I was watching a government TV show called NewsHour which had a report from an economics conference in San Francisco. Apparently Austrian economists do not get invited, so when asked "how come you did not see the bust coming?" the answers generally had to do with the failings of people who make up the market. One fellow said making money is like a drug and people get loaded and risky, one said we were lied to by banks and wall street, another said it was like a greek tragedy where human weakness overcomes good policy, and one complete idiot said it was a failing of "animal spirits" and has written a book with another top economist, called Animal Spirits, to make his argument. Talk about VooDoo economics! I will not read this book.
What happened is very simple, and since I know this I made money during the bust and am still doing so: govt policy was to loosen credit too much and print too much money. Once they play that game, the experts I followed can advise you to the week of making the right moves.
The conference was attended by several thousand people, not a single one providing any economic benefit whatsoever, but paid handsomely by government or big biz.
Friday, January 9, 2009
Animal Spirits
Wascawy Weepubweecans!
Fair is fair... when congress ripped off the taxpayers for 700 billion in a bailout package, the republicans got to blow $350 billion on themselves (we do not get to know where it went) and were supposed to leave the other $350 billion for the democrats to blow when they took office.
With less than two weeks to go, like a problem gambler making a grab through the cashiers cage while being escorted out of the casino, Bush is trying to snatch the democrats $350 billion.
What do you think they are doing with the money? Buying gold coins and bars?
War Ended the Depression
Commerce Chairman Henry Waxman says:
“It wasn’t until World War II when we had major expenditures that the Depression was finally resolved,” said Waxman. “We’re going to be looking at that experience..."
This is so wrong. As the war ended and government began to cut back, the economy finally began to recover, after 15 years of shortages and millions dead.
Add this to congressional support of Israel's attack on Gaza, USA troops iin 143 countries, Obama plans to expand the war in Afghanistan, the India/Pakistan mess, and there is not much in the way of USA getting into another world war.
Ron Paul, Hillary, Ralph Nader, any of these could have kept us out of this...
Thursday, January 8, 2009
Poof! - Congress Crushes Childgoods Businesses
Mattel is forced to recall design-flawed products, which gets blamed on the Chinese, so congress passes a retroactive law that will wipe out on 2/11/09 anyone selling anything to kids, new or used. Only congressman Ron Paul voted against it.
The current economic problems are the result of bad government policies. Now they are busy making it worse. If you thing is kids wear or goods or supplies, supply has been largely wiped out, and demand has dropped only slightly.
They should call this the small-business opportunity-transfer act.
SEC Crushes Free Market
Just as the FED policy is choking off credit, the SEC (plaything of Bernie Madoff) is now shutting down peer-to-peer internet lending sights, making free market loan systems outlawed. There are several of these that have been shut down, not for any complaints. Only that there could be trouble.
At these sites, people with money to lend review applications of people willing to borrow. After due diligence, the lender "bids" an interest rate on the terms. Two parties, freely contracting. WE cannot have that in America!
Just as the SEC outlawed shortselling when it was most needed, so they are now outlawing free market credit. Here again we have irresponsibility crushing freedom: the irresponsible people at the SEC are forbidding people to freely do business.
Our way out of this economic mess is freedom and responsibility. Obama has promised to spend out way out of this problem. No one is objecting. Expect things to get far worse.
Small Business Employment Down
Both supply and demand are crashing in this bust, which we can see all around us. Surely in spite of all the news and what we see, we know there is still some demand, and there is still some supply. We are only off a few percent in most fields, and in the worse hit, say housing, we are off 50%, but there is still some supply and some demand. Here is an essential and key insight: supply is crashing faster than demand. We are experiencing shortages of what people will consume now.
There are houses selling now, but also vast developments not selling.
There are cars selling now, but acres of unsold cars backing up in the supply chain.
There are clothes selling now, but warehouses full of the unsaleable.
Food, gifts, housewares, medicine, computers, you name it, sales continue for some items, and other items go unwanted at any price (if it does not move at 75% off, it is time to donate it to charity, and seek a tax advantage.)
