taxpayer, the acquirer and such, in exactly that order. I expect that when NY Atty General Cuomo is done with this investigation, Thain will be facing serious penitentiary time, which he should. And I don't think his jail cell will be anywhere as nice as his office, or his commode, but it will probably at least have one.

Thain and his top lieutenants have attempted to cloak themselves with the notion that they themselves didn't benefit. But they tried to buy the loyalty of the thousands on Wall Street who have become hooked on year-end bonuses to stay with their firms. Well guess what, with what's going on in Wall Street, simply doing your job properly ought to insure that loyalty, and let's face it: Wall Street is BROKEN possibly forever.

Merrill Lynch lost billions of dollars in 2008 and hurt innumerable small-fry. The fact that they have triggered massive billions in bonuses should be investigated, and frankly, if this money can be recaptured via the doctrine of fraudulent conveyance, it should be.

Then we throw all these scheming bastards in jail and let them rot.

We'll see what happens...but that's my view.

And I will go toe-to-toe with anyone who disputes me on this. If I had done a similar thing at one of our small companies, my butt would be hanging by a rope.

Geez.

Here's a recent update on these issues:

http://news.yahoo.com/s/bloomberg/20090130/pl_bloomberg/assovtyss6g8

As I Reminisce, And Also About Microsoft

2009-01-23T22:30:00.000-05:00

In the late 70's, I was a young computer scientist working at Bell Labs...God those were heady days indeed and we created much including UNIX, C+, and all the trappings. My dream was to build HAL from the 2001 Kubrick movie...obviously this was never realized.

Then the government broke up the Bell System and in so doing, destroyed the most creative organization in history...Bell Labs...where inventions included Hi-Fidelity, the Laser, and the Big Bang primordial hiss among other things.

So IBM took the mantle. Then-CEO John (I want to change my first name now) Akers proclaimed that by 1990 or so they would have $100B in revenue; they never made it even half way there. Now IBM proclaims a great victory because they have exceeded analyst expectations, but they don't even make computers any more. The Chinese (also failing) bought the last remnants of the IBM computer business.

Now I used to work with the very highest levels at IBM, for many years, and I often remarked that they were the least creative organization that I had ever encountered; internal politics turned them away from the market. My prediction at that time was laughable but eventually came true. I invite you to visit me for a trip up the Hudson River (please bring the car, I don't drive any more) to places like Poughkeepsie, Fishkill or Myers Corners. Geez, for a time, Fishkill was the largest manufacturing operation on the planet. Now these are all ghost towns.

Microsoft so reminds me of IBM it isn't funny. Prove this to yourself. What was the last Microsoft product that you learned/bought? I know the answer already. Google is infinitely more creative, yet they too are in trouble because they didn't figure out that if people aren't buying things, that advertisers will eventually cut back.

The (sad) truth is that the world no longer needs more computers. We have more capacity than we can handle with computing, bandwidth and such, so all these businesses are suspect. We do need new applications but that won't help moribund Microsoft.

Now if I could only figure out why I sit here and write all this junk?

A Quick Recalibration

2009-01-22T22:33:00.000-05:00

It was just reported (this evening) that 60,000 Chinese businesses have been forced to close. For perspective, there are fewer restaurants in New York City than this (the estimate is 40,000), and they surely employ fewer workers.

What the hell do you think is going to happen now? I don't know but I would love to hear about it.

John@arrowpointventures.com

Who Knows What's Going To Happen To The Economy?

2009-01-22T14:10:00.000-05:00

I believe the answer is nobody, including me. Especially not the financial pundits in the media. One day oil is supposed to rise, and it falls; the next day the opposite happens. A month ago, BofA and Citigroup were going to be okay with the massive bailouts proffered then, weeks later we learn that both need tens of billions more to survive. A month ago GM said it could survive on the money already transferred and the additional sums that were promised. This week, their CFO says that unless they get even more money soon, they are toast by 3/31/09. One day the market is supposed to go up because we have a new messiah in the White House. The markets crashed in a record on Inaguration Day, picked up a little the next and are in a crash-cycle again. One day it's okay to massively pump (fake) money into the system and the next day the pundits warn that we face massive deflationary-inflation in the not-too-distant future.

Why is all this opinion-oscillation happening, I ask myself? And I believe that I have come up with an albeit simplistic, theory. Economists, pundits, government types and the like, adore "top-down" analysis because it is SO much easier than to revert to basic principles and to try to figure, at the core, what is really happening. Top-downers bombard us with so called facts and figures, that may express some information, but do nothing to illuminate root causes.

At the base of our "bottom up" pyramid, we have people, jobs and their basic human needs. I don't think anyone will question my assertion that job losses across the world have begun to reach breathtaking proportions...just today, New Jersey, famous for it's low unemployment rate crossed above 7%...and for reasons that we won't get into here, all these unemployment numbers are deliberately calculated to be lower than the real unemployment rate. I wonder if the nice lady that I give two dollars to each day on the streets of New York City is counted as unemployed or just, "not working." From a mathematical perspective this makes a huge difference and I don't care a whit about whether this nice lady would work if given the chance...she remains a burden on society nonetheless. Incidentally, China is even more concerned about this problem than we are because they have closed 10s of thousands of factories and sent the workers back to their original provinces. The Chinese government is extremely worried about social unrest to the extent that they have publically so stated. In what is a huge and sad irony, it appears that it may be better for someone to have never worked, than to have worked productively then subsequently lost that opportunity. Other countries may behave more civily for a while, but social stability depends on an employed and productive work force.

Let's move up a bit the pyramid to the consumer who is in a relatively affluent position thus far. Everyone I read seems to think that if we can get consumer spending restarted again, all will be well. I happen to disagree. First, as history has taught us, unemployed people don't buy things other than bare necessities. We can also factor in that in nearly every developed country, we have been through decades of prosperity, so we have already bought a lot of stuff. For example, when I was feeling flush, I purchased no less than 4 high-definition TVs for my various residences. I do not NEED another HDTV and I won't buy one at any price. Other signals for this abound across the world. Because we have had so many prosperous years, we have achieved sufficiency with respect to luxury goods, and we don't need the next greatest, newest thing; in fact, given the new economic realities, it might very well become chic to adopt a minimalist approach. Sony, arguably the most respected consumer-electronics company in the world (I'm writing this on a Sony computer now) has announced massive retrenchments.

Will consumers buy new cars, ergo, from anyone? Now we're into the manufacturing tier of the pyramid. My answer is no...there is no price dependency here. If you want a car, you can find ample examples of new or nearly new vehicles that are being sold at dirt cheap prices. But if you can fix your existing conveyance (I might want to invest in auto repair facilities) then why not go ahead and do so. A new car is as much a vanity item as anything else; those elements tend to fall away when the economy struggles. So I think there will be a worldwide shakeup among automakers that makes what the banks are going through right now look like a walk in the park. Already Chrysler (and I love my Chrysler products (a Dodge Charger SRT-8, et al)) is attempting to joint-venture with Fiat, of all companies. I am selling my pristine SRT-8 not because I don't like it, but because I don't drive much any more...anyone interested can send me an email.

Moving to the next level, people (and companies) need a place to live, but the real cost of ownership has grown so high, and credit availability is so low, that there exists the potential for decades worth of disruption. There is nothing worse than an empty house, retail store or factory. Yet that is what we are faced with and policy changes in this area will be important, which is to say, we must get back to the point where it is affordable to rent and in some cases, re-purpose these areas. When malls lose their anchor tennants, and if you've been reading Mr. Chilleri's reports, they most certainly are, then what happens to all the little boutiques that depend on that foot traffic?

