Sunday, July 13, 2008

Innovation and junk: are both good?

There are small pockets of very bright and industrious people who are collaborating on creating innovative technology, and ultimately higher value for consumers, whether it's faster, smarter computers, faster bandwidth pipes, the treatments or cures for illness and disease, or sustainable technology. Private industry is holding hands with university labs. And there is even cross-national corroboration. But America needs to remain a major player in this innovation process, even if we are no longer the only or even biggest player.

The will to develop new technologies is there, but the government needs to not get in the way of innovation, because that is the only way we'll grow out of this mess. The early 90's recession didn't prevent research labs from rolling out to the masses internet access--in fact, it catalyzed and spawned the great tech boom. Sure, there was the requisite aftermath of a bust, but that comes with the territory (steps need to be put in place to dampen volatility--that's another topic).

But with every boom/bust cycle, there has been a huge residual benefit. The junk bond scandals actually birthed a whole new industry of alternative financing previously inaccessible to most companies. Junk bond financing and deregulation created a multitude of competitors for Ma Bell, ushering in a new era of innovation ranging from long-distance service to internet protocol (much later). Without junk bonds, there would have been no MCI or Sprint--at the time, banks certainly weren't lending to them.

Junks bonds and venture capital also financed innovation in computers, creating a whole cottage industry for funding high-tech startups. Junk bonds also forced incumbents to streamline operations via leveraged buyouts.

So yes, recessions are a necessary cleansing process of excesses. But they also naturally fertilize intense innovation which leads us to the next recovery. The ability to see around corners is priceless. We need to enable these tech soothsayers to play with their toys, because those are the toys that will put food on our tables when they become pervasive.

Saturday, July 12, 2008

Income and estate taxes

While I endorse a flat income tax, it'll never happen. The infrastructure of tax professionals, including CPA's, attorneys, consultants, financial service companies, etc. in America is too entrenched. They don't want to see their cash cow go away.

Flatten the income tax brackets, make loopholes go away, and many highly paid professionals lose their livelihood. Long-term, it will catalyze our economy, but there are too many powerful special interest groups lobbying to keep the tax codes complicated.

That's why it is imperative that people stay current on tax codes and implement strategies coherent with tax laws. Most people are unaware that their qualified retirement savings plans are subject to income and estate tax rates of up to 90%. That doesn't include the penalties levied if the retiree starts withdrawing from their savings plans outside the age corridor of 59 1/2 and 70 1/2. Those penalties are 10% and 50%, respectively, not including state penalties. And that's on top of income and estate taxes.

That's why most retirees feel helpless--they're taxed to death, and when they do die, their children and grandchildren are taxed as well.

Design your own retirement plan, or the government will design one for you, and it won't be pretty.
When the government "qualifies" these deferred retirement savings plan, does it not make sense that they benefit the government?

Taxes and a competitive workforce

A sales tax would hurt lower income people. What we need is a flat income tax rate. It encourages investment and risk-taking among the well-to-do.

While taxes and tariffs hurt imports and exports, America's uncompetitive workforce is what's driving manufacturing jobs out of the country. There's no getting around that fact. It's empirical by definition. Think about it: if a company performs a site search for manufacturing facilities, they're going to take into account the cost of doing business in every location, domestic or offshore.

I've actually gone thru the process. I worked for a small, high-tech company in the early 90's, and we already had manufacturing facilities in Korea and the States. We kept our US plant for its proximity to our R & D team, but we ended up expanding into Costa Rica fdue to its high literacy rate, low-cost labor, tax incentives, time zone (vs. overnight difference in Asia) and English-speaking managers. It turned out we were the 2nd high-tech company to take advantage of the tax-free enterprise zone. Intel was the first.

The chase for the highest bang for your buck is in constant motion. At one time, Mexico, Japan, and Korea were the objects of our ire. Then it was China and India. Well, now they are losing jobs to countries like Vietnam, Malaysia and Indonesia. All have their pros and cons. But the bottom line is that as long as your workforce can climb the value chain (higher skills, higher knowledge, higher productivity), they won't be outsourced. American workers have not kept pace with that value curve.

Tuesday, July 1, 2008


I don't think real estate and raw land would have been a safe hedge if you purchased 2, 3, 4 years ago. In fact, in some regions, you'd be grossly upside down.

Having said that, I called the real estate top 2 years ago, and called the severity of the subprime mortgage crisis last July as well as the second leg down on banks last month (ironically enough, in sports message boards). The take away message is the commodities listed (oil, gold, futures, etc.) are just assets, altho a different category of assets. Some were dormant for 20 years, and have recently come back with a vengeance. But you would have lost your ass several times over going long on them for all those years. They are just another class of assets, just like biotech stocks or mortgage-backed securities are financial assets. Some shine during certain periods of economic cycles, while others have their own value trajectories.

You're better off being a contrarian, buying assets that are beaten down and hence, grossly undervalued. Call me dumb, and that's okay, but I've never made any money following the crowd--in fact, I've always lost money going against my instincts. I will be a net buyer of certain downtrodden assets in the next couple years, as this downturn is going to last longer than most predict. We have time in this buyer's market to be choosy. But the bottom will be well-formed before the economic indicators pick up. That's my next call: when there's blood on the streets for the next 2 years, there will be huge buying opportunities. Just when the last bulls throw in the towel is when expectations will be lowest for even the most optimistic. That's when the secular low will be reached. The economy will eventually crawl up again, much like other recoveries, but entirely unique because inflationary pressures won't be dormant this time. In fact, that alone will temper the upside a bit.

I really do think future boom/bust cycles will be more pronounced, but that's not the worse part. What's worse is that the US is on its downslope in terms of being the top dog on the world stage. The 20th century experienced major dislocations as well, but America came back stronger than ever each time. These next recoveries won't be as crisp. We will have to accept that while we will still be one of the two biggest consumers of the world's goods, the adult table will now be more crowded. We will fall back into the pack along with China and a handful of powers.

One thing is for sure: we are in for a rough ride. I just find it counterproductive that the pundits and experts always want to look back retrospectively for a cure to prevent the next boom/bust cycle. But in doing so, they will introduce more legislation that merely adds to the cost of doing business. The laws to prevent fraud are in place--it's the enforcement that is lacking. Adding more legislation after the FSLIC S & L fiasco didn't prevent the current mortgage crisis. It just created more complexity and increased business costs. Just like Sarbanes/Oxley won't prevent the next stock market bubble. All S/O did was drive smaller companies out of business. They ended up too busy with compliance in lieu of concentrating on their core competence of running their businesses.

Bottom-line: we need to just accept that greed and fear have always, and will always drive market fluctuations. Irrational exuberance (coined by former Fed Chairman Greenspan) exists in every market boom, just like panic selling occurs with every market meltdown. Now, can measures be put in place to attenuate volatility? Perhaps, but the cure shouldn't be worse than the illness.