Kyle Napierkowski

Internet Memes and the Super Bowl: "The Future is Now"

2010-02-20T08:31:31Z

I just finished watching the HBO premiere of "Funnyordie Presents," essentially a produced half hour collection of skits done by the crew over at funnyordie.com. It was fantastic of course, full of Will Ferrell and other comedy heroes, and including among other things: a guy rolling on Ecstasy getting chopped up in a tree shredder; a volume of the always-fabulous Drunk History; kids on a playground playing the parts of America and the IMF feasting on a poor African country; and date-raping Jimmy Buffet tshirts. Tune in next time, you will love it.

Funnyordie Presents reminded me of reflections on the Superbowl ads this year, in particular the unmistakable acceptance of Internet culture by the mainstream. The Audi "Green Police" commercial seemed to be a pretty clear nod towards (or maybe rip of?) FOD's "Green Team" skit. Commercials featured Youtube sensations such as Numa Numa and that drugged out little kid coming home from the dentist ("is this real life??"). References to Facebook and Twitter were everywhere, and Youtube of course. And we cannot forget, Google's first superbowl ad, "Parisian Love," which wooed female Superbowl watchers across the country while giving a very Googley/clean/elegant finger to Microsoft's typically-busy Bing television ads.

It's 2010 everyone, the real Year of the Internet. It's finally hit the core of mainstream American culture -- The Superbowl Ad -- the adspace with some of the broadest target audience known to man. There's no going back now!

Kyle

Changes in wealth distribution

2010-01-28T09:03:08Z

I recently came across an interesting chart over at ZeroHedge regarding changes in wealth distribution over the 20th century. The top 0.1% of income earners' share of total income gradually decreased from the end of the Depression era until the early 80s, and then exploded back up to early-1900s levels. A wealth transfer of such degree over two decades is notable.

The shape of the graph got me thinking, what did the spikes in the latter period coincide with? I realized that the spikes matched the run-up to our major bubble/bust periods: S&L bubble in the late 1980s, tech bubble of the late 90s, and residential real estate bubble of the mid 2000s. Given my semi-obsession with the role of debt (thank you Steve Keen) in macroeconomic behavior, I wondered how the Total Debt/GDP changes lined up with the wealth distribution changes.

Using Piketty & Saez's 2009 data on wealth changes and the Federal Reserve's outstanding U.S. Dollar debt figures (data pulled from their 2009 releases), I created a rate of change comparison chart. To eliminate some of the noise, I took a three-year Simple Moving Average of the delta-squareds.

View image

Alternatively, here's the same graph with nominal change in the Top 0.1% Earners' Share of Income. Comparing second-derivative change on the Debt/GDP side with first-derivative change in 0.1% Earners' Share might be a bit funky, but it tells a better story and makes sense from the perspective of matching with the original graph... If I remembered my financial econometrics well enough I'd make a comment about data stationarity here...

View full-sized image

If anyone is interested in the source data please let me know and I will post my set.

My concluding question: how much of the change in wealth distribution from 1980-today was directly from the Financial Services sector profiting off leverage/credit expansion?

Kyle

Emmanuel Saez's dataset updated Aug 2009 available: http://elsa.berkeley.edu/~saez/

Federal Reserve data available at the usual place: http://www.federalreserve.gov

Goldstein Caldwell & Associates

2009-11-16T23:31:04Z

There is a company in Cleveland that local entrepreneurs have likely heard of called Goldstein Caldwell & Associates. I got their newsletter today, reminding me that I wanted to post about them. They describe themselves as "a seed capital investment and business development company that helps young entrepreneurs turn their ideas into viable businesses." In other words, they are trying out the Y-Combinator / TechStars / Founder Institute approach focused on the Cleveland startup world.

