Repairing the Economy

There is a piece by Mankiw in the NY Times which clearly states many of the problems. His starting observation is quite spot on. Namely:

The economy is in bad shape. Technically, the recession ended in June 2009, and since then the economy has been recovering. But it doesn’t feel that way to many Americans. Things have stopped getting worse, but they have not gotten much better. The recovery has been so meager that unemployment lingers at historically high levels. 

 But one of his final observations is the key:

Economists often rely on the convenient shortcut of separating long-run and short-run issues. Recessions are then viewed as short-run problems that require short-run solutions. That approach, however, may be simplistic. Lack of investment spending is a large part of the economy’s current difficulties, but capital investments are always made with an eye toward the future. 

First, "bad shape" is an understatement. Second, the short term and long term is truly a key factor. From an investment perspective, we on the investment side, especially the high risk tech entrepreneur side, look long term. We fortunately do not have to worry about the quarter to quarter issue, albeit it counts. Yet, we look say at a discounted cash flow, DCF, for say five years. Then we add a terminal value to see what happens. We always have the entrepreneur see it as a higher number than we do, but the point being we look at revenue, expenses and a discount factor plus a terminal value. Unlike economists we have our capital at risk.

Thus not knowing the revenue, the buying propensity, not truly knowing true costs, taxes and health care plus regulations, not knowing how to discount the risk, cost of capital plus risk factor, and finally not knowing how to determine a terminal value, even if there will be one, and of course if we lose capital gains then the deal changes totally, that is why the investors are wary to say the least.

This is not a macroeconomist's issue. It is a rational investors issue, and there currently is no rational place out there. Is Mankiw correct, in part yes, as an economist yes, but I believe there is more to this issue, or perhaps I may be just reciting a corollary to his proposal. We have been frozen in place from uncertainty, uncertainty in all elements of what goes into our decision process.

But as an adjunct, I read a piece in the Washington Post analyzing the current President as  "covert commander in chief". The author states:

This is a president, too, who prizes his authority to conduct covert action. Clapper’s predecessor, Adm. Dennis Blair, lost favor in part because he sought to interpose himself in the chain of covert action. That encroached on (the current President), who aides say sees it as a unique partnership with the CIA. 

 This may explain some of the focus. On one hand George H W Bush was head of the CIA before he became President so he had the opportunity to play spy. It can be a heady game, but we really need a leader in chief, for better or worse an FDR character, not that he was the greatest, but he was the cheerleader in chief.

Education

The Guardian has an interesting piece on school systems in Sweden.It shows the "open" teaching principles and student freedom that they have aspired to. In a way it resembles the blackboard jungle. The last paragraph is terrifying:

But as I was leaving his school, one of his students, Mohammed Mahmoud, put it differently. "This is a school for criminals," he declared, to laughter. "Nobody's working in this school, because no one here has any future."

One wonders if anyone is listening.

The Speech: "Training" Engineers

Well the speech is over but it is worth reading what is in the minds of those who wrote it. It states:

Already, we’ve mobilized business leaders to train 10,000 American engineers a year, by providing company internships and training. Other businesses are covering tuition for workers who learn new skills at community colleges. And we’re going to make sure the next generation of manufacturing takes root not in China or Europe, but right here, in the United States of America. If we provide the right incentives and support – and if we make sure our trading partners play by the rules – we can be the ones to build everything from fuel-efficient cars to advanced biofuels to semiconductors that are sold all over the world. That’s how America can be number one again. That’s how America will be number one again.

Read this, they want to "train" engineers. You educate engineers not train them, and most never make it. They take courses, they compete for entry, they pass exams. You train dogs, not engineers. And we wonder what the problem is? Companies hire engineers, colleges and universities educate them.

If they have no clue about the people who build their economy, no clue of the leaders of China, then how in God's name will they ever understand how to get out of this mess.

Do we train lawyers? Possibly a bit, but when they are associates, after they have been educated.

I am taking a course at a community college. First I was denied admission because I was over 65, a law suit helped solve that. Then the course instructor takes attendance at each class, when yo leave. Now MIT never took any attendance and my secondary school never did either. You pass the tests you get through. I took courses and Regents exams in courses never taught. No one gave a peep. But the community college is akin to some reform school. So that is where we want to train these engineers.

