a better stimulus plan?

I meant to post on this last week when Friedman’s op-ed in the NYT hit, Start Up the Risk-Takers. Friedman, not surprisingly, beats up on the US autos among others, and says that instead of giving them more money, we should instead turn to venture capital. He proposes giving the top VC’s (top 20%) a slug of money to invest in new technologies and then collect a share of the profits (80%) in exchange for this seed capital.

Fred Wilson, one of the most well respected VC’s in the business, responded on his blog: No thanks. Basically, he asserts that the problem isn’t a lack of money but that too much dumb money came in. Now we’re getting the crap washed out of the system, and the strongest investors still have money that they are putting to work.

While this little dialogue was interesting, I was troubled that this was even being talked about. It’s like the obvious was invisible to everyone discussing the topic. While money is important (and may or may not be the issue depending on who you believe), the bigger problem is complexity and bureaucracy.

The government should be making it far easier for people to start companies. Bottom line.

What if the Obama administration proposed a dramatic set of new rules intended to jumpstart new business creations?:

1) Minimize the complexity for forming a company. Today there seem to be about 8 different types of business types that you form (LLC, Inc, partnership, etc) and in any one of the states all with rather bizarre differences. How about a single, simple filing type which gets a company off the ground and “formalized.” It gives you the flexibility to finalize the specific type of business you want to be after your business gets traction. Why worry about tax treatments, etc upfront? Let people start the thing, and sort out the details later. Put the form online so that anyone can fill out the one page web form and in a matter of hours, their business is formally created. We need to cut the red tape.

2) Eliminate the complexity within a business at the start. Everything from hiring more employees to expanding office space is supported through the SBA or another body. Let’s make it as easy as using TurboTax to figure out how to add new employees, etc. I can picture an online form that asks simple questions and gives you the advice you need, makes changes to your corporate structure as a result, and recommends who to use if you need to use a vendor.

3) Health Care. One of the major (non-monetary) costs of our current health care system is that it is tied to employers and stifles innovation. Health care plans & costs for small companies is often prohibitively expensive. I’ve long argued that the reason we needed to see massive health care reform is not on moral grounds, but because it was such an impediment to the creation of small-businesses and entreprenuership.

The new economy that is going to have to be built to sustainably drive the world forward from here will, in my opinion, have to be driven by entrepreneurs and small companies. Technology has set us up for a world where david can regularly take on and beat goliath. This is awesome. As a country, we need every last drop of creativity and entrepreneurial drive we can wring out of our citizens. To tap into that we need to make it turnkey easy for anyone to start a new business. From there, the government can help create a transparent marketplace for these companies. The private sector will take it from there, and investors such as Fred Wilson, Reid Hoffman, Paul Graham, Andreessen and the slew of other great minds in the space will provide money and the advice needed to build great companies.

It’s disappointed that everyone’s answer to everything has become MORE MONEY. The black hole that is our financial system will continue to destroy more than its share of money for some time to come, so let’s think broader (and more intelligently). Let’s create more efficient and effective government that does it’s part, gets the hell out of the way, and allows individuals to unleash what’s best with themselves.

greatest letter ever.

The below note is the greatest thing I’ve read in a while. It brings tremendous happiness to me. Dude who wrote it, Andrew Lahde, is the manager of a small California hedge fund, Lahde Capital, who made 866 percent betting against the subprime collapse. That’s a lot of money.

Dear Investor:

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde”

If I ever manage to make any substantive amount of money, look for a letter of similar inspiration.

Portfolio: Hedge Fund Manager: Goodbye and F—- You

world on the edge.

The Economist (apparently Palin’s favorite magazine) has a good, short article on the credit crisis.

This is why those politicians who set the interests of Main Street against those of Wall Street are so wrong. Sooner or later the money markets affect every business. Companies face higher interest charges and the fear that they may one day lose access to bank loans altogether. So they, too, hoard cash, cancelling acquisitions and investments, in order to pay down debt. Managers delay new products, leave factories unbuilt, pull the plug on loss-making divisions, and cut costs and jobs. Carmakers and other manufacturers will no longer extend credit (see article) and loans will become elusive and expensive. Consumers will suffer. Unemployment will rise. Even if the credit markets work well, the rich economies will slow as the asset-price bubble pops. If credit is choked off, that slowdown could turn into a deep recession.

