There are great opportunities in the chaos that is our health care system. Even the investment climate is disorganized.
Archives For Business & Economics
Recent data about small business confidence is reason for cautious optimism, and in reading the recent surveys, something has crystallized for me. The improvement in sentiment and thawing risk aversion at the grassroots level is directly attributable to the end of QE. It would seem counterintuitive that a rise in rates would be the key to growth, but I realize now that QE was not a growth initiative, but rather a stabilizing initiative. The Fed’s end game was to de-risk banks by keeping long term interest rates low and hence allow them to bolster reserves. The consequence of this was increased credit availability to long-term mega borrowers (e.g. Cisco’s recent $8B bond offering), yet decreased credit for short-term oriented small businesses. The unwinding of QE is allowing the credit seesaw to tilt to small businesses which are the key to growth, not Cisco. These are the first signs of a potential slingshot for the economy. In 18 months the fear mongers could very well be talking about runaway inflation, but for now the prospect of organic growth, job creation, and the end of price controls in the credit markets are cause for market purists to rejoice.
You may love Bob Dylan, you may hate him – but no one who can argue that the man is a genius. And it is further indisputable that if you like almost any “popular” record made after 1962 that you owe it to him and the path that he paved for all who followed him. In 2012 he released an album, exactly fifty years after his first. The album was good — not thrilling, not fabulous, but good. In an of itself, it is an album worth listening to. That opinion isn’t based on a comparison to Blood on the Tracks or Blonde on Blonde, or any of his seminal works that laid the foundation of popular music as we know it. It’s just based on an evaluation in a moment in time. He’s not the man or the artist he was decades ago. It would be unfair to compare him to himself, wouldn’t it? It would be unreasonable. It would be unproductive.
For the last year I have been listening to the debate in the financial blog-o-spheres about Apple. Let me throw it out there right off the bat that I am not a Tim Cook fan. That being said, as a witness to Apple’s loss of market value and present valuation in the marketplace, I think that some of what the stock is enduring is the result of an unfair comparison of the company to itself. I say some because I agree that Apple has not been the innovative company it was under the great genius direction of Steve Jobs. It has recycled and facsimiled versions of existing products with new bells and whistles and some improvements at the margin; but, it has not given us the disruptive, cult like products that we learned to expect from it. And so some significant compression of its valuation is justified. As any stock transitions from “growth” to “value”, it will endure the same process. It is inevitable and wholly appropriate.
I really don’t want to turn this into a complex financial argument, so in the simplest of a terms I will point out that by most widely accepted measures Apple is valued between 30%-40% ‘cheaper’ than its peers. It’s not growing as fast as they are, it’s not perceived to be innovating as well, and its management team is not held in as high a regard. BUT — Apple’s profitability is enviable, its products are still extremely relevant, it has over $100B in cash, it has no debt, and we all still sit on the edge of our seats wondering what they might be giving us next. So I caution everyone not to make the mistake of comparing today’s Apple to it’s former self. Like Dylan, it may not be the genius we once knew, but that does not mean it’s not still great.
After half a decade of Federal Reserve monetary expansion, interest rate markets are in a state of flux. Bernanke has telegraphed his punch – the party is not going to go on forever. And that is a very good thing. The trick to managing any crisis is to ensure that the emergency measures do not outlast the emergency. So while many an analyst would suggest that economic data do not support a complete suspension of QE, the analysis cannot be merely based on unemployment, housing starts, and durable goods orders, but also on an evaluation of what the incremental impact is on the economy of each additional dollar of expansion of the Fed’s balance sheet. I am sure that everyone would have hoped for more than 2% GDP growth given the TRILLIONS of dollars that our government has effectively lent to itself, but the reality is that the efficacy of the “program” is waning dramatically. So it’s getting to that point in the process where it’s time to start planning for the end of free money, for better or worse. Bernanke has given us that warning.
But if US Treasury Bonds reclamation of market driven equilibrium price discovery wasn’t going to be volatile if not painful enough on it’s own, we have an added layer of complexity to deal with. Chairman Bernanke is tired and he’s ready to write a book and start teaching Econ 101 again. The man has been fighting a war for the last 5 years and he is toast. So on top of the over-televised, over-blogged, over-discussed issue of where the 10 year bond is going relative to the strength of the economy, we have to hear and read on a daily basis about the Yellen vs. Summers debate. Who’s good for equities? Who’s bad for bonds? Who’s a better leader? Would it be cronyism to hire Summers? Would it be too much of the same to give it to Yellen? It’s enough to make you want to crawl under a rock, never watch Bloomberg or CNBC again, and cancel your Twitter account. And in my opinion, it is exacerbating the already difficult process of the bond markets finding their new levels given the Fed’s eggression.
