The Ground Gives Way - Eric Janszen

[LargoWinch]

Re: The Ground Gives Way - Eric Janszen

What makes you think it will average only 10%?

As of Nov 2008, the adjusted monetary base was growing at 75% year over year. I'm not a doom-and-gloomer, but the odds of inflation only being 10% per year after that kind of input would seem to be pretty small -- and it seems like the worst spikes are probably yet to come.

Sharky, what I meant - in a not so clear way I must admit - is that inflation running 20% per year (see EJ's previous work and forecast) coupled with a benchmark rate of say 10% (that is my guess, without supporting data), hence giving us 10% real negative rates.

EJ is assuming that this 20% inflation scenario will last for about 5 years or about 100% for the period (lets ignore compounding for now).

The above would be pretty bad, but it does not mean Argentina. It looks to me more like the 70s on steroids and that is far away from the madmax scenario.

[LargoWinch]

Re: The Ground Gives Way - Eric Janszen

Once again, oil is the most political of commodities. One needs to be careful how one plays it, no matter which jurisdiction, or method [commodity or equities]. Political risk is inseparable from investing in oil.

That is why I never trade my crude ETF (HOU.TO); I am not that smart.

My strategy is actually quite simple:

a) If gold in $CAD buys you more than 10 barrels of oil: buy crude.

b) If gold in $CAD buys less than 10 barrels of oil: buy gold.

Sounds cliche, but "hey" at least it is a strategy, which is better than no strategy at all!

At the latest count one ounce of gold in $CAD = $1,050 and one barrel of crude was only $US34 that is a 31 to 1 ratio; hence I am buying crude (I mix the USD and $CAD because my ETF is based on crude's price in USD but $CAD hedged).

[LargoWinch]

Re: The Ground Gives Way - Eric Janszen

you might want to look into canadian energy-based income trusts. these are smaller companies devoted to production more than exploration, and paying big dividends. i conceptualize them as storing oil for me, underground, and then pumping a barrel or two for sale each year, sending me the proceeds.

An example of such income trusts is the following:

[EJ]

Re: The Ground Gives Way - Eric Janszen

Capitalism has its problems too, to point out trends to a more collective mindset as a form of mass horrendous stupidity as the shit hits the fan from capitalist excesses seems a bit rich.

We need both mindsets it seems in some kind of balance. As far as I can tell socialists can be thankful for some of the outcomes generated by those with capitalist mindsets and capitalists can be likewise be very thankful for positive elements brought about by those with a more socialistic perspective.

The successful capitalists have been concentrating their wealth and power over the last couple of decades and due to time proven human faults they blew it again. Now the state is having to step in to fill the void. To now start blaming people who try to look beyond their own self interest, now matter how infused with flaws their theories undoubtedly must be, strikes me as being particularly lame and striking at an easy target; and extremely ideological.

Not being a doomer I take your concerns are not involving some kind of socialist revolution but rather greater state involvement. Sorry, the purely self interested goons that you idolise so greatly were plenty involved in necessitating the state intervention that they apparently ideologically abhor but accept readily when they achieve too big to fail status.

"The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism." - Schumpeter

Allow me to give you a specific example. Last week in an exchange I had with Henry Liu of Asia Times, a back-and-forth on how to address the global economic crisis from China's perspective, Henry promoted an idea that is currently in favor within the Obama administration: use tax incentives to penalize companies for laying off employees and reward them for hiring. Such an idea can only be contemplated by someone who has never run a business and understands nothing about how competitive markets operate.

When I was running a high tech start-up Q1 2001 to Q1 2005, from the depths of the IT capital expenditure depression to the start of its recovery, we at times had to cut our own salaries and lay off employees. We did not do so because we enjoyed it. We did so to as part of a strategy to survive our competitors, who may not have been as willing to make the collective sacrifices needed to weather the storm. The pool of customers may have been shrinking in the IT CapEx depression, but then so was the number of companies vying for them. In concert with layoffs we pursued other cost reductions, such as re-negotiating the lease with the landlord. More importantly we adopted a more capital efficient business model than our competitors'. We were able to approach cash flow break-even on the $28MM I raised versus the $60MM or more our competitors raised. In a capital constrained environment, that gave us a huge advantage. We also pursued a targeted vertical market strategy that further improved our efficient by lowering cost of sales. When the dust settled, we had outlived many of our competitors, and as the market for our products grew, so did we, growing 40% quarterly for years, and we soon doubled our number of employees. We had a better team, strategy, and product than our competitor's did. At the time I met with potential acquirers in 2004, we had over 200 customers while our nearest had fewer than 20.

