Friday, June 27, 2008

401K, IRA--or not?

1) 401K's are good, but not great. If the company matches your contribution, that's a good thing, but I would not contribute more than that.

2) The reason why a 401K is merely good is due to its deferred tax status. You get a small tax break during the contribution phase, but you get clobbered with income taxes during your harvest years.

3) Roth IRA's are better than a standard IRA, but a Roth comes with restrictions and most high-income individuals don't qualify. So it's better than good, but it is not best (the tax-free harvest makes it better than a regular IRA).

4) Indexed funds are better than MOST managed funds, but there are hidden costs when indices get re-balanced. It's still better than most managed funds due to lower fees and better performance. Better yet, there are vehicles linked to the indices, but not investments IN the indices. Hence, they also provide downside protection. This is huge. And oh, btw, they also allow tax-favored accumulation and access.

5) Perhaps small cap funds have outperformed large cap funds, but that depends on the time window, and small caps are historically more volatile. That is not a good fit for older investors. Most of my clients aren't 25, because most 25 year olds have no assets.

6) Risk is a relative value, and there are efficient ways for diversification and risk mitigation.

7) Dollar cost averaging only works if there is a general uptrend or steady state. If you had dollar cost averaged into the Great Depression, you would have had to wait until the mid 1950's to get back to even. If you had dollar cost averaged into the tech bust, you may never get back to even.

8) There are many geniuses who are financially misguided. The first thing I would ask a finance professor is how much is their net worth and how did they achieve it.

9) I advise people to contribute to a 401K only to the level the company matches, as they are basically paying for the taxes you will owe during the distribution phase (retirement). Deferring taxes only means postponing taxable events when your portfolio will be worth more--the government set it up so that they get to take a bigger slice of your accumulated values. In this scenario, a typical American worker gets a $60,000 tax break during their contribution phase, and gets taxed $800,000 during the distribution phase (retirement). And if their estate plan is poorly structured, their non-spousal heirs get taxed another 72% upon death. That is, of course, unless they die exactly in the year 2010. After 2010, the exemptions from estate taxes revert back to pre-2001 levels.

There are a select few who stack the odds in their favor, looking for high reward/risk opportunities.

The younger you are (or the more you earn), the bigger the potential mistake. Think about it--compounding is great if it works in your favor. When it works against you, it is crushing.

Investments and taxes

To be honest, it's more an academic discussion for me, as I don't play the markets like I used to, and when I do, I follow astute managers who happen to have similar philosophies on markets--and life. When my philosophies are congruent, I don't allow myself to second guess my decisions, and to me, second guessing has been my achilles heel when it comes to investing. I've lost far too much money when I let emotions, politics, and other people influence me unduly. That's one of the reasons I disdain politics: like the talking heads on CNBC, I follow it with mild interest, but only to get a beat on the general consensus, and I use it as a contrarian indicator. Because let's face it, when it comes to investing, most people get it wrong. The average 35 year old American has a net worth of $15,000. We are taught from day one to go to school and how to get a job, but we have had zero training on personal financial management. And the mortgage crisis just happens to be one big symptom of that mentality.

My whole investment methodology turns conventional wisdom upside down, but in reality, I am merely a good plagiarizer--I just follow unpopular strategies that the majority of the population is not exposed to, but are readily adopted by the wealthy. Even some of the brightest and best investment managers aren't privy to these strategies--or their emotional makeup doesn't allow them patience to implement them. They're great at picking stocks, and a few are even good at market timing, but they don't understand asset optimization--the optimization of ALL assets.

Dawgbytes is 100% correct--Wall St. money managers like to brag that the long-term returns of equities is between 8-12% historically (depending on the time window), but that's only if dividends are reinvested. Without that boost, the Dow and S & P's returns are closer to 2-3% or less, underperforming inflation. And since divies are taxed as earned, it ends up being a losing game.