Cleveland entrepreneurs undoubtedly need more help getting off the ground. There are a few channels for early-stage support including JumpStart, Techlift, MAGNET, CIL, GLIDE, and various university programs, each of which I've had great experiences with. Still, these groups can only do so much, since most first-time entrepreneurs really need direct and constant advice from entrepreneurs who have experience in their industry and have done it before. A Y-Combinator branch or Founder Institute program in the city would help immensely.

On the other hand, GCA's service appears to cost the same as the big-time incubators but without the major benefits. An entrepreneur should always ask themselves before handing out equity: "Is this person someone I will be glad I'm partners with in five years?" Adeo Ressi, Paul Graham, David Cohen? Absolutely. GCA? I'm not sure. Let me be clear that I'm sure the individuals at GCA are highly capable businesspeople, which they've proven with their press coverage and footprint so far, but this does not mean they should be coaching first-time entrepreneurs.

Here are some problems I've been thinking about since first hearing about GCA this spring:

1.) The partners have not succeeded as high-growth entrepreneurs. Whereas in the current well-respected programs you work with entrepreneurs who have one or more multi-million dollar exits along with long careers of direct industry expereince, the GCA team has collectively founded one VC-track business, Zolio, which never raised more than a seed round and currently has about 1,000 monthly unique visitors. I can't say that my track record is much better right now, but I'm also not running a startup advisory firm. Actually, the main reason I'm writing this blog post is that I had been thinking about doing something like this a few months ago and realized that if I did, someone would write this article about me ;)

- How they could fix this: GCA needs entrepreneurs-in-residence on staff that work consistently with clients. That would at least give some meat to the notion of value-added advisory for new entrepreneurs.

2.) The partners have very little other experience relevant to startups. Aside from Zolio, the management team has some work experience but not what I'd imagine is necessary to really provide something unique for their clients. Todd has some business analysis background which definitely helps, but that's about it. Dar's experience isn't very relevant (two years working as an independent architect; managing a P&L but for a one-man show). Their engineering expert Jeff worked as an engineer for a small hardware company for a few years - OK but not an industry expert. VP Finance Celia has worked in ibanking (looks like mostly family-owned companies, middle market manufacturing etc. as is common in NE Ohio), but as I've learned since my summer at Western Reserve Partners, finance in the ibanking sense has little relevance to startups, since you need operating history to do any sort of traditional financial analysis, and raising capital for an established business is an entirely different art than raising early-stage funding.

AGAIN, I am not ripping on the management here. I'm only saying that they don't seem to be the right people for coaching a first-time entrepreneur.

3.) The ambiguous economics of a GCA engagement could result in naive entrepreneurs getting taken advantage of. Visit GCA's website and look for the nitty gritty details of what a relationship with them will cost you. You won't find much. Go look at the competition's sites I listed above and notice that all these groups very explicitly describe their program's economics: amount the firm invests, all associated costs, amount of the startup equity taken in return, etc. They do this for good reason: there are a lot of snake-oil salesmen in the startup world due to the relative inexperience of startup entrepreneurs. I've run into the type before: pushy and sleezy financial advisors trying to sell insurance products to Fresh Fork while we were clearly struggling financially, "angel funds" pushing personal lines of credit as the best way to fund CitizenGroove (extremely easy to do, charge 5% commission, walk away smiling), a Nevada-based "social network expert, investment banker, and venture capitalist" trying to provide consulting for a cut of equity (soon afterwards found a web community comprised of people he had scammed in the past), the list goes on....

I doubt GCA is in that camp. I'm guessing the firm is well-intentioned, but they don't have the intuition and understanding that comes with a long history of serial entrepreneurship. They may enter into agreements with startups which they think are fair, even though the agreements are way out of whack when compared with competing programs throughout the country, simply because of this lack of experience.

- How they could fix this: there's no reason not to have a standardized, publicly-available business model for something like this. The details should be listed on their site. Should be easy enough.

