I Love CNBC

I cannot say enough about how much I respect CNBC.  I don’t watch television much–well except for the Food Network and CNBC.  Specifically, I wake up to Squawk Box.  Ever since Mark Haines, Joe Kernan, and David Faber began their witty banter, insightful analysis, and jovial reporting on all things business and economy, I have been a loyal and enthusiastic viewer.  I do not think there is a better produced show with a better prepared, more intelligent, compassionate, and truly caring set of charismatic hosts anywhere on television ever.  Sure, there are the giants of TV news: Cronkite, Brinkley, Brokaw, and yes, Tim Russert.  But the show put on by Squawk Box is the best.  The current lineup is no exception.  Kernan, Quintanilla, and Becky Quick have taken the show and only made it better. And their cadre of industry leaders, guest hosts, assignment reporters, and special commentators, heaps on the value to an already valuable in-depth discussion of the state of the economy.

Despite my saccharin opinion and my gushing about the show, I do believe they, like virtually all business writers–and (even worse) business managers–suffer from a myopia that has become endemic to our view of business and economy.

All of the commentary and analysis neglects historical context.  Sure every once in a while you’ll have segment with some tidbit of historical fact.  But none of the hosts, none of the analysis, and none of their commentators approaches a problem or a situation with an historian’s eye.  It’s not surprising.  History is seen as a collection of facts or dry obtuse writing about subjects only academicians care about.  In fact History can be an essential lens into the past that illuminates the behaviors, market forces, political decisions, and social actions that have created situations we face today.   If applied to topics such as those covered by a news organization like CNBC, we can learn so much more than simply how stocks perform, what economists think the tea leaves say, and what executives have to say about their company’s performance.  Instead, we can place these statements in a context.  For example, if we understood that the U.S. economy has been through panics, recesssions, and economic depression before, and we analyze the factors that led to those previous episodes, we will be more aware of how our behaviors and decisions as individuals and institutions lead us both to prosperity and financial despair.  Looking at the long waves of capitalism can help cut through the morass of conflicting information, and make us aware that we have been here before.

As I continue to post commentary on my blog, I will highlight how the historian’s craft and the perspective of long wave theory can shed light on what’s really happening with the state of the economy.  Using the segments of CNBC as my canvas, I think we’ll get a fairly complete picture of the state of things.

 

 

Private Equity: The Sine Qua Non Of Capitalism

The lead article in Mass High Tech this week brings to light the precipitious drop in private equity deals, IPOs, and venture backed Merger/Acquisition activity in New England.  I read about this on the same day I saw a segment on CNBC which provided essentially the same thesis: that since they’ve been keeping records at places like the National Venture Capital Association, there hasn’t been this little dealmaking, new IPO activity, or liquidation events for the private equity community.  In other words, in the last 40 years we’ve never seen such a slowdown for private equity.  Well, it turns out CNBC has had a slew of segments over the past few days that have addressed the topic.

The one I saw is here

This is a second one

Wow.  What does that say about the state of our economy?  When some of the brightest business people on the planet, whose mandate in their limited partnerships is to put the money to work so they can generate double digit IRRs decide it’s better to be in the business of operating the companies in which they’ve already invested, or decide it’s better to sit on the huge pools of capital they’ve raised in their LP funds and risk having to return the money to their partners than it is to place bets on new ventures, new technology and new products…then all I can say is WOW!  That is not a good sign.

In fact it’s a terrible sign.  It’s a terrible sign because the engine of capitalism is a process known as “creative destruction.”  First used by Joseph Schumpeter to describe what he saw as the fundamental way that capitalism creates surplus value, the concept of creative destruction is what drives entrepreneurs to enter markets, innovate new technologies, and drive costs out of existing business. It is the essential process by which capital flows in to fund new ventures and products.  It’s how you get companies like Cisco, Intel, Microsoft, Apple, Starbucks, and thousands of others.  Frankly, it’s how the innovative companies of 100 years ago came to be; Gulf Oil, US Steel, Standard Oil, Westinghouse, and Sun Oil Company (Sunoco) to name just a handful.

So when I see that private equity activity has basically fallen off the table at a time when PE funds are flush with cash and credit markets are reeling from their foolhardy embrace of convoluted and contrived securitization deals coupled with unimaginably lax lending poIicies, I blanch at the thought of what that means for our economy 10, 20, or 30 years from now.  Without private equity flowing into the hands of the creative minds who see opportunity where others do not, capitalism cannot flourish.  It is the Sine Qua Non of the capitalist economy.