And because we are humans, with emotions, the average investor thinks they can time the markets, when in reality, they are terrible at it. Owning stocks between 1983 to 2000 was the best time to own equities in the history of mankind--the annual rate of return for the S & P was over 12%. Guess what the average investor earned? 2.3%. They suffer from the casino delusion--that somehow they can beat the house.

So what does that mean? You better pick the right stocks for long-term appreciation and income--or pick the right money manager. Which means you eliminate 96% of the mutual funds out there, as they underperform the Lipper averages and indices. That's mainly due to exorbitant trading transaction costs, as well as the more unscrupulous window dressing. The gentler explanation is that the funds are "actively managed", and yet clients have to pay a 3% load to have it actively managed. It's unbelievable what many of these managers get away with. So cheat with my wife, and stick me with the hotel bill while you're at it.

Then there's the indexed method of investing which I espouse, as the loads are lower, but even in that case, there are hidden transaction costs as indexed funds get re-balanced as companies exit/enter the index and market caps vary. But at least clients get a semblance of earning the averages, which 80% of active money managers can't even meet. And then there's the taxation.

People have no idea how taxes hurt investment portfolios. They think they do, but they have no idea of the magnitude.

An individual earns an income, and gets taxed on that income. After paying expenses, and he/she is disciplined enough to save enough money to invest, and lucky enough to earn a positive rate of return on that money, they are taxed again (hopefully at the lower capital gains rate). Dividends are taxed as earned. Tax what I make, tax that same money short-term, and long-term. That sounds like a triple tax to me.

That's why tax-free accumulation and income is so crucial. $1 doubled 20 times ends up being over $1 million. $1 doubled 20 times, but taxed as earned at 27%, nets a little over $50,000. I'd rather have the million.

Bernanke and interest rates

While the printing of dollars may prove to be our economy's undoing, one of the charters of the Fed is to avert an economic disaster. So dropping interest rates was something Bernanke had to do (at least politically). The economy was tanking, and dropping interest rates is usually the right prescription.

The problem is that the economy is fractured already, and the Fed faces a conundrum--increase rates to stave off inflation, which puts us into the black hole of deep recession, or drop rates and run the risk of runaway inflation. Volker took the more prudent but less popular route in the early 80's, and willed us into a deep recession in doing so, but it allowed us to recover structurally stronger (excesses were drained out in the process). We had to take our medicine, much like we have to pay today for our penance in the aftermath of the subprime gluttonous orgy.

Bernanke doesn't have the will to do that--mainly because he doesn't have Bush's blessing to drive us deeper into recession. But, it does look like cronyism, as he is saving a few of his buddies on Wall St., by bailing out big banks, and temporarily staving off a deep recession. He's only delaying the inevitable, which may heighten the severity of an economic downturn. But in doing so, he may have induced a stagflation type scenario which hasn't been seen since the Carter years. Either way, we are looking at at least a few years of real damage. Stay liquid and pounce on oversold opportunities.

In other words, Bernanke is screwed if he does, and he's screwed if he doesn't. He inherited an economy that was based on smoke and mirrors, and whose structural cracks were masked by easy money, but now the truth is coming out, albeit way too late. A strong economy can withstand financial shocks, but ours was too weak to survive the magnitude of the subprime earthquake. Frankly, Bernanke may be a weak steward of our fiscal ship, but I'm not sure the best captain in the world could do much better. We are so screwed that only time will get us out of this mess.

Saturday, June 21, 2008

Today's entry, a year later...

Today's entry:

I've never made money following the crowds. I've always made money going against the masses. If I were to hire someone to manage my money, I'd rather them have a background in crowd psychology and mob theory, instead of degrees in econometrics. People tend to rely too much on numbers on things not necessarily controlled by numbers. It works for designing innovative technology; it does not work for predicting behavioral finance.

In other words, when they win, it's because of their savviness and acumen, and when they lose, it's due to bad luck.

It is analogous to a reknown physicist claiming he will find the next treatment for certain types of cancer, using stem cell research. The interviewer decried his attempts, asking how a physicist could solve a problem that was clearly a medical and a biotech one. He curtly replied that biologists and people who study medicine don't know numbers. Metastasis is a compounding problem, an uncontrollable geometric growth of malignant cells. The drug discovery process itself is a numbers game. He was spot on in his approach.