4.) Although the details aren't publicly available, I gather that GCA is expensive even in comparison to industry-leading startup incubators. This is hearsay (although we could verify if the details were listed on their site, see above), but I understand that GCA asks for equity in the range of 5-10% for access to their consulting services and presumably free accounting/legal. This does not include any invested capital. This is *a lot* of your baby for some free business services, office space, and advice from people who, as mentioned, don't have any track record building high-growth companies.

Additionally, I'm not even sure the services offered are free of charge. From their July 2009 FAQ:

GCA will typically gain ownership in the start-up business. The extent of ownership depends on the amount of seed investment, business services and support the client needs. GCA also charges a monthly service fee for basic start-up services, business and communications tools and office space.

For one comparison, look at YC's program. You definitely receive some funding in the ballpark of $10-20k, help with all the legal work (although you pay for it in IOUs to the law firm) and services from people who have already made the mistakes that could sink your startup, and connections to dozens of angels and VCs (personal connections built over decades by the people who run the program, I might add). Oh, and if you have questions about your business you can ask someone with 20+ years of industry experience and wildly successful projects such as Paul Graham. How much does this cost you? 2-10% of your equity. Granted they don't offer you office space, but other similarly-priced programs do (Polaris' Dog Patch, Techstars...)

5.) Do the accounting and legal services actually help much? Unless there is value-added guidance from someone who has been around the startup block a few times, I can't imagine being pointed towards service providers (who probably will be paying a referral fee?) is better than doing it on your own. It's not too hard to network, get references, and find the right people to help with these things. I'd recommend going to Gorilla Group meetings, 20/30 club meetings, and getting in touch with groups such as Civic Innovation Lab, Jumpstart, and Techlift to get suggestions. Help finding these people should be icing on the cake, not the main reason you give up 5-10% of your company.

6.) Ultimately, we will not know if GCA is effective until a company raises institutional money. GCA's youth means their lack of seed or Series A raises is to be expected. I would personally let other people take the risk, though, and wait until at least one or two financings come through before I jumped on board.

Happy hunting to all.

Kyle

The biggest mistake I'll never make again...

2009-11-10T01:02:33Z

Today a friend and current CWRU student interviewed me for a Weatherhead graduate entrepreneurship class. Most of the students in the class were interviewing larger companies, so the professor wanted to know specifically from my experience co-founding Fresh Fork Market what kind of mistakes I would caution students to avoid.

The big one I mentioned is worthy of sharing with the world, the biggest mistake during my time working on FFM that I'll never make again:

A startup should ALWAYS have the "brains" behind their core business IN HOUSE! In the case of a software company like us, this means software developers. During the process of creating a product or service, these technical people will be making mistakes, learning about the business processes, and in general building what you might call "institutional knowledge" specific to the company and industry.

A startup's core competency cannot be "we are the best in our niche at being business people," it needs to be something like "we are the best at *creating* a product/service that caters to our niche," which requires in-house technical skill. FFM was started by a bunch of people that at the time had never built a web application, thinking that we could outsource the actual technical work and use the resulting product, but this meant that we could not evaluate the outside firm's work, be confident in the status of the project, or in the event of an overall failure have learned from mistakes made during the project.A software company should have a software developer, a biotech company a bioengineer, a cleantech company a chemE and/or EE, etc., and those individuals need to be sold on the idea and be equity partners.

This may seem obvious to experienced entrepreneurs, or those on the west coast where "software developer turned entrepreneur" is the startup archetype. But to a group of business students starting what ultimately became a software company in Cleveland, it was not so obvious. Furthermore, while we had advisors, mentors, etc., this wasn't something that was stressed by anyone else.

So I'll stress it now. YOU NEED A TECHNICAL CO-FOUNDER! With equity, who loves the company.