 

 

Obama Has What It Takes

This is the kind of leadership we’re going to need for the next 8 years.  I’ve been a lifelong Republican–though I am very moderate, socially liberal, and believe in limited government (yes, once Republicans stood for that), fiscal conservatism, a hawkish military policy, and States rights.  I’ve never voted for a Democrat in the presidential elections.  I was for Reagan, then Bush, then Dole, McCain (in the NH 2000 primary I voted for him), and then I would have voted for Kerry in 2004, but I lived in South Carolina where Kerry had as much of a chance at winning as I did.

But now, after 8 years of an administration that I firmly believe History will judge as the nadir of the American presidency, we need a person like Barack Obama.  His charisma, experience, desire for change, and ability to grasp the issues, are going to be absolutely critical on so many fronts.  

We have destroyed our political capital on the world’s stage, we have angered and incited a whole new generation of Muslims who think we are the devil incarnate, we have bankrupt our real estate and credit markets, we have decimated the fundamental liberties and rights of the Constitution that this country was founded upon, we have forsaken our environment in the name of profit and convenience, we have neglected to teach our children the values and morals of hard work, self worth, and intellectual curiosity, and we have created a nation of fear uncertainty and doubt around one of the greatest social forces in our nation’s history–immigration.  Unless you can trace your lineage to the Mayflower, Jamestown, or the freaking Bering Strait land bridge of 14,000 years ago, you’re a descendant of an immigrant.  Which means about 98% of you are from immigrant stock.  And oh yeah, we make less money, save less, and spend more of our take home pay on housing, debt, and healthcare than any generation ever.

With all these looming issues (and this is just at the 100,000 ft level) we need a leader who can deliver us from this bleak wilderness.

That’s why come November, I’ll be casting my vote for Barack Obama, and I urge you to do the same whether you are a conservative, liberal, Republican, Libertarian, Green Party, or whatever.

 

 

It’s going to be a long painful Summer

Well, we’re less than a week into Summer and already the Dow is showing clear bear market signs, Warren Buffet is telling us we’re in for a bad ride, and Oil jitters are all over the news.  It will be interesting to see how long it takes for mainstream economists, politicians, and the business media to acknowledge that we’re in the most serious economic slowdown since the Great Depression, and we’ve set the stage for this drama to become a quite a tragedy over the next 10-20 years.

 

If you think I’m all gloom and doom, you need to think again.  I am not.  I am a realist. And I am an Historian of business, who subscribes to the Kondratieff theory of Longwaves.  Therefore, in short, we’re at the point on the growth curve where this ride goes downhill.  Oh, it will recover, and in the meantime people will still accumulate wealth.  But for a huge proportion of the U.S. middle class (what I would define as HHI between $50K and $250K) it’s going to be painful over the next several years.  The last seven years have been the opening act.  Act II is about to begin–probably around the time Obama takes the Oval Office (I feel bad for him that his predecessor is handing over the keys to a broken down car, with no–pardon the pun–gas in the tank).  But I think he’s probably the only one right now who is really up for the challenge–a challenge that I believe will be of Rooseveltian proportions.

Good luck Barack.  And good riddance W.  I regret I ever voted for you in 2000.  What a mistake you turned out to be. 

 

 

Pundit Says Oil Is Just As Likely To Be $500 a Barrel as it is $50 in 5 Years

I was watching CNBC the other morning and they had Dr. Robert Hirsch who is a very respected senior energy analyst with a very impressive resume spanning decades of consulting, corporate, and government energy policy positions  http://en.wikipedia.org/wiki/Robert_L._Hirsch.  His experience at places like SAIC, The RAND Corporation, and big oil companies have given him true credentials in the energy policy field.

His discussion with the host of Squawk Box was eye-opening. Finding Alternatives   2 hrs ago

These days he is one of the foremost authorities on the question of Peak Oil.  Peak Oil is the thesis that at some point the world’s geological reserves of oil and gas will plateau and then enter a long period of decline.  Despite the attempts by some (declining) declining number of oil companies, the thesis is well regarded as scientific fact.  Oil, for example, is a finite natural resource.  The scariest aspect of Peak Oil, is that when it becomes commonly accepted by the mainstream media, governments, OPEC, the EIA, and other leaders in the energy field, a massive wave of psyschological panic will ensue.  Why?  Because our global transportation infrastructure is so dependent on oil and petroleum based products, that to shift the base of capital equipment to other technologies will be massively disruptive.