If the US government had in response to the recession in 2001 provided tax incentives for hiring and penalties for us to lay off employees when we needed to in, we might have gone out of business, while weaker yet better capitalized and less capital efficient companies survived us.

Multiply this across all industries as is contemplated and you see the problem: it rewards uncompetitive decision making.

But it's actually worse than that because these companies are funded by private equity, by venture capital, by individuals putting money at risk. The reason venture capital is successful in the US but not in Europe or other countries were government interferes in the private sector in the way Henry is suggesting is that start-ups are vulnerable to market forces anyway; to make them additionally vulnerable to arbitrary government policy makes venture investing a non-starter. For the US that means we can forget about innovation. I'm not saying that a single rule to tax layoffs and reward hiring will kill technology start-ups, but the idea is evidence that Schumpeter's prediction is coming true: "The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism.

Do not confuse FIRE Economy with innovation capitalism. For decades the two have lived in uneasy coexistence. But now the political response to the collapse of the FIRE Economy threatens to kill the goose that laid the golden egg. The FIRE Economy made the US uncompetitive by burdening employees with debt so that salaries must be higher than in many other countries in order for employees to pay their past tuition bills, health care, and housing. Now the collapsing FIRE Economy is producing high unemployment, and the result is a wave of policies designed to rescue economy -- bank and large company bailouts -- that do not take into account that part of the economy that has the only chance of delivering the US from its long term crisis of underinvestment (low savings), dependence on debt financing, and over-consumption.

Do not confuse rent seekers for entrepreneurs. Donald Trump is no Eric Schmidt.

[vinoveri]

Re: The Ground Gives Way - Eric Janszen

"The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism." - Schumpeter

Allow me to give you a specific example. Last week in an exchange I had with Henry Liu of Asia Times, a back-and-forth on how to address the global economic crisis from China's perspective, Henry promoted an idea that is currently in favor within the Obama administration: use tax incentives to penalize companies for laying off employees and reward them for hiring. Such an idea can only be contemplated by someone who has never run a business and understands nothing about how competitive markets operate.

When I was running a high tech start-up Q1 2001 to Q1 2005, from the depths of the IT capital expenditure depression to the start of its recovery, we at times had to cut our own salaries and lay off employees. We did not do so because we enjoyed it. We did so to as part of a strategy to survive our competitors, who may not have been as willing to make the collective sacrifices needed to weather the storm. The pool of customers may have been shrinking in the IT CapEx depression, but then so was the number of companies vying for them. In concert with layoffs we pursued other cost reductions, such as re-negotiating the lease with the landlord. More importantly we adopted a more capital efficient business model than our competitors'. We were able to approach cash flow break-even on the $28MM I raised versus the $60MM or more our competitors raised. In a capital constrained environment, that gave us a huge advantage. We also pursued a targeted vertical market strategy that further improved our efficient by lowering cost of sales. When the dust settled, we had outlived many of our competitors, and as the market for our products grew, so did we, growing 40% quarterly for years, and we soon doubled our number of employees. We had a better team, strategy, and product than our competitor's did. At the time I met with potential acquirers in 2004, we had over 200 customers while our nearest had fewer than 20.

If the US government had in response to the recession in 2001 provided tax incentives for hiring and penalties for us to lay off employees when we needed to in, we might have gone out of business, while weaker yet better capitalized and less capital efficient companies survived us.

Multiply this across all industries as is contemplated and you see the problem: it rewards uncompetitive decision making.

But it's actually worse than that because these companies are funded by private equity, by venture capital, by individuals putting money at risk. The reason venture capital is successful in the US but not in Europe or other countries were government interferes in the private sector in the way Henry is suggesting is that start-ups are vulnerable to market forces anyway; to make them additionally vulnerable to arbitrary government policy makes venture investing a non-starter. For the US that means we can forget about innovation. I'm not saying that a single rule to tax layoffs and reward hiring will kill technology start-ups, but the idea is evidence that Schumpeter's prediction is coming true: "The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism.