JuicePitcher, Mint.com's Aaron Patzer

2009-10-07T21:08:50Z

Last night I attended the inaugural Juice Pitcher event, a startup showcase cohosted by TheFunded.com and Vator.tv on Microsoft's Mountain View, CA campus. The event was a blast, full of founders with great energy and ideas. Out of ten startups, local service marketplace Thumbtack won the popular vote (I voted for them! great concept and convincing presentation, definitely check it out!), although most of the companies that presented had fairly compelling value propositions.

The event's keynote speaker was Aaron Patzer, founder of personal finance website Mint.com, which was recently purchased by Intuit for $170mil. Aaron's talk contained both very practical information for aspiring software entrepreneurs and a peek into the emotional, transformational effects of growing and selling a world-class business out of nothing. It always feels good to have your own thoughts and viewpoints repeated by someone so accomplished. I left feeling a little less crazy and a little more empowered.

Software entrepreneurs should take a look at Mint.com's performance numbers and growth history as a yardstick for developing their own businesses. Check out all the details at the Vator.tv article on Aaron's talk.

Some of the info that the article left out: Mint originally projected to have revenues of about $30/user/year, and this estimate was pretty close to the actual results today. Aaron insisted that startups should have a model which shows the basics in a single table/graphic: customer growth, COGS, revenue per sale or per user, and profit. Mint was able to get legal work done with deferred payment in exchange for about 1/2% equity, through Palo Alto law firm WSGR

Thanks Adeo Ressi & Bambi Francisco for hosting the event and organizing a pretty awesome afterparty :)

"It's been awhile," from California

2009-08-26T23:23:32Z

Well well, this has been a very barren blog for the past few months. Unfortunately it's very typical of my experiences with blogs throughout my life, although I can also attribute it to being frantically busy and posting my favorite links of the day to Facebook rather than here. In any case, I'll give you the update.

I've been in the heart of Silicon Valley for the past three months, originally brought out here for a job at web startup RealtyNation. I had known the founder John Kobs as a Case alum and former investment banker for a few years, came on to help as a jack-of-all-trades business employee, and 1.5 weeks into the gig decided to call it quits. Shortest tenure at a job ever, I think! =P It was a wonderfully eye-opening stint in terms of self-development: I learned something that I really should have known before, that I need to be working on a project that I have intellectual ownership of, otherwise I won't have the drive to succeed. Equally importantly, the job was highly demanding of my time, precluding me from really becoming part of the Valley's community by playing ultimate frisbee pickup, getting out to techie/entrepreneuer networking events, getting to know friends outside of work, etc.

Since then I've continued to work with social music startup CitizenGroove, but on a fairly part-time basis. The search for a suitable project since then has been interrupted by a week spent in Chicago/Cleveland, then the visits of two friends for a couple weeks. Otherwise I've been churning through ideas, some good some bad, and have a couple that I'm still holding on to.

Between the one business concept I've been diving into this past week or two and another opportunity that popped up, I may be making my way back to Cleveland soon, bringing with me some very useful knowledge that I've been sucking up from the tech/startup community here. I *promise* that I'll post a more concrete update here when things come through!

Until then, I recommend you sign up for a Fresh Fork Market CSA, follow music sharing and discovery tool CitizenGroove on Twitter, join me in fighting mediocrity by joining Derek Sivers' "HELL YEAH! or no" campaign, keep your startup safe from vulture VCs with the help of Adeo Ressi, take a peek at the life of expatriate and dear friend Alan Jones in Hyderabad, India, and get a taste of the valley by checking out the HackerDojo homepage.

Adieu!

Phoenix Coffee: the next Starbucks?

2009-05-28T17:35:55Z

Northeast Ohioans are undoubtedly familiar with retail chain Phoenix Coffee, an earthy-feeling coffee company with six locations in the Greater Cleveland area. I love Phoenix Coffee. More importantly, I think the company makes for a great business case study and that in the right hands it could become a major national player.

Why is Phoenix Coffee so good?

