The Insolvent Investor

Investing and economics – it isn’t easy.

Posts Tagged ‘economics’

Great list of economics Web sites

Posted by Warren on June 19, 2009

The internet is a big place and there are a lot of commentators spouting BS about economics (because economics suddenly became cool once this financial crisis started). For a good list of quality Web sites on the subject, it’s worth looking at the Economics Web sites on SiteJabber. It’s not comprehensive but the sites on there are good, and if something is missing, you can review it yourself.

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How Obama can help the environment, stimulate the economy and rebuild our infrastructure: Roundabouts

Posted by Warren on November 13, 2008

It’s 10:45 on a Tuesday morning, and I’m late for a meeting in Palo Alto, California. To make matters worse, I just miss a traffic light and am sitting at the corner of Page Mill Road and Foothill Expressway, just off of the 280.  My thoughts? OMFG, I can’t believe I’m wasting my time sitting at this traffic light! I wait for what seems like five minutes (okay, maybe two minutes) while absolutely no cars pass through the green light. Rows of cars line up at the red light behind me, waiting for the signal to turn and end the infernal wait.

Let’s think about why this traffic light might not be ideal:

(1) Since there are no cars driving through the green light, it is a particularly inefficient use of time for all the people waiting at the red light. Even if there were cars coming, it could still waste time if the flux of cars going through the green light is less than the flux that might be going through the light in the other direction. The value of this wasted time could be measured by using the rate at which these people are compensated in their work (perhaps discounted by some factor since they may not actually work more just because they have more free time). I haven’t done the math, but my guess is if you add up all this wasted time in a year from sitting at traffic lights and multiply by, say 25%, the average wage of an American worker, you would end up with a number well into the billions of US dollars.

(2) My car is wasting gas because it is idling and because I must accelerate after having stopped.

(3) Lights require energy and money to operate and maintain.

(4) Traffic lights are dangerous; 45% of crashes in America occur at intersections.

Roundabouts

Fortunately, there is a solution to the waste and my frustration – the Roundabout. First introduced in the US in 1905, roundabouts are hardly new technology. However, recent studies have shown that they are more cost effective, environmentally friendly, and safer, compared to traffic lights. Europe has been using roundabouts to great success. Roundabouts are much more gas-friendly because they do not require as much starting and stopping or idling as traffic lights. Roundabouts save money and electricity because there are no lights to build, power and maintain. And, perhaps most importantly, studies have shown roundabouts results in about 80% fewer accidents than traffic lights, so are also safer.

It would seem the only real issue with roundabouts in the US is the cost of changing over our old traffic light system in favor of new roundabouts. But it’s this type of large capital outlay which could simulate job creation and our economy. So Mr. Obama, I implore you: revitalize our country and build out roundabouts!

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The American Consumer and the Financial Crisis

Posted by Warren on October 12, 2008

Wall Street and Washington have taken a lot of blame for the financial crisis, but less attention has been paid to the role of the American consumer:  http://blogcritics.org/archives/2008/10/12/151112.php

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Our only hope for better policy and leaders is a more informed electorate

Posted by Warren on October 1, 2008

A piece I wrote for BlogCritics on the need for a more educated and engaged public to produce better policy and leaders for the US.

http://blogcritics.org/archives/2008/10/01/065601.php

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The coming recession (depression?) in Silicon Valley

Posted by Warren on October 1, 2008

Look out below

Economic road sign spotted on 280...

I realize, as an entrepreneur, I am supposed to be unendingly optimistic. But lately, optimism in Silicon Valley has begun to seem increasingly Pollyannaish. It’s become harder and harder to attend networking dinners and listen to VCs, bloggers, Web 2.0 CEOs, Facebook app mavens, and iPhone app Illuminati prattle on about how they are going to change the world. I’m sure one or two of them will. But the majority of the other X-thousand sanguine entrepreneurs will likely soon be out of business.

Living in Silicon Valley, gilded by the riches of Google, Apple, Cisco, Facebook (?!), and the oracular VCs of Sand Hill Road, it’s hard not to feel a little insulated from the rest of the world. But Silicon Valley most certainly is not. Economic downturns (or depressions, as this current downturn may turn out to be) often start in one sector and spread to others. In this particular downturn, the poor felt it first – their real incomes had scarcely increased in the last decade and with the rising cost of fuel and food, they were hurting last year. Then it was the real estate sector, long the darling of the American dream (invest in a house and you will surely be rich one day!). Then it was the financial sector – greed manifested in too much leverage and too little diligence – whose collapse is coming to a head as I write this.

Next, will be the middle and upper-class consumers. The middle class-consumer – the engine of the American economy – is levered to their ears (mortgage and credit card debt) and simply has no more money to spend. The upper class consumer still has capital, but they will no longer be buying the same volume of luxury cars and superfluous gadgets that once adorned their palatial homes.