Let's keep peeling this onion. The stock market, as an indicator for anything is a joke. Speculators, acting as "mini-hedge-funds" are distorting the fundamental market behavior. I hope and think these guys are making money in 10ths and 16ths, but stock market performance is in NO WAY a proxy for what is happening in America and abroad. Let's face it, compared with job availability, the stock markets do not affect the world's middle class as some would proclaim they do.

Ah, oil prices...we're near the tippy-top now. Pundits don't seem to want to accept that if the major users (manufacturing, the consumer, etc.) don't want oil, then oil won't be worth much. Well the manufacturers (as previously discussed) aren't making what they were, Americans at least, are driving a few billion miles less per year (AND unsold cars are more efficient, purportedly.) There are tankers with more than a hundred million barrels each that are out at sea waiting for demand in order to have them land. The major oil producing nations have for years held the world hostage to their output, and some have built virtual Shangri-Las with this capital. That era, in my opinion is permanently over and the oil producers will just have to live with it. Here's a good example. Southwest Airlines, for decades the most profitable (perhaps the only consistently profitable one) has lost money only in two quarters, the latest being the most recent. Airlines are supposed to make money when fuel prices are low and passenger count is high. Fuel prices are low now so what must that imply about passenger demand? With alternative energy on the rise (I personally find wind-power the most promising) I do not believe that we will ever see high oil prices again...just a guess, but it's my guess.

Let's move on to rampant deflationary-inflation. Anyone who dismisses this as a possibility is innumerate. We are rolling the printing presses like crazy, with nothing to back it. This is as if Saks or Macy's (or whoever is left) gave you an unlimited credit card, and you maxed it out. Either they would have to reduce the value of the goods they sold you, forgive your debt, or go bankrupt in light of the bad obligation. It sounds trivial, but that is what we are all doing in the world today. Without further innovation, improved productivity and an ability to forge new lifestyles using these tools, we are doomed for years to mediocrity. There is no "deus ex machina" operating here.

At the very top is leadership. I welcome the new administration but I pity their plight. In an environment such as we face, there are so many opinions, and it's hard to know which one, if any, to follow. And crises erupt so quickly and with such frequency that even the mythical HAL-9000 computer from the movie 2001 would have difficulty dealing with this. Ultimately, it's going to be "every person (family)" for themselves, and maybe that will turn out to be a good thing.

The NoBama Uplift

2009-01-20T11:27:00.000-05:00

I have been saying to friends and colleagues for weeks now, that the dismal economy is being buoyed by the coming inauguration. People somehow think the President can actually change what is happening to us. Well here's my opinion. The Obama uplift, which I had predicted might even last 30 days, is now over.

There are no easy answers and the public will soon realize that. Then the stuff will really hit the fan.

Unhappily submitted and still working on innovation.

Arrowpoint's New Website

2009-01-19T15:48:00.000-05:00

Nothing special...just 5 pages which describes us, and when we get a group picture, we'll put it on the home page. But if you are interested, you can visit, www.arrowpointventures.com.

I especially like the picture which is a DAWN and not a dusk...I took it myself while 50 miles out at sea at 6am. This is the sun RISING over the North Atlantic and not a setting sun on the West Coast...appropriate imagery I should add.

Thanks

John A.

A Little About Arrowpoint And Some Optimism Here

2009-01-16T19:10:00.001-05:00

At Arrowpoint we strongly believe that innovation is alive and well in America. As early and early-emerging stage investors, we canvass this country, and we see great technological progress in places like Winston-Salem, Atlanta, Raleigh-Durham, the Washington, D.C. area, throughout New Jersey, Denver, Boston and especially New York.

The Arrowpoint partners collectively have more than 60 years experience in the venture business, and we have in aggregate posted more than $2 billion in positive returns, earned through the decades, encompassing nearly every economic cycle from boom to bust. In fact, we happen to believe that many great companies emerge during difficult periods.

We are professional investors and we never forget that, but we also have first-rate credentials in starting and managing companies. With early-stage investing, it is important to empathize with the people we invest in; that’s easier to do because we have been in situations similar to those we have made investments in. And we have a 24x7 mentality, so we are always there when our companies need us; and we have many references who will attest to this.

Arrowpoint’s mission is to restore venture capital to its rightful position as an economic driver in the United States, which, incidentally, will also be lucrative to our investors, our entrepreneurs and us.

We are primarily interested in ideas that have a strong potential to improve a significant part of the world so we tend to focus on market size above all else. Arrowpoint’s partners are all technically and managerially strong, with extensive personal networks, but we realize that our former competencies are past achievements and not fodder for new invention, even though some of us are accomplished inventors. So we look to team up with talented people who are dreamers, as we are. Without the dreamers who have populated history, where would the world be now?

We also realize that we can’t know or do everything so we have some specific areas that we focus on. That includes, (but certainly isn’t limited to):

• Internet and eBusiness Applications
• Digital Media
• Business Analytics
• Medical (although not clinical) Technology
• Business Services
• Wireless Applications

Arrowpoint has a renowned advisory board, which we are willing to discuss in private, but out of respect for our friends who help us, we will not publish them on our website. We also have guiding principles that emphasize smaller (but not insignificant) fund sizes because we believe that early-stage investing, from a mathematical perspective demands this, a non-hierarchical organizational structure, and an environment that gladly tolerates dissent among our partners. We also treat our limited partners as equals by providing them with unprecedented transparency, and a nearly unique profit sharing program. At Arrowpoint, we think it is our duty to provide superior returns that go way beyond simply doubling the capital that we manage, and we strive to construct strategies that will do just that.

Arrowpoint also forms joint ventures with universities, financial institutions, other venture firms and such who are looking to either commercialize inventions, or salvage sub-optimal situations.

We are not in a hurry to make investments but we are very anxious about helping the world. If we do our jobs properly, as we know we can do, everyone will benefit.

How To Survive A Total Economic Collapse--A Post By Kurt Ziegler, A Friend And Senior Software Company Executive

2009-01-12T12:16:00.000-05:00

Through a somewhat circuitous path I came across this survival guide for Total Economic Collapse. The path puts even more credence to the guide in terms of what some feel about the press; our source of information about how our government is posturing to deal with upcoming unrest. It started all with a link to http://dailyinterlake.com/articles/2009/01/11/opinion/columns/columns01.txt regarding: A Sarah Palin vs. the Media: The rematch. It was really an editorial of how the press picked the President with biased/opinionated “positioning” but one of the comments in the editorial is about state national guard units had been federalized and that 20,000 US troops had been ear-marked to be deployed in case of 'unforeseen economic collapse' caught my attention. This gave me cause to do some research. It turns out that the comments were true.

The Washington Post December 1, 2008 reported the U.S. military expects to station 20,000 uniformed troops inside the United States by 2011 to help state and local officials respond to and assist in homeland security. The Pentagon’s plan calls for three rapid-reaction forces to be ready for emergency response by September 2011. The first 4,700-person unit, built around an active-duty combat brigade based at Fort Stewart, Ga., is already available to be deployed domestically.

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/30/AR2008113002217.html

This caused me to also Google "economic collapse" and it came up with How to Survive Total Economic Collapse. http://www.ehow.com/how_2130484_survive-total-economic-collapse.html in eHOW, a site that has no political agenda; it simply has explanations on how to do about anything you can think of including How to Apply for an Analog-to-Digital TV Converter Box Coupon

The 10 steps of Surviving Economic Collapse instructions are:

Step 1: Read. Educate yourself beforehand if possible.

Read everything you can on how to survive a total economic collapse. Start with "Financial Reckoning Day: Surviving the Soft Depression of the 21st Century" and "Empire of Debt: The Rise of an Epic Financial Crisis", both by William Bonner, for a historical perspective and very well-written analysis of the current situation. Also read "The Great Bust Ahead: The Greatest Depression in American History" by Daniel A. Arnold.