OTOH, behavioral finance is more behavioral than economic models, and mere numbers. Market participants are human, not drones who predictably turn like electrons.

I've had very long and interesting discussions with some of the brightest minds on and off Wall Street, and many of them think the number-crunchers are deluding themselves into thinking they can outsmart markets. And the road kill of some very smart people only confirms my suspicions. It's like a casino: the players keep playing as long as they win, but as soon as they lose, they get washed out for the next group of gold speculators to arrive.

The key is to manage OPM, as the managers make money no matter what their performance is, and they last as long as they can get away with it (underperformance). The clients underperform the index averages 80% of the time. And the top 10% managers are so good that they can outlast their peers, and make a killing over their life times.

I've reached a stage where my clients and I can't afford to take a hit like the tech bubble, and the recent subprime mortgage crisis. It's about capital preservation, efficient (i.e. low-cost) diversification, risk mitigation, asset optimization (all assets, not just investable liquid assets), and guaranteed floors (the last two are why I win). Lots of people can claim the first 3, but few can deliver the last 2.

An entry from last year

I posted this almost a year ago, on a sports message board, of all places:

Posted: Thu Jul 26, 2007 1:43 pm Post subject:

There's a lot of misinformation going on here. Some of you guys assume that the high-technology boom and bust cycle is unique. Perhaps it's more volatile than most, but it is far from unique.

I happen to believe a similar bubble is forming in real estate that is just starting to implode, esp. in ridiculous markets like south Florida, many parts of California, and especially Vegas. You saw mortgage lenders, esp. ones that serve the sub-prime market get hammered. Wall St. was not unscathed--Bear Stearns and other investment and commercial banks took a beating as well. Seeing how most individuals have most of their net worth tied to their homes, it is a troubling sign of worse things to come.

Add in a lame-duck president next year, and a Democrat-elect potentially, and look for the stock market to "correct" itself between now and early 2009.

The weak dollar may prop up the manufacturing and tourism industries short-term, but long-term, it structurally makes all Americans poorer--it is not a good thing. Too high, and it makes American exporters uncompetitive. Too low as it is now, and we sell ourselves out to foreigners (I consider our dependence on foreign investors to buy our bonds to support our deficits to be "selling out"--because once they decide to stop buying said bonds, interest rates will soar, and we will be in a real world of hurt). A weak dollar makes the US too vulnerable to global capital flows.

How do and would I deal with it? Tax-free equity index-based contracts guaranteeing a minimum of 3%, with a cap in the mid-teens to participate in any volatility and upside. PRESERVING CAPITAL in a tax-advantaged vehicle is HUGE--ask anyone with a math or financial background. I don't care if the NASDAQ goes up 50% next year--I'll take my 17%, avoid any down years, and say thank you very much.

And while I am not a real estate broker, I would consider buying some in Detroit. Call me crazy, but I recall when the best business in the early 90's was renting U-Haul's one-way out of California. People were leaving in droves due to earthquakes, navy base closures, race riots, a slumping economy, and the downturn in defense spending. The only growth industry was grunge rock. A house on half an acre (with some earthquake damage) in Beverly Hills was listed at $550,000. Today, it's probably worth ten times that. 12-unit apartment buildings barely 5 years old (built during the 80's boom) were going for $300,000 in Long Beach, as foreclosures hit hard. Today, that same building probably would sell for $4 million.

Detroit, tho royally screwed, will come back, altho not back to its former glory, but it will come back. I don't know if oil and gas prices will come down, I don't know if Detroit somehow can reverse the market share downward trend, I don't know if they can somehow make more hybrids, but it will come back, and those $20,000 houses will be worth $150,000 again (at least in some neighborhoods). Hell, you can buy a whole skyscraper in Detroit for $3 million. That wouldn't even buy you half a home in some California neighborhoods.