And that leaves us with technology. With middle and upper income consumers drowning in real estate and stock market losses, there just will not be much money left over to purchase yet another iPod whose batteries no longer completely recharge, or buy that extra pair of designer shoes online that they found via a Google AdWord. Sure ad spending is moving online at a quickening pace, but if consumer spending drops quickly enough, it will not matter.  People will be spending significantly less money for an indefinite period of time. This will cause a huge pull-back in brand advertising, and a somewhat smaller, but still potentially large pull-back in pay-per-click advertising (people will be simply buying less stuff, which could mean lower click-through rates or lower sales conversation rates or less total money spent).

So what does this mean for start-ups in Silicon Valley? I think there are three primary concerns:

1) If you have an ad-based business model, it may become a lot less profitable soon. Additional revenue sources may become a necessity.

2) If you need to raise more money it may already be too late. A and B rounds are getting harder to close and valuations are dropping quickly (full-rachet, anyone?). Seed financing and later stage venture money may hold up longer, but in general, Silicon Valley investors move in a herd. What to do? Reduce your burn and focus on making money.

3) If you thought someone might buy you, now they probably won’t. With equity valuation dropping, the cost of capital for Silicon Valley corporations like Google, Yahoo, and Cisco will be going up. Coupled with their own internal growth problems (no more free dinners at Google), there will most likely be many fewer acquisitions.

And for those who think, “this too will pass quickly, like 2001 and 2002,” it might be worth taking a look at Japan in the early 1990s. They faced similar challenges to the US and the Nikkei is still less than a third of 1990 levels.

Am I being too gloomy? Perhaps. But there is no doubt Silicon Valley is going to take a pounding.

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On the cause and future of the financial markets crisis

Posted by Warren on September 16, 2008

Another piece for BlogCritics – it’s a bit bleak, but I believe it.

http://blogcritics.org/archives/2008/09/16/220854.php

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The only underpriced asset is risk (or, where to invest in difficult times)

Posted by Warren on September 16, 2008

Last spring, a friend of mine at a hedge fund was complaining that he couldn’t find any undervalued assets. Everything was over-priced – stocks, bonds, real estate, commodities, high-yield bonds, the dollar, the Yuan, gold, emerging markets equity, emerging markets debt, timber. Every imaginable asset class was fully priced.  That is, except for one – risk.

The investing world learned this the hard way in 2007, and I believe they will continue to learn this through the remainder of 2008. If I had to make a prediction where the next bubble may lie, it would be in the market for risk. The cost of debt and equity will continue to rise, and investors will demand premiums for risk no less ridiculous than the premiums paid for dot com stocks in 1999.

My advice, get in on the bull market for risk! Go forth and buy straddles, have your bankers structure synthetics, do whatever you need to. But do not forget, risk is still the underpriced asset.

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On the real size of the US deficit

Posted by Warren on September 8, 2008

It’s scary big. http://blogcritics.org/archives/2008/09/08/193001.php

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Barack’s economic advisor is a reason to vote Obama

Posted by Warren on August 18, 2008

Hard not to trust him....

The US economy is rightly the top priority of most Americans in the 2008 presidential election. Without a strong economy it makes it hard for the US to improve its health care system, fix education, and maintain a robust foreign policy that will encourage peace and prosperity in the rest of the world.

Given the above, what is a thoughtful voter to do? This is beyond the scope of my little blog, but if I were voting strictly on the economy I would vote for Barack Obama. Why Barack? One man – his senior economic advisor Austan Goolsbee. Mr. Goolsbee is an impressive young economist who shares the same practical economic policy principles as centrist economic luminaries such as Greg Mankiw, but Goolsbee also possesses the charisma of a television personality. If you missed it, he recently made an appearance on Charlie Rose.

While Barack Obama spent a lot of time during the primaries criticizing NAFTA and talking about raising taxes, he is no left wing tax and spend liberal. To be sure, Barack often sounds like a populist-pandering to the audience to which he is speaking-but his appointment of and friendship with Goolsbee tells me otherwise. A vote for Barack Obama is a vote for a stronger US economy.

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Our Central Bankers are Failing Us

Posted by Warren on August 9, 2008

Beranke is about to let the monsters out

Beranke about to let the monsters out

A good article in today’s Economist describes how central bankers in the US and Europe may be risking their credibility as effective inflation fighters – arguably their most important function. Asset bubbles, high commodity prices, and a low savings rate have led the US, Europe and Japan into the current difficult economic situation. While Central Bankers have done well to squelch financial crisis so far by propping up banks (Northern Rock), mortgage lenders (Freddie, Fannie), and investment banks (Bear Sterns), those actions will only serve to incent managers to continue to take more risks, and in conjunction with the current low interest-rate environment, will do little to curb inflation brought on by high commodity prices. We’re in for some bumpy economic times for a long time to come.

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