The unemployment claims have risen so dramatically that some states' computers have crashed processing the applications.
Mish Shedlock has the numbers, and as Rothschild said, the "time to invest is when blood is flowing in the streets."
IN this case the investment is in yourself, by starting your own business. Forget about unviable suppliers and competitors. Things are so bad, and getting worse, that even viable businesses are in trouble.
On the supply side, manufacturers are seeing dwindling orders and those orders they get may be coming from people who can no longer pay. A proposition that has a low minimum and prepayment (you take the risk) may get you first class attention. Of course you must be sure the supplier is solvent. This is where your savings, to start the company, is key. Negotiate a minimum order than you can afford to buy, and check out the references of the supplier.
On the competition side, the US Govt is breaking businesses left and right with its policy of bailing out the big failures, which is directly starving the small successes. As you already know, the official policy of the US Govt remains "get big or get out." You can do quite well resisting this policy, if you are aware of the policy. Simply adhere to self-financing and use the technique of frequency to turn enough deals to make your money.
Since FED policy is to starve small businesses of credit in 2009, many businesspeople are going straight into their retirements or savings to finance the business. Say a business needs a $100,000 line of credit which has been available at 8%. If the owner cashes in his $150,000 IRA, and takes the 30% tax hit plus the 10% early withdrawal penalty, he might net the $100,000 he needs for his line of credit, and now he is self-financing. The 8% he was paying the bank is now his to keep, although there are other tax ramifications in all of this. Given the damage done to stock portfolios in 2008, this option is limited. On the other hand, isn't it better to risk that money on yourself than invested in the extremely risky stock market?
Competition is critical to success. To enter the field now, you will be up against the smartest and most flexible, which means you will learn to do business much better and faster than otherwise. Lesser competitors are falling by the wayside. A key here again, is can your competitors can service what debt they assumed in the boom.
As to customers, they are falling left and right also. But the smart ones are standing. Again, examine their debt to judge creditworthiness. Smart ones will be cutting back, but there is still plenty of demand for the new and better.
Viable retailers are keen on the kind of products that sell to the customers that are still walking into the stores. For us at the small business level, nothing has changed. It is just getting easier.
Yes, the economy is shrinking, but it is also changing. Consumer preferences are changing. Those firms established or which changed to serve a boom economy are finding their wares of no interest in the bust, and the debt assumed forbids any change back.
What is going begging are products developed with the consumer in mind, the kind of hands-on, customer centric product development that I learned from the masters and any one of those you see thriving in business today can teach you.
With everyone saying "it is a terrible time to start a business," then starting a business is a classic contrarian play.
The people advising against starting a business now are imagining starting a business in the popular conception of the last 20 - 30 years. "Build a better mousetrap, get venture capital funding, go IPO, make millions in your exit strategy." I said that plan was crazy even when it worked sometimes during the boom. So of course all the more I say don't start that kind of business now.
During the boom supply expanded faster than demand. In Seattle and everywhere else granite counter top suppliers grew like weeds. So did airport expansions, wineries, sushi shops and starbucks. It is these boom businesses that are contracting quickly, and with them perfectly viable businesses caught in policy crunches.
The opportunity, as always but even more so today, is to work with the viable retailers to develop what people want right now.
The key strategy in starting a business today is EXACTLY what I have always laid out: start with the customer and integrate demand with design.
Wednesday, January 7, 2009
Chute Happens
Airlines are going bankrupt, bank loans are out of the question, venture capital is drying up, which means it is a great time to start a business.
Cirrus spent $70 millions getting 2 prop planes off the ground (optional parachute available... for the PLANE) and now wants to develop a personal jet. The need space: bankrupt Northwest Airlines left Duluth airport in a lurch, so Cirrus picks up real estate dirt cheap.
R&D money has dried up so Cirrus told its customers they could take a place in line for a personal jet for $100,000 down. 541 people forked over the money, so Cirrus has $54.1 million interest free to get the job done. More on the way, no doubt.