A cynic is someone who knows the price of everything, and the value of nothing.

Monday, June 16, 2008

When will markets recover?

I had a steak dinner with a former colleague I hadn't seen in years. He is doing well and it was nice to see him with his daughter, an adorable 4 year old. His methods of raising her resonated with me--he showered her with love, but when she got out of line, he wouldn't respond until she apologized and they exchanged hugs. No entitlement there...

Speaking of entitlement, does the honest, hard-working American worker deserve to foot the bill for government-subsidized bailouts of bad loans, badly-run financial institutions, and poor fiscal policies encouraging rampant speculative bubbles and busts?

Is there something more insidiuous at play? Many conspiracy theorists claim there is in the form of a Working Group formed by Ronald Reagan back in 1988, originally created to prevent a stock market collapse. Coined as PPT by a Washington Post reporter, this insider group of the nation's most influential financial leaders has long been rumored to be manipulating financial markets--for the benefit of market participants. But is it beneficial to the greater good--or just an elite few? Are they lining the pockets of their friends at the major banks? I won't go into it--it's easily Google-able, but what is surprising is that officials, including past Fed Chairmen, admit publicly it is their charter to do whatever is necessary to avert a financial collapse. Yet, when pressed specifically to address recent illogical market movements, they experience a sudden amnesia on what exactly it is they do to prevent said collapses. The normal defense is the market experiences corrections, but the frequency of these patterns is suggestive of market intervention.

Are these actions more harmful than helpful? Some very astute financier friends of mine have made me aware of these interventions, and their inclination is that these interventions are not only possibly illegal and immoral, they are also counterproductive--only delaying and exaggerating the market downturns. Financial manipulation is not only unethical, but it also doesn't work long-term. The Hunt brothers found out the hard way in their attempt to corner the silver market in the 70's. Let's hope this recent alleged intervention by the SEC, CFTC, Treasury Department, and more importantly, the Fed, doesn't turn this market "correction" into a rout. The last thing we need is a loss of confidence in the markets--and that the average Joe doesn't have a chance. Maybe that's why casinos are gaining in popularity.

I hope everyone had a happy Father's Day.

Saturday, June 14, 2008

North Beach Festival

I attended my first North Beach Festival in San Francisco today, and it reaffirmed my love of two things: good music and good food. The salmon sandwich from Rose Pistola's was to die for, as I opted for the lesser of the evil food booth choices: the usual 12 different types of sausage sandwiches, the venerable Philly Cheesesteaks, the ubiquitious gyro, and the all-American corn dogs, among others. Wash that down with garlic fries, and you have the recipe for a perfect heartburn, as well as slamming your arteries shut with high-grade plaque. I could have sworn I heard sirens on multiple occasions--probably related to the numerous heart attacks caused by one too many Bratwurst.

The bands on the main stage at Washington Park were great, especially the Gator Alley Band, and the headliner, Cathy Richardson, formerly of Jefferson Starship. The Gator Alley is a tribute band for Lynyrd Skynyrd, and they did them justice. You can catch them on Shoreline, along with The Scorpions and Sammy Hagar on August 2nd. Not a bad lineup.

Thanks to cell phone technology, some of my friends were able to hear the music from the comfort of their couches, as I called it in from the front row. I talked to the lead singer after their set, and gave him my card next time they ARE the headline band.

I met up with two of my good bay area friends, offered some friendly financial and relationship advice over a killer Napoleon milles feuilles pastry, only it was in an Italian bakery instead of a French one (after all, we were in North Beach). Money shouldn't be an unpleasant topic, but unfortunately, in many instances, it can be rather uncomfortable for some.

On the way back to the BART station, on the 30 bus, I stopped at Old Navy to buy some beach paraphernalia, since it was dirt cheap. Plus, the bathrooms were much cleaner than the porta pots at the concert venue. Since I got hungry again, I rode the 30 back to Chinatown, but everything was closed. All except some underground cafe, at which point I asked two departing diners whether it was good. They nodded in agreement and I noted the local non-English speaking crowd, and I knew I was in good shape. The food was excellent--and cheap. Altho like most Chinatown cafes, you probably are glad you can't see the kitchen.

