The ActiveRain Addiction (Matt Heaton)

Jobs Report - Damn Lies and Statistics

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sat, 08 Aug 2009 18:35:16 -0500

Thursday evening I noticed something very interesting going on within the "financial media". All of a sudden the evening before Friday's big jobs report many of the media outlets started to run stories about how great the jobs report on Friday was going to be, and how it was clearly going to show our economy had turned the corner. Several financial analysts (and I use the term analysts lightly) suddenly downgraded their predictions for job losses to around 250k from much higher numbers and CNBC even took the effort of running a 1/2 hour special on how great the numbers were going to be.

Pumping up impending economic numbers in the financial media is not uncommon but this went FAR beyond anything I'd ever seen before. It was pretty clear there was some type of coordinated leak. The media outlets would have not stuck their necks out to the degree they did the evening before the numbers came out if they weren't sure of the outcome. It's not uncommon for gov. administrations to influence the media this way, by leaking reports to create positive press but this tactic seems is being taken to an extreme level lately.

Sure enough Friday morning the jobs report came and we only had 247k job losses a huge improvement from previous months, <sarcasm>clearly a sign the recession is nearing it's end</sarcasm>. Simply the that fact you saw unemployment rates decline at the same time you had 200k job losses should be a tip off that unemployment statistics are not all that they are cracked up to be. In fact when you look inside the internals of the report you see a lot of interesting number fudging to make the headline number look much better than it should have been. The report on the whole was certainly not what I would label as proof that our economy is on the mend.

One thing that pops out was the insanely huge number (422k) of people that "exited the workforce" in July. Due to the method unemployment statistics are calculated, they don't count. One reason for this is many of the layoffs, particularly at large unionized companies happen through "early retirement" programs and thus don't effect the unemployment stats in the same way. The other is as people use up their unemployment benefits without finding a job they drop off the reporting. From the standpoint of economic health, it's still less people working, earning less money to spend and paying less taxes. In fact if the US has a shrinking workforce at the same time our population is still expanding that is really bad news economically.

There were also some other one time items that added a positive influenced the jobs report more positively such as a large number of the jobs created were census workers, who will only be on the job for a couple months. The birth-death model a model that's supposed to account for creation of jobs via new companies that otherwise don't show up in the statistics also showed by far and away the largest job creation during a July in history. Never mind this is a completely ficticious number that just comes out of a computer model, not from any actual data. These numbers get revised at the end of the year based off real tax withholding data. So far tax withholding data from the first six months of the year suggests we had 500k-1m more job losses than the computer models say.

There seems to be a huge and coordinated initiative to spin and scew any economic data being presented right now, to increase public confidence. It's really starting to bother me, I don't like being lied to or manipulated. True, this happens all the time, but to the degree it's occuring right now makes me think there maybe a lot more fear in the gov. about our economic situation than they are letting on.

Cap and Trade: Yet Another Scam

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Tue, 28 Jul 2009 14:48:08 -0500

I'm a couple weeks behind this one, as all the media focus lately has been on the health care bill. I've had several interesting discussions around cap and trade lately that inspired me to put my thoughts down into a blog post.

Disclaimer

I consider myself a fairly environmentally conscious person, I do believe based on data and observations human activity is creating a huge and very negative impact on the global climate. I'm extremely worried about the this planet over the next several decades. To me the health of this planet overrides any economic impacts of decisions, but at the same time I believe doing what is right for the planet can be done in ways that is also very economically beneficial in the long run. I'm not writing this post to debate these points...

Cap and Trade is a Wolf in Sheeps Clothing

The idea behind the bill sounds fine based on the highest level talking points, incentivize investment in alternative energy and at the same time disincentivize the polluters. Once you look under the hood though, the best phrase I can use to describe it, is "financial scam".

What got me looking at, and thinking about the impacts of the cap and trade bill was when I noticed the biggest supporters throwing the most lobbyists and money behind it was not the alternative energy industry but the Wall Street investment banks. Why?

It comes down to the whole "trade" part of the bill where carbon credits received can be traded/sold to carbon producers. It's been estimated that this could create the largest derivatives market, larger than the CDS's (credit default swaps). These credits would trade on an exchange (partially owned by Goldman Sachs) and would be a multi-billion dollar windfall for the investment banks.

Since the number of carbon credits available is fixed, and is reduced each year this creates a made in heaven market for large traders and speculators (hedge funds, investment banks). The carbon bubble will become the new credit bubble, as speculators suck productive money from the system.

Destructive Impacts on the Alternative Energy Industry

I've got a lot of friends involved in the alternative energy industry who believe this bill is a windfall for the industry and will spark the next big revolution in alternative industry. Be careful what you wish for, the long term impact on the industry may in fact be very destructive.

It's analogous to what happened with the housing market and credit bubble in 02-06 with all these new fangled mortgage products, CDO's, CDS'. Everybody touted these products as being great for the housing industry as they made housing more "affordable" and accessible to the masses. We now realize the truly destructive nature of these products, which incidentally were created by the same Wall Street banks behind the cap and trade bill.

Particularly as the price of carbon credits in driven up by speculators, it will become extremely profitable for companies producing them. The catch is the total number of credits is limited and there really isn't a direct tie between a technology being beneficial long-term, and producing carbon credits. You will see hundreds of companies pop up, simply built to capture huge profits from carbon credits, with technologies that otherwise would not make any sense.

In much the same way as imprudent lenders pitching alternative mortgage products forced prudent lenders out of the mortgage business, viable alternative energy technologies will be squeezed. Investment will be redirected from the productive to the speculative, with very negative consequences. Of course this bill is practically designed to create a "carbon bubble", who's popping in a few years, will sow yet another round of economic destruction laying waste to a whole industry while the pig men walk away with their sacks of money.

The case against inflation

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sat, 04 Jul 2009 15:19:29 -0500

My in my last blog post a mid-year update to my 2009 market and economic predictions I got multiple comments about the economic threat of inflation or even hyper-inflation rearing it's ugly head.

"It will be interesting to see how those TARP funds play out and what the aftermath will be. My guess will be massive inflation.... think about it this way."

"One thing is for certain. If inflation rears its ugly head, interest rates will increase to combat that."

"Still have you noticed how no one is talking about the inflation rate? We know that in order to spend the "trillions" that more money will have to be printed."

This also seems to be the common thread in the media and much of the financial world, everybody is expecting or thinks we are currently experiencing a huge, hidden inflation. I'm going to lay out the case, why I not only don't any evidence of it, I expect the opposite, a very deflationary outcome, over the next several years.

Truth be told the central banks around the world, including our FED, are desparately trying to return to an inflationary environment. There is nothing they fear more than deflation, but their efforts to reignite the inflationary engine can only be described as an epic failure.

We already had the massive inflation through credit expansion

For about a 5 year period between 2002-2007 and maybe a little bit before the US went through a massively inflationary period, not represented by the standard government inflation or money supply numbers. It was caused by what many sometimes refer to as the "shadow banking" system (because it doesn't show up in the numbers) that drove massive credit expansion.

Not that it was exactly very hidden. It drove speculative bubbles all around us, both residential and commercial real estate, commodities, corporate debt fueling leveraged buy outs and equities. If you believed the CPI numbers published you saw inflation rates of around 2-3% during this period. Several economists have calculated the real inflation rate was actually somewhere between 10-15% annually during this period. This lead to both real interest rates that were very negative, and also a very negative real wage growth.

The last year and a half we've seen the exact opposite, a massive credit contraction, driving deflation across almost all asset classes. Just as the government numbers as an artifact of what they measure severelly understated the inflationary period they are massively understating the amount of deflation that is ocurring. Look around at real estate, stocks, bonds, commodities. Do you see rising or falling prices over the last two years?

Credit destruction is MANY times larger than credit creation

The most common inflationary argument is the FED and other central banks are printing trllions, upon trillions of dollars that are being pumping into the system. While there has been a couple trillion in money put into the system, the actual amount used to monitize debt through quantitative easying is only around a trillion or less. Now counter balance a trillion vs. over $50 trillion in global wealth destruction in 2008 alone. What's the bigger number? To put in bluntly the FED and other central banks are merely pissing into the wind with their efforts.

The money isn't moving

Now here is the real crux of the problem for central banks why money supply creation and stimulus are not having their intended inflationary effect. While the technical definition of inflation is size of the money supply, all the inflationary effects people worry about are instead driven by the velocity of money. A small amount of money moving very fast through an economy creates more inflationary effects than a large amount of money sitting on a balance sheet plugging holes.

In fact the velocity of money has completely collapsed as it's being used to pay down and service debts or cover losses. The last time the velocity of money was this slow, was heading into the Great Depression. Below is a chart of MZM the broadest measure of monetary velocity.

The hyperinflationary setup

For those people worried about imminent hyper-inflation, it might be worth looking historically at characteristics of hyper-inflationary collapses. There have been dozens of well documented ones throughout history, some of the ones that come of most peoples minds first are the Weimer Republic in 1920's Germany and recently in Zimbabwe.

Hyperinflation almost always occurs following a severe deflationary collapse. While I've made my case we are experiencing deflation right now, we are no where near what would be considered a collapse, yet. It also ocurrs in a countries that base purchasing power on a stable foreign currency. In other words if you have the world reserve currency like the US dollar, it is near impossible to get hyperinflation. It's much more likely you see hyperinflation in foreign countries that attempt to peg their currencies to the US dollar, which would result in a relative strengthening of the dollar.

