New Dollar Bill

September 30, 2008
The New Dollar Bill

The New Dollar Bill


What Would Grandma Do?

September 30, 2008

With the days of esoteric investments behind us, we will need to look at the investments of the old economy if we are going to find the opportunities of the future.

One view of what has happened over the last couple of decades is that simply put, too much leverage has created too much capital, generating too much wealth demanding too many opportunities. As financial engineers devised new places to park cash, they began to believe their own balderdash, and so more leverage was created to take advantage of the growing marketplace for their contraptions masquerading as investments.

If we are going to get through this period, and if we are to thrive in the next decade, we are going to need to get back to basics. If we all continue to go to work, those of us who retain our jobs, put in our best effort and look to create real value, the economy will at least putter through. That said, and despite the staggering losses reported, there is still a ton of cash and wealth on the planet. For the most part our financial system is a zero sum game. Although I’d argue that temporary bans on short selling might actually, and ironically, cause real losses of capital, that is probably the making of another post.

Nonetheless, for most trades there is a buyer and a seller, or more recently a winner and a loser.  After all, each person who sells a depressed asset below its fair value is giving value to the counter party.  The only way we really create value is to create or offer products and services that we need or want, even if we don’t yet know we need or want them, think iPod.

As we move through and past this storm, the eye of which has yet to hit us, we must consider how we rebuild and how to create rules that will enhance the ability of real people to make real products and offer real services, as opposed to financial widgets of mass destruction.

As Michael Pollan notes in In Defense of Food: An Eater’s Manifesto, we need to eat those foods that our grandparents would recognize, or at least consider ingredients that they would know.  I propose that the future of our economy may follow an equally simple philosophy: only invest in things that your grandparents would understand.

Green the Bailout by Thomas L. Friedman

September 28, 2008

This article by Thomas L. Friedman was penned yesterday and printed today.  It is a wonderful view on many of the comments I have posted here in recent weeks.  I’d encourage all to read it.


Green the Bailout
Thomas L. Friedman, New York Times, September 27, 2008

What ever happened to respectable political commentary?

September 28, 2008

Statler & Waldorf

Statler & Waldorf
Eric Liebowitz, New York Times Op-Art, September 26, 2008

The Girls Next Door

September 27, 2008

In light of the current market meltdown, pending crisis, and litany of debates over the topic, there is bound to be a shift in corporate (and individual) investment psychology over the coming years.  If we analogize the double digit “low risk” returns of yesteryear with sexy supermodels, then we may look to consider those single digit “no risk” opportunities ahead of us as the girls next door.

The sexy supermodel investment opportunities up until recently were made possible by massive amounts of leverage, off-balance sheet financing, complex financial engineering and syndication.  These investments were conceived, underwritten, and sold to millions of investors around the world.  A great many anticipated them with insatiable appetites, much like a typical male teenager who has discovered the Victoria Secret catalog.

Corporate CFO’s have had their pick of supermodels over the last few years, with Wall Street and its massive amounts of leverage seemingly able to offer an endless supply.  Now, the music has stopped.  Wall Street no longer exists in the same form it did as little as two weeks ago.  Furthermore, the remaining investment banks will surely no longer be allowed even 15 times leverage let along 30 or 45 in their new forms as commercial banks.  Post bailout, and after new regulations take hold, investors around the world may be forced to look at a smaller set of investment choices for their company’s and for their professional and personal portfolios.

What will the remaining insurance companies, regional banks and a host of other large institutions look to invest in?  Will there be a new financially engineered product offering high returns with “little risk”.  (How long would the disclaimers have to be on such a concept anyway?)

Since the beginning of the millennium, the field of finance and domestic markets have rewritten themselves despite antiquated regulations.  Moving forward it is more than likely that future investment opportunities become simpler, easier to understand, and less interconnected regardless of new regulations.  At least I’m hoping we go that way over writing longer and more complicated legislation.  The opportunity set of investments is likely to be smaller, and despite all the reported losses, there is still a ton of cash out there looking for a home, particularly when T-Bill yields have turned negative at moments in time.

In any event, I am more than hopeful that not all investments will force us to take a loss, and to the contrary, given where we are today there will be a lot of opportunities moving forward.  However, the concepts of wild leverage and massive syndication of complex instruments are probably at best on hold.  In their place will be the need for us to look a little further, and work a little harder to make good investment decisions.

This brings me to my final point, with respect corporate investment.  Corporate CFO’s without huge warchests are going to face new challenges.  The opportunities to make acquisitions, to fund highly accretive but speculative investments with balance sheet, or to deploy large amounts of cash into major expansions are going to be rarer.  With the hope that interest rates stabilize, and that they will remain low for some time though, the investment hurdles ahead may force more companies to look inward.  In this environment a solid 7, 8 or 9% return may be enough to get CFO’s everywhere to smile.  If this becomes the case, many investment opportunities may become inward verses outward, and corporations may be looking to rebuild infrastructure, efficiency and cost advantages.

One more lever in the case for investing more sustainable modes of business.

Treasury Prices Firm After Auction; T-Bill Rates Below Zero
Reuters, September 24, 2008

Bailing Upward
Larry Grafstein and Jim Millstein, The New Republic, September 26, 2008

Fault-Tolerant Design

September 26, 2008

This one is straight from Wikipedia.  You’d have thought someone in charge of markets had heard of this before:

In engineering, Fault-tolerant design, also known as fail-safe design, is a design that enables a system to continue operation, possibly at a reduced level (also known as graceful degradation), rather than failing completely, when some part of the system fails. The term is most commonly used to describe computer-based systems designed to continue more or less fully operational with, perhaps, a reduction in throughput or an increase in response time in the event of some partial failure. That is, the system as a whole is not stopped due to problems either in the hardware or the software. An example in another field is a motor vehicle designed so it will continue to be drivable if one of the tires is punctured. A structure is able to retain its integrity in the presence of damage due to causes such as fatigue, corrosion, manufacturing flaws, or impact.

We need more than a bailout, we need solutions.

Fault-tolerant design
Wikipedia, 06:45, 1 September 2008

Devils and Dealmakers

September 26, 2008

In dealing with Wall Street types, the moral is not trusting the devil you know over the devil you don’t.  The moral is that anyone you strike a deal with is likely to, in fact, be the devil.  Caveat Emptor.