Finance is Nutrition

From the Prez this week:

"We've seen mortgage, uh, interest rates, uh, go down, uh, to historic lows aaaand we've seen a, uh, very significant, uh, pick-up in refinancings. Uh, that has the fact of not only putting money in the pockets of people but also contributing to stabilization of the housing market."

Oh. Great.

Somebody please remind me ... how did we GET in this mess in the first place?

Oh, yeah, historically low interest rates which allowed people to over-leverage their houses in favor of current consumption spending.

I was a finance major, so I should probably not be so arrogant. But I can't help it. One semester into Finance 101, I declared that the whole industry could be summed up in four basic (meaning not complex, not mystifying) concepts. I taped the list up on my dorm wall. Upon graduation, moving out of the dorms, I double-checked my youthfully exuberant list. Guess what. I had nothing to change or add. Finance really is that simple. I really can't understand why it remains such a mystery to most people, apparently including the entirety of the talking-head class and most politicians.

Perhaps it's just not worthy of their attention because it's not sexy. Thinking about finance doesn't lead to orgasm or procreation or satisfaction of our innate narcissism. So, let me speak in the language of narcissism. Let me try this metaphor:

• Savings is protein, vitamins, and calcium: building blocks of a necessary strong frame for the body. To be clear, the body CANNOT be strong or capable without these building blocks.


• Investment is exercise: it builds muscle atop the frame, making the body more capable. There is NO other way of building muscle than exercise.


• Consumption spending is empty carbs: an immediate, but short-lived boost of energy, followed by a sickening crash. It solves an immediate need without any lasting benefit. Sadly, this boost trains the brain to seek more and more empty carbs, to the exclusion of other, healthier behaviors. The only tangible thing left over is disgusting, useless fat which is extremely difficult to get rid of.


• Leverage is substance abuse: from coffee to cigs to crack cocaine, the result is merely the illusion of increased energy, strength, and capability. To maintain the illusion, you have to take on ever-escalating amounts of the stuff. The dose becomes toxic and eventually lethal. And once you stop, you're gonna wish you had died.

Like Spending a Dollar to Get a Dime

That's how Louisiana Govenor Piyush "Bobby" Jindal described the Stimulus payments on unemployment on Meet the Press 2/22/09.

Leave it to a first-generation American to cast an objective eye on US politics. His parents, as most immigrant families, struggled to make a better life for their kids. They fended for themselves. They took responsibility for improving their own lives. They sacrificed. Bobby was undeniably acculturated from the outset, preferring the Brady Bunch to Bollywood, but his parents' lessons were clearly not lost.

He's not the only one, of course, but he's a nice contrast to the likes of Puerto Rico, which sees no problem asking for nearly 5% of the total stimulus, though their population is under 4 million and their economy contributes nearly nothing to GDP. Boy, it must be expensive to build down there. "100 acres of new energy efficiency industrial zones" is gonna cost us $17 billion. That would be $4,000 a square foot ... or $11 million per job created. Why don't they just hand out shovelfuls of cash to these Caribbean shits? That would probably be cheaper than one of their other requests: $500 million to give solar water heater tanks to rural families. 14 very short-term jobs there (by their own count), so $35 million per job. Apparently the current $2,000 tax credit just isn't enough for these people, even though that's precisely the price of a one-family sized tank.

Not that they're the only ones. Miami (city and county) have put in for nearly the same amount, mostly for transportation projects like the "Two hundred million dollar mile" project ($2.4 billion to extend the "Orange Line" east-west transit by 10 miles). By comparison, their pitch for $1.4 billion to expand the same "Orange Line" north-south is a bargain.

And there's:

• The "Billion Dollar Bridge" in Moline Illinois
• The $600 million 100MW solar plant in Alabama using outdated technology. Strangely, other states can use newer technology to generate the same 100MW for hundreds of millions less.
• The new digs for the chief of Oakland police, $450 million
• And a parking garage for the Oakland Airport $300 million. Who can blame them? Its just SO TIRING to walk through their current lot.
• The events center and hotel in Albuquerque, $418 million
• Not to be outdone, a similar pitch in Irving, TX (and here and here), including residential, commercial, and every other kind of -ial $1.4 billion. Where the hell is Irving anyway?
• Or a Performing Arts Center in Vegas. $375 million. Apparently they don't have enough stages in that town.
• Or $2 billion to put (outmoded) solar panels on every roof in LA

Below the $300 million mark (aka chump change), there are literally thousands of projects to replace things that aren't broken (over 1,000 fire/police station renovations) and install things that range from unnecessary (over 100 police or fire "training centers" for every village and hamlet from here to Timbuktu) to downright infuriating (dog parks; river walks; a $20 million "downtown quiet zone" for raucous San Diego; several multi-million dollar golf courses in Texas ... including a 36 hole Disc Golf course for the dusty hipsters in Austin).