Product is only the first step, a necessary condition on greater success instead of the primary driver. I know when I go to Phoenix I will get top quality products, whether I'm ordering a fresh, artisanal pastry, a latte which comes topped with beautiful milk/coffee artwork, or a bag of coffee beans to take home for my espresso machine. Even this is not enough to make a highly successful chain.

I have a strong opinion that Phoenix is on the cutting edge of retail brand strategy. They have embraced the extreme localization trend like very few other businesses have. By "extreme localization," I'm referring to the growing desire of consumers to buy goods and services from local businesses and local people. This is becoming big in the food industry, as I have had the pleasure of experiencing first hand with Fresh Fork Market, and the retail foodservice industry is a natural continuation of this. Phoenix's "extreme localization" strategy utilizes branding in a different way than Starbucks or any other foodservice establishment. Rather than having every one of their stores look and operate nearly the same as the others, as is common with top-down chains like Starbucks, Panera, etc., each location has its own unique look. You'll sometimes hear coffee enthusiasts talking about their preferences between each Phoenix, discussing how the Lakewood shop feels a bit more "indie," or the Lee Road shop has good angles for spurring productivity. Furthermore, the stores have other quirks which promote the localization feel, such as open mic nights, concerts, or even the paper and crayons at the Coventry Phoenix, used by patrons to draw goofy pictures which the Phoenix team hangs on the walls.

This branding strategy focuses on just "feel" rather than "look and feel." If retail businesses can harness the ability to generate the same general feeling amongst all their stores while allowing for the addition of extremely local culture, it could be a recipe for the next big national (or international) retail chain. I'd love to peek at the company's financials and talk with the owners. Who knows, maybe they'll see this!

Cleveland Recruiting Co.

2009-05-21T20:07:30Z

A friend of mine recently got in touch with me about his new venture, Cleveland Recruiting Co., a talent group targeted specifically at Cleveland. The city definitely needs something like this, so props to Pat and the rest of his team.

from the email:

I would like to bring to your attention the exciting launch of The Cleveland Recruiting Company. The Cleveland Recruiting Co. is focused on:

Talent Attraction and Retention

Connection and contact to the civic and young professional community

Job Recruitment

Current and potential job seekers stay informed on greater Cleveland entry and mid-level job opportunities via facebook
Companies get exposure to thousands of professional candidates who have an affinity to the Cleveland area

Our goal is to simply engage the next generation workforce (typically young professionals 40 and under) with career opportunities and exposure to our city. We are doing this using facebook.com an online social networking site. Both Clevelanders and ex-Clevelanders have already signed up to get updates on opportunities. This also is used as a portal for those folks who have been gone from Cleveland for sometime that may be looking for the right opportunity to bring them back

We are currently populating our facebook.com page and are also reaching out to prospective corporate clients.

What we need:

Companies that would like to post entry and mid-level job opportunities and internships. If we find you a candidate that fits your needs and you hire them, there is a nominal fee. Internships are free!
Companies looking to showcase the city to their next generation workforce
Help spreading the word to people and have them log onto facebook.com and search The Cleveland Recruiting Company, and sign up, its easy!

PLEASE VISIT OUR WEBSITE AT http://clevelandrecruitingco.com/

Get real on Chrysler

2009-04-30T23:53:02Z

Today Bloomberg reported on Obama's reaction to the "Committee of Chrysler Non-Tarp Lenders'" cold and calculated actions regarding Chrysler bankruptcy.

http://www.bloomberg.com/apps/news?pid=20601103&sid=anOtOhu3yDyU&refer=news

President Barack Obama said Chrysler LLC lenders who turned down his buyout offers are a "small group of speculators" who forced the automaker into bankruptcy.

"A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout," Obama said today in Washington before Chrysler filed for bankruptcy protection.

What do you expect, President? The American government has made clear their willingness to backstop large failing companies in any politically sensitive industries. Given this, bondholders should be expected to make rational decisions with the goal of maximizing their returns. This is how financial markets work; they have always worked this way and always will. The beauty of these markets is that they are amoral. Because of this, they will behave in predictable ways. President Obama's crew should take this into account when they craft plans to alter economic outcomes instead of calling foul on rational investors when their plans don't work out.