Step 2: Plan. Make a plan for how to survive a total economic collapse.

List your debts and assets. How quickly can you pay down your debt, while still purchasing necessary supplies? Your goals should include no debt and the procurement and storage of valuable assets. Your preparation timetable should be as short as possible.

Step 3: Nix debt. Pay off debt and avoid new debt by paying with cash instead of credit cards.

Concentrate on paying off high-interest debt, loans with adjustable rates and unsecured debts first. Sell expensive vehicles that have loans to pay off what you owe, and buy cheaper replacements using cash. In order to survive a total economic collapse, you need to have assets, not liabilities. (Note: storing food and resources are higher priority than paying down debt for families of modest means.)

Step 4: Buy Silver. Change liquid savings into silver and gold.

If the dollar collapses, having precious metals will preserve your money and it can be used as currency or can be exchanged for a currency with value, such as Swiss francs. As the dollar continues to lose value, silver dollars preserve their value or go up in value, thus protecting your assets in the event of a economic recession, allowing you to financially survive a recession or depression.

Step 5: Invest wisely. Re-evaluate your stocks and mutual funds.

In order to financially survive a total economic collapse, your investments must be secure. Consider putting some of your stocks into gold (GLD) or opening a precious metals IRA. Research stocks that will survive a total economic collapse through sites like Daily Reckoning Day.

Step 6: Store grain and buy goods such as guns for hunting and personal protection.

Purchase goods and valuables such as guns for hunting and personal protection, and basic food supplies such as whole grains and legumes, which are easy to store. Invest in water purification bottles and tablets, and keep some bottled water on hand to meet immediate needs in the event of a shortage. All of these will make it more possible to survive a total economic collapse.

Step 7: First aid.

Prepare a First Aid Kit, sewing kit and other practical necessities of daily life to aid in survival of a total economic collapse.

These are good things to have on hand anyway, for regular daily life as well as unforeseen emergencies.

Step 8: Build community.

Get to know your neighbors and build a community wherever you are. In the event of total economic collapse, life will become very local and survival will depend on working together with others, beginning with families.

Step 9: Grow food.

Grow some of your own food and raise animals for meat. Chickens and rabbits are small and easy to tend. Chickens provide eggs as well as meat and are excellent sources of protein and fat, both critical for survival. In economic downturns such as a recession or depression, being able to produce food is a important skill to have.

Step 10: Barter.

Learn how to barter, and stock items to trade. Think about necessities (wool blankets, soap, boots, duct tape, ammunition) as well as luxuries (chocolate, tobacco, alcohol). Useful tools will be more valuable than money if there is a currency collapse. Useful barter items will be helpful to have on hand as you prepare to survive an economic collapse.

Where Did All The Stores Go...Another One By A+ Student Tim Chilleri

2009-01-11T15:09:00.000-05:00

Where Did All the Stores Go?
By: Timothy Chilleri
10 January 2008

Circuit City, Boscov’s, Sharper Image, Mervyns, Linens ‘n Things, Whitehall Jewelers, The Parent Company (which owns eToys), and Steve and Barry’s; all have filed for bankruptcy protection. Starbucks announced last summer that they will begin shutting down 600 stores in light of deteriorating economic conditions. We all know the trouble facing Detroit and many financial institutions. Unfortunately, few seem to accept the economic realities as 2009 will likely be worse than 2008.

Last year, a financial WMD detonated in the United States (see “Christmas Past, Christmas Present, Christmas Future” for more details). The first wave of casualties were those on the front lines: home owners who purchased mortgages they could not afford, banks and lending institutions who foolishly lent out money to these unqualified candidates, Wall Street firms who sold and purchased various collateralized debt obligations (CDO’s), and institutional investors who purchased such obligations with little understanding of the real risks. They huddled together at the nucleus of the explosion as the government stepped in to hold together a shattered industry.

In 2009, the after effects will blow apart the remaining part of our tattered economy. Housing prices will continue to fall as supply is still outstripping demand and default rates will increase (1). Next up is retail which accounts for 70% of consumer spending. Christmas sales make up a mind numbing 26% of total retail sales. For all major retailers, Christmas is life or death. Sink or swim. In the black or in the red. Did anyone go shopping this Christmas and get bombarded with savings in every store? “Take an Extra 10% Off”, “25% Off This Week Only’, “50% Holiday Blowout Sale”, “Going Out of Business Sale: Take 80% Off Every Item in the Store”! While I consumers were delighted, did anyone really stop and evaluate the prospects for retailers?

I am 99.9% certain that holiday sales will come in well below expectations. Why so confident? A) Consumers were not willing to spend as much because they finally woke up from their coma to realize they have no money to spend on Nephew Nick and Niece Nancy. B) Everything was on sale! How do you think this is going to affect gross sales? Think of it this way, if a retailer had a 20% markdown on their merchandise, they would need 25% more volume to break even for the season. Did that happen? No. Why? Read A.
After studying more than 180 companies, AlixPartners, a restructuring firm, estimates that over the next 24 months there will be a fourfold increase in the number of retailers in deep distress; companies that do not have enough working capital or are unable to finance their debt. “Unfortunately, this is the new normal,” said Matthew Katz, a managing director at AlixPartners. “It's all about liquidity,” he continued, “what retailers are trying to do is turn their inventory into working capital and use that to fund the operation and to fund the debt load. And without that your lifeline is soft or gone” (Rosenbloom).

Earnings at US retailers will fall 20% this year, according to analysts’ estimates. The International Council of Shopping Centers in New York predicts 73,000 US stores may shut in the first half of 2009 after what may have been the worst holiday-shopping season in 40 years. That’s after about 148,000 stores closed last year, the most since the 2001 recession, according to the trade group. “You'll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains- either multi-regionally or nationally- go out,” said Burt Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York (“Grim Outlook for Profit”).
“I think you're going to see people giving back the keys and saying ‘We don't think the asset is worth the debt,’” Mark Weiss, president of McLean, Virginia-based JER Investors Trust JRT.N, said in a December interview. Commercial property values are falling after being propped up in the 2005 to 2007 period by lax underwritings and investors eager to boost paltry yields with risky debt (Yoon).
Once the terrible sales numbers are in, more bankruptcies will follow suit. On one hand this will leave a lot of people unemployed and on the other, thousands if not tens of thousands of empty stores. And who will rent them? No one. So, who else will go out of business? Failed financial firms, restaurants, tanning salons, travel agencies, and anything else of superfluous value (remember how we have been overindulging as a society)

The result will be a collapse in the commercial real estate market which will be more damaging than the residential one. Major projects in cities will halt (it’s already happening, eg, Las Vegas, Miami) leaving the unfinished buildings as a reminder of the collapse. Even where I live, Mohegan Sun casino has halted construction on its second major casino and hotel tower.
As the retail and commercial sectors break down, the credit card sector will be the next domino. Those who have been living off their credit card will not have the cash to pay everything off and some will default. Those who were smart enough not to get into debt will scale back and/or not use them at all. As a result, the credit card companies and all the related businesses and operations will be forced to pare back. The United States has about $3 trillion in debt (excluding auto and mortgage). I’m willing to bet that this will only add to the downward pressure of the economy.

Personally, I have a difficult time believing we can pull out of the recession in the next year. If our economy broadened during the major credit expansion era (arguably 1982-2008), won’t it shrink during a credit contraction? And to make matters much worse, we all know the most popular phrase in America will soon be ‘inflation’. When will it start and how high will it go? Who knows, late 2009, 2010 and once out of the bag, it will be much more difficult to control. As such, I see little light at the end of the tunnel.

(1) I am still unconvinced that the government can save distressed homeowners. Will lowering mortgage rates help? Perhaps, but with unemployment going higher and tighter credit conditions, home prices must still fall.