Do not confuse FIRE Economy with innovation capitalism. For decades the two have lived in uneasy harmony. But not the political response to the collapse of the FIRE Economy threatens to kill the goose that laid the golden egg. The FIRE Economy made the US uncompetitive by burdening employees with debt so that salaries must be higher than in many other countries in order for employees to pay their past tuition bills, health care, and housing. Now the collapsing FIRE Economy is producing high unemployment, and the result is a wave of policies designed to rescue economy -- bank and large company bailouts -- that do not take into account that part of the economy that has the only chance of delivering the US from its long term crisis of underinvestment (low savings), dependence on debt financing, and over-consumption.

Do not confuse rent seekers for entrepreneurs. Donald Trump is no Eric Schmidt.

Well put. Couldn't agree more. The strength of the U.S. and its populace has always been its ingenuity and inventiveness, willingness to take risks and work hard. Contrary to what our critics contend, this "cowboy" attitude coupled with the historical capital of decency and good will that we've built up is what has and will serve well in the future. to the extent the gov encourages or discourages these will undoubtedly impact where we head.

Couldn't help but suggest this clarification.
"Mutiply this across all indsutries and you see the problem: it rewards mediocrity resulting in a mediocracy.

[Slimprofits]

Re: The Ground Gives Way - Eric Janszen

"The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism." - Schumpeter

Allow me to give you a specific example. Last week in an exchange I had with Henry Liu of Asia Times, a back-and-forth on how to address the global economic crisis from China's perspective, Henry promoted an idea that is currently in favor within the Obama administration: use tax incentives to penalize companies for laying off employees and reward them for hiring. Such an idea can only be contemplated by someone who has never run a business and understands nothing about how competitive markets operate.

When I was running a high tech start-up Q1 2001 to Q1 2005, from the depths of the IT capital expenditure depression to the start of its recovery, we at times had to cut our own salaries and lay off employees. We did not do so because we enjoyed it. We did so to as part of a strategy to survive our competitors, who may not have been as willing to make the collective sacrifices needed to weather the storm. The pool of customers may have been shrinking in the IT CapEx depression, but then so was the number of companies vying for them. In concert with layoffs we pursued other cost reductions, such as re-negotiating the lease with the landlord. More importantly we adopted a more capital efficient business model than our competitors'. We were able to approach cash flow break-even on the $28MM I raised versus the $60MM or more our competitors raised. In a capital constrained environment, that gave us a huge advantage. We also pursued a targeted vertical market strategy that further improved our efficient by lowering cost of sales. When the dust settled, we had outlived many of our competitors, and as the market for our products grew, so did we, growing 40% quarterly for years, and we soon doubled our number of employees. We had a better team, strategy, and product than our competitor's did. At the time I met with potential acquirers in 2004, we had over 200 customers while our nearest had fewer than 20.

If the US government had in response to the recession in 2001 provided tax incentives for hiring and penalties for us to lay off employees when we needed to in, we might have gone out of business, while weaker yet better capitalized and less capital efficient companies survived us.

Multiply this across all industries as is contemplated and you see the problem: it rewards uncompetitive decision making.

But it's actually worse than that because these companies are funded by private equity, by venture capital, by individuals putting money at risk. The reason venture capital is successful in the US but not in Europe or other countries were government interferes in the private sector in the way Henry is suggesting is that start-ups are vulnerable to market forces anyway; to make them additionally vulnerable to arbitrary government policy makes venture investing a non-starter. For the US that means we can forget about innovation. I'm not saying that a single rule to tax layoffs and reward hiring will kill technology start-ups, but the idea is evidence that Schumpeter's prediction is coming true: "The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism.

Do not confuse FIRE Economy with innovation capitalism. For decades the two have lived in uneasy harmony. But not the political response to the collapse of the FIRE Economy threatens to kill the goose that laid the golden egg. The FIRE Economy made the US uncompetitive by burdening employees with debt so that salaries must be higher than in many other countries in order for employees to pay their past tuition bills, health care, and housing. Now the collapsing FIRE Economy is producing high unemployment, and the result is a wave of policies designed to rescue economy -- bank and large company bailouts -- that do not take into account that part of the economy that has the only chance of delivering the US from its long term crisis of underinvestment (low savings), dependence on debt financing, and over-consumption.

Do not confuse rent seekers for entrepreneurs. Donald Trump is no Eric Schmidt.

