Take a look at these Google search trends for the word recession.
And for just 2007:
You don’t Google it if it’s not on your mind.
Category: Money
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Prospering in the downturn
Prospering in the downturn
It’s absolutely no secret that the US economy is headed to hell in a handbag, and honestly, it’s overdue. We’ve spent the last 20 years inflating one bubble after another – defense in the 80s, tech in the 90s, real estate in this decade – and the time for another correction has come. That said, while I believe that many of the large financial institutions need to get their houses in order and take their knocks, I also desire no harm to come to my family, friends, and community. Here are some thoughts about how to weather the storm and even prosper during it.
First and foremost, get your own house in order. Figure out exactly where you are financially, and do your best to clean house. Cut down discretionary expenses as much as you can without turning to a miserable quality of life. You -must- have three months’ mandatory expense funding set aside, or as close to it as you can. That will give you a cushion of three months to figure out next steps in the case of job loss.
Having a strong personal network is more important than ever. Not just a strong network, but a large one, one in which you participate and try to help as many people as you can and ask them to do the same. With so many social networks and digital communities, this is easier than ever. A strong network will provide you with information you’ll need to make decisions, and will also provide you with leads if you need a job, etc. as long as you bring as much or more value to the people in your network. The key is to get building as fast as possible. Reconnect with old friends, establish new friends. Attend conferences and other meetups, such as PodCamp, BarCamp, MacCamp, etc. that are free or low cost. Look for opportunities to help others.
I strongly recommend Keith Ferrazzi’s book, Never Eat Alone, as a good guide on network building.
Build a strong personal brand. Having a personal brand that’s established, clear, and unambiguous gives you the advantage of being memorable. If you can speak confidently about something you’re an expert in, you’re heads and shoulders above most people who can barely put together two words about themselves. That will translate into more opportunities for you. Be clear about yourself, about your goals, and about your passions, and you will build presence.
I strongly recommend Mitch Joel’s Six Pixels of Separation blog for more reading on personal brand.
A downturn is also a crowd thinner – if you’re able to weather the storm, once it’s over you’ll find the playing field emptier than normal. Strategically speaking, as competitors go bust during a downturn, if you’re able to weather it, you’ll pick up marketshare and when business trends upwards again, you’ll be in a much stronger position.
What things will you do to weather the economic downturn?
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Money is based only on faith
Money is based only on faith
I had the terrific experience of speaking in front of high school students today, and the part that I think disturbed them most was the opening discussion about money and where it comes from. It’s unsettling to a lot of people to realize that money – currency – has no intrinsic value. Its value is entirely based on the faith you have in it and the government that’s backing it, as well as the faith of the vendors from who you buy stuff.
Once upon a time, money had backing and intrinsic value. You could redeem a United States dollar bill for a dollar’s worth of silver or gold, albeit a small amount, and thus the money had intrinsic value. Today, it’s only a medium of exchange, as there’s no store of value any longer. Your money is worth only what you think it’s worth, and more importantly, only what others think it is worth. Ask anyone in the currency exchange markets just what the worth of a dollar is relative to other currencies in the world.
At the end of the day, if there ever was a serious crisis of confidence in the US dollar, it wouldn’t matter whether you were a pauper or Bill Gates – your money would be worth the exact same amount – the paper it’s printed on. Ask anyone still alive who survived the Weimar Republic, when citizens burned Deutschmarks to keep warm, so low was their value. History was not kind to the Weimar Republic or what came after – a dictatorship led by a guy with a scrubby mustache who gave us a second World War.
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Scratch troubled, we are screwed as a country
Scratch troubled, we are screwed as a country
I read with great alarm on CFO.com that as the housing and mortgage crisis deepens, people are dipping into or even cashing out retirement funds.
“In the last four or five months we have seen an absolute onslaught of people trying to do hardship withdrawals and loans out of 401(k)s,” Mark Anderson, CFO of Granite City Electric, told CFO magazine in October. “What has happened with housing and the economy has really blown up for people at the lower end of the spectrum.”
When you cash out a retirement fund to pay down a mortgage, you take a double hit. First, you lose the money itself in a market that is declining rapidly, dumping good money after bad. Second, and most perilously, you create an enormous opportunity cost for yourself that you will in all likelihood never recoup in your lifetime.
Let’s do the math. Let’s say you are an eager 21 year old college graduate, with a great outlook on life, a job that pays a salary of 2,000 a month before taxes, and 45 years in the workforce ahead of you. If you start saving today, 3% of your income with employers that match with a 3% contribution, and your investments give a safe return of 6% over your working lifetime, you’ll retire at the age of 66 with roughly330,000, give or take.
Now, let’s say you, at the age of 50, make some bad choices and consider bailing yourself out of a mortgage problem with the 110,000 you’ve accrued so far in life. Boom, problem solved, right? Wrong. You’re now in incredible trouble. You will retire in 15 years with a grand total of only35,000 in the bank (at the same savings rate). To retire with the same amount of money as you would have had, you would need to save 30% of your income instead of 3%, have an employer that matched 6%, and hope for an 11% return over those 15 years. Otherwise, you have to depend on the government and HOPE that Social Security is still solvent when you retire – otherwise, you will not retire.