I make no mystery of my opposition to each and every one of these government bailouts. Everyone has their reasons for advocating or opposing it. Here are one or two of mine:

• Today, 12% of GDP is spent servicing the national debt With our new expenditures, this will likely increase to 20%. This is an untenable level for any economy. There is no way to prevent it from reducing GDP growth (and thus standard of living) other than to bring it back down to single digits where it should be.


• The above is just to "service" (maintain) the debt. Fees and interest. To actually reduce debt means increasing taxes and reducing government spending over the 5-to-25 year horizon. Mathematically, when people and businesses have an increase in taxes without a commensurate increase in earnings, investment, savings, and/or consumption must fall. In other words, the major "drivers" of our economy must be throttled back in favor of the non-productive, non-job-creating, non-profit-generating activity of paying down government debt. GDP will necessarily fall.


• There is a strong inverse relationship between the amount of debt a country has and the long-term value of the currency. Currency values are determined by supply and demand, just like everything else (pay attention, Tim and Barry). Any schmuck who didn't sleep through Econ 101 knows that supply and demand meet at a price which "clears the market." For currencies, that "price" is the NPV of all future interest payments one can get by owning the currency minus inflation. In other words, the interest rate now, plus the PV of expected interest rates into the future, adjusted for inflation, determine the current exchange rate. All of this is a round-about way of explaining what most people just accept: the interest rate drives the exchange rate. So what drives the interest rate? It is a consensus opinion about the credit-worthiness of the country. Just like a corporation's bond issue, the US government has to offer an interest rate which compensates investors (=holders of dollar assets) for expected inflation plus the risk that the US economy goes tits-up. Inflation expectations and default risk have been low, so interest rates have been low. This thanks to Paul Volcker and the Reagan economic team (including Greenspan) who realized that a high interest rate stifles investment and savings. It thus stifles financial stability and economic growth. The inflation component drives people to put their money in other currencies and thus other economies instead of ours. With the current gratuitous increase in debt, coupled with the decrease in long-term growth due to inflation and taxation, this risk is increasing significantly. Interest rates will necessarily increase.

Call me crazy, but personally I'm a fan of financial stability and economic growth.

PS: I'm amazed by the notoriety Rick Santelli of CNBC has garnered by refusing to accept the Washington line. The snarky childish response from the White House, referring to him by name, is a little Putin-esque. Last I checked, we still had freedom of speech around here.

Grumpy Old Men Quotes: The Stimulus Bill

A billion for prisons?? I'm sick of hearing about prisons. They just do drugs and have sex and don't get rehabilitated. Then they come out and go on unemployment 'cause nobody will hire them. We should send them to a deserted island so they can survive on caterpillars and snails. Maybe we could try shock therapy instead of letting them watch TV from the comfort of their cell.

650 mil for digital TV coupons? If your TV is that old, it's a national treasure and belongs in a museum.

Having Vision but Flying Blind

They're misunderstood, if not neglected entirely. They're maligned. They're abused. They each need to be adopted ... by all of us.

I won't be so bold as to say whether Obama or I first sweetened to this set of keys. Clearly, however, we've all been burned by their absence. At least the new administration is trying them out. And I don't mean vision, itself.

You see, having vision is a great thing. Quite rare is the fortitude to choose the right path in spite of the fear mongers, detractors, and wailing interest groups. More rare, however ... in fact, nearly extinct these days ... is successful execution. My recent blog bemoaned and pondered the failings of the US over the past few years. To me, these were seldom from lack of vision, skill, or will. The ideas were sound. The people were smart. But despite having vision coming out of all orifices, they were flying completely blind. Calamity came from complete failures of execution.

Utter failures of execution. On many levels.

It is thus nice to begin to see ghosted hints and hear soft whispering breezes indicating that some people in corporate and political America "get it." It's early days, and this blog will have many follow-ups, but let me describe what's on my radar so far:

A focus on communication.

