Monday, May 25, 2015

Clinton, Business and Oxymorons

To concurrently think of a politician and business is tough. But to think that Hillary Clinton is somehow a business guru is plain impossible. Now that you don't have to take my word for it. On May 21st, Hillary's handlers wrote an Influencer post for the LinkedIn audience. The topic? Business.
picture of Hillary Clinton in front of local small business owners.
Is she thinking about what advice to give you or
how to destroy you and your business?
Let alone the fact that LinkedIn Influencer posts are reserved for those with authority on a given subject; Hillary's own account of her expertise were her experience as a daughter of a once business person. Nonetheless, no one was impressed by the fact that this was her only Influencer post ever.
In a nutshell, Hillary and her team somehow think that using the platitude-ridden shallow-message style commonly deployed by her and Obama would be effective with an educated audience. Well, based on the comments, their calculations seriously failed. Aside from the many hardcore feminists, the left faithful or those who simply felt sympathy for the attempt, most saw the post for what it was: a failed attempt at voter pandering. 
But why not let you decide for yourself. Here is a transcript of what she wrote. Then, you will get a chance to read my comments to her main points. Yes, I am being a little picky. While I would allow a new manager to get away with similar comments. I have little patience with those who have access to the best minds in the world yet opt to instead make a half-hearted attempt. In essence, I feel their message is "here is what you want to hear but which I just don't care about". In my opinion, this is totally unacceptable.

When I was growing up, my father owned a small business. And when I say small, I mean small: It was my father and an occasional day laborer. My mother, brothers, and I would help do the silkscreen printing on the drapery fabrics he sold. We were an all-hands-on-deck operation, guided by my father’s belief that if you worked hard and did what you were supposed to do, opportunities would be there for you. 
Despite generations of progress on so many other fronts, it’s still too hard to get a business started today. Hard work is no longer enough to guarantee opportunity. Credit is too tough to come by. Too many regulatory and licensing requirements are uneven and uncertain.
And yet, as I travel around the country, I hear signs of optimism. Just yesterday, I sat down with a group of small business owners at Bike Tech in Cedar Falls, Iowa. I met a young man named Brad Magg. He started his first catering business at 15 with a loan from a local bank — they were willing to take a chance on a very young entrepreneur after years of watching him sell baked goods while in elementary school. At 20, Brad decided he wanted to start a restaurant — just as the owner of the local ice cream shop, Goldie's, was getting ready to retire. He bought the business from Goldie herself (and liked the name so much he kept it). Like many business owners, Brad struggled to make ends meet during the Great Recession, so he sought help from a Small Business Administration program in his town. With support and sheer determination, he was able to save his business. Today Goldie's Ice Cream Shoppe has grown from one and a half employees to almost 30.
That’s the spirit that got Americans through the Great Recession. And as we come back from the crisis, potential new business owners and entrepreneurs from Silicon Valley to Des Moines to Brooklyn are ready to seize the moment. All they need are policies that help them get ahead instead of holding them back.
That’s why I want to be a small business president. Throughout this campaign, I’ll be proposing specific ways to help jump-start small business, including:
1. Cutting the red tape that holds back small businesses and entrepreneurs. 
It should not take longer to start a business in the U.S. than it does in Canada, Korea, or France. 
2. Expanding access to capital.
Small business owners need access to financing and credit to build, grow, expand, and hire. Lending has recovered since the crisis, but it’s still hard for new firms to get credit. A Federal Reserve Survey found that the current market is especially hard for the smallest firms and startups. And despite the fact that millions more women have opened businesses and become their own boss in recent years, they're still starting out with about half the financial capital as their male counterparts.
3. Providing tax relief and tax simplification for small business.
The smallest businesses, with one to five employees, spend 150 hours and $1,100 per employee on federal tax compliance. That’s more than 20 times higher than the average for far larger firms. We’ve got to fix that. 
4. Expanding access to new markets.
Every American small business should be able to tap new markets — whether they are across their city, across their state, or around the world. Some American businesses are already doing this through new platforms, such as Etsy and Ebay.
The early lessons I learned about hard work and entrepreneurship have stuck with me all my life — a sentence my father would be thrilled to read. In the weeks and months to come, I want to have more conversations with people on the frontlines — people like Brad in Iowa, who have seen firsthand what’s working and what isn’t. Then, we need to build their experiences into our policies —because small businesses are the backbone of our economy, and they have as much to teach us as ever.

And now my reply:

"1. Cutting the red tape that holds back small businesses and entrepreneurs" 
I love the idea of less government. It is well documented that a few smart central managers will never outperform us all. Yes, I am talking about the many studies about the wisdom of crowds. Despite whatever your friend Barry says about the fact that business owners are simply the recipients of hand-me-downs from society, I ask for no more Nanny-state please. Business owners can fend for themselves if government gets out of the way. Just remember that before there was big business in this country, small business was pervasive despite the dog-eat-dog environment of the era. Anything is better than the predatory redistributionist government that we now have; which punishes small business. Just think of it, tax collections have accelerated at the same time that business profits have collapsed. And of course I am talking about business in general and not just about the financially engineered P&L's of the Blue-chips. For further insight Ms. Clinton, just check the St. Louis Fed's website. It's all transparently there.