The feds are propping up the failing companies. At the same time the fed policies are killing viable companies who rely on bank credit. If you compete on design (cirrus planes have airframe parachutes), no problem. But it is good to know right now is a great time to start a business.
Charity Is Hard To Do
When my wife joined a local board for Habitat for Humanity, I argued against it since their mission is to take the people who would qualify for a loan at lowest acceptable level, and work with them to get into homes. My argument was those who could get into a house thru HFH could do so in the free market too, so why the charity?
When the housing boom came, who needed Habitat for Humanity when Washington Mutual would loan money to anyone who could fog a mirror. About this time Habitat for Humanity began taking government grants.
Once a charity begins to accept celebrity advocates and govt money, they get into trouble. Turns out, houses built by Jimmy Carter and other celebrities are falling apart.
In my lifetime Jimmy Carter has been my favorite president, what with him deregulating beer and travel and transport and telecommunications, which in time Reagan was able to take the credit (republicans never really deregulate, they just change who gets the money.)
Attacks On Labor Continue in USA
There is a false premise: there are unions, therefore there are problems. The correct premise is: there are problems, therefore there are unions. Industrialization came before the unions (although one can argue unions are reconstituted guilds).
Nonetheless, show me a unionized house, and I’ll show you poor management. Show me a union-free business, and I’ll show you a well managed business. Click on to read more...
I’ve worked briefly on the docks as a longshoreman which means I have some seniority in the ILWU, and I also busted an ILWU house, so I worked both sides of the issue.
Austrian economists spend as much time on what is missing as what is, so there is some debate as to whether unions would exist in a free market. All can agree in a free market unions would be generally more honest in the measure they are responsive to market forces. Austrian objection to unions seems to be of the same sort as the objection to big business: both are in bed with big government. Government unions are doubly evil, and would not exist in a free market (but then, government would not exist.)
My view is on balance unions are a good in a distorted market. I understand they are unduly leveraged, prone to gangsterism, and distort the political landscape. But all to the good. Imagine big business without the unions’ choke hold.
What unions have done is taken a cut of the loot of empire the Hamiltonians would keep for themselves, and proven to be a restraint to some degree on war, class or otherwise. Union workers are the first to admit their success was suicidal, by bringing the working poor into the middle class, solidarity flagged, and union management found love in the arms of politicians.
Now, how could it ever be more clear than right now that the problem is management in the USA? Nonetheless, it is labor and immigrants to whom invective is directed. Here is a typical slam on the UAW, common arguments, which I would like to respond...
“We cannot continue to pay $65 an hour for someone to cut the grass and remain competitive.”
Why not? It may mean less for management, but it is not impossible. But more to the point, why did you agree to pay $65 an hour to begin with? An explanation of the genesis of this result would reflect very badly on management.
“For Delphi [auto parts maker], this idled labor cost $400 million in the second quarter of this year alone. Facing similar numbers until the contract's end in 2007, Delphi took refuge in bankruptcy.”
Naturally, to avoid responsibility for living up to the Delphi agreed contract. By going bankrupt, Delphi avoids its responsibilities, and in effect those people who thought they were making $70 an hour end up yielding only half that for their tenure, resulting in wages exactly what workers in the South are being paid at Honda, Toyota, BMW over the same tenure. The workers in the South have it better since the cost of living is lower, due to the fact workers were not being paid nominally inflated wages in their states.
Why did Delphi agree to this 400 million cost? There is no such thing as an outrageous union demand, only outrageous management concessions. Labor law in USA only requires that the parties meet and confer, not meet and agree. Delphi and others agree to the “labor pool” so workers do not go find other productive jobs, just in case production jumps up again. Knowing they will be bailed out by taxpayers on the one hand, and they can just repudiate benefits through bankruptcy on the other hand, management followed the path of least resistance and entered the moral hazard public policy handed management.