• Conveying the right message. One side effect of our current info overload is that people have become amazingly good at hearing. People hear more than just the words spoken and can quickly identify the message being conveyed. Too often, Bush administration representatives were speaking about one thing (terrorists in Guantanimo, for example) but projecting a message about something entirely else (caginess from a deep mistrust of the current justice system or the public stomach). It is critical that speakers determine, memorize, and deeply understand the message they're trying to convey. This doesn't mean memorizing a speech and presenting it deer-in-headlights style. It means knowing the message well enough to convey it while sounding like a real person. This builds trust. So does consistency. For an administration, the SAME message needs to be broadcast via multiple channels. It needs to be immutable in its repetition. And the message needs to be right. It needs to be strategic. In the corporate world, for example, the message should convey a specific brand identity and aspiration.
  
• Closely related is Selling the value proposition. Yes, this is Corporate Newspeak. Said in plain English, this means that communicators need to really understand the relative benefits of what they're advocating. This needs to be incorporated into their message every time they communicate. To say it even more simply: sell, sell, sell.
  
• Communication isn't a one-way street. Listening actively to feedback is not optional. It is a diferentiator between failure and success. Actively means listening to and understanding everything they say, literally and in terms of message. It means checking your understanding "So your main goal is X because Y?" It means accepting things that don't sync with your view or message. Once understood and accepted, communicators must be willing to do the unthinkable: incorporate their message into their own, either by responding or by absorbing.
  
• Taking another step back, though, communicators need to make damn sure they've got the right vision as well as message. They can blunder through it; they can be lucky enough to be in the right place at the right time; OR they can do it the right way by investing in information. They must collect, standardize, and analyze data. They must ensure their people AND their audience are properly educated on the issues. They must be brave enough to risk some time and money in skunkworks which may yield nothing, may yield something that doesn't fit with their current vision.

A focus on accountability.

• You cannot have accountability unless you know what your goals are
  
• Then you must identify what the measurements of success should be
  
• Then you must measure what the current state is. Now. With all it's warts.
  
• Finally you need to build the right incentive programs. You need to test your carrots and sticks for perverse incentives.

Blog Hat Tip: Iowahawk's "Numbers in the News"

I highly recommend you point and click your way over here to Iowahawk's blog where earth-shattering news has been broken this week.

And I quote:

An international mathematics research team announced today that they had
discovered a new integer that surpasses any previously known value "by a totally
mindblowing shitload." Project director Yujin Xiao of Stanford University said
the theoretical number, dubbed a "stimulus," could lead to breakthroughs in
fields as diverse as astrophysics, quantum mechanics, and Chicago asphalt
contracting.

Happy Reagan Day!

Obama keeps telling us he's the second coming of ... err ... Reagan. Lou Cannon and NPR merrily joined the mantra last week. In that case, it would serve him well to begin delivering messages along the lines of these Reagan Quotes:

Government always finds a need for whatever money it gets

Sometimes I think that government fits that old-fashioned definition of a baby: An alimentary canal with an appetite at one end and no sense of responsibility at the other

Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

We don't have a trillion-dollar debt because we haven't taxed enough; we have a trillion-dollar debt because we spend too much.

I have a special reason for wanting to solve this [economic] problem in a lasting way. I was 21 and looking for work in 1932, one of the worst years of the Great Depression. And I can remember one bleak night in the thirties when my father learned on Christmas Eve that he'd lost his job. To be young in my generation was to feel that your future had been mortgaged out from under you, and that's a tragic mistake we must never allow our leaders to make again.

It is not my intention to do away with government. It is rather to make it work -- work with us, not over us; stand by our side, not ride on our back. Government can and must provide opportunity, not smother it; foster productivity, not stifle it.

Growth, prosperity and ultimately human fulfillment, are created from the bottom up, not the government down

There can be no security anywhere in the free world if there is no fiscal and economic stability within the United States.

there has been a fourth branch added to the traditional three: a vast bureaucracy ... of enormous power which determines policy to a greater extent than any of us realize, very possibly to a greater extent than our own elected representatives. And it can't be removed from office by our votes

Government growing beyond our consent had become a lumbering giant, slamming shut the gates of opportunity, threatening to crush the very roots of our freedom. What brought America back? The American people brought us back -- with quiet courage and common sense; with undying faith that in this nation under God the future will be ours, for the future belongs to the free.

This is the issue of this election: Whether we believe in our capacity for self-government or whether we abandon the American Revolution and confess that a little intellectual elite in a far-distant capital can plan our lives for us better than we can plan them ourselves.