I could see us, creating a setup for hyperinflation if the dollar looses reserve currency status, and we experience a deflationary collapse, but it would take us several years to get there.

Interest rates rising without inflation

Ok, so I've gone on record saying I expect rising interest rates and possibly a crash in the US Treasury market within the next year. If rates are rising doesn't that imply inflation? Well not exactly...

Inflationary expectations are only one component of what sets interest rates, the other major one is risk of default. The higher the risk of default the higher rates must go. It's this rising risk of default that I expect to significantly push up rates not inflation. In fact the rising rates may have a highly deflationary impact as it will further choke off credit, stalling economic recovery.

More charts, "Dude, where's my inflation?"

Mid-Year Update - 2009 Market and Economic Predictions

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Wed, 01 Jul 2009 13:48:24 -0500

We are now officially half way through the year so it's time for me to do an update to my 2009 market and economic predictions, also known as, Matt is being a buzz-kill again. The quick scorecard is, four have already occured, four I'm still predicting will happen, one I still think will occur but probably not this year and one is DOA.

The media has become fairly delirious from smoking few too many of those "green shoots" as of late along with 90% of economists calling for the recession to end shortly. It should be noted that a similar number of economists were confident we'd avoid a recession in the first place. They are latching onto month to month fluctuations in data claiming the economic recovery is upon us, while almost all trending and forward looking data is continuing to paint a fairly pessimistic outlook.

Another main factor in my continued pessimistic outlook is the attempt by those in charge to play confidence games instead of solving problems. If we believe things are getting better, they will, right? Confidence without the foundation to support it, is not a very good economic base to build from.

1. The "Credit Crisis" morphs into much wider economic crisis

Ok, I think this one is playing out as we've moved from people claiming we're just having financial system and housing issues to seeing dramatic drops in employment and even more dramatic drops in tax revenues (corporate, income, sales). While the official government reported unemployment rate is now up to 9.6% the broader unemployment measure like U6 has now skyrocketed to 16.4% the highest since the 70's.

The data shows job losses are actually accelerating, not decelerating. With the unbelievably dramatic drops across the board in tax revenues, we are just beginning very extensive layoffs from the nations largest employer, the local, state and federal governments. We also have not seen the layoffs happening in the automotive industry show up in the official numbers yet.

2. The recession gets an upgrade

While I didn't expect an official pronouncement this year my prediction is that we'd meet the criteria for a depression not just a recession, which is defined by more than a 10% total loss in GDP. I still think this is going to happen, and in fact I think the forward looking data makes this almost a lock to happen. Though, this quarters GDP coming in flat or even just slightly positive wouldn't surprise me.

For some great visuals on how bad the economic trends really are check out this post on Nate's Economic Blog.

http://economicedge.blogspot.com/2009/04/economic-cliff-diving-by-charts.html

3. Pension funds, the biggest non-story of 2008 becomes THE STORY of 2009

Ok, I'll give myself about 1/3 of a point for this one. The story is huge, it's just getting almost no play in the main stream media. Many of the largest pension funds in the country are in deep trouble shifting into riskier and riskier investment strategies to make up shortfalls. For example CALPERS the largest pension fund in the country shifting large portions of their assets to real estate right at the top of the bubble and then stocks right at the top. They are in a massive hole, and have stated they are relying on being able to borrow from the state of California to fill the massive hole. Yes, the state who tomorrow will start issuing IOU's in lieu of checks to pay bills.

Not to be outdone by California, PBGC (Pension Benefit Guaranty Corporation) which insures pension funds including those at GM and Chrysler followed suit. Why are the pension funds pursuing such a risky strategy that would once have been looked upon as insanity?

He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Boston Globe article on PBGC

As they say, when in a hole, keep digging, or something like that...

4. House prices continue to fall, but in most regions not as fast

Not much to add here, the Case-Schiller data showed a 19% year over year price drop first quarter, with declines in all 20 major markets they track. Anecdotal the declines in many markets appear to be slowing but historically in housing downturns the steepest declines occur in the first 2 years, where the average overall length of price declines in 5-7 years. There's also still a huge backlog of foreclosures sitting on bank balance sheets which have been held back from the market. This will keep inventories in most markets elevated for some time and keep the downward pressure on prices.

Update: Just saw the updated Case Schiller data released today, basically shows what I expected. Still declining across the board but at a much slower pace.

5. The stock market is far from seeing a long term bottom

My prediction was that we'd see the November lows of 738 on the S&P500 broken this year, and we saw that happen in the first quarter of this year ominously putting in a low at 666 on the S&P 500. Despite a several month, 35% straight up rally since then I don't believe we've seen the lows for this bear market, and see a high probability of the S&P500 going under 500 later this year. Simply put we are still in a deleveraging phase and we've seen a massive drop in corporate profits making the stock market extremely overvalued at it's current level by almost all metrics. These profits by and large were driven by the credit bubble, particularly in financials and unless we are able to blow another massive bubble they are not returning, like some are placing bets on.

6. Where does the bailout money come from when it's time to pay up?

We'll have to see, they just started issuing the debt a couple weeks ago, and we're now issuing as much treasury debt per week as we were per year less than a decade ago. This is at the same time the major foreign buyers are slowly inching their way to the door, buying shorter and shorter duration debt, as the FED tries to hold back the flames through quantitative easing.

7. A crash in the US Treasury market?

This was the prediction I said I was the most hazy on last year, and now I think it's inevitable due to the insane government spending we've seen coupled with the gigantic collapse in tax revenue. The FED has been pulling every trick in the book trying to surpress rates and support the treasury market through quantative easing. History shows these types of efforts are simply fingers in the proverbial dike that inevitably bursts. If the treasury market does crash you'll see double digit interest rates on mortgages within a few months.

On a related note, the consensus of late seems to be for rising interest rates but due to (hyper)inflation. I simply don't see the case, all of the data points to massive deflation. Oh, the FED's monetizing debt and printing. The problem is the deflationary pressures and wealth destruction is dozens of times larger. Also, the FED pumping money is only inflationary if the money moves, as inflation really is the velocity of money not the size of the money supply. A small amount of money moving very fast through an economy is more inflationary than a large amount of money that sits on a banks balance sheet plugging holes. The fact it's being used to plug holes that are not magically going away, is exactly why I don't see it suddenly becoming inflationary.

8. GM files for bankruptcy despite the automaker bailout

My prediction was that both GM and Chrysler would file for Chapter 11 bankruptcy this year despite their bailout at the end of 2008 with the goverment providing massive DIP (debtor in possession financing). Check...

9. Regional bank failures and consolidation accelerate

We're up about 50 regional bank failures this year compared to 25 all of last year. Technically I guess this counts as acceleration but it's still well below the hundreds I was expecting. It has nothing to do the increased stability in the banking system and more to do with the FDIC and OTS not doing their job to protect depositors and tax payers.

A good example of this is Bank United a large regional bank in Florida that collapsed about two months ago, at an estimated cost of about $10 Billion. This bank was on my list of dead men walking back in April of 2007, due to the how badly their loan portfolio had already depreciated. Two years ago it was clear from their balance sheet without pulling accounting tricks they were insolvent. Every Friday for nearly two years I was shocked when I didn't see an announcement his bank had been seized due to how far gone it was. Had it been seized two years ago it's likely there would have been very little, if any cost to the FDIC and US taxpayers, instead it cost us $10 billion.

Then two weeks ago the head of the OTS resigned after it turned out he had ordered the Bank United to falsify financial statements to cover up their insolvency. Yes, the top banking regulator was ordering banks to fudge their financials so they would appear solvent and would not be seized. Bank United is not an isolated case, not by a long shot. In fact, 2 other high ups at the OTS resigned or were fired in the last year for pulling similar stunts with other banks. There is a organized effort to avoid failures at all costs by covering up the problems and hoping they go away. This just makes the ultimate failure many times worse.

The government banking "stress tests" meant to prove to the public and investors how sound are banking system was a similar sham. We're already well past the loan default rates used in their most stressful scenarios, banks were asked to provide the valuations for complex securities like CDO's, and provided values many times above current market prices. Commercial real estate, who's impact on bank balance sheets is likely to be worse than residential mortgages, showed almost no losses in the stress test numbers.

Suffice to say, I expect the next "unexpected" banking crisis to rear it's head this fall at the latest and this time I'm not sure if there's the will political will to throw a few hundred billion more at it.

10. A revolt against corruption

Grrrrrrrr... Where's that change Mr. Obama... Must stop writing here or I'll launch into a rant and this post will be 20 pages before I know it...

My new startup Timu officially launches

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Thu, 11 Jun 2009 15:03:56 -0500

Yesterday was a big day for me, after 8 months of planning and product development work finally launched my new startup, Timu. Timu gave me a chance to apply many of the lessons learned with designing and building ActiveRain to another market, amateur sports.

It's a social networking platform specifically built to solve the communications problems encountered by athletes, sports teams and their fans. Online social networking is a natural way to solve many of these problems. Yet, existing social networks provide disjointed solutions that do not handle sports specific features, such as player rosters, game results and statistics. At the same time existing sports web site offerings provide little interactivity and user engagement.

Individual athletes can setup an profile on Timu in minutes. Profiles can be customized with information about the sports they participate in, teams they play on, and their competitive highlights. Photos, videos can be uploaded, and various “widgets” can be added or modified. These profiles serve as one center of communication within Timu.