All in all, it was a great day--except for the fight that broke out on the 30 bus from North Beach to the Powell BART station. Apparently, there was one too many shoves while some were trying to get out. People panicked and de-bussed (is that a word like "de-planed" often used by flight attendants?). A couple girls cried, but I just used the opportunity to take a seat as they opened up, and waited for the popcorn. I've witnessed a few fights in my lifetime, and sparred thousands of times, but let me tell you, this was not a fight, it was patty-cake, patty-cake.

Anyway, what was much more harrowing was a drunken driver almost hitting me and another pedestrian, before slamming on the brakes. Sorry, I couldn't hold back and told him to fornicate off--the other pedestrian was a better man because he didn't let out a peep. I need to turn the other cheek more often.

The economy is headed south, and the only growth businesses in this environment are crime, law enforcement and bankruptcy law. Law enforcement budgets are being slashed as the number of crimes are skyrocketing. It makes sense: when people aren't working, more turn to crime. So let there be a lesson: the next time someone cuts you off on the freeway, don't flip them the bird or tell them to do something to themselves--gather yourself, and move on. You never know who's on the other end of that 9 millimeter.

Friday, June 13, 2008

Our favorite teachers

I posted this on a school alumni social networking site I created, after hearing some closing remarks from the mortgage seminar I attended:

Teachers can leave indelible marks on us. Does anybody remember who the 2007 Miss Universe was? Or the 2007 Nobel Laureate winners? Or even the 2007 NFL MVP? Yet, we certainly remember who are favorite teachers were--even if our aging memories are starting to fail us.

In fact, I'll start a new discussion on favorite teachers: Mrs. Nelson, my 4th grade Lewis School homeroom teacher. She motivated us, not with too light a hand, or with a heavy hand, but she certainly gave us a definitive moral compass, sprinkled in with good-natured, but sharp humor--but with a stern message--live by the golden rule, and treat others with respect. She even invited us to her home to play with her St. Bernard's.

Mr. Horst, the most stern, anal retentive person I ever met. We were all afraid of this 7th grade English teacher at Lincoln Jr. High, and that fear was founded, but he sure got us to use proper grammar. And once in a while, he cracked open a wry smile. The guy was classic old school, but he occasionally had a little bit of Eddie Haskell in him (for those old enough to remember Leave it to Beaver).

Just like I wish I could have told my father one more time how important he was to me before he passed on, I wish I could tell these teachers how much of a positive impact they had on me. As I get older, I realize how much more important teachers are to all of us. Seriously, and I hate to sound corny, we all should share our gratitude to our former teachers as much as we can--as well as others we've learned so much from--including our parents. I'm sure they would appreciate it. They make a real contribution.

Another sign pointing to a recession...

This may be my most accurate economic indicator ever--traffic flow. If it takes an hour and a half to drive from Century City to Manhattan beach on the 405, we have full employment. On the other hand, if it takes 20 minutes, bet on a recession. That's assuming no highway drive-by shootings...

I also hear some homes in San Bernardino are going for 20 cents on the dollar, as long as you buy 100 of them at a time. That might seem too tempting to pass up--until you factor in that life expectancy in the Inland Empire is 10 years shorter than the beach areas.

The best deals around the country seem to be in high disaster areas. But then again, the reasons are self-explanatory.

My girlfriend is vacationing in Australia later this month. She got a good deal on the airfare and hotel, but I warned her that she may get sticker shock once she lands on resource-rich Down Under. The dollar is tanking, thanks to Bernanke's alleged life-respiratory reduction of the Fed rate. That's fine, until you figure out you just deposited your monthly rent into the fuel tank of your Chevy Suburban. The Aussies seem to be holding up well. Probably because China and India are buying up all their ore.

Actually, the US has strong exporters, too. Foreigners are eating up cameo appearances of Paris, Lindsey, and Britney on TMZ...