"2. Expanding access to capital" 
image of a male's empty pocket
When big government crowds out small business
If only you understood that it is big government that's crowding small businesses out of capital markets by its unsustainable borrowing. Yes, I know that this comment is esoteric and that it may go over the head of many, but government and its many so called brilliant advisers should know better. Despite of where the Fed may fix interest rates at, risk aversion has made it impossible for small businesses to borrow at reasonable rates. For all intents and purposes, small businesses have been kicked out of capital markets since the recession ended. And considering that capital is always needed to fuel small business growth and that all marginal employment growth is 100% levered to small business innovation driven growth, it is not surprising that employment has been stagnant, in spite of the book-cooking taking place around headline data. Just look below the headline, Ms. Clinton, and you will see the facts elegantly connect. If big government stops living beyond its means, it will borrow less. Capital will then be available for long term capital investment, the kind used by small business. But don't just take my word. Besides looking at the St. Louis Fed's website, I suggest you review all recent public presentations by Greenspan. It seems that now that he has been out of government for a few years he has totally reformed. He is starting to make sense again.

"3. Providing tax relief and tax simplification for small business" 
Tell that to your friend Barry. We already knew it.

"4. Expanding access to new markets"
Image of long line of dissatisfy customers
Ms. Clinton misses the whole point
about small business.
Ms. Clinton, no doubt that you miss the whole point about small business. By definition, small business structures are not sophisticated or large enough to viably sustain operations that are excessively diversified. Focus is always the better advice for small business. There are just not enough bodies around the office to handle customers with diverging needs. And if you think that a business can become large by setting up an eBay account, just ask the many who have tried to see how difficult it is to profitably serve every little picky request by customers who hold you hostage to your public ranking. No, small business reach new markets not by fiat, which is clearly the only way you know, but through innovation. It is their innovative approach to unsolved needs that allows small business owners to serve diverse customers. Different customers are all bonded together by their common need. Thus, a small group of one can build a viable business before she has to worry about HR and the many business regulatory needs. To help us all, I ask that you and the rest of Washington stop getting in the way of small business. Clearly the relevant concepts elude you all.  

Saturday, March 14, 2015

Capital Misallocation DuJour

Let's polish your financial and accounting skills. What price would you put on the stock of the following Fort Lauderdale based company? 
Their Investor Relations web site reads as follows (minus a few crossed-out words to keep the suspense going):

Photo of person marking the words Marketing and others on a transparent board."The Xxxxxxx, Inc. is an American entrepreneurial “emerging growth” company with a brand and xxxx that is widely followed throughout the nation. We believe that xxxxxxx is the “new xxxxx”.  The Xxxxxxx is a fast growing, early mover in the xxxxxxx industry. Management believes that we are one of the most followed xxxxxxx on Facebook, and we believe we are the only known xxxxxxx verified by Twitter.
Many quality xxxxxxxxxxx go into every xxxxxxxx we make which is what we believe elevates our xxxxxxxxxx above the rest and why people line up in front of our xxxxxx sometimes for over an hour to get one of our xxxxxxxxx creations. Our goal is to make people happy with our xxxx.
Our xxxxxxx have received numerous accolades, including being listed as one of the best xxxxxxxxxx in the country."

composite image of the Twitter bird and their check mark
Don't let their "Management believes" and "we believe" statements throw you off. Clearly, both were made by the same person (natural or legal). Let's remember that the speed of growth associated with start-ups often results in simple message mistakes like this one. Now that you can call me old fashion, but I am not sure of the bragging value from being "verified" by Twitter.
And in case you doubt it, the company is real. It's even publicly traded. Their latest 10Q shows revenue at just over $995K, That's "K" as in Thousands.
COGS show at over $920K, and Total Operating Expenses at $959K.
Like with any other up-and-coming company, their 18 million shares-outstanding trade with some volatility. The recent market correction pushed this company's stock down by 29%.
composite image of NBA game between Lakers and Suns
Key assets are deployed in LA and Phoenix
Their key assets are deployed in two important metropolitan areas: Los Angeles, CA and Phoenix, AZ.
As for their balance sheet, liabilities equate to 280% of their assets; thus leaving them with a stockholder's deficit rather than the usual equity. Translation, their founders either blew up all their money or have no skin in the game. Both are bad, if you wonder.
But the market is nonetheless quite confident. That much is evidenced by their rich valuation. How rich, you ask? Well, have you guessed how much capitalization do they deserve?
Say you give up.
Wall street has valued their shares-outstanding at a whopping $71,000,000; which is down from their recent valuation in excess of $100,000,000.
What? These guys are insolvent and losing money by the boat load. Why would anyone give them more funds? Their negative Cash Flows from Operations amount to about 250% of their revenues. Are investors off their tree?
But wait, something important must be missing among all these facts. Why else would financial experts dish out such rich valuation for what amounts to garbage, right?
Let's see, their President / interim CFO has an MBA from the University of Miami. Meanwhile, the CEO has an undergraduate from Jarvis Christian College. Could their pedigree be the reason for so much market good faith?
If you haven't taken a look at the company's name by clicking on the 10Q link above, let me share that the special product they tout is a cheese sandwich... Well, a "gourmet" cheese sandwich. So their main assets deployed are food trucks. To be exact, we are talking about four (4) food trucks.
Not an image of a military-spec food truck with anti-ballistic features and vertical jet liftoff capabilities
Is it possible that each of these trucks will deliver value in excess of $17 Million?
I thought long and hard and continue to be convinced that the trucks must be special. Certainly a mission critical project like theirs calls for military-spec vehicles with anti-ballistic features and vertical jet liftoff capabilities...
... and it goes without saying that the cheese used in their splendid sandwiches must carry self-propelled cancer-fighting nano-agents...
... all features that are highly valued by beer guzzling fairground attendees in LA and Phoenix.
At this moment, I feel the need to clarify that I hope no one has been hurt by my sarcasm.
... drum roll please...
The name of the company is The Grilled Cheese Truck, Inc. I think that it vividly illustrates the orgasmic nature of the Wall Street party that is taking place right now; thanks to the keg sponsors at the Federal Reserve. 
Two days ago, I proposed that the presently inflated stock market valuations were not a sign of economic health. 
Even the best marketing guys I know can't come up with this much fluff-ware.
Financial bubbles anyone?