Coaches, players, or parents can create a team center for your team on Timu. Team centers provide many features like team news, schedules, player rosters, photos, game results, statistics, statistics and a wide range of commmunication tools. All of the people associated with the team can be invited to become members of the team center, which can then function as a hub for team communications.

A few examples of team centers: http://bellevueblaze.timu.com http://dreadsox.timu.com http://baseball.timu.com

Currently Timu supports about 30 different sports ranging from baseball and soccer to unicycling. Each of these sports has it’s own section or hub on Timu including photos, videos, game results and discussions. Timu members can participate in the conversation at these hubs about their sport. As Timu grows we will be providing the ability to view these hubs by region, subsection of a sport, or even by sporting venue.

Create a Sports Profile

Setup your Team on Timu

The solution to the banking crisis

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Mon, 23 Mar 2009 17:29:13 -0500

The administration's new banking rescue plan was officially released this morning after the details of it had been leaked over the weekend. It sure didn't take long but pretty much every economist and financial blogger not connected with Wall Street has already ripped it to shreds calling it everything from a massive tax payer fraud, another big bank hand out and a massive government sponsored confidence game. Economist and former Nobel prize winner Paul Krugman spent no less than 3 posts since Saturday blasting it. While Mike Shedlock (Mish) went so far as to proclaim Treasury Secretary, Tim Geithner the architect of this plan (and of many of the bank bailouts and AIG bailout fame/shame), "the most dangerous man in America"

Actually it was pretty easy to rip apart quickly as it's basically a repackaged version of former treasury secretary Hank Paulson's proposed plan which was also blasted to smithereens. Of course it's unfair to blast a plan without providing your own for saving the banking system, so here goes...

Unlike the administration, FED and Treasury department I do NOT believe solving the banking crisis will solve the our economic or housing problems, but we still need to solve it or it will contribute to things getting much worse. Surprisingly we already have a good solution to the banking crisis, one that was born out of previous banking crisis', and that has been battle tested and has worked great for over 70 years in dealing with thousands of banks. It's called FDIC receivership, and it was notably used recently for dealing with several large institutions including Washington Mutual and IndyMac.

Banks are legally mandated to carry a certain amount of cash reserves relative to their loans and other assets and liabilities to ensure they can safely pay depositors that want to withdraw funds. If they fall below this threshold the FDIC and OTS is required to come in and seize the institution taking it into receivership to protect both depositors and tax payers. This is one of the things you submit to when operating a bank in the US and to be able to have your deposits FDIC insured.

In FDIC receivership, the bank is essentially cleaned up to be return to private operation as quickly as possible. Incompetent management is given the boot, the books are combed over looking for fraud, liabilities are zero'd out with stock holders and then bond holders taking the first loss while depositors are protected. The now clean in unencumbered bank is then sold off to another bank either in whole or in pieces whatever, is more workable. It's different from the concept of nationalization as the whole goal is to return the bank to private operation in short order. In fact receivership often only lasts days and appears near instantaneous to the public.

Now the crisis in our banking system, is that a huge number of banks including several or the very largest in the US would prove to be below reserve requirements if they were to use proper accounting, write down their bad loans and assets. Falling below these reserves would mean the FDIC would legally required to take these banks into receivership to protect depositors and tax payers. The Treasury rescue plans all revolve around trying to keep the banks above reserve requirements by pumping cash into them and making accounting/regulatory changes so they don't have to properly account for losses. Why?

While, FDIC receivership is a very effective and well tested for dealing with these sorts of banking crisis', it also has a high political cost. The incompetent bank executives that have been lining the politicians pockets for years would almost certainly find themselves out of a job, and many on Wall Street would eat substantial losses on stock and bond holdings in these banks. There is also the fact that people don't want to admit some of the banks that have been mainstays of the US banking system for decades may in fact be failures. I guess it just comes down to the fact there isn't the political will in Washington to actually solve the crisis.

The treasuries "toxic asset plan" a massive taxpayer fraud

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sat, 21 Mar 2009 16:32:23 -0500

The details of the Treasuries much anticipated toxic asset plan to "cleanse" the banking system and restore financial stability are now public. My reaction posted on Twitter as I was reading it.

@timu_matt: Reading the Treasuries new toxic asset plan. Everytime I think they can't get more hell bent on destroying this country they surprise me again.

Yeah, that pretty much sums it up. In a nutshell the plan revolves around the Treasury and FDIC loaning private investors money to buy the toxic assets from the banks. These loans would be made at almost no money down, when you combine the Treasury and FDIC incentives these (non-recourse) loans would account for up to 97% of the purchase price. The treasury is essentially trying to create a whole bunch of private "hedge funds" operating on insane amounts of leverage (33x), overpaying for toxic assets.

Wait, isn't excess leverage one of the main causes of this mess? At 33x leverage, 3% drop in the value of the assets blows up the investor, but hey the US taxpayer the one taking taking the loss on 97% of it, so who cares. This scheme basically opens the door for wide scale gambling in the financial system at the taxpayers expense. Now, you want to know the truly sick part?

The biggest gamblers in this system will be the big banks themselves. They will practically be fighting each other to grossly overpay for each others (and their own) toxic assets. Hey, they make money either way no matter how much they overpay, it's the tax payer on the hook. Seriously, we might as well pass some new legislation so that any federal taxes we pay go directly into the coffers of the big banks just to formalize the whole arrangement, because that is what we've been doing informally for months now.

Others finance bloggers react (similarly):

Paul Krugman: Despair over financial policy

Calculated Risk: Geithner's Toxic Asset Plan

Naked Capitalism: Private Public Partnership Details Emerging

Karl Denninger: Toxic Assets: Promise, But Also Peril

Comments on todays CBO Projections

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Fri, 20 Mar 2009 15:08:31 -0500

So this afternoon the Congressional Budget Office or CBO released their updated budget projections for the US government and the numbers are both a shocker and a head scratcher. They are now projecting the US gov to run budget deficits, of $1.8 Trillion this year and $1.4 Trillion next year. That is the US government is projected to spend nearly 75% more money than they took in via taxes this year, and another similar percentage next year. To put this in perspective our budget deficit the last four years was about the same as what we'll now have in a single year.

Now here's the head scratcher, the projections assume a total GDP loss of 1.5% this year and growth of 4.1% next year, basically calling for an amazing economic recovery later this year. To call this projection insanely optimistic would be an understatement, and means their overall deficit projections are almost certainly way too low.

The US government is going to have to borrow an estimate $1.8 Trillion via the US Treasury market this year, plus roll over existing debt. We're going to be issuing somewhere close to 4X the amount of debt this year as last year. The primary source of this funding for more than a decade has been foreigners, primarily Asian and Middle eastern countries. These countries have recycled their massive surpluses from selling the US oil and cheap lead painted, plastic crap to the US into treasuries, effectively funding our government.

Guess what's happened to those surpluses as the global economy has cooled and the US consumer has slowed their buying? Yes, they are rapidly vanishing. In fact the available data from Jan, shows purchase of long term treasuries by foreigners slowed very significantly. To fund our budget they must buy several times the US treasuries than they have money to buy, the math simply does not work.

The Treasury, CBO and Congress are living in a complete fantasy land right now. This massive spending is not just imprudent, but it simply can't be funded no matter how many times we click our red slippers together.

Fractional reserve banking and FED incompetence

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Wed, 18 Mar 2009 23:58:05 -0500

Going off the reservation on another financial rant/post today...

The other day I saw this great post explaining Fractional Reserve Banking in really simple terms. It really lays the foundation for why our Federal Reserve and Treasury's policies not just now but over the last decade have helped lead us to where we are now and have actually been a main contributor to our worsening financial crisis.

Without going into the details of how it works (follow the link if you want a clear explanation), fractional reserve banking is the type of banking system that the US and pretty much every other country have operated under for hundreds of years. There is nothing inherently bad about it, it's actually been very beneficial to society. Without it banks could not lend money at rates at even close to the rates they do and still make money. Many of the advances in society we've had, for example the industrial revolution may not have occurred without fractional reserve lending. Certainly the concept of home loans, car loans and credit cards would not exist today.

Now like almost all good things, fractional reserve banking has some trade-offs. The main one being that a cycle of boom and busts is mathematically inevitable within it. As money is recycled through the banks, society becomes increasingly in debt and each additional cycle of lending generates less economic production, as more money is eaten up by interest costs.

You eventually reach a point in which the system becomes mathematically impossible and a "reset" is necessary. The people who took on too much debt for unproductive uses like consumption (buying that new SUV, boat, 6 TV's) go bankrupt along with the banks who made the imprudent loans. The total indebtedness of society is again reduced to a manageable level by defaulting debt. These resets are an inevitable artifact of a fractional reserve banking system, and occur fairly regularly through things like recessions. They need not be cataclysmic, society changing events and typically occur well before the mathematical brick wall is reached.

For more than a decade the US at all levels government, corporate and individuals have increasingly taken on greater and greater indebtedness, while at the same time the economic productivity from this debt has decreased. Particularly over the last 6 years, the amount of debt we've taken on has been impressive but what was it used for? Buying a house, and a new car is a great thing it really doesn't generate long term economic production in the same way building a factory does. At the same time our manufacturing base has moved off-shore, most of our economic "growth" was not real nor sustainable.