“Grim Outlook for Profit.” The Sydney Morning Herald. Internet. 5
January 2009. Available: http://business.smh.com.au/business-
/world-business/grim-outlook-for-profit-20090105-79y7.html.

Rosenbloom, Stephanie. Post-Christmas retail bankruptcies begin
In U.S. International Herald Tribune. Internet. 30 December 2008. Available:http://www.iht.com/articles/2008/12/30/busine-ss/3-0shop.php.

Yoon, Al. Commercial Property Loans Signal Deepening Stress.
Reuters. Internet. 6 January 2009. Available http://www.-
reuters.com/article/bondsNews/idUSN0643290720090106.

Christmas Past, Christmas Present and Christmas Future

2009-01-09T14:06:00.000-05:00

This new post was created by Tim Chilleri, a former Wake Forest student in my ESE302 class. I have taught hundreds of young adults and Tim is among the very finest young thinkers that I have ever met. I sponsored him as an intern at a company that I had invested in and he did a brilliant job there. Several days after Bear Stearns collapsed, he called me (it was a Saturday, and I wasn't feeling too well) and we spent two hours on the phone discussing the fact that we had just seen "A Black Swan." In any event, Tim volunteered his work which is most thorough, and which I very much admire...I don't think I could have produced such a scholarly piece. Here you go (and if you want to reach Tim, just email me.)

From Tim Chilleri:

Christmas Past, Christmas Present, Christmas Future
By: Timothy Chilleri
25 December 2008

Alan Greenspan should wear a gold medal everywhere he walks. It wouldn’t be a medal for distinguished service but rather, a mark of ignominy as he is the worst Federal Reserve Chairman in history. Luckily for him, his replacement, Ben Bernanke is anxiously trying to usurp him. You won’t hear this on CNBC or Bloomberg, but these men will be more despised than President George W. Bush once the full ramifications of their policies become evident to the public. Let’s see why.

In early 2000, the tech bubble burst, sending asset prices down dramatically. A year and a half later, 9/11 sent fear down American’s backbone and markets tumbled to its lowest levels in years. The Fed attempted to spur the economy by bringing down the key Fed rate; and it did, to 1 percent keeping it there until June 2004. Americans used this opportunity to take on more debt, either through refinancing to lower mortgage rates (and spending that saved money) and/or tapping into a home equity line. The move worked and the 31 consecutive months of negative real rates brought upon the housing boom. American’s were flying high and feeling rich. Their property value(s) was/were soaring, their stocks pushed higher, and all was well on the home front.

Then unexpectedly, the tide began to shift in August 2007. American Home Mortgage, one of the largest U.S. independent home loan providers, filed for bankruptcy after laying off the majority of its staff. Short-term credit markets froze up after a large French bank, BNP Paribas, suspended three of its investment funds worth €2 billion, citing problems in the U.S. sub-prime mortgage sector. The European Central Bank (ECB) pumped €203.7 billion into the Eurozone banking system to ease the sub-prime crunch over the course of three working days as The Fed and Bank of Japan took similar steps. That same week, Countrywide Financial, the largest U.S. mortgage originator, drew down its entire $11.5 billion credit line. Australian mortgage lender Rams admitted it also had run into a cash crunch. On August 17, the Fed cut the discount rate by a half percent to help banks deal with the credit problems. Within a month, it was disclosed that Northern Rock, the largest British mortgage banker was bordering on insolvency, triggered by a bank run (the first time this had happened in a hundred years) (Soros xiii-xiv)! The tropical financial storm turned into a Category Five hurricane as numerous giants began to topple: Bear Stearns, Fannie Mae, Freddie Mac, Indy Mac, Lehman Brothers, Merrill Lynch, AIG, Wachovia, and Washington Mutual. The tide went out and they were all caught with their pants down. But before we jump to conclusions, who is really at fault? In my opinion, direct blame lies on the Federal Reserve. Why?

Let’s put it an analogous terms: Say a kindergarten teacher walks into her classroom and delivers an enormous bucket of candy and soda to her students. She (stereotypical I know) instructs the children to keep working and she’ll be back in an hour. Do you expect the children to be idly working on their coloring books when she returns? Of course not, they are going to be swinging from the rafters, pushing over chairs, throwing paint all over each other while screaming at the top of their lungs. Now who do you blame here? The teacher who provided the means for this to happen, or the five-year olds who went willy-nilly with all the free candy? Naturally you blame the teacher. In this example the teacher is the Fed and the children are the banks and lending institutions. Think about it. You’re a banker. You wake up in the fall of 2001 with hundreds of billions in nearly free cash. What do you do with all these Benjamin’s? Sit on it and count crisp hundreds of dollar bills, or lend it out in hopes of watching your bonus hit seven figures?

The entire housing bubble and bust was manufactured and distributed by former Fed Chairman Alan Greenspan. He artificially suppressed interest rates to stimulate the economy. If he had let the natural free market work, we would have experienced a harder and longer recession beginning in 2001-2002 but am certain we would not be experiencing the current housing meltdown.

While banks and lending institutions do hold some responsibility for manufacturing exotic derivatives with huge leveraged risk (up to 35:1), you cannot expect them to idly sit on their hands. However, it is clear that these institutions held a prevailing misconception about market; that is, these securitized bundled “assets” were dependent on housing prices to rise.

This brings us back to Mr. Bernanke who on December 16, 2008 slashed interest rates to 0-.25 percent. Not only that, the Fed Chairman intends to leave interest rates at this level for “some time” to fight off deflation and is willing to print as much money as needed to stimulate our economy. In fact, on November 21, 2002, then Federal Reserve Governor Ben Bernanke gave an address before the National Economists Club in Washington D.C. The infamous speech which is now known as the “The Helicopter Theory”, Bernanke outlined a plan to avoid Japanese style deflation saying, “The U.S. government has a technology, called a printing press that allows it to produce as many U.S. dollars as it wishes at essentially no cost” (Wiggin 81). Scary? I think so.

I believe that the U.S. economy is a house of cards. Our economy is entirely predicated on credit expansion and without it we collapse under our own weight. 70% of our GDP is consumer spending. What happens when there is significantly less money to borrow and spend? We are a sustainable economy only if the rest of the world continues to lend us money. For the past several decades, we have shifted from a manufacturing based economy that produces and sells things to the rest of the world, to a service based economy in which we borrow money from the rest of the world, import the things we want to buy, and then send our borrowed money back to them. Does anyone see why this is a problem?

In my opinion, our day of reckoning is finally upon us. The rest of the world now realizes that there is no way we will be able to pay them back. The finance minister of India hinted as early as 2004 that they were reducing the amount of U.S. dollars it holds in its reserves. Soon after, South Korea made the same announcement. In August 2007 (the same time that the mortgage markets became unpinned), the central banks of Japan, China, and Taiwan sold U.S. Treasuries at the fastest rate in as many as seven years. In all, Asian banks have decreased its holdings of U.S. Treasuries by about $52 billion in the final summer weeks of 2007. Not a titanic sum considering they hold a little more than $1 trillion but certainly indicative of a trend, particularly since these countries are looking to stimulate their economies in the face of the current global recession . A few months later, the U.S. Treasury’s TIC data revealed that Japan, China, the Caribbean banking centers, Luxembourg, Hong Kong, South Korea, Germany, Singapore, Mexico, Switzerland, Turkey, Canada, the Netherlands, Sweden, France, Russia, Ireland, and Israel were all net sellers of U.S. Treasuries in September. The central banks of these countries will conclude that it’s smart to move their funds into other currencies, or to demand higher returns on their money (Wiggin 135-36).