The Melty Buzz illustration from The Grilled Cheese Truck's website.

Friday, March 13, 2015

Artificial or Else - Questionable US Recovery

They claim the recovery is solid. Just look at the stock market, they say.
picture of CNBC's Senior Economics Reporter Steve Liesman
CNBC's Steve Liesman
Economists like CNBC's Steve Liesman and investment peddlers everywhere insist that the seemingly unstoppable stock market climb is a sign that all is rosy within the US economy. After all, they say, isn't the stock market a price-discovery mechanism intended to value all information about the economy instantaneously?
Well, yes and no. The stock market, like any other market, acts as a pricing tool. Where things go bad is that it is now being distorted by the massive gravitational presence of the Federal Reserve's balance sheet. Never before in history did a single entity monetization so much. Never before did markets have to deal with such a large distortion. Let's take a close look at a sector that I feel disproves their allegations.
image of chart from Saint Louis, MO Federal Reserve showing a decline in Retail Sales at Department Stores compared to an increasing US population
Department Store Sales collapse.
Meanwhile, the buying population increases.
Visiting the Federal Reserve's own website, one can easily see that retail sales at department stores across the nation have collapsed. Things are so bad that I will suggest you take pictures of all the anchor stores next time you visit the mall. In no time, your images of formerly well known dinosaurs will appreciate in value.
But not all is bad of course. Noise is never so simple to clean. The fact remains that a continuously growing US population has made the size of the buying market larger; thus helping grow total US retail sales. Yet, all benefits from such market growth seem to have completely missed department stores across the nation. Just look at the Fed's chart above; department store revenue has fallen to scary levels. As a result, there's even talk about how these players are failing to entice new buyers as they continue to lose old ones.
But don't say I didn't warn you. While my forecast for the beginning of 2015 was a little lower than where things are now, I had told you in my article back in July, 2013 that Department Store sales would continue to plummet. Well, they did.
stock price chart comparison of Dillard's, Macy's and Nordstrom.
Stock valuations of Dillard's, Macy's and Nordstrom
continue to push higher despite horrible retail performance
Surprisingly, though, none of these terrible facts is reflected in their stock valuations. As things have turned worse, stock prices of companies like Macy's, Dillard's and Nordstrom continue to increase; just as if revenue performance was stellar.
So, how is this possible? Isn't bad sales data supposed to push stock prices lower?
While we all know that the stock market can behave irrationally in the short term, we still trust that long term price performance correlates with fundamental health. But as it should now be clear, we are witnessing an anomaly.The expected poor stock price is conspicuously missing. Current valuations rather reflect boom times.
Thanks to the disruptive effect of the Federal Reserve's Balance Sheet, department stores are being rewarded for carrying a poor business model that sports an upcoming expiration date.
The Fed's massive money printing has created the ideal environment for capital misallocation. So the story repeats: excess money is put in the wrong hands and... boom, a bubble pops. Let's hope that shrapnel doesn't hurt innocent people this time around.
If you still believe that the market is really serving as proof of a healthy US economy, don't worry; I have a couple of other posts that will destroy your thesis. Until then, enjoy the volatility.

Friday, December 12, 2014

Why would a billionaire need life insurance?

It is generally believed that life insurance is only for those who aren't wealthy. This is because people tend to think of life insurance as a way to cover the needs of a destitute widow and her children. But nothing could be further from the truth.
image of luxury car next to an executive jet.
A life insurance policy is a high-leverage financial instrument like no other. It also enjoys unique tax treatment privileges equal to no none. In a nutshell, there isn't a single financial product that can deliver the power of markets in a single laser-focused product. It can uniquely add liquidity at a time when illiquid assets turn your net-worth into no more than meaningless data noise.
Let me sound the warning bell for those running a successful business, those who are asset rich and those who are passing through the most productive time in their lives. By no means should you assume that there is no place for an insurance policy just because money seems to rain all around you. Last I checked, those who earn big also take on larger bets. And it is these bets that can drain liquidity at the worst moment.
There's a simple way to determine the absolute lowest amount of life insurance needed by an individual; including these asset rich billionaires.

In the video link above, CNBC discusses how even the mega-rich must have life insurance to cover the cash needed for the so called death taxes and for paying off all loans outstanding. Here is the formula in detail:

Min Coverage    =    All Debt    +    Possible Capital Gains    +    (0.45  x   Net-Worth)

The formula is simple. Total all your outstanding loans. They are going to get called after death. If you don't have the cash to pay for them now, how exactly will your family do it then?
Then add any capital gains from the sale of assets that may need to be liquidated. Here, a guesstimate would be preferred to doing nothing. In any case, this is not the biggest factor within the formula.
Finally, add 45% of all your net-worth. It will be owed to the IRS in the form of estate tax; which is often referred to as death tax. Ask yourself: would you be able to immediately write the IRS a check for 45% of all your assets? No? What a surprise.
While an argument can be made that, for many, estate taxes are irrelevant due to the aggregate value of assets falling below the $5.25 Million minimum for 2013, I would like to warn against quick conclusions; especially when a business is part of the estate transfer. Keep in mind that without mark-to-market price discovery it would be difficult to set a price for the business that the IRS would agree with. You may think that for tax reasons, your business is not very valuable as an inheritance. Surely soon after, the IRS will disagree. Would you like to pick a fight with the IRS about how much taxes they should collect based on such business valuation? Would you like to have your heirs take on the challenge without your help instead? With the cost of term life insurance being so low, the risk/reward ratio favors erring on the side of having to pay estate taxes.
contrast image of a family over a grassy field
Do note the caveat that no part of the resulting amount will be targeted to cover death related expenses, wealth transfer costs or replace any lost future earnings. This calculation will only serve to preserve the value of assets already held. That's it; just asset-loss elimination. As a result, I find that insuring for anything less would be irresponsible since the certainty of taxes and loan calls is always high.
picture of a female college graduate giving the thumbs upThis back-of-the-napkin calculation can simplify the decision of how much to protect as a minimum. Am I then suggesting that this is all the insurance you need? Of course NOT. You should also cover the value of all future productivity and hedge other business and family risks.
My goal here is humble. I want to simply show those who are successful today that their net-worth is not as much of a reliable hedge as they originally thought; that their asset wealth may not be enough to cover everything life brings. Look deeper into it. There are plenty of inexpensive solutions available.