If you want to get the real deal on this, Dr. Hirsch recently gave a presentation at a Nanotechnology conference in Boston.  His slides can be viewed here http://www.csievents.org/Cleantech2008/pdf/72026.pdf

Here is another resource for media coverage of Peak Oil:

http://www.jordomedia.com/RSS/l_op=viewrss/lid=181625.html

The bottom line is if we don’t get our act together fast, the economic consequences of Peak Oil are going to make the Great Depression of the 1930s seem like a day at the beach.  For those of you who might be thinking this is somewhat of an alarmist statement and think we’ve been here before with the two oil shocks of 1973 and 1979, you need to take a hard look at the causes and effects of those events.  First, the  1973 oil crisis was a direct result of the Arab-Israeli War.  The effect of the oil embargo was unemployment, inflation, rationing, oil shortages, and GDP decline. Like 1973,the 1979 oil shock was caused by political conflict–this time the fall of the Shah of Iran and the assumption of power by Islamic Revolutionaries.  Again, the effect on the US economy was similar in both the duration and nature of the problem.

With Peak Oil we will not be so lucky.  Peak Oil will signify the beginning of a decline in oil availability at a time when consumption will be increasing.  And Peak Oil is not a temporary shock to the system.

 

 

2007 Credit Crunch: Deja Vu All Over Again

Before there was a Fed to regulate the money supply and dictate monetary policy on a national level our banking system ran without any real safety net.  If you happened to put your money in an institution that made bad bets, was mismanaged, or operated without morals and proper ethical values, you could lose all your money and have no recourse.

But then in 1913, Congress created the Federal Reserve System.  And to this day, the Fed is there as the lender of last resort as well as the maker of monetary policy that allows the banking system to flow smoothly.  Of late, the Fed’s been kind of busy…shoring up the credit markets, extending billions of dollars to financial institutions that made very bad bets on the housing market’s continuing rise, and lowering interest rates to historically low levels.

Back in 1907 the U.S. economy went through a similar period of turmoil: overspeculation in certain sectors (railroads), bad lending decisions (not enough to cover), some natural disasters (major Spring flooding), and finally, a run on banks that caused a panic.  But there was no Fed to shore things up, reassure the masses, and inject money supply into the market.  At a time when the Knickerbocker Trust Co of NY went illiquid and thousands of people were demanding their money from banks all over New York, Philadelphia, Pittsburgh, Baltimore, Detroit, Chicago, and St Louis, one man was in position to stave off a massive financial catastrophe: JP Morgan.

Obviously, a diverse and complex economy like the United States in 1907 couldn’t be reliant on a private citizen to keep it from ruin…so discussion began that ultimately led to the formation of the Fed.  

Today, the Fed faces many of the same problems…but with a twist.  The economy is orders of magnitude larger, more complex, with sophisticated financial instruments that create interdependencies only few can understand.  And the challenges are wider: there is a widening income gap, prices for core goods and services like food, oil, and transportation are spiking, and real wages are down.  

It’s why the Fed had to inject money in the money supply, change the borrowing terms for banks that it never previously had to lend to, and generally do what it had to do to prevent the collapse at Bear Stearns from sending the Investment Banking community into a full scale Panic like we had in 1907.

 

 

Everyone’s Talking About Oil

Nobody likes to see the recent spike in oil.  It conjures up memories of the 1970s, gas lines, stagflation, and reactionary politics (like mandating 55 mph speed limits).  But what if $150 a barrel oil was a good thing?  What if $4.00 per gallon gas is the tipping point at which private industry gets off its collective asses and realizes we need a viable longterm solution to our dependency on oil–foreign OR domestic.  Oil is a finite resource, it is environmentally irresponsible to continue to explore, drill, refine, transport, dispense, and combust it.  It creates a geo-political chess game with potentially catastrophic outcomes should things turn south.  Society needs technology that frees us from the dependency on oil.  It’s only been a part of civilization since 1857. Depending on whom you believe there’s a good chance that by it’s 200th anniversary it may be entirely depleted.  Regardless, we know there is a day when oil cannot sustain the planet’s appetite and need for motorized transportation.  We need something else and corn-alcohol based fuels are not the answer. Buying cars with 10% more gas efficiency is not the answer.

