Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

[rchdenton]

Re: apropos - a crappy blast from the past I came across again today

What do these hard working small business people do? Run accounting, law and property management firms for commercial real estate investors [the quintessential "service" economy]? Are any of them involved in manufacturing? ...

A good question. Bars, motels, finance, retail, govt. The service economy. But it could easily be engineering, fish processing, etc, but that would be industrial property rather than commercial.

Our local economy is based on fishing, farming, forestry and tourism in roughly equal parts.

The question I am fumbling to pose has to with whether there really is a food pyramid in economic terms with these good basic things at the bottom, then services and construction on the next layer, then finance at the top (land ownership being part of finance). Is this a useful or daft analysis?

[Guest]

Re: apropos - a crappy blast from the past I came across again today

whatever happened to what Ken Fisher was saying in late 2006 / early 2007 ?

The thesis that debt is good?

That "a few" Americans would be hurt by excessive debt, but that most Americans did not have enough debt, that more people should leverage up - take debt out on their houses and invest it.

http://www.amazon.com/Bloomberg-disc...sin=047007499X

http://theaustrianaccountant.blogspo...oves-debt.html

Unfortunately a quick search didn't turn up the article being described in this last link.

believe it or not, this thinking is STILL (!!!!!) out there.

Ironically if this whole mess leads to hyperinflation those with fixed rate debt may benefit from it, assuming they used it to buy something tangible and useful

[Spartacus]

Re: apropos - a crappy blast from the past I came across again today

it seems to me you're not clearly separating speculation from commerce

As I understand it, and my reason for posting is that you can point out the error in my thinking, is that during times of asset price inflation debt is useful as it magnifies your gains. The danger is that during times of asset price deflation, such as we have now, it is to be avoided as it magnifies your losses.

This needing to "get out" is the trademark of speculation, not "business".

what FRED wrote was, the best use of debt is to produce business income. Pay off the debt with that income.

Using debt to purchase assets that may or may not appreciate in value is leveraged speculation. This was the cause of the current mess - leveraged speculation on housing, cmmercial property and the associated derivatives and asset-backed securities.

The difficulty is getting out the door ahead of the crowd and knowing when to do that.

As would be true of any speculation, as opposed to a business that is a going concern.

If you find some web resources on Hyman Minsky, you 'll see that at the start of a business cycle, debt is invariably used prudently to finance "going-concern" businesses.

As people become more comfortable with debt, it creeps into higher and higher risk uses.

toward the end of the credit cycle, a stage that Minsky called "ponzi finance", people come to believe that huge debt loads are the norm, and vast quantities of debt are used for speculation, not for regular business.

I don't know the Wedgewood story, but it appears to me someone must have leveraged up that company to speculate elsewhere. I suspect it was a target of private equity - why would a century old company in a staid industry have that much debt? Someone raided it (loaded it with debt) to "free up capital" for speculation.

[rchdenton]

Re: apropos - a crappy blast from the past I came across again today

This is speculation, not business.

what FRED wrote was, use debt to produce business income. Pay off the debt with that income.

Using debt to purchase assets that may or may not appreciate in value is leveraged speculation. This was the cause of the current mess - leveraged speculation on housing, cmmercial property and the associated derivatives and asset-backed securities.




As would be true of any speculation, as opposed to a business that is a going concern.

If you find some web resources on Hyman Minsky, you 'll see that at the start of a business cycle, debt is invariably used prudently to finance "going-concern" businesses.

As people become more comfortable with debt, it creeps into higher and higher risk uses.

toward the end of the credit cycle, people come to believe that huge debt loads are the norm, and vast quantities of debt are used for speculation, not for regular business.

I don't know the Wedgewood story, but it appears to me someone must have leveraged up that company to speculate elsewhere. I suspect it was a target of private equity - why would a century old company in a staid industry have that much debt? Someone raided it (loaded it with debt) to "free up capital" for speculation.

I think I follow you there.

My problem is that the value of any asset is derived from its income flow. So, for example, I buy a commercial property and pay off the debt, or I buy it for cash, or I buy three, sell one later and pay off the debt on the other two. Putting aside tax considerations, what you suggest will mean my income goes down dramatically as my tenants hit difficulties, but my money will be in a real asset not a pretend one (such as cash in the bank) and hopefully I live to fight another day. The risks are greater with the more highly leveraged strategy. I still think I'm missing something.

Is there a distinction between business and speculation as is commonly supposed? Doesn't business imply speculation.

[Spartacus]

Re: apropos - a crappy blast from the past I came across again today

IMHO most business profit should come out of markups, not asset appreciation.