Recently I had a conversation with a friend about a group at Case whose purpose was getting the school's endowment fund to divest from companies related to Sudan. This is a similarly misinformed perspective formed from the idea that financial markets should incorporate morality. They don't. Unlike a boycott program which harms the financial health of the target company, these divestment programs only make investor participants lose out to better informed investors. Divestment drops stock price, and other participants in the market will see that the asset is underpriced relative to its long-term earnings potential. They will then buy at the lower price until the price has risen to its intrinsic value. It's a hopeless battle that does no good to further the actual cause.

Financial markets are amoral. They always will be. Know this, and work around it.

Right to privacy eroding further, threatening confidentiality

2009-04-07T18:47:30Z

Salon.com reports that the Obama administration has, despite campaign promises to the opposite effect, continued the Bush-era "state secrets" defense for warantless wiretapping and has expanded that defense to include immunity for all forms of communication interception:

In other words, beyond even the outrageously broad "state secrets" privilege invented by the Bush administration and now embraced fully by the Obama administration, the Obama DOJ has now invented a brand new claim of government immunity, one which literally asserts that the U.S. Government is free to intercept all of your communications (calls, emails and the like) and -- even if what they're doing is blatantly illegal and they know it's illegal -- you are barred from suing them unless they "willfully disclose" to the public what they have learned.

Why should the business community care? Unreviewable eavesdropping is a particularly valuable tool for large corporate interests. Completely opaque wiretapping policies open the door to corporate espionage aided by government insiders. A bit of information as simple as finding out before the market does that a company is considering selling to a competitor can be worth millions and millions of dollars. Without proper review of procedures, and without insuring that warrants are issued before taps begin, this information espionage is likely to occur and without anyone finding out.

TALF in action

2009-03-23T00:20:43Z

It looks like I have a good chance of seeing TALF 2.0 in action this week. The program is a beautiful work of art in that it disguises a very basic subsidy for the banking industry using the veil of a complex "public-private partnership" arrangement. I'll hopefully be watching an asset management firm in action this week as they purchase these securities with a small amount of cash down, the remaining value made up of loans from taxpayers. This comment from a Naked Capitalism entry sums up the situation pretty well:

The Geithner plan is a scam designed to allow the investor to bid for the remaining coupon payments and leave the taxpayer holding all the losses. The key to the scam is the high leverage ratio COMBINED with a non-recourse loan:

Investor buys a CDO tranche at 50 cents on the dollar that is currently paying a 5% coupon. The investor puts up 20% and the govt provides the remaining 80% via a non-recourse loan. This highly leveraged CDO tranche will stay current on the coupon payments for 3 years and then default with zero residual value.

The end result is that the investor who pays 10 cents(20% X 50 cent bid) ends up walking away with 15 cents(.05 X 3) over three years and the government ends up losing the entire 40 cents of non-recourse financing. (Note that I haven't included the cost of the low interest financing, nor used present value discounting in order to simplify the point I'm trying to make.)

The beauty of the scam is that the losses on the govt's books won't show up for 3 years.

More details in Yves Smith's article here.

Brazil trip recap

2009-03-18T21:46:58Z

For the past week and a half I've been in Brazil, first to São Paulo and then to Rio. Along with 35 other MBA, MSM, and MAcc students from Case, I explored a number of companies in very different industries, getting a good feel for the country's current economic climate and how business differs from the U.S. As you may guess, the trip was a blast and involved plenty of dancing, eating, and downing caiperenas (the traditional Brazilian drink made with sugar cane liquor and an excessive amount of sugar...), but in addition, I learned so much about the economy and wanted to share.