What SHOULD you do if you find yourself in super-serious, no end in sight mortgage trouble? Walk away. Mail in the keys to your lender, declare bankruptcy, rent a nice apartment somewhere, and work off the bankruptcy. Does foreclosure look bad? Yes. Foreclosure and bankruptcy means you’ll be paying cash for a lot of things for a while. But it lasts 7 or 10 years at the most. 7 to 10 years of bad credit is easily survivable, and you may even develop good personal spending habits by only being able to spend what you have. Compare 7 to 10 years of conservative living with 30 years as an elderly man or woman trying to make ends meet with meager savings. Can’t declare bankruptcy? Leave the country. As long as you have useful skills, there are PLENTY of nations on this planet that are all very nice, and very few of them have credit bureaus connected to the United States.
Truth: the United States is NOT the best country in the world. It’s one of many very good countries, and any flag-waving moron who blindly believes that one country is the best has probably never traveled more than 20 miles past his doorstep. LOTS of good countries in the world.
Unfortunately, for a lot of people, they’ve already dived off the cliff, and that means a certain percentage of the population in the years to come will be gambling that social services and the government can assist them in their “golden years”.
Is that a gamble you’d take?
Like the old Willie Nelson song goes, know when to hold ’em, know when to fold ’em, know when to walk away, know when to RUN.
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Dear Non-Profits and Political Campaigns
Could you use an extra 45,000 per week?
If so, you might want to consider having a subscription object written for you in Second Life.
A “bonus” called an allowance is issued in Second Life every week to residents. It’s L50, or roughly US0.18 per avatar.
18 cents doesn’t sound like much, but hire a developer to create a script for your cause and ask people to donate their L50 every week to your cause. A quarter million Second Life residents would be US$45,000 per week. Not too shabby!
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We really are in trouble in this country. This is just the beginning of it.
“I have been saying for about two years we’re looking at a 1929 kind of event. I think that we are really in trouble in this country. And what you have seen in the last four months is just the beginning of it.”
-Patrick Byrne, Chairman and CEO of Overstock.com, December 2007
“If home prices decline by 30 percent, as one noted economist has said could happen, “We’re all going long apples and boxes to sell them in,” Syron said, invoking an image from the Great Depression.”
– Richard Syron, Freddie Mac CEO in today’s Washington Post
“The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis.”
– Alan Greenspan
The United States doesn’t -make- anything any more. For the last 5 years, our economy has been driven by increases in asset prices, namely housing. People cashed out equity and spent like crazy, driving the economy forward.
All good things must come to an end, and we’re seeing just the first inning of the housing bubble unwind in a game that’s going extra innings. As prices drop, equity vanishes, and mortgage owners owe more than the property is worth.
Next in line are consumer grade loans – auto defaults are already up, as are student loans, because when the choice is between a roof over your head or a student loan payment, you go with roof every time.
Housing equity can’t be used to pay down those loans any more, so they go red. The next wave after that is credit card defaults, because once you’ve maxed out, you’ve got nothing left and have no way to pay. Discretionary income? No such animal in a recession. Everyone’s paying just to stay afloat and with the basics.
All this plays out over the next 3 years. Mortgages are unwinding now, but subprime goes nuclear in March 2008 with the largest wave of rate resets yet, 65 billion worth, and stays at that level for 6 months. Defaults typically occur in 30 days of a rate reset; some borrowers don’t even make a payment.
Expect secondary loan (car, student loan, etc.) default rates to hit the wall shortly after the mortgage ones, and credit cards even sooner as the source of last resort financing, because the people who are in trouble are living lifestyles beyond their means.
Scared yet?
While I’m not a certified financial planner or anything, I’m going to give this piece of advice. If your money is in a place that is not insured, move it to an insured place. Insurance means FDIC coverage for up to100,000 of cash per account. Money market funds are discovering they’re tainted with bad mortgage debt. Municipal bonds are finding out their guarantors overextended.
Anyone who promises a fix for this situation that isn’t “we have to ride this out” either has something to sell you or is running for office. Don’t believe them. This financial crisis took years to make and it will take years to unmake.
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The Contagion Spreads
The Contagion Spreads
If you want to talk viral, let’s talk about the disease of debt that’s spreading. What started out as a portfolio of subprime mortgages going bad is rapidly spreading to any financial sector that touches any form of credit or debt.
Last week, First Marblehead (ticker: FMD), one of my company’s partners, registered a half price haircut on its stock as their student loan portfolio was downgraded. Turns out that defaults may be higher than thought, and FMD might be forced to buy back bad loans.
What does this have to do with the mortgage crisis? Two things. First, securitization depends on available credit and liquidity, and the markets have neither in great supply right now. Second, on the consumer side, my gut instinct tells me a lot of people were paying their student loan bills with home equity. Now that the housing ATM is closed for business for the foreseeable near-term future, expect credit card and student loan defaults to rise precipitously. We’re going to do our best to help people avoid default, but there’s only so much you can do.