Another dimension is ignored. Under democrats, competition problems are solved by taxing imports, which was the proposal on the table when Reagan entered office. A putative free-marketer, Reagan pushed for “voluntary restraints” instead of taxes. With “voluntary restraints, Honda agrees to limit its exports to USA, below what the market demands. If fewer cars are imported, those that do get into USA command a higher price than otherwise. As Honda prices rise, GM can follow the price up when marketing Pontiacs. With taxes, the US govt gets more money. With voluntary restraints, the Japanese manufacturers get more money. In both instances, the consumer gets screwed.
Now the Japanese can take those outsized profits and build auto manufacturing plants in USA, using non-legacy labor. Which they did, and now we see the result. Republican policy benefits the big business side of big biz/ big govt, and democrat policy benefits the big govt side of big biz big govt. The taxpayer consumer is always ripped off.
Another reality: There is so much waste fraud and abuse in this system, that executive compensation seems irrelevant in all of this. Surely if management were to forgo their millions, it would do nothing to address the hundreds of billions in shortfall. True, but the problem is one of the motivations.
These managers, and their enablers in government, have only so much experiential capacity. Even counting 24/7/365 there is only so much “la dolce vita” can cost. Potemkin perfection is achieved at each meal, private jet flights with compliant staff, skiing at Christmas in Vail, swimming at St. Barts at Easter... Aspen institute in August, completely ersatz business meetings where nothing of import or consequence is achieved, but ritual and form is awesome, for both manager and political ally. (We know all of this is ersatz, because it has to be bailed out. In a free market, nothing is bailed out.) The total cost of this, including outsized paychecks, would be an acceptable rounding error if overlooked on a P&L, such is the vast expense of empire.
For these people, there is no interaction with the market. This lifestyle, the goal of hamiltonians everywhere, is the payoff. This system supports the few who are afflicted with libido dominandi, and as we saw first in 1 Samuel 8, there is no shortage of people in history that line up to follow these leaders. People beg to work for such “leaders.”
"The jobs bank must be eliminated," says Miller. "Paying people not to work is just not sustainable."
Then why did management agree to do so?
The total of all the waste this article complains of is what the unions grabbed, and management agreed to. If union labor , including 103,000 per year forklift drivers, layabouts, featherbedders, and 26/hour grass cutters only accounts for 8.4% of the cost of a car, then 91.6% of the cost is other. If you want to control costs, where to start?
To management, well, step #1, is to get taxpayers to bail out poor management. Path of least resistance. Step #2 is bankruptcy, in which all the promises to the unions are abrogated, netting a actual cost of labor per car being reduced to some 4%, since those health and benefits and pension promises which went into the calculating the cost of manufacturing the car have disappeared. That 103,000 per year forklift driver, turns out he was only earning $51,000 per year over the last 20 years. What a fool!
If labor agreed to work for free for the next hundred years, no pay, no benefits of any sort, this would not be enough to save the auto industry. As a practical matter, the solution lies elsewhere than labor.
And what about all the talk of high paying jobs? How come on one hand it is a political imperative to have high paying jobs in America, but on the other hand, as soon as someone gets well paid in America, particularly labor, all bets are off?
And here is sheer nonsense, because the premises are false, and the conclusion is erroneous:
“When future debts (like health care and pensions) far exceed realistic estimates for future income, there's a problem. The union workers' loyalty is to the Union and not to the company or the stockholders. Hello...there is no Union without the company and stockholders. The Union's argument: there is no company without the worker. It's a good argument but those workers need not be Union. That's the reality.”
Let me take that apart sentence by sentence...
*When future debts (like health care and pensions) far exceed realistic estimates for future income, there's a problem. *
Future debts were agreed to by management. So whose problem is that? Now management wishes to be irresponsible. Labor suffers for that.
*The union workers' loyalty is to the Union and not to the company or the stockholders. Hello...there is no Union without the company and stockholders.*
Simply not true, when Chrysler disappears, the UAW will exist. My nephew, when pursuing his Ph.D. at the University of Washington in philosophy, and serving as a TA to a full professor, was obliged to become a member of the United Auto Workers. Yes we have government unions in the schools, but house unions are mattress-back groups, and have nothing to say when real labor organizers show up. At several leading universities in USA so far, the UAW has organized “labor.” As mentioned earlier, there are problems, therefore there are unions,
*The Union's argument: there is no company without the worker. It's a good argument but those workers need not be Union. That's the reality.*
Two edged sword. On one hand those workers need not be union, but on the other hand that company need not be Chrysler, or GM, or the far more sly Ford.