There is little doubt that we are on the eve of destroying our currency. Individuals who think it is safe to hold U.S. bonds and/or currency are going to have no idea what hit them. Interest rates are now at 0%. Bernanke has made it crystal clear he is going to keep rates low and “add liquidity” to the system by buying all the stuff no private investor would touch. Where is it going to end? Recently, major developers across the country petitioned Congress for a $200 billion bailout. This is Socialism, pure and simple. More importantly, Bernanke is running the printing presses day and night to pump cash into this economy which will ultimately lead to massive inflation. This is an extremely dangerous precedent. Why?

Once the United States came off the gold standard, it gave the Fed complete reign over the money supply. And just like every other fiat currency in history, the Fed has lost discipline, printing money whenever needed. However, the Fed is very clever; they realized they needed a way to deflect or hide how much cash they were introducing into the economy.

The official rate of inflation is given through the Consumer Price Index (CPI). When more money is introduced than goods and services produced, prices will rise. So how is the CPI calculated? Each month, the U.S. Bureau of Labor Statistics (BLS) goes shopping, figuratively, by running around grocery and department stores, purchasing goods and adding it all up (Buchholz 22). The next month, they pick up the “same” goods and recheck the prices (you will understand why I put the “same” in quotations soon.) The delta or rate of change is the CPI.

While most focus on the CPI, it is an unreliable measure of the inflation rate. First, the BLS will purchase the “same” basket of goods regardless of price discounts, coupons, etc. Second, the BLS does not account for price fluctuations among products and substitute if necessary (Buchholz 23). For example, if you usually purchase fillet Mignon but lose your job, odds are you’ll begin purchasing hamburgers instead. Further, most forget that inflation is about overall prices, not just prices for a few items in the basket of goods.

Here is where the story takes a dramatic turn. The government began rigging the “basket of goods” in order to make it seem that inflation is low. Why? It turns out that the CPI was used to adjust Social Security payments annually for changes in the cost of living. In the early 1990s, press reports surfaced saying that the CPI was actually overstating the real rate of inflation. As such, it became costlier for the government to pay out higher amounts to retirees every year. So two financial “geniuses”, Michael Boskin, then chief economist to the first Bush Administration and Alan Greenspan, Chairman of the Fed issued some new directives. While the political uproar killed any consideration of Congress moving forward with the new changes (and rightly so), the BLS quietly moved forward with the changes under the Clinton Administration.

How did Boskin and Greenspan pull it off? Let’s say that Item A in their usual basket of goods goes up 14% over the course of a given year (the BLS finds that number unacceptably high). Well, instead of using the “same Item A”, they substitute “Item A” for “Item B”, which only went up 3%. Thus, they are able to wipe out an 11% increase in the price of goods by pure substitution.

Second, they use a term called geometric adjustment. Say one item in their basket of goods is a chocolate bar whose standard weight is one ounce (28 grams). If the price rises more than the government likes, they simply “adjust” its geometric properties, using only 24 grams, instead of the usual 28 grams. If the price of an item drops, they add “properties” to it reducing inflation further. And just like that, inflation isn’t all that high after all!

So, if the government is rigging the inflation rate, can’t we look at the money supply to truly see how much money they’re printing? The money supply consists of several measurements: M1, M2, and M3. The M1 consists of coins, dollar bills, and checking account deposits and are all added up. To calculate the M2, the search for money is expanded to include the M1 plus savings accounts and small CD’s. And lastly the M3, which is the M2 and includes large CD’s. So by looking at the M3 number, we can accurately see how much money is in the economy and how much more is being added correct? Well, that is now an impossible number to obtain because after March 23, 2006 the Fed stopped publishing the data! This is most likely the case because they are too embarrassed to tell the public how many dollars are actually sloshing around the world. What does this all mean? It tells me that there are massive inflationary pressures coming down the pipeline.

Now getting back to Bernanke and Paulson, they said the economy was robust and flexible a year ago. If they believed the economy was so strong then, does it mean they didn’t know what was going to happen? And if so, are they qualified to steer us out of this crisis? It’s clear that they didn’t understand the problem and now they’re pursuing the wrong solution. So the question ultimately becomes, will the government change the policies, eg low interest rates, printing money, bailouts, and stimulus packages that will only serve to hurt our economy? I don’t know. I hope so, but the longer we stay on this course, the harder it will be to stop in the future. If our government isn’t willing to deal with the problems we face now, why would they deal a problem ten times its size in the future?

If you follow mainstream financial news, you will hear all sorts of theories as to why the United States isn’t in that bad of a position relative to the rest of the world. They will cite things like we were the first ones into the recession, so we’ll be the first ones out. Well, why? They say things are so much worse in other countries (with no empirical evidence) and/or we’re the engine that drives economic growth which is no longer true. Go look up the yield on the 30-year Treasury bond. As of Christmas Eve, it’s paying a dismal 2.633%. No one in their right mind is actually buying a 30-year note with the intention of clipping coupons for the next 30 years collecting 2.6%. For all we know, the only buyer in town is the Fed as they are attempting to suppress short term interest rates. In fact, I hold the belief that foreign central banks are selling their bonds back to Fed and taking the dollars they receive and dumping them into foreign currencies. Just take a look at Treasury prices and foreign currencies. Treasury prices have risen (remember that bond prices and yields are inversely related) while the dollar has dropped against every major currency pair since the dollar rally ran out of steam .

This is a very important moment in our history and it is time to make some very important decisions about your financial future. What risks are you willing to assume? Are you willing to see it out that the Keynesians are right? That the inflationists are right? Are you going to trust your wealth to central planners; to Socialist and Marxist ideologies? If you have faith in these ideologies, I recommend holding your wealth in U.S. dollars. But if you believe in free markets, capitalism, in the writings of Adam Smith, and the founding fathers, you need to get out of U.S. dollars and you need to get out now.

Every time you hear the word economic stimulus or bailout, you need to associate another word with it, such as annihilation, destruction, and/or obliteration. Every single time the government bails out another industry we are simply amplifying the longer term pain. President elect Obama has recently said that he plans on pushing through a New Deal style stimulus package. He somehow seems to forget to mention that we are completely dependent on the willingness of foreigners to supply the necessary funds. In light of an ever weakening dollar, it makes foreign governments much less likely to purchase Treasuries. For example, Obama wants to work on is our infrastructure to build new roads and bridges. Now let’s think about this from an individual perspective. Say I’m $100,000 in debt and I go to a credit counselor. I tell them my issues and they say, hey, you know what, why don’t you finish your basement. Yeah, wouldn’t you like a two more guest rooms, another living area, and bathroom? And you say, of course but how is that going to get me out of debt? And that’s exactly what these politicians are saying. Building our infrastructure isn’t an asset, it’s a liability. We can’t put these roads on an eighteen wheeler and sell it to foreign countries.

So what’s the moral of the story here: the government and Federal Reserve are not letting the free markets operate. The market wants to fix itself but cannot. I do not know when these inflationary pressures will be released out of the bag. I just know it will and when it happens, the tsunami wave that follows will destroy everything in its path.

Buchholz, Todd. From Here to Economy. USA: A Plume Book, 1996.

Soros, George. The New Paradigm for Financial Markets: The Credit
Crisis of 2008 and What It Means. New York: Public Affairs, 2008.

Wiggin, Addison. The Demise of the Dollar…and Why It’s Even Better
For Your Investments. Hoboken, New Jersey: John Wiley & Sons, Inc., 2008.