This nicely describes the anxiety I’ve been feeling about the credit markets seizing up.

the financial crisis explained.

So. Like most people you’re wondering what the hell is going on, right?

Don’t worry. Well, you should worry about the fundamentals of America but you shouldn’t worry about understanding it. Because I’ve got it covered.

First, go to Blockbuster and rent the movie Boiler Room.

YouTube Trailer:

In real life, all of Wall Street followed the pattern of the firm in Boiler Room. Wall Street packaged incredibly crappy mortgages in a complex way and sold them to “savvy” investors that understood them about as much as the average Joe that was sold worthless stock in made-up companies in Boiler Room.

In Boiler Room, they talked about the huge “rips” (commissions) they’d get when they sold stocks and wondered out loud how it was possible to be making so much money for doing so little. The risk-reward was way off. Guess what? In real life, Wall Street was even more incompetent because they never seemed to ask how they were getting such lucrative fees for constructing these seemingly low-risk mortgage backed securities. Well, it’s either incompetence or hubris. It seems so many on Wall Street actually thought they deserved these massive fees just for existing. At least in Boiler Room, the main character wonders what the deal is.

In real life, our government was nowhere near as competent as portrayed in Boiler Room. In the film, government agents were watching the scam, looking for a way on the inside, and trying to take it down. While in actuality, our government aided these morons efforts by providing next to zero oversight or regulation, relaxing rules on leverage and capital requirements so they could ensure the firms would get “too big to fail.”

One more way that Boiler Room is different from reality? I already touched on it, but in the movie, Morgan Stanley, Goldman, Lehman, Bear, ML, et al are lionized. Today, they’re bankrupt, consolidating, or disgraced.

In summary:
Go watch Boiler Room. Step one is to substitute their fictional firm with all of Wall Street’s banks. Next, substitute schilling stocks to average Joe for packaging and selling weak-ass mortgages to the world’s investors. For step three, replace a competent SEC for a worthless Washington (Alan Greenspan & company) and you’ll get government intervention only when things start blowing up and nearly a trillion dollars is lost instead of actual oversight.

are they stupid?

The SEC is looking into banning short-selling in the stock market. Temporarily.

Are they morons? The problem is that government didn’t regulate businesses that were amassing leverage and assets that could take down the nation’s financial system. Since they had their heads up their asses then, they feel like they have to do something now. This is stupidity.

So people will cover their shorts. The markets will go higher. Then you’ll see people bail from the market. I know I don’t want to own securities in a market like this.

UPDATE: If this is true, that this is being done to potentially stop financial terrorism, then I stand corrected. It looks like a significant portion of the shorting is being down overseas, and potentially London is seeing similar activity, hence the temporary ban until order is restored. Wow.

lipstick on a pig?

It’s classic. We’re going through one of the worst economic crises that our nation has seen in decades, and the media is talking about lipstick on a pig comments and other total crap.

If there’s lipstick on a pig, it’s the lipstick the Fed is trying to put on the pig that is Wall Street. After years of zero regulation, and allowing the broker / dealers to leverage hundreds of billions of dollars in instruments even they didn’t understand, we potentially face the collapse of the global financial system.

While this is going on, all we can talk about is whether John McCain is being too mean to Barack Obama or if Obama was sexist with his lipstick on a pig comments. How about we ask them what the hell they’re going to do to try and salvage our economy. Their plan for the financial system? How does it differ from the current Fed “plan”? Nah. Who wants to hear about that?

Rome burns, and we change the channel. We’re too busy watching Jerry Springer, a little NFL, and some of the “highlights” of the election. Yeah, go ahead and ignore the fact that Lehman just filed for bankruptcy and Merrill got gobbled up. Nah, that won’t affect us.

This is nuts.

oil: are we screwed either way?

On Kedrosky’s blog todayhe posts that we’re screwed either way oil prices go.

1) oil goes up and our economy is in trouble (eats up all consumers’ disposable income, inflation, etc)
2) oil goes down and alternative energy funded bets don’t make sense.