Our fractional reserve banking system reached that point were a "reset" was needed to stabilize things and get back to productive ways. Instead the geniuses at the Federal Reserve (yes I'm talking about you Greenspan) came up with the idea that could prevent an inevitable and needed business cycle through manipulating monetary policy, effectively lowering reserve requirements in banks and deregulation. Instead of letting the system flush itself out and going through what probably would have been a fairly bad recession in 2002, they lowered rates and took actions that allowed increasing amounts of debt. Deregulation occurred that allowed for banks to increase leverage and this debt trickled down to the consumer level via cheap lending. Massive debt was added to society for things such as home loans and leveraged buy-outs in the corporate world, neither which generate lasting economic benefit.

Over the last two years this legacy has been carried to the extreme by Bernanke, Paulson and co. as they continued to do the exact opposite of what must happen to stabilize our financial system. Remember the two things needed to “reset” a fractional reserve banking system and get it operating smoothly again is a reduction in total indebtedness through the default of bad loans, and the failure of those banks that made those loans. So guess what they’ve done and continue to do. Artificially hold down rates, increase total debt in the system via injecting massive liquidity, prevent the bad debt from defaulting and prop up banks that made bad loans.

It makes you want to bang your head against a wall, at least it makes me want to.

Why do people continue to act like these guys are saviors steering our country through this crisis when their actions do the exact opposite, and are in fact some of the main perpetrators of this crisis?

Since the beginning of the financial crisis I’d get asked what my solution to the problem would be and my response would basically be “let them fail” and stop trying to artificially prop things up. People would look at me like I was insane, that’s not a solution, it would create a disaster, lots of companies would fail, the government just needs to do more. No, that is how you fix it and every attempt the government takes to intervene and prevent the needed reset, itself only creates a new, bigger problem. The years of continuous government intervention and artificial attempts to circumvent corrective market forces is a primary reason this crisis has gotten so bad and continues to get worse.

Which brings us back to todays FED announcement that they are planning to purchase US treasuries to hold down long-term rates, but that’s for another post...

The next big asset bubble

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Wed, 18 Mar 2009 16:34:49 -0500

We've all seen several prominent asset bubbles and their collapses in the last decade. The collapse of the stock market in 2000 and again in the last year, the ongoing "housing bubble" bursting, a less talked about but no less spectacular recent collapse in the commodities and corporate debt markets. A bubble is usually used to refer to a boom that gets so far away from fundamentals and often purely driven by psychology or artificial attempts to keeps the good times rolling. Boom and busts are a natural economic cycle, where the principal "The bigger they are, the harder they fall" rules the day.

While, bubbles in across so many assets have burst during the past year, one mountainess asset bubble continues to bulge over the horizon, the US treasuries market, the mechanism which with the US government funds itself. This market exhibits almost all the typical classic signs of an asset bubble, a disconnect from fundamentals and artificial influence like todays announcement of the FED buying long term US treasuries to attempt to prop it up.

Lets say the following person came to you and asked for what amounts to an unsecured loan.

They currently have debt in excess of 4x their annual income.
They have spent more money than they've made nearly every year for the last decade.
They project to spend 72% more than they'll make in the during year with similar losses stretching off into the horizon.
Their estimated future liabilities are several times their hard assets.

Does this profile look like a person that over the long term is going to be able to make due on that loan? Would you give them a long term loan? Yet, the world keeps loaning this person (The US Government) massive amounts of money at what is currently a 2.5% interest rate for a 10 year term. Need anymore proof the US treasury market is not running off fundamentals?

It's a very similar situation to GM, for which ironically there is this saying, "as GM goes so goes the country". For several years anyone that looked at GM's balance sheet knew that failure was inevitable. The only reason they kept operating is that for years people kept loaning them money at insanely low interest rates. But then in the last year something changed, due to credit market troubles people began questioning whether GM really could fail, the cheap loans dried up and GM was forced back into financial reality.

So why do people loan the US gov. money at 2.5%? Well it all comes down to safety and the idea that if anyone can make good on their loans, well just because the can. The fundamentals don't support it, they say failure to pay back these loans in inevitable, it's just a question of when.

But, but the US gov. has a printing press

Oh, we're forgetting one thing, these loans are payable in US currency and the US gov. has this handy machine called a printing press, so they can just print up more money to pay their debt. Now here's the problem, the US gov prints money, US currency become worse less, inflation goes up and you have to get more interest on your loan or you are loosing money. So, isn't this just another fundamental disconnect suggesting a growing asset bubble?

When does it pop?

It's notoriously hard to determine the peak of an asset bubble. Many correctly saw the real estate bubble and predicted it's immanent collapse, several years before it did. But there are a few common signs, that asset bubbles are nearing their end.

One of them is a peak in "irrational exuberance", that is people believing the bubble will continue for the foreseeable future. In 2000, the stock market crashed at the same time surveys were showing the highest percentage of people were bullish on the stock market. What is now seen as the peak of the real estate bubble coincides with surveys showing a similar insane bullishness of real estate. Same with the recent commodities bubble. Sentiment in the US treasury market seems to be reaching that same irrational peak with nearly everyone expecting long term treasury rates to stay depressed for the foreseeable future.

Also near peaks you begin to see increasing amounts of artificial manipulation to keep the party going. Manipulation of earnings statements in 2000, increasingly inventive lending schemes in 05-06. This is how I view todays announcement by the FED that they will begin buying long-term US treasuries in order to hold down interest rates. It's an artificial attempt to keep the US treasury bubble inflated, and I take it as a sign this last asset bubble may in fact be nearing it's peak.

So what would the bubble bursting mean?

Well to put it in four words, "Much higher interest rates" and a true funding crisis for the US Government. Just like with GM, the US government would be rudely jolted out of a financial stupor. The forced contraction of government spending almost overnight would be rather shocking to put it lightly.

Timu goes beta

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Fri, 06 Mar 2009 17:30:33 -0600

Over the last several months I left a couple of semi cryptic posts Timu, the startup company that I left ActiveRain back in the fall to found. Obviously from the logo I posted people were able to correctly guess what industry it was in, sports. This inspired some guessing around ActiveRain about how exactly Timu was related to sports and what if anything Timu stood for.

After several months of development work, we finally opened Timu up this week in a private beta test. Unlike how so many web 2.0 companies slap a beta sticker on a product (cough, Google) and launch it like that this is an actual beta test with a small group of users to work out the kinks before a real launch in the not so distant future.

So what is Timu?

While Timu isn't yet open to the public, we are finally letting the cat out of the bag about what Timu is. Timu is a communication and social networking platform for sports teams. Whether it's little league, high school or adult rec. leagues Timu allows teams to take advantage of social networking concepts to help teams to schedule, coordinate, organize and share.

I've played on and still play on several sports teams, and team communication away from the game has always been a problem. How do you know when practices are, who's going to make it to games, is the game rained out? These are some of the core problems that Timu will help to solve.

We're initially launching the platform for baseball and softball teams but will be adding in all the other major sports over the next year.

And what does it stand for?

I've seen plenty of guess about with Timu actually stands for, a couple of my favorites have been "Tetherball in my utopia", and "Teams in Motion United". Sorry to ruin the guessing, but Timu isn't an acronym for anything, but it does have a relevant meaning. Timu means "Team" in Swahili, plus it was a short, easy to remember and acquirable domain name :)

Looking for some beta testers

While Timu is not yet open to the public, we are still looking for a few additional beta test teams. If you play on, organize or coach a baseball/softball team and would like to participate and help shape the direction of a really cool application, let us know.

Breaking the silence, thoughts on stimulus

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Mon, 16 Feb 2009 20:38:55 -0600

So I haven't written a blog post in what pretty much seems forever, after my massive barrage this fall on the bank bailouts and economic issues. Many people are surprised I haven't chimed in on the massive "stimulus" bill that every-bodies been talking about. Part of the reason is I've been way getting things ready to launch with Timu and haven't followed all the details as closely as I have in the past but also because I just got burned out, frustrated and cynical with everything, particularly anything that involves Congress.

But, ok here's a few quick thoughts...

First of all and this one is gonna strike a nerve with a lot of ActiveRainer's, housing is not the core problem. Housing is a symptom of the core problem. True, it's a massive symptom that is causing pain for most Americans but because it's not the core problem, so we won't solve our economic issues by trying to fix housing alone. It won't lead us out of the mess like some claim, never has, never will. The core problem was/is massive amounts of cheap credit that caused people, corporations and even the government to take on a unsustainable debt load while at the same time not creating much of anything productive. Look at the LBO (leveraged buy out) boom that occurred at the exact same time as a prime example. Due to cheap credit corporate raiders bought out and literally destroyed thousands of productive companies for a short term gain. Enron should have been a warning, but it became a model.

Our amazing recovery after the .COM crash was a mirage, masked by financial wizardry, that attempted to create money out of nothing, and distorted the true state of the economy. Simply put we were looking for a quick fix but didn't create sustainable growth (thank you Greenspan and the financial industry).

Ok, now back to the stimulus, the problem is we are attempting to do the exact same thing, and I think it was Einstein that said the definition of insanity is "doing the same thing over and over again and expecting different results" The stimulus no matter what it is used for is no free lunch. It's simply the government taking on more debt which will come out of our pockets at a later date either via taxes or the government finally needing to start of the printing presses to not just inflate but hyper-inflate. Unless that stimulus is being used efficiently to create long term growth (which it's not) then it's a net negative for us, plus it masks the true problems a little bit longer allowing them to grow. I've read economics paper layout how similar attempts during the 1930's actually lengthened the great depression rather than saved the US, yet for some reason most economists seem to be gung hoe about it this time around.

