Category Archives: Economics

Industrial Logic

The information age has transformed the economy. The financial service industry has been a tremendous beneficiary with huge financial rewards for innovation and engineering. The financial services sector grew to at least 2nd largest in the US on at least 2 occasions, and that’s not counting banking and securities brokerage*.

Financial engineering created such large returns in the investment industry that it absorbed a large number of top talent from the global workforce for a generation. The industrial world, through automation and logistics applications has changed, too, but not like the financial markets.

Financial engineering has matured and the breakthroughs for systemic outperformance and securitization are harder to find. There is still obvious room to improve how to tailor services for individuals, but you know what I’m saying. Rather than choosing to innovate in the financial services, more engineers will see the best opportunities in industry.

And that gets me to the point: As the information age matures, I think we will see that financial engineering will give way to industrial logic as the most powerful force in the economy. Now that capital is being allocated so efficiently, productivity gains will increasingly come from industrial logic: information systems tied to production and services.

APIs** will be a catalyst for industrial communications. Companies can become part of a global network of improving efficiency, production, services, and innovation.

Reading my Clay Shirkey book from Christmas has me all optimistic.

Happy New Year. Get back to work,
– Dan

* based on my recollection of Value Line data from over the years…

** It stands for Application Protocol Interface. Just like consumers have been blessed with this new smartphone app phenomenon, developers have been blessed with APIs. APIs let companies talk to companies over the internet. They can send data and receive responses with other data. It’s great.

Planning and Investing for the Long Term

2 Great articles quickly tell the story of global trends, risks, and strategies:

The 1st, by McKinsey & Company, focuses on Globalization’s critical imbalances:

Globalization’s critical imbalances

The 2nd, by Investors Insight, talks about how to use global macroeconomic issues like these in your investment decisions:
What’s the point of macro?

Not Investment Advice

Dear Friends,

First

No Liability. This is not advice for any specific person. Everything here could be wrong; think for yourself. Only you are responsible for your behavior. If you accept these terms, you may continue reading.

I get asked for financial and investment advice a lot, and want to help. There has been tremendous public attention aimed at complicated financial and economic issues, and I’m happy to give my perspective on planning and investing.

Cash Flow and your House

First of all, as always, never maintain a balance on your credit cards from month to month. For those who maintain big savings accounts and a mortgage, make extra principal payments now. Savings accounts earn much less than mortgage interest, so use some of that savings to reduce the interest you pay. By law there is no penalty for making extra principal payments.

The Planning Mindset

Economic risk is high right now. We could recover with strong employment and growing prosperity. We could have a run on US Dollar debt and fall into an inflationary and humanitarian collapse. The likely future is somewhere in between. Our future course is unknowable, and anyone who tells you otherwise is overconfident. Instead, try to be aware of the range of possibilities and strike a balance that leaves you well prepared.

The biggest reason for high risk right now is the fragile confidence in the long term solvency of debtor nations. The shaken confidence is rational because it remains unclear if global debt and trade imbalances can come back into balance smoothly – or only through national default.

Making Investments

Stocks look pretty reasonable right now. In the US, dividends and earnings look good from a historical perspective. In a lot of emerging markets, stocks have big discounts because of perceived risk — but how much riskier is it for an emerging business to imitate existing efficiency, compared to a developed business improving through R&D? Owning stocks now looks better than usual, and diversifying globally seems as important and attractive as ever.

Bonds look bad. They may be in a bubble. If the Federal Reserve and the banks can not work together to maintain a stable monetary base, we risk high inflation. Monetary policy has eased in an attempt to offset the shrinking bank leverage, but history suggests that reversing this situation will not go smoothly. The recent financial reform included some good ideas, but does not protect against re-leveraging the banks.

Assets are the opposite of bonds; the same thinking above applies in reverse to assets. If bank lending recovers while monetary policy is still generous, then inflation can raise the price of real estate, gold, and everything else.

Overall, pay down your mortgage and use credit as little as possible – interest rates are high for people and companies. Don’t loan the government money by buying bonds — money has flooded in and they pay a low interest. Focus on global equities and real assets, especially emerging markets and commodities that are supply-constrained.

Economics and Trends

In the modern adult lifetime, emerging markets look poised to fully emerge. Investing globally looks wise. As global production enables global consumers to behave more like US consumers, there will not be enough raw materials. The constraining factors are the commodities used in production, so owning those looks wise. There is plenty of low skill labor in the world, so education will become increasingly important. The most educated nations likely have better 10-40 year outlooks than the less educated nations.

Finally, innovation has been lowering prices and improving products at an ~increasing~ rate, so save your money and delay your gratification because products in the future are going to be much better than what you can buy today.

Hope that helps.

Happy to discuss,

Dan

Feeling down on Angel Investing?

Feeling down on angel investing? I am. But maybe we shouldn’t.

An interesting new study, “The Economic Future Just Happened,” found that more than half of the companies on the 2009 Fortune 500 list were launched during a recession or bear market, along with nearly half of the firms on the 2008 Inc. list of America’s fastest-growing companies.

A link to the study:
http://www.kauffman.org/uploadedFiles/the-economic-future-just-happened.pdf

Reconsider the Stimulus

I am fed up with the structure of the stimulus plan.  Bailing out failed banks is foolish when tax credits for mortgage payments would cut the foreclosure rate and fix the toxic debt.  Why ignore this easy and super-efficient tactic?

If I could recommend a specific plan, it would be to provide tax credits for up to $30k/year in mortgage payments for primary residences for the next 2 years. This relatively cheap solution maintains free market capitalism with all the good incentives, and would dramatically reduce the foreclosure rate — particularly for those paying less than $30k/year for their mortgages. The plan could be extended or expanded if necessary, of course.

The result would be a reduction in mortgage defaults, an increase in the value of mortgage backed securities (MBSs), and a recovery of the financial strength of the lending institutions and pensions that hold MBSs. Essentially, this would repair the cause of the credit crisis rather than throwing money away at the symptoms and rewarding failure.

As soon as it is announced, assumptions about foreclosure rates would fall, raising the value of MBSs the same day.