What would it take to convince people that think along your lines to run for public office or is that a non-starter? Maybe we need an army of retired entrepreneurs instead of current lawyers in Washington.

Do you have suggestions for campaign financing rules in the U.S.? That is one of the commentaries that I've looked forward to on Itulip since "the Politics of FIRE" series.

[marvenger]

Re: The Ground Gives Way - Eric Janszen

"The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism." - Schumpeter

Allow me to give you a specific example. Last week in an exchange I had with Henry Liu of Asia Times, a back-and-forth on how to address the global economic crisis, Henry promoted an idea that is in favor in the Obama administration: using tax incentives to penalize companies for laying off employees and rewarding them for hiring. Such an idea can only be contemplated by someone who has never run a business and understands nothing about how competititve markets operate.

When I was running a ahigh tech start-up Q1 2001 to Q1 2005, from the depths of the IT capital expenditure depression to the start of its recovery, we at times had to cut our own salaries and lay off employees. We did not do so because we enjoyed it. We did so to as part of a strategy to survive our competitors, who may not have been as willing to make the collective sacrifices needed to weather the storm. The pool of customers may have been shrinking in the IT CapEx depression, but then so was the number of companies vying for them. In concert with layoffs we pursued other cost reductions, such as re-nototiating the lease with the landlaord. More importantly we adopted a more capital efficient business model than our competitiors'. We were able to approach cash flow break-even on the $28MM I raised versus the $60MM or more our competitors raised. In a capital constrained environment, that gave us a huge advantage. We also pursued a targeted vertical market strategy that further improved our efficienty by lowering cost of sales. When the dust settled, we have outlived many of our competititors, and as the market for our products grew, so did we, growing 40% quarterly, and we soon doubled our number of employees. We had a better team, strategy, and product. At the time I met with potential acquirers in 2004, we had over 200 customers while our nearest had fewer than 20.

If the US government had in response to the recession in 2001 provided tax incentives for our competitors to hire, and penalties for us to lay off employees when we needed to in, we might have gone out of business, while weaker yet better capitalized and less capital efficient companies survived us.

Mutiply this across all indsutries and you see the problem: it rewards mediocracy.

But it's actually worse than that because these companies are funded by private equity, by venture capital, by individuals putting money at risk. The reason venture capital is successful in the US but not in Europe or other countires were government interferes in the private sector in the way Henry is suggesting is that start-ups are vulnerable to market forces anyway; to make them additionally vulnerable to arbitrary government policy makes venture investing a non-starter. For the US that means we can forget about innovation. I'm not saying that a single rule to tax layoffs and reward hiring will kill technolgy start-ups, but the idea is evidence that Schumpeter's prediction is coming true: "The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism.

Do not confuse FIRE Economy with innovation capitalism. For decades the two have lived in uneasy harmony. But not the policital response to the collapse of the FIRE Economy threatens to kill the goose that laid the golden egg. The FIRE Economy made the US uncompetitive by burdening employees with debt so that salaries must be higher than in many other countries in order for employees to pay their past tuition bills, health care, and housing. Now the collapsing FIRE Economy is producing high unemployment, and the result is a wave of policies designed to rescue economy -- bank and large company bailouts -- that do not take into account that part of the economy that has the only chance of delivering the US from its long term crisis of underinvestment (low savings), dependence on debt financing, and over-consumption.

Do not confuse rent seekers for entrepreneurs. Donald Trump is no Eric Schmidt.

I understand the rent seeking nature of the fire economy and the productive nature of the real economy and I'm in complete favour of a move towards equity based investment and bankers learning new skills as farm hands.

The piece just struck me as being more than a little black and white in its treatment of intellectuals and their association with socialism. It seems to me that its intellectual endeavour that has lead you to a career as an entrepreneur because you believe this activity provides for the needs of you and your community in the optimum way. I believe you are looking beyond your own self interest in arriving at this career choice decision, I could be wrong but with your grasp of finance it seems you could have made more money by following this career path.

Capitalism argues in an altruistic way that this systems provides the most for all, but its clear that capitalism only works as well as the system in which it operates to provide the most for all, and its intellectual endeavour outside of self interest that achieves these altruistic ends.

It wasn't just market forces that ended the appalling working conditions during the industrial revolution and i'm sure some industrialists lost out big time due to the new conditions forced on their hiring policies.