I have a feeling at some point down the line, I will have a rant about our priorities and our educational system. I'm proud of the fact that I have no idea who won the latest American idol (okay, that was a lie--I remember him now as I caught the finals--I just don't know his name). My girlfriend no longer forces me to watch it, just like I don't force her to watch Golf Channel anymore.

Signs we are in for rough seas...

A couple days ago, I attended a seminar for mortgage brokers looking to increase their deal flow. One of the many stats cited by the seminar speakers indicates that there's been a 40% attrition rate among loan officers. The positive spin is that there are fewer loan officers chasing the same deal, altho deal flow has decreased significantly, especially refi's. In any case, since I have a couple mortgage planners in my affiliate network, I wanted to get an indication on how bad the industry was, as all I heard from them was doom and gloom about the mortgage industry. My attendance at the seminar confirmed it. I got depressed via osmosis.

Thru a referral from a realtor friend, I visited a senior loan officer, one of the top revenue producers in the country prior to the mortgage industry balloon popping. He went from funding up to 104 loans a month to virtually nothing today. He's lost 5 of his 7 homes, basically losing millions in equity, and starting over. He is sharp, proactive, a strategic thinker--and broke, with a plummeting FICO score. He's working 3 times as hard on each deal, and each deal is bringing in one third the revenue he used to make on loan origination fees. In essence, he has to work 9 times as hard to fund one deal. And only 1 in 10 applications are being funded (the seminar speakers said 1 in 5 applications are accepted). It got me thinking--here was the one of the top producers in the country, and it was no fluke as he was on top of his game. Yet, he was flat broke. What is going on here?

I told him I'm having my best year ever, and so are my affiliate partners in the lending and real estate business. Why? Because my clients protect their equity, thriving even in a severe real estate downturn. I create a need for clients to either refinance--or to sell their existing home, and purchase a new one, in order to acquire new tax-deductible debt. It's due to Rule 264, which defines the limits of acquisition indebtness. Most individuals are unaware of this rule--and so are their CPA's.

The aforementioned loan officer is sharp, he may become a client, and we definitely will work together to shore up his clients' balance sheets. It's too late for some, but there are some who will need our assistance.

I also visited another realtor friend who was a multi-millionaire the last time we met. He owned 5 beautiful homes scattered across the bay area, each worth over a million each. Today, he is upside down on all of them, barely able to fill up the gas tank on his luxury SUV. I know the technical definition of a recession is two consecutive quarters of negative GDP growth, but I really don't care what the government statistics cite. We are deep into a recession--and it's going to get worse. These aren't exactly low-paying jobs people are losing.

The anecdotal evidence is mounting--UBS' mortgage-backed securities department laid off 400 of their staff of 450. JPMorgan Chase bailed out Bear Stearns, the country's 4th largest investment bank. Bank of America bailed out Countrywide--the country's largest mortgage lender. And Texas Pacific Group, a private equity firm, injected billions of capital into Washington Mutual, that little commercial bank on every street corner. It's the ultimate trifecta--investment banks, mortgage banks, and commercial banks. This triple crown of exploding debt is going to implode the US economy. On the other hand, the thoroughbred Big Brown didn't have a chance at his Triple Crown...

And the government continues to artificially deflate reported inflation numbers for their best interests, but to the detriment of every American consumer, but especially retirees living on a fixed income, tied to the cost-of-living index. What's noteworthy is that the cost of food and fuel are not included in the inflation index, with the reason being they are "too volatile" month-to-month to be included in the "core" inflation index. Well, that's Jim-dandy, but the problem lies in the fact that those are the two household components whose costs are skyrocketing. Does anybody really think inflation is only growing at 3%? Pleeze...

In any case, last Tuesday, one of my mortgage planner partners is refinancing 7 properties for 4 of my clients, totaling approximately $4 million. I'm also putting those very same clients into something that is safe, liquid, earns more than their tax-deductible mortgage interest, and compounds tax-free. For those that don't know me well, I'm applying Missed Fortune concepts, a safe, conservative strategy on building wealth by optimizing current assets.