So who is to blame for this added and wholly unnecessary volatility in bonds? Speculators? Seeking Alpha bloggers? CNBC talking heads? Hedge funds? The answer is “E” – NONE OF THE ABOVE. The responsibility for this nonsense is none other than the White House. The President has told the world from his vacation in Martha’s Vineyard that he needs some “space” to make his decision about the new Fed ChairPERSON. He needs space. What is this? A college girlfriend he doesn’t have the courage to break up with? I get it…He’s tired and needs to play some golf, hang with the kids before school starts, have a beer on the beach with his wife. We all need that once in a while. But while President Obama is an amazing communicator from the stage of a political rally with adoring fans cheering for him, when it comes to managing his “business”, it’s not really his strong suit. Markets have been climbing the wall of worry for the last 5 years despite Obama’s opacity throughout. And while of course there needs to be a rigorous and through process for these kinds of major decisions, and they cannot be dictated or rushed by hyper-sensationalism on social media and journalism outlets, sometimes pragmatism has to prevail. I believe now is one of those times. There is no need to perpetuate the added drama of this debate and its exacerbation of already challenged credit markets, despite the fact that the President needs a vacation. Markets, homebuyers, and businesses need some visibility. They need some communication on this issue. They deserve it just as much the President deserves a vacation.
Out of deference to my favorite Einstein quote and business mantra above, I feel compelled to post this Natasha Lomas blog post that appeared in TechCrunch earlier this week. My first boss back in 1994 managed his firm on the KISS model (Keep It Simple, Stupid), and it has stuck with me since (Thanks Dad). My big takeaway is that startups must understand that simplicity is not just about messaging, but about their business models in general. It may feel like a conundrum as today’s investors all seem to be looking for the 50X exit, but the longest of journeys begin with a single step. Solve a problem. Be agile. And remember that Johnson & Johnson was founded with a first aid kit as its first product.
Analysis of the #FiscalCliff abounds. The issues are distilled into the categories of taxes versus austerity. Revenues and spending cuts. Who, if anyone, should pay more taxes? What happens to investment related taxes? What happens to social security? What is the impact on entitlements in general? Should we tackle Medicare reimbursements? Is Obamacare in the deal? You get the picture.
To me, however, there is a lot more at stake here that transcends economics. The fiscal cliff was a steamroller that we saw coming a mile away. There are crises that emanate from various sources that we cannot anticipate or prepare for — hurricanes that decimate Staten Island and New Jersey, grotesque acts of violence on school children, attacks on New York City, etc. There are few, however, that we can prepare for, and, hence mitigate or avert altogether. This crisis was one of the latter. And in this era of great cynicism about what America has become and our position on the world stage, the fiscal cliff (a right hook to our economy was telegraphed for all to see) presented an extraordinary opportunity. Yes, that’s right, an OPPORTUNITY.
I am a well documented two time voter of Barack Obama. The first time I pulled the lever I did so with great enthusiasm and hope. The second time I did so much more reluctantly, but still confident that he was the better man. But what I have learned over the years is that leadership is defined by many a quality, with intelligence and integrity only being a couple of them. Leadership is about consensus building, inspiration, and, unfortunately, salesmanship. And so while I am of the opinion that Obama is faced with a great deck stacked against him, and that those named McConnell, Cantor, and Boehner are playing a binary game of “we win if Obama loses”, I am disheartened nonetheless at the lack of ability to get in front of the problems, bring unique viewpoints to the table, and show that we can act in the greater good.
So what was the opportunity? The opportunity was for our leaders to let pragmatism prevail over dogmatism to show America’s citizens and the world that when it really counts we can get it done. As Doris Kearns Goodwin stated after the election, we tend to glorify the “good old days.” We may long for the days of the Whigs and Tories, but they used to beat each other up on the House floor. Maybe I am being naive, but that feels a lot more honest than what goes on these days. In a media age it all seems so disingenuous and petty. To watch Obama on Meet the Press this morning was painful. “The Republicans can’t say yes.” “I am fighting for the middle class.” “I am not a liberal.” Rhetoric, rhetoric, and more rhetoric. He builds consensus with business leaders to do his bidding for him, but when did he invite the Republican leadership (a new oxymoron) to the White House, put a pot of coffee (or bourbon) on the table, and say “no one is leaving without a deal”? And while they are all saving face on the Sunday morning news shows, Americans (like me) are fighting the anxiety over the fate of their small businesses, their earnings power, and their children’s prospects in a country whose government is ALWAYS behind the issues and NEVER in front of them. Choose a topic, any topic — energy, education, social security, diabetes — each one a steamroller crisis. Where is the pro-active leadership on these? And to think that one day, when it’s too late, we will say that we saw it coming but didin’t have the will or leadership to get at it.
So here we are on a Sunday night in the 11th hour before our nation faces a self-imposed calamity at a most fragile point in our economic history. And that is awful. But the true tragedy is that we let it happen. To me, that is what keeps me up at night. That we are so dysfunctional, inept, and dogmatic is the real issue that makes me most fearful. When it really hits the fan we need leadership, not politicians who are more concerned with protecting their legacies or placating special interests. Naive perhaps, but if it was going to happen, now was the time for everyone to check their egos at the door and recognize what was a stake. No matter the outcome of a vote that may or may not happen before midnight tomorrow night, our leadership blew it–a squandered opportunity whose wake will perpetuate a crisis of confidence that long outlasts its economic ramifications. So sad.
Fantastic piece from Kenneth Rogoff on Project Syndicate dissecting our current (and future?) economic malaise into its component parts. I would argue that the financial crisis was the tipping point into the trough, but I agree that there is a tremendous innovation gap that will keep us at below trend growth for years to come. Lack of credit to small businesses despite the flood in liquidity from central banks will only perpetuate the problem.