And the argument misses the point that without the union power, the unions would not have supported the unwarranted growth of the car companies, with all of their subsidies, counter-competitive regulations and wealth transfer programs that unions got 8.4% of, and management got 91.6 % And best of all for management such as GM’s Nardi and others, people with exactly zero business skills can pull down hundreds of millions a year keeping a seat warm in a private jet, going no where in particular, for no particular reason.
And this observation:
“Alas, the Jobs Bank became little more than a casino and lounge, where workers would report for a full day of leisure, reading newspapers, playing cards, and generally not adding value to GM’s vehicles. (Sounds a bit like my job description, actually.) Now you know why a handle falls off or you hear a tinny sound when you slam your Chevy’s door.”
So what? it was agreed to, and is included in the 8.4% of the cost of labor. Those people represent taxpayers and political clout, which benefits big three when we worry about USA labor. And they are back-up workers ready to hit the lines should business pick up. Instead of developing marketing skills and design skills, big three auto makers simply agree to keep redundant workers around at consumers expense in case something goes right and sales pick up. Since the managers know ultimately taxpayers will bail them out, they need not hire the kind of talent that designs attractive cars and projects demand accurately. Why bother?
And the cheap shot regarding tinny sound and handles falling off... since when is quality control not the direct responsibility of management?
And here is a blog comparing wage rates, which if read correctly will graphically show with bankruptcy, any pay differential that big 3 workers were getting nominally, will disappear in actuality.
Hamilton and empire lead to an unwarranted flow of toxic capital. Labor got some, and moved into the middle class.. the symbiotic nature of this organism surely shows that both union and management has benefited greatly from the relationship, management vastly more than labor. Now management by bailout or bankruptcy will cheat labor of the little they received. Expect talk of class warfare to re-emerge.
Too bad, since there is a better way. Cut off all subsidies and regulations to auto industry. end voluntary restraints on imports and rediuce import duties to zero on cars. Let the rule of law force bankruptcies, and let the free market resurrect the industry. The big losers in this plan would be Toyota, BMW, and Honda. the big winners would be USA labor and consumers.
Tuesday, January 6, 2009
Key Business Ratios
Got question today about finding the markups on beauty care products, so here is a good reference list...
Foreign Management Expanding into US Auto Market
In a vote of confidence to USA labor, Volkswagen, after making free market moves on the finance side, is planning to build in USA and hire USA labor.
Monday, January 5, 2009
Iguana Causes Darwin Re-write
Every field is open to challenges of innovation... Darwin missed this Iguana, which causes some theoretical problems. No problem, Darwin is updated faster than critics can keep up... and the far more likely explanation, quick mutation (slower than a suntan but faster than evolution) does not have quite the imperative behind it.
Wedgewood Goes Down
Wedgewood/Waterford Crystal is going down after 250 years... same problem, took on too much debt. Management foolishly decided to expand to serve customers who aspired to own the best, and to do so, Wedgewood expanded operations... in Indonesia.
Wedgewood would be sitting oon a pile of gold right now had they simply innovated iin design and jacked up their prices to mop up money over the last decade or two.
The good news is more production capacity is now available dirt cheap and another supplier is gone, for those in the housewares business.
More Opportunities In Medicine
Seems medicines do not always work as stated, but there are tests that can predict efficacy for an individual, although Big Drug wants this regulated.
The age of tailored medicines is coming, although probably not in the USA. Excellent opportunity for a small business.
Dirk Launches
I received an email from one fellow who fears, given all that is out there, some one must have thought up anything he would, so there is nothing new, thus competing on design is not tenable.
And the next email was from Dirk who has launched something new. Nice juxtaposition.