But, but everybody is screaming about how the government HAS TO DO SOMETHING NOW. The problem is unless you do the right thing we'll actually make the problem worse, and we've been stuck in this loop now for years. We have to get out of this near term thinking where we are just reacting to short term problems and kicking the can a little farther down the road.

If the government is going to use stimulus it has to be done very efficiently to make sure that you are creating more long term value with each dollar spent than is being spent. Think of it like taking out a loan to build a business or an investment. Unless you can use that money to make more money it's just a bad idea because YOU will have to pay it back. The stimulus roughly works out to $7,500 per tax payer before interest (and yes it's debt, there is interest), so ask yourself, is your $7,500 being invested wisely or are you just buying $7,500 of stock in the next Enron?

2009 Market and Economic Predictions

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sat, 03 Jan 2009 06:08:52 -0600

As promised I put together my list of market and economic predictions for the New Year. I somewhat unfortunately managed to go 10 for 10 in last years predictions (Recap). Admittedly my crystal ball is a bit hazier this year, and the law of averages should give people hope. Sorry, if my predictions this year aren't any more optimistic, but I'm not going to pull a David Lereah and will just call them like I see them.

1. The "Credit Crisis" morphs into much wider economic crisis

During 2008 we saw what was first labeled as the sub-prime crisis morph into a mortgage crisis then a credit crisis as problems spread to every type of debt security. This year we are going to see the issues spread much deeper into the wider economy. Job losses, particularly during the last quarter of 2008 were horrific using the reported government numbers, but downright terrifying when you factor out their number fudging. In much the same way as government inflation numbers showed almost low inflation over the past several years when it was fairly high, there's several artifacts of the BLS's job reports that make them look much better than they really are. Things such as the Birth/Death model and the fact that 637,000 left the job force last month because they couldn't find work (so they obviously don't count). Using broader measures without these fudge factors, unemployment is the worst since 1983, running closer to 12% at the same time job losses are accelerating.

2. The recession gets an upgrade

Ok, I'm getting a little ahead of myself here, after all it was just officially declared we were in a recession about a month ago (backdated to last Dec) but almost everybody crunching the number on their own could have pretty much declared a recession over a year ago. While we almost certainly won't get an official declaration this year, I think it will become apparent to independent number crunchers we will be closing in on depression territory by years end. A depression is defined as a GDP loss of over 10% Almost across the board economic numbers are coming in as some of the worst on record and in many cases the plunges are worse than they were in the 1930 time frame.

3. Pension funds, the biggest non-story of 2008 becomes THE STORY of 2009

This maybe one of the biggest stories of this last year and not next to no major press. Simply put many of the largest public pension funds were trying to be hedge funds and were decimated. These pension funds everybody expects to be invested in nice safe things found themselves already underfunded and decided to pile money into riskier and riskier things, CDO's, risky MBS's, huge positions in financial stocks, even the historically volatile commodity market.

Take for example CalPERS, California's massive pension fund, they lost 103% on their residential morgage investments. Yes, you read that right 103%, because like a hedge fund, leveraged up and used borrowed money. CalPERS lost 25% of all assets just since July 1st ($70 Billion), and while I can't find the number to reference, I saw it calculated they lost 47% of assets in the last year. Of course learning their lessons from Bear Sterns and Lehman Brothers, they continue to claim, nothing to see here, we're well capitalized.

Unfortunately, CalPERS is far from alone, this same type of risk taking was par for the course among many of the large pension fund and so far the losses have been kept surprisingly quiet. Baring the most amazing economic recovery in history, many are toast and the damage is trillions.

4. House prices continue to fall, but in most regions not as fast

I'm basing this mainly on historical price trends in when regional real estate markets have collapsed. The price declines typically last 5-7 years before bottoming out, but the steepest of the price declines typically occur within the first 2 years before leveling off somewhat.

5. The stock market is far from seeing a long term bottom

Back in Oct. when we hit an intermediate bottom on the equity markets, about 738 on the S&P500, I started telling people I thought there was a good chance we were about to start a multi-month rally, mainly due to the massively negative sentiment I was seeing. As a side note it's interesting that in almost all markets, sentiment is the most negative near bottoms and most positive right at tops. So far we've managed to rally for a month and a half and it may continue for some time, but we are far from the overall bottom.

For example during the great depression we saw more than half a dozen multi-month stock market rallies taking the market up over 40% in short periods of time, yet despite this the total loss from peak to trough was nearly 93%. Based on many types of analysis that people have done and some of my own looking at technical patterns, historical trends and economic impacts and valuations, I think a very likely bottom could be in the 300-500 range on the S&P500 within the next couple years. That would equate to a 68-81% loss off of the peak or 45-68% loss of where we currently are after all the nastyness in the fall.

People subscribing the buy and hold philosophy maybe in for a shock. The whole stock market comes back and gains 8% of year over time that people like to spout is actually predicating on picking some very "convenient" date ranges. There's been some rather lengthy (15-20 year) periods in the last century where annual stock market returns were closer to 2% and well below that of bonds.

6. Where does the bailout money come from when it's time to pay up?

When you add up all the bailout money that's been committed to in the last several months it adds up to over $8 Trillion. Yes, $8 Trillion, to put that in perspective the total tax revenues of the US government last year was $2.7 trillion. While that much money has been committed to, that is not the same as actually spent or handed over, similar to social security. Most of it is in the form of backing various debt securities, which are likely to go bad in the future. It's basically a giant credit default swap written by the government, and we've all seen what happens to those. So, what happens when it comes time to pay up? Who knows? Truthfully I don't think they have a plan, I think they're just trying to kick the can down the road a little bit longer hoping for a miracle, and a new person to be in their position. This maybe related to the next prediction.

7. A crash in the US Treasury market?

This is probably the prediction I am feeling the haziest about, particularly since I thought we were on the verge of a crash in the treasury market late last year and instead it rallied. But the US treasury market is beginning to look like just another giant asset bubble, and asset bubbles have a tendency to continue longer than anyone expects before collapsing. Right now prices of long term US treasuries are the highest, thus yields the lowest they've been in, well as long I can find historical data. This is mainly due to a flight to safety from all other asset classes, particularly other types of debt, mortgages, corporate corporate bonds, etc.

Now the problem, is this is depressing long term US treasury yields to a range of 2.5% at the same time the US is taking on a unsustainable debt load plus massive future bailout commitments (see #6). So, either the market for US treasuries is pricing in a very, very lengthy period of deflation/depression or the market is just setting up for a spectacular crash very similar to the situation in 1931 that sends interest rates soaring. Neither is good but given the US debt load now, a treasury crash this would bankrupt the US, giving the US two choices of either hyper-inflation or flat out defaulting on debt, both which have some terrifying consequences. Interestingly enough, guess what's the best performing asset in hyper-inflation, yes real estate.

8. GM files for bankruptcy despite the automaker bailout

They just got billions in low cost government loans, but that isn't going to tide them over for very long. Given how fast they are burning cash, (you couldn't burn it faster with a forklift and a blast furnace) along with a continued economic decline they'll need continuous giant cash infusions. There's a good chance the next cash infusion this spring comes in the form of DIP (debtor in possession) financing for a pre-packaged bankruptcy. Really, a bankruptcy is the best thing that could happen to GM as it's the only legal way it's going to be able to restructure in a way that allows for long term survival. Chrysler is in the same boat, but Ford is in substantially better financial shape and will probably avoid bankruptcy. If the government really wanted to help Detroit it would be better off using part of that money to supply seed funding to several new car companies but unbordened by past liabilities and being smaller and more agile could be more innovative.

9. Regional bank failures and consolidation accelerate

I was somewhat shocked to only see 25 bank failures on the FDIC's Failed Bank List at the end of the year. Though you could realistically add several others like Wachovia that when through FDIC forced/assisted mergers. To me not proof that the banking system is in better shape than I thought, but rather that the FDIC and OTS are even more incompetent than I thought. There are dozens, probably more like hundreds of regional banks that appear better capitalized than they really are, due to um, creative accounting. As far as the biggest of the banks go, keep an eye on Wells Fargo, who've continued to profess they are clean, just don't look to far into their books.

Allowing them to continue to operate while realistically very under-capitalized is putting more and more depositor and tax payer money at risk. These bank failures and mergers mean that the banking system will continue to consolidate into a few super banks, clearly including the likes of Citigroup, Bank of America, JP Morgan/Chase, etc. The problem is these are some of the worst offenders out there, they simply get to survive because they happened to be the biggest thus are getting the direct government assistance. Is this really good for America? I think you know the answer to that one.

10. A revolt against corruption

The last 10 years ago has probably been some of the most corrupt years this country has seen at all levels both government and corporate. Much of this corruption still has yet to get the exposure it rightfully deserves. What was once frowned upon became the status quo.

Maybe this is more of a hope than a prediction, but 2009 may mark a turning point in this cycle. Maybe it'll be a new incoming president (for the record I think both parties are equally as corrupt) or maybe the spreading economic problems will finally cause people not to be able to afford their cable bill, thus interrupt their stream of American Idol and Dancing With The Stars. I don't know but hopefully people not only wake up but start to display the outrage needed to actually change things.