In order of our visits, the organizations we met with included:

Tekoha - a startup business that buys handcrafts from rural Brazil and sells them into the cities
Grupo Orsa - one of the largest paper products companies in Brazil; owns land in the Amazon the size of Connecticut and is recognized by environmental organizations as a green/sustainable logger.
Sherwin-Williams - with a strong tie to Cleveland and Case, Sherwin-Williams hosted our group in their Sao Paulo paint production site. The location sells to the South America region, mostly Brazil.
Developers Diversified Realty - the Cleveland company founded by Scott Wolstein has just entered the Brazilian shopping center market through a joint venture with a Brazilian development firm. We toured one of their shopping centers and heard from the operations manager, executives from Sonae Sierra (their Brazilian partner), and the DDR liaison who communicates back with headquarters.
Petrobras - The third largest company in the Americas, formerly the monopoly oil company in Brazil, and now the largest oil producer in their competitive market. The firm was partially privatized 10 years ago, with the government still holding 55% voting power of the $100 billion company.
Banco Central do Brasil - Brazil's central bank, operationally but not organizationally autonomous from the national government.
O Globo - the largest newspaper in Brazil, provided us with a presentation and tour of their production facility in Rio.

My major conclusion from the visits is that Brazil stands better positioned to weather the financial storm than any other country I've recently studied. While poverty still remains an issue, the country has a growing middle class that lacks the attitude of entitlement present in the U.S. I didn't realize the vast amount of resources Brazil has access to, including the highest amount of undeveloped arable land in the world and substantial oil reserves, nor the self-sufficiency of the economy. Real estate prices have not been impacted at all, and banks remain well capitalized, well above capital limits imposed by Basel. Lower prices are impacting manufacturers, but overall the economy continues to grow.

How has the economy fared so well? As a finance guy, the most important policy-related takeaway from the trip was Brazil's treatment of interest expense. Consumers receive absolutely zero tax breaks from mortgage payments, and companies cannot deduct interest expense from their Brazilian taxes. This may seem mundane at first, but think of the massive impact such a small policy change would have on the U.S. economy. We have too much debt, yet we subsidize debt over equity... it should be the opposite!

Another important financial highlight: banks are required to keep Collateralized Debt Oligations on their books for the purpose of measuring capitalization. While I do not know the specifics of the regulation, our presenter at the BCB, Renato Rosek, emphasized how this policy has protected the Brazilian financial system from the problems U.S. banks have experienced. It's a topic I will be looking at in more detail in the near future.

Green and sustainable development seems to be much more present in Brazil than in the U.S. Although we did look specifically for sustainable companies due to the importance of Case's sustainability MBA program, even the companies that were unrelated seemed to stress their environmental and social commitments. Petrobras and Grupo Orsa, two companies whose operations one would expect could be very damaging to the environment, demonstrated these commitments through specific programs, extra R&D spending on environmental issues, and donations to nonprofit organizations. More specifically, Grupo Orsa donates 1% of gross revenues to their non-profit arm, Fundação Orsa.

I was amused by our first visit, Tekoha. The entrepreneur who spoke to us spent one year as an investment banking analyst at JP Morgan before deciding that he needed more meaning in his work and left to start several companies. Certainly his story was a reflection of my own, a South American reaffirmation of my plans and decisions.

"Why the Meltdown Should Have Surprised No One"

2009-03-18T21:26:14Z

After a long hiatus from posting, I'm back to bring you a (lengthy) lecture by Peter Schiff over at EuroPac. In the lecture, Schiff talks about the root of our economic crisis and the poor policies we've undertaken to address the crisis.