Finally here is the caveat de rigueur:
This material is provided for educational purposes only and is not intended to be legal, financial or fiscal advise. Please seek the advise of a licensed professional in your state.

Friday, June 27, 2014

Doing Business Right

I strongly recommend all employers in Florida become familiar with Gulfstream Goodwill Academy. This incredible institution educates individuals with disabilities. It then readies them for successful integration into the work place.

The Transition to Life Academy
I know from experience that incorporating programs like these into a business' strategy is both, very rewarding at every level and a fantastic way to increase customer and employee loyalty. In a nutshell, everyone wins. If interested, reach out to Laila Seagle at (561) 259-1000

Saturday, June 21, 2014

A Positive Solution to Frivolous Litigation

photo and graphical image of a business owner in front of his inventory
For our purpose here, it makes no difference
if your company was exposed to other risks through
medical, legal or any other services or products
Here's a business owner's nightmare scenario. Let's say that your company uses hazardous materials in its daily operations.
Let's also say that despite doing everything right to protect your workers, an employee finds a complaint and gets a hold of an attorney.
But this happens to be more than just an attorney.
This guy is good... I mean, bad; depending on whether he's on your side or is playing against you. This attorney has an astute modus operandi that diverges from the norm and which is quite effective. This guy sues you and your company.
But he has no interest in winning the court-battle. No!
image of bad attorney with white horn illustrations outside of his face shotJudicial Harassment is more like torture. Pain is the main factor driving results. The more intense and personal the pain he can exert on you, the better his chances at getting what he wants.
After proving that there was damage to his client, he will ask that the court safeguard the money that could be used to pay his client's compensation. He will ask that your accounts be frozen.
image in black background of an old neoclassic style bank building with chains and a lock in front of it.He knows that most small business owners pay personal expenses through their company in an attempting to reduce tax liabilities. Many businesses follow the advice of their CPA's. They create pass-through companies and show no income at the end of the year.
It is therefore easy for this lawyer to show that you have previously taken money out of the company for non-business related expenses. He will next argue that you will certainly be tempted to doing it again; thus putting at risk his ability to properly gain indemnity for his client.
Depending on the case, this hassle will even disrupt normal cash operations in the business. Thus, the risk of crippling the company is very real. Remember that his chances of winning increase as he cranks up the pain.
The net result is always the same. You won't be able to pay your mortgage, your cars or a number of important expenses. Under the circumstances, you won't be able to get an income increase to compensate for your now strained cash position. If you did, the judge would probably respond with strong punitive measures; never a good thing. 
illustration of never ending spiral clock with back background and white numbersIn a nutshell, you could easily lose your property; which is the essential part of the Harassment. Just think of the fact that it always takes a long time for a case to go through the courts. How long could you hold your breath underwater? It may be over a year before you can prove your innocence to the judge.
Inevitably, you will probably give up and settle. He wins!
Yes, you and every small business are just one bad-attorney away from a scenario like this. Perhaps more depressing is the fact that more successful companies make better targets as the bounty collected by the pirates could be much greater. And for those who pay the price once, the chances for a repeat are greater yet, once the word spreads.
simple illustration of a shooting range targetCompanies may go for decades without experiencing a single frivolous law suit. But this is a case where past experience does not offer a certain view at what the future will bring. Moreover, I find questioning the probabilities that you could experience Judicial Harassment to be misguided.
If a solution was costlier that the problem, I could see why ignore the issue. But since the cure is simple, valuable to you and your family, and may be used for other purposes, the real question should be why not?
You see, this is no ordinary protection. It isn't like liability or car insurance, which expire worthless every year and which serve no other purpose.
Section 7702 of the IRS code allows for the creation of an impenetrable fund where money is protected from dirty attorneys and other predators. They just can't claw their way into the money.
composite image in black background titled Section 7702 of the IRS code These funds are completely under your control and could be structured to have a high degree of liquidity for these or many other emergencies. They can be structured to benefit from tax deferred growth. Tax free access to the money is even possible when well designed. And perhaps the best part is that in case that you are never under threat of Judicial Harassment, the money continues to grow under your control and available for your retirement or gifting needs down the line. Despite mentioning it before, it is worth writing it again: Unlike derivative options or other types of hedging mechanisms, which lose value every day, these solutions continue to grow their worth over time.
Intrigued? Ask your professional advisers about how to use 7702 for this and other business risks.