NAR's "Baghdad Bob" Confesses

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Mon, 29 Dec 2008 14:52:01 -0600

You remember "Baghdad Bob" from the Iraq War, right? Iraq's information minister who repeatedly claimed no American troops in Baghdad as US tanks patrolled only hundreds of yards from his studio. Well the NAR's very own Baghdad Bob, former Chief Economist, David Lereah was notorious for his bullish optimism during the peak of the housing bubble now admits in a Money Magazine article it was just spin.

As chief economist for the National Association of Realtors, David Lereah was famously optimistic. Now a private consultant, he’s abandoned what he calls the “positive spin.”

Q: Were you wrong to be so bullish?

A: I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right inline with most forecasts. The difference was that I put a positive spin on it It was easy to do during boom times, harder when times weren’t good. I never thought the whole national real estate market would burst.

Who could have guessed? Yes, that's sarcasm, but unfortunately, due to his title as Chief Economist for the largest housing related organization the vast majority listening took the spin as truth and continued to propagate the (dis)information. This is similar to all of those "Chief Economists", and "Analysts" at investment banks that will produce report after report for public consumption about how great things are while their internal analysis is very different. Their job titles are crafted to make them sound independent while at the same time their jobs are really to be their companies propaganda ministers.

What's really ironic is this spin was happening at the same time the NAR was trying to promote Realtors as a trusted source of information. Seems kinda counter productive doesn't it. More importantly how does this spinning really benefit the real estate industry? Are Realtors really better off in having a housing market of booms and busts as opposed to a more stable market?

2008 Market and Economic Predictions - RESULTS

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Fri, 26 Dec 2008 15:36:59 -0600

On New Years Eve last year I wrote a post, Market and economic predictions for the new year where I set out 10 predictions mainly about markets and the economy for the new year. I tried to choose topics where my predictions were differed from the majority of mainstream economists and market pundits. Since the year is now coming to an end, it's time to revisit this list and see how I did. I should have a new predictions list for 2009 coming within the next couple days.

1. The fear of inflation is misplaced, deflation is coming...

Correct - There has been massive monetary deflation as credit throughout the world has significantly contracted. While price inflation in commodities surged for the first half of the year due to hot money speculators trying to find the next asset bubble, this bubble collapsed rather spectacularly mid-year. Between massive demand destruction from slowing economies around the world, and the continuing deleveraging in our financial systems this will almost certainly continue. It wasn't until October that I heard the first mention of deflation not inflation in the main stream media.

People are screaming that we are going to experience near term hyper-inflation do to the central banks pumping liquidity. The central banks ability to pump money pales in comparison to the size and speed of the credit contraction. Consider over $30 Trillion in wealth evaporated this year across the various asset classes, compared to a couple trillion pumped by the central banks. Plus most of this money particularly pumped into banks in simply being hoarded in US treasuries, so it really has no inflationary effect at all.

2. The dollar will strengthen against most currencies...

Correct - The dollar index started the year at about 76 and appears that it will end around 81 with most of the US dollars strength coming against the Euro. My prediction was based on the fact that world economies were in just as bad of shape if not worse than the US economy and there would be massive rate cuts not in the US but internationally. There were also massive bets being made against the dollar that would b unwound during global deleveraging and the market realization economic problems are not limited to the US. The global decoupling theory spouted by many economists and market analysts is proving to have more holes than Swiss cheese, the world economy really is dependent on the US consumer.

3. The housing downturn will continue...

Correct - Yup, last I checked it's still going on and I think we've got several years left until "bottom" is hit. We have many substantial regional housing down turns in the past to look at for a model, and they usually lasted 5-7 years from peak to trough. It should be noted the steepest price declines happened in the first two years and then it was a slow grind down for several years. The main driver behind the housing market this time is almost totally availability of cheap credit, so until you see a turn in the credit markets there won't be in housing.

4. It is not subprime...

Correct - Look no further than default statistics on mortgages in general and it's obvious in it's not just subprime, Fannie and Freddie should be proof of that. Secondary markets for everything from credit card debt to students loans are now pretty much dead, and we even saw it spread all the way into the municipal bond markets this spring as they locked down (I wasn't expecting that to happen so soon). The worst effects are yet to be felt, as some of the secondary credit market troubles have yet to have spread down to the consumer. I do not believe the credit crisis is over, in fact I believe we are experiencing another lull in the storm just like we did last fall, then again in the winter, and then again after Bear Stearns.

5. Real estate commissions will increase...

Maybe Correct - Most people were claiming average real estate commissions on a percentage basis were going to contract due to new business models such as Redfin. My prediction was made on the basis that commissions typically increase in down turns as it becomes harder to sell properties and that many "innovative" models will die off because they can't survive in an environment of lower transaction volumes. I haven't seen any hard numbers on this, but I have lots of anecdotal evidence that my prediction was correct.

6. Several large regional banks will fail...

Correct - My prediction was "This next year several large regional banks will fail and end up being seized/merged by the OTS for violating capital requirements. There is a very significant possibility of at least one of the top ten banks in the US having a similar fate. I won't mention any names but several candidates come to mind."

Out of the large regionals we saw IndyMac, Washington Mutual, Wachovia, Downey Financial go down. Both WAMU and Wachovia laid claim to being in the top 10 largest banks in the country. Additionally, the only reason Citigroup (the largest) made it through the year was several hundred billion in bailout money being thrown at them. Back in April 2007 when I started really investigating the banking system I put together a list of banks that I thought were dead men walking based on their exposure to bad debt and low capitalization. All of these failed banks were near the top of the list. There are MANY banks on that list, that I still believe are walking dead even with the government intervention and I actually expect the rate of bank failures to increase significantly in the next year.

The accounting fraud in are banking system, which the regulatory agencies like the FDIC and OTC are assisting to cover up is massive. There is no other way to describe it other than criminal, the agencies put in place to protect us have instead been assisting in the crimes for years. See: The TRUTH Behind The Credit Market Lockup

7. More bail-out schemes than you can shake a stick at will be proposed...

Correct - Does this one need any further explanation? I think I'd need about 10 pages just to list the bailouts set in motion in the last two months alone. Keep in mind one line from the 2008 prediction though, "Yet, none of them will fundamentally do anything." I'm sticking with that, mathematically they can't solve the problem, it's all a smokescreen, all they do it drag out the economic pain longer, and act to distribute the losses wider in the system. History has shown you can not have a true economic recovery until you take the losses and get them out of the system.

8. The FED substantially lowers the target rate...

Correct - What are we at, .25% now from over 4% at the start of the year? Welcome to ZIRP (Zero Interest Rate Policy), it's gonna last for a while, and no that isn't a good thing.

9. ActiveRain will launch many cool new features and several new faces will join the ActiveRain team...

Correct - ActiveRain launched the redesign Localism, Outside Blogs, and is preparing to launch channels which may be the biggest overhaul to the main ActiveRain.com site in years. Many new faces too, though I've moved onto to start a new venture.

10. Despite all my bearish predictions we will survive and life goes on...

Correct - I'm still here writing this...

Now I have some work to do to come up with a whole new set of predictions...

And it's name is Timu

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Tue, 09 Dec 2008 23:10:48 -0600

About two months ago I announced my departure from ActiveRain full-time to found a yet to be announced start-up outside of the real estate industry. I've been pretty silent around here, for a little bit but have been hard at work on the new venture. While I'm still keeping most of the details under wraps, but I think it should be pretty obvious from the logo what industry it's in :

Look At The Dollar Rocket

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Tue, 21 Oct 2008 23:24:35 -0500

One of my 10 predictions at the start of the year was despite the forecasts of most, was the US dollar was going to strengthen against foreign currencies during the year. Well in the last couple weeks the dollar has been on an absolutely impressive tear against almost every currency in the world. The ferocity of this move has simply been amazing, with it moving almost nearly 3% against a basket of currencies in just the last 24 hours. Think of it this way, your dollar in your pocket just got 3% more valuable in the last day, even if it may not seem like it to you.

Basically we're seeing signs of mass liquidations of risky assets (stocks, bonds, commodities, derivatives) around the world and the resulting money is flowing into US dollars, strengthening the dollar against other currencies. While our banking/financial system has it's problems the simple fact of the matter is it's in better shape than many around the world.

The speed at which this move is occurring will likely generate significant effects (problems), but it's very tough to predict in what form they might be. One of the many things that's got my radar up in the last couple days, trying to determine what's likely to happen.

Credit Market Update - A False Recovery???

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Tue, 21 Oct 2008 12:21:20 -0500

It's now been just over a week since the FED, treasury and central banks around the world made some massive interventions to try and stabilize the credit markets. My prediction is that these interventions would do very little to unlock the credit markets the main issue is trust, not liquidity. I've been watching many different indicators very closely for signs of recovery over the last week.

One of the main indicators of health in the credit markets is call the TED Spread. I've discussed it many times on this blog but it's basically the spread between three month treasuries and three month LIBOR rates. The higher the spread, the more stress in the system. Historically it averages 30 basis points, over 200 is signs of a crisis, and it had reached 454 basis points before the interventions. In the week or so since it's collapsed back to 266 basis points. While still in critical condition this is appears to be a very good sign, and the financial media have been crowing about the credit markets being on their way to normalization.

Why it might be a false signal?