Since the talk is over an hour in length, here are the main points I picked up:

On risky banking activity: nobody cares about what banks do with their deposits as a result of FDIC insurance. The most important decisions of banks are how to invest deposits, yet competition no longer pushes banks to be more conservative when making these decisions. Were depositors to worry about whether or not their savings would be lost, every consumer would scrutinize banks. We could expect to see one or several "Consumer Reports"-type services for the banking industry, exposing the risky activities of bad banks and preventing a crisis of this magnitude from occuring

On the sub-prime market: Fannie and Freddie were the largest buyers of sub-prime mortgage assets, even though they did not originate them. While we are talking about more regulation for the private banks, Fannie and Freddie needed more regulation as a result of their implicit government guarantee. Instead, the companies were sheltered from this regulation, no doubt thanks to huge cash contributions to politicians in both major parties.

On our treasury secretary: Let's get rid of Geithner and appoint Bernie Madoff. He's good at all the things we're doing with our economy right now.

Stocks: still expensive on a historical basis, judging from high P/E's and low dividend yields. While I'm not sure I agree with Schiff's love of international equities in a mid-term basis, it is pretty clear that U.S. markets still have a ways to drop, especially with the uncertainty and inevitable slowdown related to the stimulus plan.

Monetary & fiscal policy: If you liked Bush/Greenspan, you'll love Obama/Bernanke. The same broad policies are being enacted now as they were in the Bush administration. We need high interest rates and deflated real estate prices to cleanse the economy, but the Obama/Bernanke approach is to provide exactly the opposite.

Inflation effects: Schiff expects price controls on energy, gas, and consumer staples to likely occur before the end of Obama's first term in office.

Historical comparisons: Bush is the modern day Hoover, vilified for being pro-market even when he took largely big-government, interventionist approaches to solving the crisis. Obama is the modern day Roosevelt, criticizing Bush's policies while simply expanding them.

Near the end of his presentation, Schiff made the remark that "we are not the engine of the world economy. We are the caboose." I respectfully disagree. Our markets, institutions, and relationships control the flow of capital throughout the world. We are not the engine, we are the conductor. What with the world's governments cooperating to maintain the financial status quo, it appears that only a massive geopolitical event will really be able to change this.

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US Treasury CDS at new high

2009-01-21T23:25:52Z

For the past 3-4 months I've been following U.S. Treasury CDS spreads out of morbid curiosity. CDS, or Credit Default Swap contracts, are insurance policies against the default of bonds. They exist for corporations as well as government bonds, including the U.S. Treasury bonds. If you pay up front for CDS contracts covering $1,000 in U.S. Treasury bonds, and the U.S. Treasury were to default, you would receive compensation covering all the money lost.

As of today, the CDS spread on a 5-year Treasury note is 72.9 bps; in other words, it would cost $7.29 to insure $1,000 worth of 5-year U.S. Treasury debt. Historically, these spreads have hovered around 15bps; clearly, the invincibility of U.S. sovereign debt is a thing of the past. The markets currently peg U.S. sovereign debt as riskier than Japanese, German, and French debt. Strange, huh?

I'll be studying Treasury bonds in detail over the next few months, for a couple of projects. One is an independent study project in which I'll be projecting the outcome of a default by the U.S. Treasury, an event that the markets are telling us is now a possibility, even if a remote one. Also, I'll be working with Case financial markets specialist Peter Ritchken on forecasting U.S. Treasury bond yield curve changes, a slightly more technical endeavor. I'll be sure to post periodic updates on both of these.

RIAA lawyer in the white house!

2009-01-07T06:38:01Z

yuck!

http://news.cnet.com/8301-13578_3-10133425-38.html

As a presidential candidate, Barack Obama won applause from legal adversaries of the recording industry. Stanford law professor Larry Lessig, the doyen of the "free culture" movement, endorsed the Illinois senator, as did Google CEO Eric Schmidt and even the Pirate Party.

That was then. As president-elect, one of Obama's first tech-related decisions has been to select the Recording Industry Association of America's favorite lawyer to be the third in command at the Justice Department. And Obama's pick as deputy attorney general, the second most senior position, is the lawyer who oversaw the defense of the Copyright Term Extension Act--the same law that Lessig and his allies unsuccessfully sued to overturn.