And you are right, there's no absolute clear-cut demarcation between commerce and speculation. There are clues, heuristics, signs and portents.

needing to get out at a particular time is a clue (not fool proof) that some activity has gone out of "normal business" into speculative territory.

When various business ratios stray outside of historical ranges (like rent versus ownership costs did recently in housing) is another clue

I think I follow you there.

My problem is that the value of any asset is derived from its income flow.

not strictly current cash flow - expected flow into the future is also part of it.

And when asset prices stray away from this type of normal valuation (like internet stocks in 1999 and rental properties recently), it's a clue that speculation has taken over a some segment of the economy.

So, for example, I buy a commercial property and pay off the debt, or I buy it for cash, or I buy three, sell one later and pay off the debt on the other two. Putting aside tax considerations, what you suggest will mean my income goes down dramatically as my tenants hit difficulties, but my money will be in a real asset not a pretend one (such as cash in the bank) and hopefully I live to fight another day. The risks are greater with the more highly leveraged strategy. I still think I'm missing something.

It sounds lke half way through the post you switched to asking and answering a different set of questions.

"realness" of different assets and asset classes is a separate issue from the prudent use of credit.

Predicting which assets and income streams will do well in a recession is also another issue entirely. commerce and asset speculation do merge in this last exercise (the exercise of deciding where to put your investment dollar).

[rchdenton]

Re: apropos - a crappy blast from the past I came across again today

IMHO most business profit should come out of markups, not asset appreciation.

And you are right, there's no absolute clear-cut demarcation between commerce and speculation. There are clues, heuristics, signs and portents.

needing to get out at a particular time is a clue (not fool proof) that some activity has gone out of "normal business" into speculative territory.

When various business ratios stray outside of historical ranges (like rent versus ownership costs did recently in housing) is another clue



not strictly current cash flow - expected flow into the future is also part of it.

And when asset prices stray away from this type of normal valuation (like internet stocks in 1999 and rental properties recently), it's a clue that speculation has taken over a some segment of the economy.



It sounds lke half way through the post you switched to asking and answering a different set of questions.

"realness" of different assets and asset classes is a separate issue from the prudent use of credit.

Predicting which assets and income streams will do well in a recession is also another issue entirely. commerce and asset speculation do merge in this exercise.

Okay, I think I have got the message.

When speculative activity has come to dominate normal business criteria this is a warning sign. So for instance, if the long time average capitalisation rate is 8%, (which seems a fair rate of return, if there is such a thing) and property is priced at 6% then do not buy. Consider reducing debt by selling. This seems to me to be the basics.

The wild card is the availability of credit - the best laid plans are entirely de-railed if loans cannot be rolled over at any price (or the bank reduces the loan to value ratio). Hence the panic to preserve the banks.

[FRED]

Re: apropos - a crappy blast from the past I came across again today

Okay, I think I have got the message.

When speculative activity has come to dominate normal business criteria this is a warning sign. So for instance, if the long time average capitalisation rate is 8%, (which seems a fair rate of return, if there is such a thing) and property is priced at 6% then do not buy. Consider reducing debt by selling. This seems to me to be the basics.

The wild card is the availability of credit - the best laid plans are entirely de-railed if loans cannot be rolled over at any price (or the bank reduces the loan to value ratio). Hence the panic to preserve the banks.

Recommend: Time at last to short commercial real estate

[rchdenton]

Re: apropos - a crappy blast from the past I came across again today

Thank you Spartacus. Sorry to be so slow, but the confounding factor is that commercial real estate, like most businesses, has one foot in the production/consumption economy and one foot in the real estate/finance economy.

Adapting Michael Hudson: the building is part of the production/consumption economy, it provides a service, the usefulness of which changes with supply and demand; the land value is part of the finance economy and its value changes according to credit availability.

[labasta]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

Father-in-law worked in manufacturing (yarn maker for denim) in Ireland in the 70s and 80s. Amazing he actually had a job at this time. He said every year that the machines were upgraded someone lost their job (replaced), and it was never someone from management. Then in the early 90s they shut up shop and moved to China. A great way to increase employment... not. Machines have made for repetitive and dull work, but I suppose most work must have it's fair share of repetitivesness in this world of standardised products. Maybe it doesn't have to be so, or maybe menial jobs can be kept at a minimum. I don't know. How do we create fullfulling careers might be the right question.

At last, the race to the bottom has broken the bottom and there's nothing they can do to fix it. No bullshit economics will work this time. Finally, the fraud of globalisation is over.. and it is going to be one hell of a smack in the face.

They will begrudgingly have to race to the top now, and not a moment too soon.


People on the property pin were wondering how Waterford Crystal was still in business. Question answered.