Something didn't smell right to me about the recovery and today's Treasury auction have shed some light on where the smell was coming from. Most of the recovery in the TED spread has been in the yield of short term treasuries increasing not LIBOR rates coming down (though they have come down substantially). The increase of treasury yields would typically indicate people are leaving their bunkers and starting to move their money back into riskier assets, BUT... The treasury auction demonstrated the yield increase is not coming from the demand side, but the supply side. Yields are increasing on short term treasuries not because people are moving out of bunkers but the US Treasury is absolutely flooding the market with short term debt. This is not good, not good at all.

Here's a chart of the t-bill issuance by week, as you can see it appears to be going parabolic.

I've also seeing many "weird" movements in asset classes from currency to bonds to commodities that are setting off my alarm system. I haven't been able to figure out what exactly they mean but something is emitting a very bad smell right now...

Part Of My Halloween Costume Arrived Today

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Mon, 20 Oct 2008 22:38:19 -0500

I got home from the gym today to find a package I'd been expecting sitting on the porch. It contained a few of the pieces for my upcoming Halloween costume that I'd been waiting for. I like to have some fun with Halloween, but this year I'm not above making a statement too. Personally these two characters scare me more than about anyone right now. So who should I be for Halloween?

Hank Paulson?

Ben Bernanke?

Why Start A Company In A Bad Economy?

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sun, 19 Oct 2008 18:51:52 -0500

This question has been in my mind a lot lately. Anybody who reads my blog knows my outlook on the economy over the next several years in pretty bleak. I believe and have believed for some time now that we're not just heading for a protracted recession, but a downturn that will fit the definition of a depression before it's over. I believe the stock market declines are far from over, despite any any short to intermediate term rallies we may get. I believe the biggest asset bubble, the bond bubble has yet to begin it's collapse and I believe we've yet to see the true economic fall out of our credit market issues.

Pretty pessimistic, right? Yet, I left my secure position to start a new company where I don't have a secure paycheck for who knows how long. Doesn't sound like something a pessimistic person would do, does it :)

My belief is the best opportunities to build a business occur in the down times. Today an essay was passed onto me, Why To Start A Startup in A Bad Economy by Paul Graham, that I thought was an interesting read and echo's some of my thoughts.

"When Microsoft and Apple were founded.

As those examples suggest, a recession may not be such a bad time to start a startup. I'm not claiming it's a particularly good time either. The truth is more boring: the state of the economy doesn't matter much either way.

If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders.

Which means that what matters is who you are, not when you do it. If you're the right sort of person, you'll win even in a bad economy. And if you're not, a good economy won't save you. Someone who thinks "I better not start a startup now, because the economy is so bad" is making the same mistake as the people who thought during the Bubble "all I have to do is start a startup, and I'll be rich."

Less Competition

In bad economies only the strong survive while weak companies will often flourish during booming times. Not only will competitors begin dropping like flies but new competition will have problems getting funded or be so scared they go an hide in their bunker. Advertising/Marketing budgets will get slashed by big competitors allowing the smaller, more innovative people to flourish.

Startup/Operational Costs Become Lower

In a sinking economy the pool of potential employees increases significantly, and this will reduce the cost of bringing in talented people, often pretty significantly. Other types of costs such as office space will also be reduced and there is opportunities to buy things much cheaper from companies that didn't make it.

Better Business Plans

Being in a economic downturn forces you to be much more conservative and rational in your business planning. Too many companies built in the upturns, plan around an ever increasing market opportunity and cheap capital, which leads to many unsustainable companies being built. Think back to all the idiotic business plans that turned into well funded companies in the dot com boom and even more recently in the web 2.0 and real estate bubbles.

Now almost everyone here on ActiveRain can think of themselves as a startup, since pretty much all real estate agents work for themselves. Educate yourself, be realisitic in your analysis of what is happening, and use that to look for opportunities that others who simply hide in their bunkers will miss.

Read this post on BigStartups.com...

Hedge Fund Manager Who Bet Against Sub-prime Says Goodbye

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sat, 18 Oct 2008 16:09:15 -0500

In the past year hedge fund manager Andrew Lahde has become quite famous for correctly predicting and betting on the problems in the sub prime mortgage market and more recently in the commercial real estate market (these problems are just starting). His hedge fund produced a return of over 1,000% in only a year on these bets, at the vast majorities of hedge funds have literally melted down.

He sights several reasons for leaving the business, but one of the main ones is the risk going forward of a full scale financial system collapse. "Our entire banking system is a complete disaster,”, “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.” I can not say I disagree with that analysis.

I did find his very candid goodbye letter, to investors informing them he is liquidating and closing the hedge fund rather interesting...

“Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life."

Read the rest of the letter...

The TRUTH Behind The Credit Market Lockup

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Wed, 15 Oct 2008 22:47:32 -0500

The truth behind the credit market lockup has nothing to do with liquidity or lack of capital in the system, it is literally about TRUTH itself. Let me list a few examples that illustrate my point.

In March, Bear Stearns' CEO goes on national TV and claims they are well capitalized and don't have a liquidity problem. This statement is backed up from the SEC a regulatory agency in charge of monitoring Bear Stearns. Only a week later Bear Stearns collapses and we later learn, they did not just have liquidity problems but were in fact insolvent (effectively bankrupt) by a wide margin.
In July, Indymac issues a statement saying they are well capitalized to handle there problems. The OTS/FDIC issue a similar statement saying they don't see any problems with Indymac's capitalization. Only about a week later IndyMac fails, is seized by the FDIC, and we later learn as their assets begun to be liquidated, that they are in fact insolvent by over $8B. This is against total assets of only $32B, so that is not even close to being solvent.
Fannie Mae and Freddie Mac along with regulators repeatadly issue statements that they are in a solid financial position and well capitalized. In September the government seizes and nationalizes these two GSE's and the truth comes out that the bailout is going to cost tens of billions if not hundreds of billions of dollars. In fact they were no where near solvent or well capitalized as claimed.
Lehman Brother's makes numerous statements on their capital adequacy throughout the summer and early fall. When they finally blow up the CDS auctions show that bond holders are only expected to receive about 9 cents on the dollar once assets are liquidated. They were insolvent by a huge margin.
Washington Mutual and Wachovia, two of the largest banks in the US, effectively fail and received arranged shotgun marriages with the help of the FED and FDIC. As part of these shotgun marriages they each write down tens of billions of dollars in bad loans they'd been holding on their books and claiming in financial statements were good.
Wells Fargo's CEO gets on national TV and claims Wells Fargo has never done risky lending such as subprime, stated income, interest only, no ratio. Cough, cough, bullshit, they're sitting on a metric ton of that stuff.

Starting to see a pattern here? Not only are companies repeatedly cooking the books and lying to everybody involved about their true financial state, but the regulatory agencies are not calling them on it and in some cases helping to cover it up. These regulatory agencies have literally had staff inside these corporations monitoring their financial state on a day to day basis so you are left with two choices. Either the regulators are more incompetent the Michael Brown of Hurricane Katrina fame or they are flat out lying to the same public they are supposed to protect.

So here's my point. Now that we've had a few major failures and people realize that not only are companies lying about their financials, but regulators are not making them come clean, everybody is assumed guilty by players in the financial system. That is why the credit markets are locking tight, LIBOR skyrocketing and spreads blowing out.. It has nothing to do with companies not having capital to lend, in fact there maybe more liquidity in the system than ever. It's the fact that lenders don't trust that they'll get the money back if they do lend it. The government can throw as much liquidity into the tornado as they want but they can't force the institutions to lend.

This is why despite the absolutely massive liquidity injections, backstopping and bailouts the credit market lockup continues to get worse. More liquidity can not solve a trust problem. The ONLY way you can unlock the markets is to force transparency in the system, expose those companies who are insolvent and deal with them. If you don't you don't do this, all companies will be assumed to be lying and insolvent whether they are or not and nobody will lend. This is why the government's expensive bailout plans are literally doomed to fail.

More Bailout Details Emerge - Ok, This is Maddening

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Tue, 14 Oct 2008 13:06:55 -0500

Tonight we found out how the first $250B of the taxpayers $700B bailout of the financial system would get used. According to the bill passed by Congress this money would be used to buy bad assets off of bank balance sheets. Instead it is being used to purchase non dilutive preferred stock mainly in a small number of large banks. We were also told by treasury officials that they only expected to need about $50B of that money a month, and just wanted to the full amount in their back pocket. Well they are already going back to Bush to authorize the next round.

Ok, so the details (from NY Times)

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

The goal is to inject massive liquidity into the banking system. The government will purchase perpetual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

Now here's where I get pissed

1. NON DILUTIVE PREFERRED, that is the definition of moral hazard, you are bailing out a company yet rewarding those who made bad investments. We were told during congressional hearings by Paulson it was important for this money to be used in a way that didn't reward the stock holders. The plan was to take large dillutive equity chunks out of banks that were bailed out via warrants or preferred stock. Guess we were LIED to!!!

2. Lets see Wells Fargo and Bank of America get rewarded with an extra $5B for getting a sweat heart FED back deal to take out a competitor. Yeah that gets a sets a good precedent. What do you want to bet, Wells and BofA knew about this little kickback when they were at the bargaining table? Seriously, it appears the plan is too consolidate the whole banking system into a dozen or so "winners" that the Treasury has chosen to survive this mess. My putting their support behind the large banks it undermines the ability of the smaller ones to gain depositors and investment further hastening this consolidation.

3. It was absolutely critical for us to pass that bailout bill without much time for debate, yet a week and a half later, we're using the money for a purpose not even authorized in the bill.