I think this is crap. Paul’s right from a historical perspective: after the oil embargo of the 70’s, one would think we would have realized that making ourselves beholden to an unstable region of the world that doesn’t have a lot of love for America is probably not a winning strategy. But as soon as the crisis passed, as a nation, we stopped doing all the things we seemed so committed to previously (improved fuel standards for vehicles, conservation, fuel alternatives, etc). Stupid, stupid, unforgivable strategy. So looking at that, you’d say if oil drops #2 comes to fruition.

But I have to believe that we’re in a different world today. If oil were to drop, alternative energy will still thrive. Here’s why:

1) The notion of danger coming from the Middle East is burned into everyone’s mind. Supporting regimes (Chavez, Iran, etc) that are hostile to the American gov’t is becoming a generally accepted bad idea.
2) The amount of money that flows out of the country to fund oil (as well as crap from Asia) is likely nearing it’s breaking point soon. Stopping this huge outflow of cash has to stop.
3) The almost certain to continue to fall dollar will provide a floor underneath oil prices.
4) China, India, et al coming online as growing and hungry fuel consumers will change the dynamics of the market for the long term.
5) Climate change has enough mindshare that it plays into fossil fuel usage regardless of price.

I say that this time is different. Prices go down, oil!

do you realize what just happened?

dear children,

I think we’re sorry for what we’ve done to you. I say “think” because I don’t believe that most Americans have any idea what’s going on right now.

We’re sorry that we’re sandbagging you with massive amounts of debt that will likely reduce your standard of living. Someone called it “indentured slavery”. They might not be far off.

What the hell am I talking about?

Most of us have heard about the current sub-prime crisis, housing values dropping, the gov’t having to take on debts incurred by the private sector. But other than getting that this is likely a bad thing, it can be hard to grasp what this all really, practically means.

In real terms, we might have just increased our total national debt by 50% by guaranteeing Fannie and Freddie. Why does this matter? Because our debt per working person in this country works itself out to be somewhere around $60,000 a person.

No, I didn’t mistype that.

Read this NY Times op-ed.

I’m horrified by just how many people think everything is OK with our economy. How many think everything is OK because we  spend a lot of money (ie., # of cars on the road, housing sizes, total consumer consumption.). The problem is that this is all symptomatic of the disease which we’re in danger of dying from. We’ve borrowed massively from the rest of the world (and from what we would consider the poorer nations of the world, to boot) to finance our decades of prosperity. Then, in a bizarre turn of logic, we point to that borrowed prosperity as a sign that everything is OK. It’s as if we we were parents, and our teenager worked at McDonalds, but thanks to her credit card, she drove a new Lexus, wore all designer clothing, and took fabulous vacations. When we’d try and explain that this just doesn’t work, and that problems are ahead, she’d say that we, “just don’t get it” and point to how well she was doing.

As Bill Gross pointed out in the letter he wrote to Obama a few weeks ago, the reckoning is coming. Our president in ’09 is going to have to choose to right the ship (incredibly painfully) or to continue as is, and ignore the problem. Either way, it sure looks pain is coming. Good luck, children of America.


P.S. This is essentially the overview material for the chapter in Forsaken, on fiscal crises.

5/27/13 –

hand baskets.

dear hand baskets,

When people ask what I’m buying these days, I respond: “hand baskets.”
“Hand baskets?”
“Yeah, everything seems to be going to hell in a hand basket these days, so I might as well own stock”.

(Credit goes to my boy Graig for coming up with that one)

But still, Mr. Basket, you must be a busy guy these days. America’s banks are imploding. The government is promising literally trillions of dollars in taxpayer money to bail out these institutions. People are losing their homes. People can’t sell their homes (9 months and counting for me…sweet!). People can’t afford gas. Almost every other commodity is going sky-high. Since jobs have been leaving the US for years now, and the middle class is heavily beaten down, spending is down and growth has gone from stagnant to negative. Aforementioned inflation is kicking ass. Stagflation – something my parents remember that well in the 70’s! Oh, yes, hand baskets, times most certainly are good for you.

And what is the media covering? Cartoons. When I did my previous entry on The New Yorker on Obama I had no idea about the cover. I didn’t think much of it, other than to add the PS. But it seems the media thinks that this is the important issue. Don’t look at the steady stream of hand baskets marching down the highway, look at the cartoons.

So, in summation, I’m long hand baskets (you), short everything else (especially the damned media).