Recall our method: we go shopping. If CUSTOMERS say it is a good idea and does not exist, then it does not exist. Let's take the case of Dirk's product. What if such a thing has been introduced in say France, and yet no one in USA has ever seen it or knows about it. (This is unlikely, but bear with me...) If it exists but is otherwise unavailable, then for all practical purposes it does not exist, and Dirk is the first to market.
Let me anticipate another argument: what if there is a patent on the item, that Dirk does not know about, but finds out later? Dirk is already getting feedback that will lead to new and different versions and allied products, since he is in the game. Because this particular product is relatively small part of a small business, the cost of coming after such "violators" is too much to bother, especially since the item is being redesigned anyway.
Your Competitors Take A Hit
If you are not reading Mish everyday, you should be... he bird dogs the best stuff... in this article apropo to the talk of ratings agencies and regulation, he calls for the elimination of the ratings monopolies the govt gives Fitch, Moody, etc....
But more important, there is something this article notes: the bailouts are so massive and the US Govt guarantees to banks so strong, that banks find it better to keep their money than risk it on small and medium businesses. I know people who've had to dip into their IRAs to replace lost lines of credit at the small business level. As the article notes, perfectly profitable, viable businesses are folding for lack of credit.
If so, how about in your field? A self-financed business may be 1/20th the size, but plenty profitable as a start for you.
There is something else here, having to do with natural law and making money on money. Does using interest give people outsized leverage, allowing them to control more than would be normal? And if so, is it ultimately a unsustainable biz practice?
Sunday, January 4, 2009
Anthony Checks in On BioTech for Fun and Profit
In economics the bad drives out the good, such as with our biotech industry. The model of amassing money to start a biotech company is over for a while, so the opportunity to start such companies on the kitchen table is rising. Here someone interested in a home version of a test to find melamine in baby food, in light of the scare from China. Her business should be good, especially since Johnson and Nestle include melamine in their best selling USA-made baby foods. USA introduced the practice and there is even a 1958 patent for it in cattle production. Checkout all wikiepdia has to say...
Food
Jim Rogers says the next bull market will be in food, and with delicacies coming out of hard times, Anthony checks in with pigeon farming... and someone doing fruit right...
Lagerfeld Buys Knock-offs Too
I've mentioned before that the design houses know better than to care about knock-offs and pirated goods since such items sell to people who are not customers anyway. Here is Karl Lagerfeld shopping in NY.
Don't Call It Honor
It is sad to see people committing suicide over their losses, but it is never an act of honor as it claimed by this suicide. If you live like royalty for years on other peoples money, and lose it all through foolishness, the least you can do is stick around and make a full explanation of what happened, failure analysis, so we can make sure it does not happen again.
So many of these people put so much into one fund, a direct repudiation of the biblical advice to diversify? Because they have far more money than they can manage themselves? How did they accumulate so much? Only two ways: either cooperating or resisting government policy. In a free market, it is impossible to amass more wealth than you and yours can personally handle.
Here the 94th richest man alive kills himself over the financial problems. He made huge wrong-way bets on Volkswagen, and lost a half-billion. He has much more. (In the Volkswagen deal investors used free market thinking to win, and did.)
Will to suicide reflects an illness on some level, physical, mental or spiritual, or all three, which in some cases goes untreated. A free market in medicine would give us far more people working on these problems.
I've been told the time to take a suicide seriously is when the perpetrator names his method (gun, pills, jump...), at which point call in the professionals.
Prince Competes On Design
The artist yet again known as Prince will release 3 albums in 2009. The interesting part is he will use no record label, aka publisher.
Since all media is under strict government control in USA, by one means or another, the market is highly distorted, and naturally corruption follows. Nonetheless, innovators break through when exposure of corruption occurs, or innovation intervenes.
The payola scandal of the late 50's allowed an opening for the British bands to get into the mainstream USA market along with soul music. Deregulation lite of the internet has foiled the lockdown of the music and book publishing industries. Not sure how long the freedom will last, but right now, it is a great time to be starting a publishing business.