Last night, I had a meeting with a former colleague, who is now at a major investment bank (one of those two-name ones). Altho Missed Fortune concepts are antithetical to what Wall Street espouses, even he agreed to the unconventional, yet straight-forward principles. His caveat is that a money manager can beat Missed Fortune strategies if he/she can achieve a 15% annualized return, pre-tax. I say, good luck...most hedge fund managers strive for 12-15% pre-tax growth, and most money managers underperform the Lipper market averages. My clients earn the index averages tax-free, with a guaranteed floor, and sleep at night. Albert Einstein said "Compounding interest is the 8th wonder of the world". If that's true, tax-free compounding is the 9th wonder.

Doug Andrew, my mentor and friend, really is a genius. Each component of Missed Fortune isn't novel--but how he has taught me to structure each plan--both liabilities and assets--THAT is the secret sauce.

Thursday, June 12, 2008

Innovation cycles in an economic downturn

I am a student of history, and it seems innovation accelerates during economic downturns. Innovative technologies blossom as the economy recovers, serving as a catalyst to increasing our productivity. California was in a serious recession in the early 90's, but that backdrop merely served as a precursor to the adoption and pervasiveness of the internet. What followed was an unprecedented boom in technological innovation (and equity market capitalization). While California was in the depths of a recession, researchers in university labs and private industry were busy bringing interconnectivity to the masses. Innovative high-tech companies, especially forward-thinking incumbents, were increasing their R & D budgets, while their competitors were merely trying to hold market share. Startups by nature, were continuing to develop the next great mousetrap.

You could probably follow the timelines of breakthrough technologies for the transistor, integrated circuits, PC's, biotech, software, databases, web technology, etc. and see similar trajectories of mainstream adoption and penetration.

Unfortunately, we are entering one of the steepest economic declines in quite a while, due to the mortgage lending crisis, rampant abuses and over-speculation (that's polite-speak for greed--does this sound familiar?). I am hoping that the silver lining is that our industry overall will be allocating more resources to develop the next gee-whiz technology. The companies who slash their R & D will suffer relative to their competitors when we turn the corner--whenever that is. Increasing research expenditures may be unpopular during a downturn, but it is absolutely crucial in order to thrive in the next upcycle.

University research labs need to deepen their relationship with private industry. I have visited several campuses recently, trying to get a glimpse of the next new, new thing. I believe UCSB, my alma mater, and other university engineering departments are doing the right things, increasing their fund raising efforts, as well as collaborating with private industry. They still need to maintain their academic integrity and independence, but by working closer with private industry, they can make a bigger impact and monetize their research efforts quicker. Time to market still matters even in academic ivory towers. It takes initiative and commitment.

The promising technologies I predict will be in sustainable technologies (greentech), nanotechnology, and biotech. Moore's or Metcalfe's Laws won't be invalidated, as we continue to make tools and products faster, smaller, and cheaper. These incremental improvements will be crucial to nurturing nascent industries. But the "Blue Ocean" industries will be spawned from breakthroughs developed in labs where pocket protectors are fashion accessories. I'm enthused that UCSB's Engineering departments share my vision, and that they are applying a multi-disciplinary approach to solving our society's pressing needs, engaging with other departments on campus, as well as corroborating with other universities.

I've made visits and taken tours of Cal Tech and plan on doing so at Stanford and UCI, as these outstanding institutions map out how we all will live years from now. They are corroborating with private industry more than ever, and raising their visibility among influential alumni in private industry. Many faculty members continue to create and invest in promising, innovative early-stage companies.

My fear is that myopic legislators and technocrats do what is traditional and popular--cut R & D spending, which will portend very bad outcomes for our country, because the rest of the world isn't standing still. If the US wants its citizens to continue enjoying our high standard of living, we have to remain competitive as a technological power. Terrorism isn't our only foe: so is poverty.

My next blog will dispel the myth that the US is not in a recession...