Maybe $4.00  a gallon gas will spur innovation and investment in something that actually can sustain us.  I say bring on $5.00 a gallon…our friends across the pond are paying $10!

Hydrogen, solar, battery…there are plenty of great technologies out there, maybe with the right economics we’ll finally have real movement toward a sustainable transportation paradigm.

 

 

 

I’m Going About This All Wrong

The concept of blogging is predicated on short form writing, not long thoughtful expository writing.  I just had that epiphany.

One of the reasons I’ve been dilatory in blogging is that I agonize over what to write, edit, rewrite, and publish.  I just had a personal newsflash that I need to pick a topic–say, the absurd state of healthcare in America–and just write stream-of-consciousness highly analytical treatises in short form (less than 250 words).

Maybe now we’ll get into a rhythm and my blog posts will start to flow.

 

Advertising and the recession

I currently work in a niche of the advertising industry.  Recently I was at a conference where several ad industry speakers pointed out that advertising in 2008 is stagnating, if not in fact retreating.  Ad categories that are flat and or down in the last year include:  financial services, travel, real estate, jobs, automotive. Outside of packaged goods, these would have to be the lagest segments of the ad industry.  If major publishers are looking at negative growth, or at best, flatlining in these segments, what does that portend for the trajectory of our economy?  Clearly there are macro economic forces at work here, but for the most part we have been thinking about the impact on housing starts, access to credit, core price inflation, and interest rates. We’ve yet to really see the impact spread to other sectors, like advertising.  Stay tuned…

 

 

 

I’ve Been Putting This Off Long Enough

For six months I have been procrastinating and delaying writing about my thoughts on our current economic trajectory because, I must admit, I have serious trepidation.  During my period of delay we as a nation have been deluged with constant news of the seemingly inexorable downward spiral of our economy.  Just scan the major news sites and you find things like:

 Oil Pushes to New High Above $113; Gas Prices…

 US Foreclosure Filings Jump 57 Percent in March

 Food and Energy Costs Lead Wholesale Prices to…

Median Price of SoCal Homes Plunges 24 Percent

These are just 4 randomly plucked from from the web.

In light of this constant flow of negative press about our economy, I think it’s time to throw my hat in the ring and begin analyzing the analysis of our economic trajectory.  What makes me qualified to do this?  A couple of things.  First, I spent the better part of my college and graduate years studying History; specifically, how economies adapt to changing financial instruments and technological innovations.  I wrote a dissertation on the subject and then I left academia for a job in the private sector as a business historian and consultant.  From there I continued my departure from my academic roots, gave up studying entrepreneurialism and it’s seminal role in the growth of our economy, and struck out on my own as an entrepreneur myself.  And for the last 10 years, that’s what I’ve been.  So, I think I have a unique perspective.  I am a formally trained Historian of the U.S. economy who has spent the last 10 years as a businessman and entrepreneur.  I’ve experienced both failure and success in those endeavors.

As I get more into blogging about our economic trajectory and its attendant news coverage, I think you’ll see a pattern emerge.  Hopefully, people who have more influence than I do will agree with my analysis and recognize that pattern and do something about it.

So where is the U.S. economy heading in the next year? How about the next 4 years? Or decade?  Well, that’s the $15 trillion question.  $15 trillion.  Just about the current level of the  U.S. GNP.  But it’s a hollow number–and not just because of all those zeros.  It’s hollow because we just cannot fathom the scale and scope of the number. While a trillion is mathematically speaking just a million million, our cognitive powers cannot truly grasp what that means–just like we can’t begin to fathom what it will mean for our society as our economic foundations continue to erode over the next decade.

For the past 60 years–since we fought back fascism in World War II–we’ve been at the top of the global economic food chain.  Our ability to marshal our collective national resources and win the fight was brought about by decades of prior (1865-1919) unbridled industrial, social, urban, and financial innovation.  Now, as we close out the first decade of the 21st century, we risk undermining that power and prestige because of patently idiotic political decisions in the last 20 years.

History is rhythmic.  The actions of today have far reaching implications in the future.  By understanding the forces behind decisions in the past my hope is that people who lead the political, financial, social, and economic institutions of this country will open their eyes.