(1) Remember that sub prime borrowers were the first victims of the credit crunch. This occurred because the low teaser rates offered by banks and lending institutions ended after a two year period and the borrower’s mortgage rates ballooned. This is extremely indicative of what is about to happen as many standard teaser rates (non-subprime mortgages) which go up after five years. The reason why the Fed cut rates to effectively 0% on December 16, 2008 is because they are attempting to drive down mortgage rates. Why? Because these higher rates are about to kick in for many U.S. borrowers and the Fed is terrified these people will default. The Fed is attempting to lower mortgage rates so these borrowers can re-finance at lower rates so housing prices will not crash (this is going to happen regardless of government intervention as you cannot fool free markets!)
These countries have been saving up U.S. debt for a rainy day. Now that rainy day has finally arrived. When China wants to spend hundreds of billions to stimulate its economy and decides to sell U.S. Treasury bonds back the Fed, how will the Fed pay for it all since we’re broke? No worries, Bernanke can use his favorite toy, the printing press.
The artificial dollar rally from July through the end of November was pure trading: it was because of financial deleveraging, a reflexive flight to “safety”, speculation, and momentum. None of it had anything to do with market fundamentals.

Bernie Madoff Corporate Sociopath

2009-01-08T12:31:00.000-05:00

I have read dozens of articles about what Madoff did, about those who were affected (including those killing themselves) and about the small fry who got hurt. I have also read about SEC investigations and the like. What I haven't read about yet is why he did it.

In the spirit of full disclosure, I too am an investor and I have lost money, but thankfully, have made far more than I have lost. In the few cases where personal friends and such were involved in a loss, I have made full restitution from my own funds and/or I am still trying to do this even though I have no such obligation to do so. Why do I do this? Because I have a conscience.

The definition of psychopath (sociopath) is amorality...ergo, no conscience is possessed by the perpetrator. Back in 2003 the NY Times and the BBC ran articles about psychological studies that demonstrated this phenomenon--the corporate psychopath; you can Google these articles if you are interested.

Now I have to be clear, I (gratefully) wouldn't know Madoff from a hole in the wall. And I have enormous sympathy for all who lost money with him. But the large institutions with the wherewithal to conduct due diligence and the ability to survive the losses were merely playing the tables at Las Vegas. My heart really pours out to those small fry who have lost entire life savings and are now, at advanced ages, forced to try to compensate. The chances are that they will never recover. AND WE HAVE PEOPLE KILLING THEMSELVES OVER THIS THING!

Why did Madoff do it? This interests me greatly from a personal and academic standpoint. After all, if you steal a million and get away with it, then why continue? Or $100 million? But at $50 billion and counting, there has to be a better explanation than pure greed. My supposition (not yet covered in the press) is that Madoff is a corporate psychopath (sociopath) who went on a lengthy financial killing spree at the outset. After he risked exposure, he (as my students have heard so often) then settled into habituation, which is to say that he did it again because he was able to do it before.

But he acted not alone. There must have been hundreds of "investment advisers" who attempted to steer the poorer small folks towards Madoff, and while it may be comforting to think that they were just trying to help their clients out, you better believe me, they got quid pro quo for this activity. The evident disclosure lapses by all involved compounds the matter.

So is Madoff a scumbag? The answer is unequivocally yes, and he is a sicko scumbag to boot. But let's not forget his aiders and abettors who used "apparent scarcity" to entrap their victims.

The truism is that if it looks too good to be true than it is. That applies here in spades. For those who would like to understand that the world works in oscillations and not smooth curves, I would recommend reading "Fooled by Randomness" and "The Black Swan," both authored by Nassim Nicholas Taleb.

Respectfully submitted.

VW Acquired by Porsche--Another Sign of the Times

2009-01-06T21:18:00.000-05:00

This is a quick one. In a delicious irony the Volkswagen Company (the people's car) designed by Ferdinand Porsche, and commissioned by Adolf Hitler is being bought by the Porsche company, which makes high-end autos (I've owned several, they are wonderful but not the best.)

What better way to express what is happening today. A high-end automaker is rescuing the people!? Or the rich are helping out the poor. Bernie Madoff is next on my list.

Guns In America--A Current Report

2009-01-04T11:34:00.000-05:00

As I have been discussing throughout this blog series, with the economic situation deteriorating steadily, I surmised that things might begin to get a little chaotic from a social standpoint. One indicator I proposed was the rise in gun sales in the United States, and presumably elsewhere, where they may be legal. So I have a very good, astute, observant friend who as a hobby monitors personal and business security developments, this includes attending gun shows which include personal defense weapons ...he lives in Texas and these shows are apparently quite popular there and to my surprise across the country. So I asked him to be my "reporter on the scene" and let me know what is happening at these shows. His first report follows my comments, but let me say that I do not encourage firearms ownership, but I don't condemn it either. If responsible, properly-accredited, law-abiding citizens want to legally exercise their Second Amendment right, that is just fine with me. So here's the narrative:

More cannon fodder ….

There was a Gun Show in Dallas today … this by itself is not an unusual event, there are about 16 such events in the Dallas/Fort Worth Metroplex a year, however, the fact that there was a constant fast moving 35 minute long line to get in was. We are talking about a constant line of 250+ people. More than 4 thousand people were in within 2 hours of opening. In contrast, I have never waited in line for more than a 5 minutes to get in for this particular show. The folks were going in buying and leaving, there was usually little “window shopping” or “browsing” . It was a demand driven environment. The sellers were getting the asking price, also unusual. Some tables were are already depleted of ammo by noon. Hand guns and para-military semi-automatic weapons were being purchased at an unusual pace.

Perhaps even more interesting, the people weren’t the normal gun show diehards. There were a lot of Joe and Sally averages. The buzz in the line was “Obama was going to come down on the ammunition and guns” and they felt that they had buy a weapon or stock up with ammunition and reloading supplies. Unspoken but obvious from the people purchasing guns inside they were getting something for self defense. The purchase of the firearms were expedited with a phone-call “check-out” (instant background check) for those who didn’t have a Concealed Handgun License. No two or three day waiting to pick up the firearms. Bunches of people who had obviously never fired a gun walked out with an under $300 hand gun and ammunition.

Here is some similar coverage from a show in Tennessee Dec 26thhttp://www.volunteertv.com/news/headlines/36762344.html the video says it all. The Dallas show had even more activity.

By the numbers

A few statistics about gun sales in the United States since Barack Obama was elected president in November:

During election week the number of background checks for gun purchases was up 49 percent, compared with the same week in 2007, the FBI reported.

There were 15 percent more gun background checks for October of this year, compared with October of 2007.

Statistics on national instant criminal background checks show that 374,510 people purchased a handgun or long gun during the first week in November, compared to 251,804 during the same week last year. This is a 48.7% increase! That month the FBI completed more than 1.5 million background checks in November, a 41.6 percent increase over November 2007.

The D-Word

2009-01-02T14:19:00.000-05:00

For a recent addendum to my theme presented below, please follow the link below to read Paul Krugman's excellent article on this topic, published today, which I think follows my reasoning very closely: here is the full article link:

http://www.nytimes.com/2009/01/05/opinion/05krugman.html?_r=2

the shortened link (from Yahoo) is:

http://finance.yahoo.com/tech-ticker/article/153165/Krugman-Fed-Can%27t-Save-Us-from-Great-Depression-II?tickers=gm,tm,^dji,^gspc

The only salient thing that Krugman ignores in my opinion is that rampant money printing must eventually result in super-inflation.

Here are my comments:

Most political and economic commentators are very reluctant to use the word Depression in their description about the world today. They point to the fact that in the Great Depression, unemployment was 20% or more, and I dread this, but we may get there, and we are nowhere near that now. What they don't calculate is how inter-connected the world economy has become, and how the public's responses have changed. And honestly, how you can actually calculate unemployment...back then, nobody cared in this country about how many people in India were out of work.

So first, I'll give you three personal anecdotes. My maternal grandfather worked for Buick in what was then a lovely town called Flint, Michigan. My mother (long since deceased) used to explain that she hardly knew anything was wrong...her dad went to work every day. Well there is about to be no more Buick and probably no more Flint.