Icono de Banderas Mexicana, Argentina y Colombiana

Tuesday, April 29, 2014

Finding a Buyer; An Owner's Dilemma

Image of business owner handling the bills
Retirement Planning?
You’ve poured a lifetime of sweat, time, and capital into building your business. You’ve begun thinking about retirement. Your strategy is to sell your company for a good price, settle back, and enjoy a financially secure retirement. But, like many business owners, you’ve made the mistake of assuming this scenario will happen, and you haven’t bothered to make any other retirement plans. 
My advice to you? Be realistic. What are the odds there will be a person showing up at your doors at the right time, with cash in hand and willing to buy your business for a fair price? For thousands of small business owners each year, no buyers ever ring the bell.
Perhaps your business is too specialized or is tied too closely to the owner’s unique personality and skills. Then there is the chance that potential buyers may equate a retirement sale with a distressed opportunity; subsequently making only low-ball offers. Whatever the reasons, many owners find that their company has suddenly become a white elephant that nobody wants.
But here is a thought: select and develop a successor. Prime a replacement; someone who will buy your company when you’re ready to retire. You could even look at your current co-owner. Just be careful if she is about the same age as you. Retirement plans may coincide for the two of you.
The, how about your son or daughter? Are they active in the business? Could you look at a younger key employee? Business owners who successfully groom their own replacements leave nothing to chance. They realize that there’s no room for error at the point of retirement.
Be cautious nonetheless; make sure your heir apparent is the right person in terms of temperament, personality, competence, and personal goals.
Image of a business owner and his prodigee.
Nurture a buyer, write a buy-sell agreement
and fund the deal with insurance. That simple!
But don't look for yourself. Being compatible does not mean being identical. You are not looking for a twin but for a potential leader who can do things as well as you, but differently.
Set up a probation period so you can terminate the relationship if you find that this person will not work out. During that period, keep everything as informal as possible; strictly verbal. Even when you go to a formal agreement, make sure it contains a termination provision. It's important to reduce your risk's profile while you engage the search.
Offer incentives to ensure that your replacement stays until the baton is passed. An ambitious successor needs and deserves gradually increasing authority and benefits. Options should include deferred compensation or the opportunity to acquire partial ownership prior to your retirement. This provides both parties with something to win by sticking to the agreement, and something to lose if it falls apart.
Create a buy-sell agreement. With the help of your attorney, lock in who does and gets what, spelling out all details and caveats, including how to establish the final valuation of the business. This formal agreement protects everybody.
Build in a funding mechanism. This is of crucial as funding is why most deals fall through despite even the best buy-sell agreement terms. Any plan is worthless without the money.
Under one option, the successor may be able to purchase the company from ongoing profits. Other options include setting up a sinking fund or allowing the successor to simply borrow the money. These options may work but they leave much to chance.
sepia image of a ripped Life Insurance print on a piece of paper over several 50 dollars bills
Life insurance is a flexible financial
instrument available to any business owner
Instead, consider a funding vehicle that also protects your family in the event of your disability or premature death, such as life and disability income insurance. You would be surprised what can be done with a properly structured life insurance policy. Your insurance professional or your independent professional advisers can work with you to help you develop a sound business strategy.
Alternatively, have a Plan B. As a business owner, you know that very few things go exactly as planned. What if your business hits tough times or your successor dies, becomes disabled, or leaves because of a personality conflict? Or what if there simply is no heir apparent waiting in the wings? Sometimes, your only alternative may be to dissolve the business. Be ready. It is after all the route most often taken.
Now that, if you dislike the idea of fading your business away, then you have no alternative but to begin mapping out your retirement strategy today. What are you waiting for?

Friday, March 7, 2014

Sure! Blame Baby-Boomers

colorful composite photo image of the mid-body of a Psychedelically dressed hippie
Are Baby-Boomers Retiring?
A dropping unemployment rate says jobs are coming back. Unfortunately, main street can't see the improvements. Why not blame Boomers? 
Come to find out that the unemployment rate has dropped because workers are leaving the job market and not because of job creation.
Normally, disillusioned workers would be a terrible indicator of a failing system. So, to make us feel better, our leaders are blaming Boomers. Their story is that only retiring Boomers are departing the job market in large numbers because of age. But the argument seems convenient at best. As the government loses track of millions of workers who have fallen out of the labor market, our leaders in Washington are missing a few hints.
It turns out that it doesn't make sense to blame Boomers.
First, Boomers are not like their parents. Members of the Greatest Generation liked telling stories of war as they chilled under the porch. Boomers, on the other hand, are much more active. They dislike both dependency and immobility.
From early on, Boomers' free spirit drove them to change the rules to society. Starting with the role of women, they then demystified sex and even found a place for drugs. As their personal productivity increased, they became the biggest spenders in the history of the planet.
But spenders they are no more. You see, Boomers are kind of broke. They do not have enough money to retire. So, they will have to continue to work longer than their parents to make ends meet.
How can I be sure? Well, if they had enough to retire, we would witness great signs of celebration honoring their accomplishments; from parties, to travel, to spoiling grand kids. Boomers have left no doubt about their desire to do everything bigger, better and faster than any other generation. But I just don't see the indication that this is taking place.
Chart of US Labor Participation Rates vs. Recessions (by Thomson Reuters)
Labor Participation Rates vs. Recessions
(by Thomson Reuters)
Moreover, if boomers were truly preparing for retirement, we would see great asset liquidations. As a result, there would be massive drops in the price of everything from Harley Davidson motorcycles to fishing boats. While this may still take place a few years from today, it isn't retirement that's in the minds of Boomers right now. They still think they can ride the Harley without much back pain.
So what's pushing Labor Participation Rates down? Who are the workers giving up looking for jobs?
If my assumption is correct, a different large group must be leaving the work force in place of Boomers.
It is evident in the Labor Participation Rate chart above that rates peaked at the end of the 90's. More recently, rates have collapsed further after the recession ended. Unlike with all other recessions in the chart, this one failed to rebound, even after a prolonged period of time.