It’s getting ugly out there, folks. Cash is king now and will reign supreme in 2008.
If you have debt, and you have the capacity to eliminate it, eliminate it as soon as you can.
Debt is your enemy in uncertain economic times.
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How secure is your new media money?
A funny thing happens when there’s excess liquidity in a financial market, as has been the cases in the past 6 years due to housing. First, a quick primer. Liquidity is any asset that can be converted to cash quickly and with minimal loss of value. A blue chip stock – like Coca Cola – is a good example of a liquid asset. Barring a complete collapse of the stock market, you can sell your Coca Cola stock relatively quickly with minimal friction. If you had a doctor’s bill you had to pay, you could sell your Coke stock today and have cash to pay with tomorrow.
An illiquid asset is something like a house – you can’t really trade it quickly or easily. It’d take weeks, if not months, to sell that house and get the proceeds to pay off a doctor’s bill.
Excess liquidity is when there are too many dollars chasing too few goods or services. A nation’s central bank can print more money, and when they do, those dollars have to go somewhere. The same is true on Wall Street for investors. A sudden influx of money means they have all this extra money to play with and nowhere to invest it. This creates great investment opportunities, but it also creates a bubble that will eventually burst.
Enter new media. Investors looking for the Next Big Thing have been dumping tons of money into new media companies. Podshow, for example, received 8.8 million in round 1 of its financing and15 million in round 2. Plenty of other companies and web properties have been funded partly through all the play money generated by the excess liquidity on the market.
The market, however, is being called. People are cashing out and it’s causing both a liquidity squeeze and a credit crunch – loans at absurdly low interest rates aren’t available any more, investors aren’t buying portfolios where the value is just a guess, and available cash to play with is going away fast.
What does this mean for you? If you’re working at or running any kind of new media or Web 2.0 company – or a company that relies on them for cash flow – it’s time to bootstrap. Forget VC money, forget private equity, dismiss thoughts of being bought out and everyone getting a fat chunk of investor proceeds, and get down to business. Get cash positive, nuke your debt, and build the business. Not only does your survival depend on it, but so does new media’s.
If you’re a member or a part of a new media company, for example a podcaster at a podcasting network (pick any one), you’d better have a Plan B. Make sure you have archived copies of all your shows on a few data DVDs or an external hard drive. Back up your blog, show notes, and site. Make sure you have copies of everything, including emails, because Plan B assumes that one day, you’ll go to upload your show or edit your blog and there will be a big 404 there – and nothing else.
I’m not saying it’s going to happen like that, but for a couple hours’ work, it doesn’t hurt to plan for it. Anything less than that and you’ll feel smugly overprepared.
What are YOUR plans for Bubble 2.0’s bursting?
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Made in the USA?
With the recent events surrounding imported products from China, such as cough syrup, stationery, childrens’ toys tainted with lead or coma-inducing drugs, mislabeled fish, fish treated with malachite and other cancer-causing drugs, tainted beef, bad radial tires, leukemia drugs, toxic pet food, breakaway hammocks, electrocuting palm tree decor, Craftsman electric saws with flying blades, and deadly toothpaste, it’s no wonder that people are a little leery of Chinese imports. Over lunch, a coworker and I were discussing why the Made in the USA folks aren’t capitalizing on this chain of events to promote US-made goods, and the reason may be…
… well, nothing’s made here any more, not in significant quantities and not with sourced materials. Even the Made in the USA trade group and NAFTA have rather relaxed guidelines about what Made in the USA must mean:
“Made in the USA” products need a content consisting of 51% or more of domestically produced or manufactured parts, labor and or value-added content or any combination thereof.
Thus, even if a toy was manufactured in the USA, if the leaded paint used on the toy was of Chinese origin, the product would still qualify for a Made in the USA label.
The unfortunate reality is that in the quest for the lowest possible prices at all costs, we’ve effectively outsourced virtually every part of the supply chain, and to countries (not just China) who have varying standards of quality and safety, not to mention labor laws. Unfortunately, buying American is harder than ever.
Don’t even think about American icon Hershey Chocolate for this holiday season. From Forbes.com:
In February, Hershey announced a major restructuring designed to cut costs and excess production capacity in the United States and Canada, while expanding in Mexico, China and India, where labor is cheaper and Hershey hopes to sell more candy.
Since then, Hershey has announced it will close six U.S. and Canadian plants and cut more than 3,000 workers in the two countries, including up to 900 at its hometown plants. It has plans to shift more production to contractors and a new plant it is building in Monterrey, Mexico.
On Thursday, it said production is underway in China through a joint venture with South Korea’s Lotte Confectionery Co. and its joint venture in India with Godrej Industries Ltd. is up and running.
Perhaps we’ll see a resurgence this holiday season of small craftsman goods – things made not only in the USA, but made by your own hands. It’s the only way to be sure of a product’s origins. Just make sure you make the components, too.
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Cramer to world: Armageddon
Jim Cramer’s not known for subtlety, but this was a whopper.
[youtube]https://www.youtube.com/watch?v=GY5nfytTQT8[/youtube]