I guess my suspicions that this is simply a looting operation by the major banks has now been confirmed. This could not have been carried out in a way more beneficial for the bankers and the shareholders and less beneficial for the taxpayers. Hope you like your Citigroup, JP Morgan/Chase, Morgan Stanely, Bank of America overlords...

* The image on the right is what I think of Hank Paulson right now, and yes that's the mask for my Halloween costume this year. These guys are more concerned with bailout out there buddies right now that solving the real financial crisis that is getting worse by the day, not better.

You Call That a Bailout, THIS is a Bailout

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Mon, 13 Oct 2008 19:00:03 -0500

Boy, it's Monday and there is already a years worth of news to report on the bailouts, credit markets and the global economy. The central banks the world game out of the G7 meetings with a real fire lit underneith them, some might say desperate and have been enacting financial measures almost hourly in an attempt to unstop the credit markets. There seems to be a lot of throwing *#$ against the wall to see what sticks, if the markets don't react something that is announced, forget about it and announce something different.

Lets start with the US

An updated bailout plan has been reported by the Wall Street Journal that is significantly different in many ways that what was submitted in approved by Congress.

$250B of the money will be used to purchase equity (preferred stock) in over 2,000 banks in the US, which essentially is a partial nationalization of our banking system. Preferred stock will be purchased immediately in the top 9 banks which the FED and Treasury just finished meeting with. Some of the banks were reportadly not to happy with the plan but didn't have a whole lot of choice in the matter. I suspect most of this will likely go to small number of choosen banks (Citi, BofA, Goldman, Morgan) into which most of the smaller banks will be consolidated over time.
The FDIC expected to temporarily lift the insurance limits for non-interest bearing bank deposit accounts.
The FDIC will insure all new FDIC preferred debt issued by banks and thrifts. This basically means that if I'm a big fund and I want to invest $5B into Mr. Bank, the FDIC will insure my investment. The idea is to try and jump start external recapitalization of the banking system, by insuring the investments of big investors.

We've also got a report from Saturday in Bloomberg that Fannie and Freddie (recently nationalized) have been instructed to purchase $40B in under performing mortgage bonds (mainly subprime and ALT-A) off banks balance sheets each month. In effect this is additional debt being purchased by the US government off above the $700B authorized by Congress. The three plans above are easily going to require additional government borrowing of several trillion dollars. Again, where is this money coming from? I believe the current policy actions are almost guarenteeing a bond market crash and double digit interest rates in the near future.

Now onto Europe

Germany commits $681B to bank bailouts, given our GDP is 4.3x theirs, that is the equivilent to the US doing a $2.4 Trillion bailout. On a side note if you think our banking system is in bad shape the German banking system is so levered, a mere 2% drop in bank asset value wipes out the net worth of their banking system.
Britain nationalizes the Royal Bank of Scotland and HBOS, and there are discussions about nationalizing utility and transportation companies if things get any worse.
The French commit about $480B to bank bailouts, given our GDP is 7x theirs, that is equivilent to the US doing a $3.4 Trillion bailout.
The Dutch commit $200B to bank bailouts, lets see 1/20th our GDP so, that's like them doing a $5 Trillion bailout
Spain is committing $100B, so at a GDP 1/12 ours so, that's similar to us doing a $1.2 Trillion bailout

There's some other ones in there to, but that is an absolute ton of money being thrown around, money that quite frankly that doesn't exist. Either the collective central banks are bluffing and hoping that the credit markets will unstick without having to follow through, or a ton of new worldwide debt will need to be issued. Supply and demand again says long term interest rates worldwide are probably about to do a rocketshot northward. Here's a hint, you can't borrow your way out of a debt crisis.

Did they unstick?

Despite all of these additional bailouts over the weekend in Europe, LIBOR and the TED Spread barely came down, meaning the credit markets did not unstick themselves to any material degree. The US bond markets where closed today so it's hard to get a good read on things, but tomorrow morning should be very telling.

The "Smart Money's" Take - Sequoia Capital Meeting Notes

Matt Heaton (Timu Corp - CEO, ActiveRain - Co-founder) — Sun, 12 Oct 2008 12:02:58 -0500

I thought this was interesting enough to repost on my blog as it is Sequoia Capital's take on our current economic situation. For people that don't know Sequoia Capital is one of the most respected of the large VC firms. There portfolio of companies reads like a who's who of well known Internet firms, many of whom everybody here would be familiar with. I'd had this meeting described to me on Friday, and I was able to get a copy of meeting notes today from another source.

This is particularly relevant to me, as I am in the process of building a new startup company. Given that I've seen this situation coming for sometime my business plan is built around many of the assumptions. I'm building it in a way I can self fund without raising outside capital and being cash flow positive as fast as possible is my top priority.

Update: I also found the slideshow had been shared online.

Speakers:

· Mike Moritz, General Partner, Sequoia Capital (he moderated the speakers).

· Eric Upin, Partner, Sequoia Capital (Eric ran the $26-Billion Stanford Endowment Fund and knows a few things about Economics and investing.)

· Michael Partner, Sequoia Capital (Michael was recruited to start Sequoia’s very first hedge fund, coming from Maverick Capital and Robertson Stephens. I know him from my BEA days.)

· Doug Leone, , General Partner, Sequoia Capital
Slide projected on the huge conference room screen as people assembled inside the conference center to take their seats: a gravestone with the inscription: RIP, Good Times.

Mike Moritz:

· The only time Sequoia’s assembled all CEO’s like this was during the dot.com crash.
· We are in drastic times. Drastic times mean drastic measures must be taken to survive. Forget about getting ahead, we’re talking survive. Get this point into your heads.
· For those of you that are not cash-flow positive, get there now. Raising capital is nearly impossible if you’re too far off of cash flow positive.
· There will be consequences for those who hesitate. Act now.

Eric Upin:

· It’s always darkest before it’s pitch black.
· Survival of this storm means drastic measures must be taken now, so you will have the opportunity to capitalize on this down turn in the future.
· We are in the beginning of a long cycle, what we call a “Secular Bear Market.” This could be a 15 year problem. [many slides on historical charts of previous recessions, averaging 17 year cycles.]
· The credit market [versus the Equity markets] are the issue and will take time to recover.
· Inflection point: Make changes, slash expenses, cut deep and keep marching. You can’t be a general if you turn back.
· This is a global issue and not a ‘normal’ time.
· There is significant risk to growth and your personal wealth.
· Advice:
o Manage what you can control. You can’t control the economy, but you can control everything else.
§ Cut spending. Cut fat. Preserve Capital.
§ Don’t trust your models and spreadsheets. All assumptions prior to today are wrong.
§ Focus on quality.
§ Reduce risk.

Michael Beckwith:

· Note: Michael had a lot of slides that were charts, data points and comparisons.

· A “V” shaped recovery is unlikely [√]
· Cuts in spending will accelerate in Q4/Q1. Look at eBay—this is just the beginning.
Doug Leone:
· This is a different animal and will take years to recover.
· Getting another round if you’re not profitable will be rough.
· Do everything possible to get to cash flow positive. Now.
· Nail your Sales and Marketing message.
· Pound your competitors shortcomings. They’re hurting and they will be quiet. Take the offensive.
· In a downturn, aggressive PR and Communications strategy is key.
· M&;A will decrease dramatically and only lean companies, with proven sales models will be acquired.
· Spectrum discussion:
o Capital Preservation ß----------------------------------à Grab Market
o Everyone should be far to the left (capital preservation)
· Requirements of our companies:
o You must have a proven product
o You must cut expenses. Now and deep.
o Your product should reduce expenses and drive revenue [NOTE: I want to revisit this with the Management team. Our solution does both, we need to quickly and crisply define the sound bite here.]
o Honestly assess your solution vs. your competitors.
o Cash is king [have you gotten this message yet?]
o You must get to profitability as soon as possible to weather this storm and be self-sustaining.
· Operations review:
o Engineering: Since you already have a product, strongly consider reducing the number of engineers that you have.
o Product: What features are absolutely essential? Choose carefully and focus.
o Marketing: Measure everything and cut what is not working. You don’t need large Product Marketing, Product Management teams.
o Sales &; Business Development: What is your return on this investment? The Valley has gotten fat with Sales people: Big bases, big variables. Cut base salaries on sales people, highly leverage them with upside (increase variable) and make people pay for themselves via increased sales productivity. Don’t add sales people until you’ve achieved your goals with sales productivity. Be disciplined.
o Pipeline: Scrub the shit out of it and be honest with yourself.
o Finance: Defer payments, what is essential? Kill cash burn.
· Death Spiral (Nobody moves fast enough in times like these, so get going and research later.)
o The death spiral sucks you in, you’re in it before you know it and then you die.
o Survival of the quickest.
o Cutting deeper is the formula for survival.
o You should have at least one year’s worth of cash on hand.
o Tactics:
§ Assess your situation. Drop your assumptions, start with a blank page and start zero-based budgeting.
§ Adapt quickly
§ Make your cuts
§ Review all salaries
§ Change sales comp
§ Bolster your balance sheet—if you can add $5M to your coffers, take it and save it.
§ Spend like it’s your last dollar.
· Get Real or Go Home.

I will review and clarify any points with you tomorrow. This is the real deal folks. Let’s buckle down, change the way we operate, be very agile and look at things differently. We need to change things around and get aggressive