My mother-in-law grew up in a family in Clifton, New Jersey and they had a little land there (a few acres.) Her father was very handy, ergo was constantly employed, and when the crap hit the fan, he decided to build a chicken-coop and stock it with chickens, rabbits, and other small wildlife that could provide sustenance. They also farmed their small estate for vegetables and other foodstuffs and so they never went hungry. As my beloved mother-in-law (an oxymoron for most) tells it, strangers would show up at their doorstep to be fed, and feed them they did...they had it to give out, and so they could afford this generosity. Compare this with this present situation that not only can't I build a chicken coop in West Windsor, New Jersey (it is against the law,) but also, it is unlawful for me to drill a fresh-water well to water my lawn or fill my now-defunct swimming pool. Besides, I wouldn't know how to deal with a chicken or a rabbit as far as food procurement goes. Our present society does not have the "self-help" alternatives that were available in the past. Nor do we have the independent agrarian base that we had back then...the food companies are either giant conglomerates or cooperatives...the small fry has been squeezed out. If people can't eat, they can't survive, and this a major difference between now and then. And if they can't survive then they revolt...this is true throughout history.

My third vignette involves my own family and my father who grew up church-mouse poor in Chicago despite the fact that his own dad arguably invented the modern super-market and was making big bucks (which he subsequently lost (that's another story about why you shouldn't tolerate nepotism)) in the early 1900s. My grandmother made her children clothes from what today would be considered scrap material. In fact, among my most prized possessions are the patchwork quilts that grandma made from old dresses that I remember her wearing. Who the hell knows how to make a quilt these days?

So here we are, and (1) We have less control of our destiny because while our sophisticated skills are more attuned (trading, blogging, writing computer programs, etc.) our basic skills have eroded to the Dark Ages. Who knows how to sew their children's clothes...I don't, do you? (2) How many people know how to grow a tomato or kill a chicken, or even how to find one to kill?

Okay, so there's more. We were not as inter-connected then as we are today. The big rub against America back then is that we were Isolationist. There is a wonderful book that I read (and often re-read) published more than fifty-years ago by David Potter, called "People of Plenty," and written in 1954 it presaged all our responses to crises...we would just find more resources, and Professor Potter warned against this mentality. As a young math-philosophy student at Columbia University, I embraced this way of thinking and I still endorse it today. The issue here is that it is no longer possible to be isolationist. Someone has to work with all the various factions to coordinate efforts, or like a dysfunctional team in any sport we will all fail.

Finally, the "herd-mentality" got us to where we are, it will keep us here or it will tank us further. Unless innovative thinkers like my partners and I keep hammering on the ultimate truths, then we will lack the courage to seek, perhaps unusual, but ultimately effective solutions.

Respectfully submitted.

John A.

Some Suggestions

2008-12-31T08:11:00.000-05:00

My colleague, partner and friend Rashid Ashraf excellently suggested that while I am wailing away at how bad things are, that I should equally try to provide some answers, insight or at least approaches. I think that Rashid is spot-on right, so let's review the situation in another light.

1. If we are going to socialize, and it appears that we are long down that road, let's do it the right way; admit it, and get on with it. What that means is that if we give money to banks, they need to be accountable to the taxpayers who have, ultimately, provided this funding. Whoever we give money to needs to adhere to the same standards...we can't have a quasi-capitalist system...either this is social support or it isn't, and if it is, then information must flow freely.

2. The car companies, worldwide, need to start consolidating; meaning merger, and whatnot. How many factories do we need anyway? What's more, Rashid's astute observation is that GM et al have to liquidate their inventory even if this means virtually giving it away. This will generate cash, reduce government responsibility, possibly help stimulate the consumer economy and so forth. Zero percent interest, as recently reported doesn't do this because of all the hidden costs associated with new car ownership. 2 for 1 programs would be far more effective. Let's admit it, the new car inventory is a declining asset so whatever you can get for it is better than what you have now.

3. Bankruptcy is not the "f-word." The car companies for one, should embrace this so that they can repudiate their disastrous labor situation...airlines have been doing this for years. The lame excuse used thus far is that people won't buy a car from a bankrupt company. Well guess what, right now people will not buy a car from anyone.

4. We should immediately halt ALL real estate foreclosures, again in the spirit of socialism (and I hate this concept, but it is, in my view inevitable.) This means than any residential or commercial owner/lessor who is willing to pay a reasonable, market-adjusted rent should be allowed to stay in the property. There is nothing worse than an empty house or factory...when and if things realign, these rent payments should be credited to restoring the equity positions. The residential problem has been detailed ad nauseam in the press...the commercial problem hasn't hit us yet but it will soon.

5. Pro activity is a virtue and we should use it mercilessly. For example, forget about health care in general...hospitals all over the country are about to go bust. Let's get on top of that one before we have to enter reactive mode again and run the Monopoly printing presses again.

5. In the same spirit as #5 above, we have to start planning for hyper-inflation, which is the ultimate consequence that attends printing Monopoly money. If we get on this problem right away, we may be able to abate it somewhat. Ideas include privatizing public properties, possibly even including the national parks. Hell, the Garden State Parkway is up for sale so why exempt Yellowstone?

6. We should pay people extra to work more years. In order to alleviate the growing Social Security problem, why not have a "tax-free" zone wherein, under a certain earnings amount (I have not studied numbers enough to suggest a threshold) whatever you earn beyond, say, age 55, is tax free, as long as you don't draw on your SS account.

7. The United Nations is an obsolete, derelict organization. Disband it and in its place install a World Government Organization whose goal is to coordinate information exchange, and police world affairs. The point is that the Arabs (and Russia) need to realize that oil may hit $25 per barrel soon, and that there are worldwide repercussions to this. China needs to understand that people are going to be buying fewer things, and by the way, please stop being the major polluter on the planet...then the rest of us can stop spending all this money to Greenify things. Oh and India, education doesn't guarantee a job. Europe, vacations cost money, you don't get them as generously as before. Finally, in the USA, the message is get your ass out of bed (as I have to tell myself every day) go to work wherever, and innovate the crap out of whatever you do.

8. The only thing in my view that will save us ultimately is innovation. Already people are talking about MSFT, GOOG and YHOO being the next "Big Three (except there's no way the government will bail them out.") This is because they have long ago stopped being innovative...ask yourself this...what was the last MSFT product that you learned? I already know the answer. And like IBM before it, when people stop buying computers (as they have done, just like cars) the "guaranteed" income disappears.

9. My partners and I have (crazily, perhaps) rededicated ourselves to restoring innovation in America. Maybe we should move to Switzerland or Ireland instead (and maybe we will still do so, it is a legitimate option for us) but here we are putting out this stuff for your perusal.

Thanks

John A.

As I Have Been Saying For Some Time Now

2008-12-27T18:18:00.000-05:00

We are no longer a capitalist country. We have been becoming socialist for quite some time now...first with the finance industry, then the automakers and now, even with the infrastructure.

The Western-styled world will follow suit...Japan is first in line.

If you want proof...follow the link below...who would like to buy the Garden State Parkway?

:-(

http://news.yahoo.com/s/ap/20081227/ap_on_re_us/meltdown_selling_assets

Alan Greenspan

2008-12-27T15:34:00.000-05:00

Why doesn't he hang himself? If I were him I would have done so months ago. I keep waiting to read about this and it just hasn't happened yet. Nevertheless, he shepherded the most disastrous fiscal policy in human history...yes that's right...IN HUMAN HISTORY. What a flaming arrogant intellectual he must be. He robbed in one day what it took Bernie Madoff 50 years to accomplish. Yet Madoff's victims are killing themselves, while Greenspan's are still going to fancy New York restaurants.