It will only get worse before it gets better!

Does IIT in Mumbai or Tsing Hua in Beijing "train" its engineers, were Watson and Crick "trained" at Cambridge, was Einstein "trained" to come  up with Relativity, the Photon Effect, Brownian Motion? It is not just misuse of words it is a gross misunderstanding of how things work. God forbid we start training people. They like the dog would then do just they are told. Or is that what they really meant!

In the old days, a "Training" School was a place to reform delinquents. Perhaps they want to have such a place. But wait, can we train a new Steve Jobs, Thomas Edison, Claude Shannon, well perhaps in their minds. I wonder what they think in China?

Yield Curve Collapse

The yield curve is collapsing. We can see in the above that it is dropping down to record lows. Despite the FEDs free hand with cash the same cash seems to go no where. Again we note that those on a fixed income relying on secure long term debt for payments are facing record "inflation" as the rate drops, while prices continue to rise.

The spread has also collapsed. We have been tracking this for three years now since the current Administration took over and we see the lowest ever in spread. The anticipation is for record low growth.

The details above show further the nature of this spread. The short term Treasury is as near zero as it can be but the 10 years have also collapsed. Good news for debt payment but bad news for long term growth potential.

Dumb and Dumber

I have been listening to what some folks have been saying about jobs. Now I have a personal view as one who for a few decades created jobs, out of whole cloth. I did not work for someone and hire new people, I created a new company and hired people to do things in the new company. And from time to time we have reunions and they always say that working in the start up was the greatest moment of their career.

Why? Well I did not care about degrees, I wanted to have people do their best. I had quite a few High School grads, and PhDs, and they all did a great job. Never really asked where they were educated just wanted to know what they could do. The secret to good management, finds out what someone does well and then let them at it.

Now I have heard an actor, at least that is how he was introduced, tell his interviewer how we should create jobs, train people, have the Government train more people. Now when I listened more closely he and his interviewer, some foreigner from across the seas, said yes, high tech training, that will create jobs!

Are they out of their minds. What shall we do, take some teamster and train them to be a PhD in EE from MIT, thugs with brass rats! Do we just say to MIT, forget standards, open the door and take these thugs and make them leading edge researchers, get them to come up with great ideas, now, think, create! They are union thugs, they cannot do this, it is not in their genes. This is what we get from Washington.

How about training Cancer Researchers at Stanford, we just get unemployed auto workers ship them to California, set them up in labs and train them to cure cancer. Oh yeah, that will work! After all they take their breaks, they leave at 4 PM, just drop those good old gels down the drain and come back on another work day. And then they strike, yes strike, after all they are not paid enough. That will really encourage post-docs.

Train entrepreneurs? Trains researchers? Do these people have a clue, apparently not. After all they are actors, big egos, little brains.

Municipal Broadband: A Failure

Burlington Telecom was apparently sued by Citi to get all of the equipment used as collateral back. The Burlington Free Press states:

Citicapital, the financer of Burlington Telecom to whom the city owes more than $33.5 million, filed suit today in federal court seeking repossession of all equipment and millions of dollars in repayment and damages.

The city-owned provider of television, Internet and phone services has been in arrears for much of its existence, and also violated its state license by spending cash from general Burlington accounts to keep the utility afloat. Burlington Telecom has been unable to make payments to Citicapital, and the financing giant responded Friday by suing the city in federal court in Burlington.

In a brief statement, the city said it is "reviewing the complaint and will vigorously defend the City’s interests in court. Citicapital’s filing has no impact on Burlington Telecom’s provision of services to its business and residential customers."

 We had indicated almost two years ago that this was to be the outcome, despite the remonstrances of several of those interested in its success. This is no surprise. We have seen the Government hand out almost $10 billion to companies with no track record in deploying fiber and operating systems of significant size. In fact as we observe the progression of some we see further internalization and less attempts to get the experience necessary for meeting the challenge. This we believe may very well mean a total loss of the $10 billion or so given away. It is a shame for RUS up to this point had a fine reputation. Alas it may be sullied.