Who is missing?
Composite image of an age-group member female plus chart of US Labor Participation Rate for those 65 year and older
Labor Participation Rate (65 years and over)
Looking at the Labor Participation Rate for those ages 65 and above, there is no doubt that they have not given up. The chart is clearly on a sustained uptrend which started in the mid 90's.
Honestly, the clear lack of correlation between this and the chart of the total Participation left me stunned as I reviewed the information. While I did not believe the story promoted by many mainstream economists, I certainly did not expect for this age bracket to contradict the trend by such large margin.
Composite image of an age-group member female plus chart of US Labor Participation Rate for those 55 to 64 years
Labor Participation Rate (55 to 64 years)
Now look at workers between the ages of 55 and 64. While their participation is flattening, it has certainly not dropped in sympathy with total participation.
I should probably highlight that the probability of a sudden change in direction of an uptrend is very low. It is much more probable that these uptrends move sideways as they exhaust the energy that pushed them higher.
So far, these two charts corroborate my suggestion that Baby-Boomers are not moving towards retirement yet. There is no doubt that at some point they will, as it is natural. We will simply have to wait longer.

If not Boomers, then who?
Composite image of an age-group member female plus chart of US Labor Participation Rate for those 16 to 24 years
Labor Participation Rate (16 to 24 years)
Let's look at the other side of the spectrum. Thus far we know that many 16 to 24 year olds still live at home with their parents, have large tuition debt and display a higher degree of entitlement than other generations. Could these characteristics show on Labor Participation? You bet!
Perhaps counterintuitively, this group has been pushed further and further out of the labor force. The decline in the chart dates to the end of the 90's. Furthermore, the recent declines are very robust in nature. You see, when we discuss impacts on demographics, we tend to focus mainly on Baby-Boomers because they are the largest single group that can easily affect economy. But what we often miss is that their children, the Millennials, are showing up in two larger waves. In the aggregate, there are more Millennials than Baby-Boomers. It thus makes sense that Millenials would also create seismic shifts on the economy.
Composite image of an age-group member female plus chart of US Labor Participation Rate for those 25 to 54 years
Labor Participation Rate (25 to 54 years)
Now look at the group in the middle. Definitely, the 25 to 54 years group dictates the main shape of the total participation rate curve. Meanwhile the 16 to 24 years group determines the acceleration. Together, these last two groups oppose the positive influence of those who are closer to retirement.
That these charts completely contradict the general consensus among economists who think that Labor Participation drops are due to Baby-Boomer retiring is not surprising. We live in a world where everybody is afraid of being exceptional. Everyone follows everyone else; even if it means we all end up in the precipice.
This is one more piece of evidence that the stories served by our nation's leadership are bogus at best. Our Presient would like us to believe that jobs are coming back thanks to his great economic projects. But the reality behind the scenes is different. Boomers are having to work longer to pay for retirement. With a lack of jobs, Boomers face accepting lower paying jobs; something that takes entry level jobs away from younger professionals.
We are letting headlines distort our economic impressions in a way that directly contradicts our intuition. In a nutshell, the country is broken and our leadership is either driving disinformation or they have no idea on how to better our position.

Friday, February 28, 2014

Limitless - US Federal Debt

Are politicians racking up debt that your children will have to pay?
photo image of a toddlers holding a pink pen with hundred dollars in the background.
National Debt is Silly!
Anyone who has visited my Blog has probably noted the US Debt counter on the right side of the main page. To me, national debt is a serious issue.
While my biggest concern has to do with what's done with the money borrowed, the overall amount is also hard to ignore.
Whether we pay the money through loosing buying power due to inflation or through income confiscation (taxes), the amount we owe is so large that there is just no way for our present generation to pay for it. As a result, it will be our children who are left with the bill.
But in every family, there is someone who just does not understand the problem of spending. Most of them see government as a kind of deity (God) who has the power to create money from thin air. What they miss is that the problem is not about the creation of the money but the creation of value.
image of the Empire Estate Building.
To pay a trillion in debt to the
Chinese, we need about
1,500 Empire Estate Buildings
For example, if the Chinese lend us a trillion dollars, we will have to give them a document that promises we will pay in ten years. Such document is a 10 year treasury bond. Well, in ten years, the Chinese will come back to get paid. But we will have to give them something of value. They will want to trade their bond for corn, cars or famous buildings. Of course that they will be fine with first receiving cash that they can then exchange for the Empire Estate Building and a few other landmarks. But what do you think will happen if the money we give them is not good? They will certainly refuse to accept dollars and would rather get paid with the buildings directly. After all, the money they lend us has value when we borrow it. They expect the same in return.
This is exactly what happened with German money after the first World War. The country was broke and as a result their money was worthless, So, the rest of Europe demanded to get paid with gold and other valuables.
Now think. Would you like the US government to come to your house in ten years and tell you that you have just lost your house to the Chinese as payment for the money Uncle Sam borrowed ten years before? What if they tell you that your house is exactly your fair portion of the total amount owed? Would such fairness make you feel any better? Do you think that it is fair for the Chinese not to get paid instead?
But you may be thinking that the government just prints money that the Chinese can then use to buy whatever they want. But the question is: if the government can just print money out of thin air, why did it had to borrow in the first place? The answer is because they can print money but not value. To pay the Chinese back, Uncle Sam will have to take your money or your goods. It is as simple as that.
If we are a nation that does things right, we need to have a good plan on how we will pay for what we spend before we use the money.
image of the chart illustrating US debt during the 20th century.
President Obama, in his attempts to take advantage of the public's ignorance, claims that we should raise the debt limit because we should pay what we owe. With this, Obama uses the high moral ground as his argument without explaining how money payments really work. By the time he is done, Obama will double the debt accumulated by all US Presidents combined.
It's not about not wanting to pay. The US has the best credit in the world because we do pay. Instead, it's about making sure we don't default. The best way to prevent default is to spend within our means. Unfortunately, this is at the core of our incompetence. We just can't do it. We love to talk about spending money for fireman and teachers even when it isn't our money we are giving away.
To see how ridiculous this situation is, look at this video.
Rather than making things complex by using national debt, the video simplifies things by putting everything within the context of family in debt. Make sure to share the article with anyone who needs to understand the topic better. Let's be more responsible. Enjoy!