GOD this sucks.

JMA

Things Are So Bad It Isn't Funny

2008-12-27T13:19:00.000-05:00

Here’s proof:

Who the hell would fly into DC on a $40M jet to ask for a multi-billion$ bailout…would that even cross your mind?
We have job losses that are unprecedented.
Mayors are warning the public to arm themselves.
Ammunition is flying off the shelves faster than it goes on…this has nothing to do with Obama…and everything to do with social-stability as my NYC acquaintances are loathe to admit.
I have original research that demonstrates that morals erode exponentially when the economic foundation caves.
The press is underplaying this severity, although US News is beginning to get the picture.
The big 3 automakers will fail—if we give them $34B we will just be flushing that down the toilet. Every carmaker in the world is in trouble—the most efficient and the least efficient—who the hell is going to buy a new car right now?
Nobody understands that in the United States, there are more guns than people (registered+non) and that this is isn’t distributed proportionately. For example, in Michigan, Ohio, and Indiana (hardest hit by the auto debacle) there are more guns than people.
Real estate, long a bulwark of the US economy, is in trashes, and is eroding net worth by the second.
Oil is below $50 per barrel which some welcome, as I do, but it will hit <$30 before 2009 ends and this will destabilize economies like Russia (the #2 producer), and this will have a global impact.
Retail sales, bricks and mortar and online suck and will continue to do so for a long time to come. Retail health has buoyed our economy for longer than it should have.
The Fed Chairman (the man behind the curtain) manages to use the phrase “Great Depression” in a seminal speech…why would he make such a comparison if it weren’t on his mind?
Restaurants are empty in NYC except for those that cater to the ultra-rich…I can attest to this first-hand although I do not frequent those beyond my modest surroundings. My minority interest in a Cupertino place, right across from Apple, isn’t worth shit right now even though it has paid me the original investment each year for 20+ years before now.
If you haven’t lost your job yet, you will.
Innovation in America is stifled because there is no credit and no capital.
Your credit card available balance will be cut in half; no matter how credit-worthy you are because lenders are scared stiff right now.
Universities and colleges are burying their heads in the sand for now, but there will be a massive out flux of students from prestigious private universities (aka Harvard) to public institutions. Harvard just announced a 22% diminution in their endowment (from investment performance,) analysts peg it more like 30% and I suspect it’s 50%.
IF (and big IF) we manage to pull out of this thing, all the Monopoly money that is being printed worldwide, including China will cause the most massive deflationary inflation seen in world history, and will make the Weimar Republic seem like a picnic.

Sorry to be such a jerk but I have too much time on my hands and I have been studying this thing for far too long, since it won’t go away.

Good luck.

JMA

A Monograph About Why Magic Works

2008-12-27T08:28:00.000-05:00

Since I was ten years old, I have been practicing magic and have entertained thousands of people...the reasons for this don't much matter so I won't go into them. But this past summer (July 23, 2008) an article was published that suggests that magicians know more about human psychology than scientists. The team responsible for this was from Durham University in England and the University of British Columbia and included Derren Brown and Dr. Gustav Kuhn. I have never heard of them so I don't know if they are reasonable magicians or not.

The study concluded that there are three fundamental elements that make magic work, and help to alter our perceptions: "misdirection, illusion and forcing."

While I have no particular differences with the study's conclusion, after decades of of work, practicing and such I think that their description is very simplistic. I have many more categories that I would add as follows:

1. Disarming the audience...they don't know what you are going to do so you can use myriad techniques to keep them off balance. The best way in my opinion is to always use common objects; coins, cards, rope etc. so that nothing fancy seems to be happening.

2. Misdirection as noted by the authors...but this is more about voice, body movement, original stance and such. Juan Tamariz the noted South American magician has reviewed all this in the excellent and rare book "The Five Points."

3. Timing. The aforementioned authors do not mention this one bit and it is a critical element. When I do a trick, I may need to skip a beat or two because:

4. Memory is also an element...people don't remember short-term things for very long, so if I hesitate for a second or two, they will immediately forget what they recently saw.

5. Angles. You can produce miracles by adjusting your body and line-of-sight just so...I did this yesterday and blew them away. If you don't believe me, look at the "wrist kill" for 10 seconds.

6. Suggestion. If you explain what you are going to do, then people set up in their minds what they expect to see. When you do the opposite, it confuses them to no end.

7. Technique. This is standard. You have to be able to successfully turn a double or vanish a coin...but this is the "illusion" referred to by the authors and frankly, it is the most trivial part of magic. So is forcing...very mundane indeed.

8. Patter. Every great trick needs a great story. This confirms the illusion, interests the audience and affirms everything that you are doing.

9. Expectation and repetition. As mentioned above, nobody knows in advance what you are going to do. Unsuccessful magicians get flustered when they blow a trick, better ones just change the trick so that it isn't blown. If you can do a trick well, then you can repeat it...see Ambitious Card for example.

10. Explanation. Nobody really wants to know how the magic is done...it will wreck their experience. But if you have "regulars" as the famous Jay Sankey points out, every now and again it makes sense to "give them one." In my case, I actually ask them to commit to forever performing the effect, and if the thing involves a gaffe, I go back home and make it for them.

11. Tension. Magic requires extreme tension between the performer and the audience...why wouldn't it...we as performers are doing the impossible and you as onlookers are expecting to expose us. Tension abatement at the proper time allows for the most enjoyable experience for both parties. Humor and self-effacement from the performer are major factors here.

12. Confidence. If you want to be good at magic, you must think you are good at it...it's the consummate sales pitch. Whenever I conclude an effect, I try to surprise myself...obviously this isn't altogether possible and is somewhat tautological, but if I am not astounded by the audience's reaction then I probably have not done the magic well enough. In other words, be your own worst critic.

Respectfully submitted to the magic community.

John A.

A Not Too Rosy View Of The World

2008-12-27T08:14:00.000-05:00

With or without government bailouts, the auto industry, worldwide will fail. Look at it this way; anyone who needs a car already has one, and if you don’t have one and need one (my young daughter) you’ll borrow or buy used. If you’ve driven coast-to-coast along Route 80 like I have, then you should be able to predict what will happen next. Whole towns beginning with Detroit, Dearborn, Hamtramck will collapse from the ensuing domino-effect. The calamity will extend to places like Flint, Gary, IN, South Chicago and Chicago’s south side. Moving further West, Milwaukee will get hit, and to the North, Minneapolis. Running east you’ve got Cleveland, Cincinnati and Columbus, not to mention Youngstown which is already blighted but will become obliterated, and even Pittsburgh. The Pocono’s will suffer because people will not be skiing this winter. Car pooling will become the national pastime, and oil prices will drop below $30 barrel. This will engender great social rancor if not over time, upheaval.

There’s more. Since Russia is the 2nd largest oil exporter, and lacking much else besides weapons, vodka and caviar, it will cave in as we are already witnessing. And China, having nobody to export to will also deteriorate. In response, I expect that Russia and China will revert to their Communistic ways. The US, Canada, Mexico, England and the rest of Europe will adopt a form of socialism; hell we are already nationalizing all the financial institutions. Singapore should be fine…who cares. India will relearn what starving is.

After a few years and some stability in the “new order,” we will see worldwide hyperinflation because of all the “Monopoly money” that is being printed to shore things up right now. As in the Weimar Republic, we can foresee what happens during hyperinflation…it isn’t pretty and it takes a dictator and a world war to escape it, or so it did.

There’s more such as Silicon Valley’s demise (see the recent Intel announcement), empty (closed) restaurants in San Francisco, San Jose, Chicago and New York and a massive rebasing of our society.

Jesus I hope that I am wrong but the logic seems inescapable to me.

JMA