Concentrated power has always been the enemy of liberty

You and I have a rendezvous with destiny. We will preserve for our children this, the last best hope of man on earth, or we will sentence them to take the first step into a thousand years of darkness.

They say the world has become too complex for simple answers. They are wrong. There are no easy answers, but there are simple answers. We must have the courage to do what we know is morally right.

The DNA of the Economy

Probably a good time to remind everyone of exactly what makes up the real economy:

GDP = C + I + G + (X − M),

C = Personal Consumption expenditures
I = Gross private domestic investment
G = Government consumption expenditures and gross investment
X = exports
M = imports

Surmounting Surmounted Stature

At this very moment, at least a billion people (myself included) must be wondering what the hell happened to the US over the past fear years. Our global preeminence economically, politically, and militarily seems less impressive and less assured today. Of those billion people, sadly, many simply blame one man. The US President is powerful, but he's not all that and a bag of chips. Other people, even more sadly, blame the overall US way of life: our culture, our youth and exuberance, our taste for risk, our ADD, our wealth, our celebsessions, our fast food.

To me, it's adolescent logic to argue that our strengths are our greatest weakness.

The perception that the US has fallen is exaggerated by half, but clearly execution failures, spectacular to mundane, are all too pervasive. Have we just gone pear-shaped? Tits over tea kettle? Lost our mmmmmojo?

One theory is that the rate of failure is unchanged, but in this age of information, they are spectacularized whereas century ago they would have been squelched.

Another theory is that the US has run out of easy wins. Once, oil literally oozed out of the ground in downtown LA. Now, we install rigs in the harshest of locations and must poke miles down into the earth ... or just deal with the Devil. When electricity was first harnessed, options for exploitation were limitless. Gains were huge. Now we must conserve. Innovation used to happen in leaps and bounds as we thought up brand new things. Now it's a slow climb up a steep mountain, figuring out how to do the same old things incrementally cheaper, faster, better.

Or perhaps a social evolution theory applies: Humanity was once, by necessity, survivalistic, decisive, ends-justify-means, hunter-killer, red meat, Western, wanderlust, and masculine. With innovation and social organization, that necessity has abated, being replaced by new imperatives: collaborative, change-averse, risk-averse, non-confrontational, agrarian, vegan, Asian and emasculated. We've evolved (socially) to a point where we believe that our best chance for survival lies not with our individual abilities, but is tied to our capability to integrate within, and enjoy the shared bounty of a larger society. In order to push the whole society to produce and achieve, each member must first endure the necessary overhead of "connecting" with the other members. To "connect" one must spend time communicating, documenting, justifying, persuading, organizing, planning, coordinating, motivating. I'll lump these societal requisites together under the term "connecting."

As the theory goes, people now focus so much on "connecting" that they run out of time to actually produce. This sea change in the way of getting things done (or not) causes a black hole which swallows great people, ideas, laws, and businesses before they can create anything of value.

If you don't like that theory, you could just say that we've just become rich, fat, and lazy. In his case, you must conclude that, just as the Romans, the Akkadians, the Hun, the Mali, the Egyptians, the Ottomans, the Spanish, and the English, so will the American empire fall.

Alternatively, you could decide that we've consolidated power in the hands of a few, and left hoi polloi impotent to look after their own best interests.

Or you could conclude that the human brain has found information overload, that life is just too fast, and that we've thus become irrational and random our their decisions.

It doesn't much matter which justification you prefer. What I would like to figure out is where we go from here!

Grumpy Old Man Quotes: Parenting

You're a corporate monkey. Let me see if I can put it in terms you'll understand. When your kids are born, you're their manager. When they hit adolescence, you're fired! The goal from that point forward is to get re-hired as an independent consultant.

Fashion in North America

Between work and play, I've spent an inordinate amount of time on the road lately.

In my business, you're in front of new people every day. The way you connect (or don't) in the very first few augenblicks pretty much locks in your relationship, and consequently how much trust and attention they allow you ... and consequently how successful you are in the long run. To say it bluntly, if they think you're "cool," they want more of you. Sadly, it's just as grade-shool playground as that.

Sitting in a sardine can hurdling through space this week, I got to thinking about what's cool or fashionable in the places I've been lately ... stewed down to a single word:

Montreal :fashionably preened
Toronto: fashionably concerned
SF: fashionably superior
Seattle: fashionably ambiguous
DC: fashionably frumpy
LA: fashionably connected
Vail: fashionably chill
NY: fashionably rushed

Just stereotypes of the images people project, of course. In reality, everyone just wants to get laid.