Thursday, February 27, 2014

Jobs or no Jobs

image of an educated professional holding a jobless cardboard sign.
Photo by
In what seems like a repeat of 2007, macro-indicators continue to soften. Just like in 2007, the reasons behind the shift abound. But if history rhymes, we may be witnessing the next cyclical downturn.
Today, the Jobless Claims report surprised experts with a 348,000 claims headline. Before to the announcement, the expected range was between 330,000 and 345,000. The prior report was adjusted down 2,000 to 334,000; thus making the current report a substantial increase.
Since the report is volatile in nature, it is always best to use a moving average when looking at the data.
So when could we expect confirmation of a failed recovery in jobs? Cycle theory advocates concur that any time in 2014. Their idea is that markets oscillate in a fairly periodic basis and that it is now time for the next swing lower.
Demographers generally agree. Demographers look at the effect that Baby-boomers have on the overall economy.
Just remember that these are not sharp points on a graph but rather a slow turning curve. So, keep an eye on the broad trends.
Look at this morning's Jobless Claims chart.
New Jobless Claims chart with 4 week moving average made with data from Haver Analytics.
Jobless Claims data by Haver Analytics
Today, new data continued to build on a trend that started during the third quarter of last year. If the bad weather argument holds, the 4 week moving average (the cyan line) will soon correct down.
But if the thesis fails, we should be challenging the top end of the larger trend, which is marked by the channel I drew over the chart. There is a strong chance that in about seven to eight weeks we will test the channel's integrity with the 4 week moving average line. The target is near 350,000 claims.
As we approach the upper channel band, the chart may display a bit of volatility (noise). But soon after, we will know the outcome.
Even if the resulting trend moves sideways at a 350,000 level after breaking above the channel, it would still be a confirmation that the so called recovery in jobs failed.
Why is employment important? Well, because the consumer is a massive portion of the US economy.
Yes, I am geeking out with the technical chart analysis this morning.

02-27-2014 10:14 AM Update:
Consumer Electronics expert Barry Vogel made a very relevant comment in my LinkedIn page:

To my way of thinking, the jobless reports and related reports are a meaningless exercise. When the vast majority of jobs created are minimum wage or near minimum replacing solid middle class jobs, the numbers are meaningless. When people are forced out of the workforce before they wish to retire, the numbers are worthless. When formerly hard working people have given up after failing to find meaningful employment after more than a year, the numbers are an insult. To your point, the economy is far more fragile than anyone cares to admit. I do not believe that we have recovered. The economy could not stand on its own without being propped up by government spending. We are just one major financial blow away from disaster at any time.

This was my response:

You are very correct Barry. 
The Unemployment report, which is reported separately, fails to include (1) people with expired benefits and (2) those with part time jobs who would rather have full time employment. But if today's Jobless Claims report increase, as it is now evident, then things would be worse than you have clearly noted. It's a bit of bad on top of bad. 

Thanks for the great insight.

Wednesday, February 19, 2014

US Builders; Anything But Confident

Like when discovering that Santa doesn't really bring toys to children around the world, economists everywhere fell off their chairs after receiving Builder Confidence Data this morning.
illustration of a small home
Negative NAHB Builder Sentiment
Today, the National Association of Home Builders' Housing Market Index shocked the world of academia by revealing a negative confidence level among US builders. Considering that any number below 50 is bad news, last month's 56 was pretty OK; especially now that we convinced ourselves that mediocrity is the new recovery normal. Experts anticipated a number between 54 and 58. Now imagine their surprise when the news of an silly 46 hit the wire.
Naturally, the immediate reaction was to blame the weather. And why not? Everybody is blaming the weather.
aerial photo of the hoover dam
US builders aren't sissies
But if I know something about builder greed is that it is stronger than the weather. Think of all the great construction feats that took place in this country over the last couple of centuries. From trains to bridges, builders are anything but sissies.
Does this mean that something else may be at fault? Well, how about Greed's balancing partner: Fear?
Back on May of last year, I covered the real estate market in an article called Robust Real Estate Hides Truth. There, I described the fundamental issues challenging the industry. But lets bring everybody up to date on those issues.
Last year, homes were being sold too cheaply for builders to want to compete. This is because, after inflation, it was more expensive to build a house than to buy one built ten years ago. This is especially true when investors where the main market buyers. Remember that investors buy wholesale. The retail consumer had no chance to compete because homes were being appraised about 15% below the asking price while bids were being made 10% above ask. This meant that only buyers with a 20% to 30% of extra cash at hand could play the bidding game.
logo in black background of FHA logo with "Your door to homeownership" legend
FHA buyers were out of luck last year
Then consider the fact that this was an environment where the banking system failed to fully come back as a source of real estate loans. Even today, builders are complaining about the difficulty to get their projects funded. Just think of little home buyers. Now completely forget about FHA buyers. Low appraisals take most of them totally out of the market. I am sure that you heard stories about people spending up to a year trying to buy a house. These poor souls were being outbid by pro's.
Most homes were being sold to investment managers like BlackRock, rather than families. The interesting part is that this was no secret. Recently, BlackRock unveiled bonds made up from billions of dollars of securitized trounces of homes bought specifically to be rented. It should be clear that any home price increases were due to the vicious fight for inventory being waged between various investment managers.
Now put yourself in the shoes of builders. Imagine a market where capital is either too expensive or impossible to get. Add the fact that market prices for the goods you make are much lower than your cost to manufacture them. Then, consider that your main customer has yet to find reliable loan sources. Finally, think of the fact that the next generation of potential home buyers prefers to live at home with their parents.
All things being considered, there is simply no reason why builders should be upbeat.
Thankfully, they have enough sense as to not blame the weather. But the same can't be said about economists who insist that the weather is behind the malaise we are now seeing across the economy. From government to academia, naive optimism about a recovering real estate market abounded despite the evidence.
photo of three large snow plowers clearing a highway after heavy snow
Don't blame the weather
In Robust Real Estate Hides Truth I described how the so called recovery lacked fundamental strength. The fact that a part-timer like myself can analyse the same data as the pro's and come to diverging conclusions isn't surprising. What's incredible is when the pro's see their models crashing back to earth after such a short time.
This is why I have a hard time thinking of economics as a science. Pseudo-scientists like economists are great at curve-fitting until they see what they want from charts. Real scientists would be glad to be surprised by the evidence rather than by the failure of their fully developed models.
Illustration of "Fear to Greed" gauge showing that fear is stronger
Fear is stronger in this market
In a nutshell, this morning's news should have surprised no one. The home market is out of inventory and those who make the widgets have no incentive to make any more. These are the distortions typical when ineptitude is rampant among those who control the economic levers. So far, housing and employment have demonstrated the degree of market distortion and dysfunction that is our present reality. This despite a clueless president who continues to brag about his brand of recovery.
For now, keep walking people. There are no new news here!