[Louie.G]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

Today is beautifully sunny and it is a lovely place to live but the same problem exists here - property is the only game in town.

Property has been the only game in town there for years but I feel the kiwis might move out of their denial stage soon unless there is a massive immigration to save their high property prices. My company specialised in Product development and in the early 90's I tried to raise capital in NZ. Deal was, buy a bond from one of the 2 largest banks, return was inflation plus 3% after tax. If my company failed, you took your bond to the bank and got your initial investment back. Kiwi investors all said no because it was too risky. None of them could explain to me how a Bank guaranteed investment was risky other than to say, we were in product development. However I would have to agree that these days I would not trust a bank guarantee lol.

Thus I now do a lot of my R&D here in the US and it is tax deductible as against having to be capitalised in NZ.

Hold the nice sunny days there please. I am due back in a few weeks and it is cold here in Santa Fe, but at least I can go snow skiing lol.

Cheers

[jtabeb]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

The process of backing away from long term equity investment into UK industry has been going on for many decades. I delivered a 170 page report to the UK government in 1992 detailing the problems I had by then been able to clearly document regarding several attempts at capitalisation, one in conjunction with a major university where the answer came back to a very high level individual brought in to help by a Deputy Lord Lieutenant (Queens representative at the local level), "Research and Development old boy? Bottomless pit, never touch it with a barge pole."

The UK has been an accident waiting to happen for some time now. But my problem is, do I stay or go? Will the message get through this time, and thus is it at all possible to see a chance to establish something new now, or should I abandon the UK entirely and seek a better location to establish new business. And for that matter, where do we go?

Galt's valley?

[rchdenton]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

Thanks Louie,

Its not just house prices, land prices are massively overvalued too. But hopefully the rest of the world will continue to find our food useful even if they can do without iron ore for a while.

[Chris Coles]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

Galt's valley?

Atlas does not shrug around here and mythical valleys in the minds eye of a far right wing author have no place in the search for a long term business location. But thanks for the thought....

[Louie.G]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

Thanks Louie,

Its not just house prices, land prices are massively overvalued too. But hopefully the rest of the world will continue to find our food useful even if they can do without iron ore for a while.

I agree, land is crazy too. It is difficult to get a reasonable return on a dairy farm even with the huge payout last year. And now I understand the payout has dropped about 30% odd from last year.

Unless other countries introduce tariffs (like the USA with their 100% lamb tariff a few years back, and France with the striking farmers.) then Agriculture should save the day somewhat. The drop in the NZD will also help.

However NZ is, IMHO, still just a C & C economy (Cows and Construction) Dairy products are our major export, and their stuff up in China with the milk powder scandal may come back and haunt them.

Construction. Well with many workers moving to Aus because of no work, then that ain't a growth industry. Unfortunately, there is no real industry in NZ to speak of. I guess it will be back to the old bring on the immigrants policy to save the day again, like the 90's and Rah Rah up the Tourism. Unemployment should stay low because of all the kiwis moving to Aus.

NZ is one of the most highly indebted developed countries in the world, (as say RBNZ) so that isn't a good thing, yet Christmas eve had the highest recorded credit card sales in history. Foreign debt at 130% GDP hmmmm

So what is going on, are they all still in la la land, or has our new ex Wall Street Prime Minister pulled a rabbit from the hat?? I note that household debt has increased even more in the past year, and NZ has officially been in recession for most of the year. Don't know what it is but NZ seems to keep defying gravity as regards logic and economic sense. lol.

Ahhhh. I know the answer, I shall return to NZ penniless, rent a house on the beach (cause there will be no work there and Social welfare will pay the rent), then go on the dole (unemployment) and retire my days away watching the sun come up and the tide come in. Do a spot of fishing to catch dinner, dive for my quota of seafood and to hell with economics lmao. Door will be open for all Itulipers, with the key under the mat in case I am out fishing when you arrive.

You will know I am out fishing because the 45 ft launch will not be moored in the bay.

Cheers

[rchdenton]

Re: Debt brings down venerable manufacturing firms, right on schedule - Eric Janszen

However NZ is, IMHO, still just a C & C economy (Cows and Construction)...

Unfortunately, there is no real industry in NZ to speak of.

Whilst this is largely true we are more diversified than that. Construction is an industry that can get turned off for a while, which is why the govt are keen on road building and such like to keep the productive capacity and to provide employment. 5% of exports in recent months has been oil of all things and 15% of our electricity is exported as aluminium. I live in Nelson so seafood is a big regional export earner, as are forestry and apples from time to time.

As Wayne Lochore observed, there are worse places to be than a country of 4 million with food for 55, and it is still sunny.