I agree socially minded policies often have unintended consequences but that isn't all they have. Like everything you have to try to maximise the positives and minimise the negatives. I think there is some truth to the invisible hand of the market but unfortunately it does need a guiding hand from intellectual effort despite the flaws that these efforts undoubtedly create.

[Rajiv]

The Ground Gives Way - Eric Janszen

The current Banking structure also contributes to Venture Capital being and being perceived as an expensive source of capital due to it relative scarcity. If and when Banking shifts to an equity based model (Islamic model), this should result in greater availability of Venture funds, and to availability of less expensive venture money (of course the risk profile of investments will always play a role in the cost of capital!)

Compound Interest money appears to have a lower cost (in the short term) to it -- but it is very expensive over a longer term.

The difference between Venture money cost and Compound interest cost can be appreciated in the following curves from Margrit Kennedy's work - Four Basic Misconceptions About Money

'A' being Venture money, and 'C' being compound interest money!

[The Outback Oracle]

Re: The Ground Gives Way - Eric Janszen

Sharky, what I meant - in a not so clear way I must admit - is that inflation running 20% per year (see EJ's previous work and forecast) coupled with a benchmark rate of say 10% (that is my guess, without supporting data), hence giving us 10% real negative rates.

EJ is assuming that this 20% inflation scenario will last for about 5 years or about 100% for the period (lets ignore compounding for now).

The above would be pretty bad, but it does not mean Argentina. It looks to me more like the 70s on steroids and that is far away from the madmax scenario.

10% a year negative interest rates....how the hell do you work that out? OK Start with $100...earn 10% Income tax marginal rate let's say 40%..so you are left with $6.00. But inflation has cost you 20%...so you are negative 14%!!!!!!! Now repeat for 5 years and I don't have a table immediately to hand but i reckon after 5 years your $100 would be worth what....40% pf what you started out with ...well that's OK eh....stealing from someone else because we are a bunch ofprofligate, self indulgent, selfish lot of bastards is OK.
Well anyway, it's only those retired or approaching that who are really affected. They got to be getting a bit old so it doesn't matter if they starve to death!!!
Damnd if i know - but a society in which stealing from one group to give to another reckless undeserving lot is promoted as public policy and regarded as right , has a short life-span.
Negative interest rates have brought us to this pretty fix...how in teh name of God are they now going to magically fix it all??????????????????????

[ThePythonicCow]

Re: The Ground Gives Way - Eric Janszen

...how in teh name of God are they now going to magically fix it all??????????????????????

I don't know, but I'll wager it won't be done in the name of God ;).

[bart]

Re: The Ground Gives Way - Eric Janszen

...
If and when Banking shifts to an equity based model (Islamic model)
...

The thought has crossed my mind that the Middle East troubles aren't all about oil.

[LazyBoy]

Re: The Ground Gives Way - Eric Janszen

[Schumpeter] argued that capitalism's collapse from within will come about as democratic majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure.

Is this what ituliper's really think is causing the current collapse? The welfare state?!

[FRED]

Re: The Ground Gives Way - Eric Janszen

Is this what ituliper's really think is causing the current collapse? The welfare state?!

No. It was precipitated by policies that resulted from the capture of the US federal, state, and local governments by the Finance, Insurance, and Real Estate industries.

[vinoveri]

Re: The Ground Gives Way - Eric Janszen

No. It was precipitated by policies that resulted from the capture of the US federal, state, and local governments by the Finance, Insurance, and Real Estate industries.

I.e., the corporate welfare state, or more precisely the rentier welfare state.

[LazyBoy]

Re: The Ground Gives Way - Eric Janszen

The strength of the U.S. and its populace has always been its ingenuity and inventiveness, willingness to take risks and work hard. Contrary to what our critics contend, this "cowboy" attitude coupled with the historical capital of decency and good will that we've built up is what has and will serve well in the future.

I guess I'm more cynical about the "U.S. and its populace".

IMO, "ingenuity and inventiveness" is more often used to work the system than for the greater good. Credit Default Swaps and many other financial instruments and techniques were quite ingenious.

And regarding the "willingness to...work hard", it seems there are a lot of people who won't get off the couch. This is not The Greatest Generation we're talking about here.

And "historical capital of decency and good will that we've built up". Have I fallen for a troll?

Maybe I'm too cynical. Maybe as things get worse, we'll start to shine and do amazing things. I'd love to see that. But I wouldn't bet any money on it.