2014/02/19 9:06 AM Update
Housing Starts and New Housing Permits data collapse in January. 
From an expected 975,000 in New Housing Permits, the final number came in at a meager 937,000 for a 5.4% in month-to-month decline. 
New Home Starts did worse. From the anticipated 950,000, the real number dropped by 16% when compared to last month to 880,000.
Despite the now normal tendency to blame the weather, the West may tell a different story. The West fell by 26% in a Permits month-over-month comparison and by 17.4% in month-to-month New Home Starts. The West is the second largest component in the survey and was not affected by the weather. 
Whether this is a fluke or a fundamental indicator of a weak economy, time will tell. To me, this has an eerie resemblance to April, 2006. Despite clear fundamental flaws, the data had just begun to show housing weakness. Back then, it took two years for everyone to finally admit we had a problem. 
In 2006, the problem was irrational exuberance; too much of a good time. Today, the issue is incompetent malaise driven by a White House leadership that insists in maltreating capital and business; thus creating a level of uncertainty that can't be lifted by all the money pumping at the Fed and through the Japanese carry-trade industry.

Wednesday, February 12, 2014

Is the Venezuelan Circus our own Show

What's happening to Venezuela? Is democracy failing them or is it totally absent?
photo image of clashes between Venezuelan civilians and army soldiers
I agree with the contemporary idea that democracy is not for everyone; especially democracy the way Americans define it. History shows plenty of communities where democratic levels were weak, yet progress abounded. Just look at China today.
Also consider the fact that a high degree of democracy in a nation of ignorance will lead to great consensus but definite failure.
Thus, I feel that Venezuela's problems did not arise from its democratic level. But, while democracy isn't for all, food surely is. The real shame of the Venezuelan regime is that it has turned one of the best economies in Latin America into a circus. Whether suffering from a shortage of toilet paper or milk, whether today or fifty years ago, these regimes have yet to learn that central planning by bureaucrats never succeeds.
The worst that could happen now is for oil to drop in price. The country would then have to borrow more from a market already reluctant to buy their bonds. But such is the luck of oil economies.
Income from high oil prices made Chavez' economic incompetence look like brilliance. When the price of oil is high, the leader in place looks like a hero. When oil goes down, the boss gets excommunicated.
The only constant is the dependency on high oil prices and the cyclicality of the pain. If only these so called leaders would help the economy diversify while things are cyclically great, the result would be the opposite. Instead, they opt to spend surplus funds on things that keep them in power; things that do not improve national productivity.
American's are very familiar with the problem. Borrowing money from the Chinese to acquire Wal-Mart stuff to fill their closets is wasteful. Buying Wal-Mart stuff results in the accumulation of things that nobody wants to buy from us. We become the end of the chain.
image of a calculator, a pen and a few quarters placed over a business chartThe inverse took place during the fifties when any money borrowed went into business spending. Investing in businesses created things that others value. We were then an important part of the chain.
The formula is simple. Opt for saving rather than buying personal things; meanwhile invest aggressively in business for maximum results. While this article begins with a question about the source of Venezuela's difficulties, it is evident that the problems of Venezuela can easily replicate elsewhere; including the US. The only thing helping America is the fact that it is already diversified. Unlike Venezuela, the US has plenty of vibrant industries that have succeeded with or without government intervention. The problem for us is that, like Venezuela, our leadership is focused on the kind of entitlement spending that doesn't lead to the creation of things that others would want to buy. How does a union change whether others want to buy things from us or not? How effective is paying irresponsible teachers a higher wage when it comes to making our products more desirable? In either case the benefit is for either the unions or the irresponsible teachers only. They add zero value to our marketable products. In America, we are forgetting to curve personal spending and to invest in business first.
While I am not optimistic that Venezuela will recover any time soon, I am hopeful that we do. I would love to see us prioritize business investing once again.