US Economic Risks (Sept 2010): Impact on Investors & Entrepreneurs

Posted on Aug 30, 2010 | 45 comments


This post was originally published in a shorter (more sensible) format in the Wall Street Journal online.  If you’re short on time click on the WSJ link and read  the 990 word version there.  Otherwise, grab a cup ‘o coffee …

Clicking on any graph below will take you to that article.

One year ago I predicted that in 2010/11 the economy, far from being on the path of permanent recovery was on a temporary resurgence and there was a strong possibility of a “double dip” recession.  My advice to entrepreneurs was and is “when the hors d’oeuvres tray is being passed take two” (e.g. raise money now to weather any storms).

My original thinking from Oct ’09 was, while I didn’t (and still don’t) have a crystal ball I worried that: consumers were over-stretched with debt (and make up 77% of the economy), unemployment would continue to rise, which in turn would drive the stock market south and cut the rate of M&A activity and VC investment even further.

Sounds obvious now, but as I wrote the original piece the DJIA had already come roaring back from 6,600 to 9,865 so it was certainly against conventional wisdom. It eventually closed at 11,204 in April ’10 before sliding back around 10,000 as I sit here and type.  Well before the recent decline I sent out a Tweet that said, “Many will disagree but I still fear deflation, structural unemployment and political malaise.”  Scott Austin of the WSJ (worth following) saw my Tweet and asked me to go on record with my rationale.

So I agreed to offer my current thinking on the economy and what it portends for the VC industry & fund raising for entrepreneurs.

Let me preface by saying I obviously have a vested interest in being wrong about tough times ahead but as the old saying goes, “hope for best, plan for the worst.”

  • 2010 has been a great year for startup fund raising: Let’s face it, 2010 has been “the year of the super angel / seed funds” that was arguably first popularized by First Round Capital but has gathered steam with the success of great firms like FloodgateFounder Collective, SoftTech VC and more recently Felicis Ventures, 500 Startups and incubators like YCombinator & Betaworks.  The prices of angel deals have recently crept up, VCs have also gotten their checkbooks out again, frothy deals are happening and people are feeling bullish.  I heard an entrepreneur last Friday tell me that after he appeared on AngelList he had a funding frenzy with one investor whom he had never met offering to fund him after just 15 minutes on the phone.
  • We’re still caught in the “post recession bounce”: What’s happening is that the angel & VC community is still feeling good from having bounced back from the nadir of the famous “RIP Good Times” funk that we felt in 2008. This has been especially true for angels or seed investors as there is a new thesis that less capital is needed to start Internet companies so more money is being spent at this phase of the funding lifecycle.
  • VCs have also gone back to writing checks because as an industry we can’t be seen as “sitting on the sidelines” for years at a time.  VCs get paid to “put money to work.”

    While not 1999 all over again but I am observing first-hand the signs of funding frenzy.  I know not everybody agrees.  Let’s talk again in a year or two.  I’ll happily eat crow if it turns out this wasn’t an overly bullish phase.  The industry is still in major contraction with many funds shutting down or slimming down and I believe this trend will continue for the next few years.

  • We have structural employment issues:  The official unemployment rate in the US is hovering just below 10% but “true” unemployment is much higher when you account for those that have stopped looking or taken part-time employment and in key states like California and Michigan we’re downright hurting.  45% of all unemployed people have been looking for jobs 6 months or more – this is unprecedented.  And when you further strip out any employment created by government stimulus that is uncertain to continue going forward we know that the country is not creating enough jobs.  We’d have to hit 2.5% GDP growth just to stand still on employment! And last quarter we now know grew at just 1.6%.

    We as a country are suffering from what is known as “structural unemployment” where jobs have disappeared from certain segments forever due to technological or structural obsolescence.  This led to the unusual protectionist proclamations by Andy Grove (former CEO of Intel) in a recent BusinessWeek article where he measures the US against China in what he calls the 10x problem – for every high-tech job we create in the US, China is creating 10 as evidenced by Apple’s 25,000 employees against its Chinese supply-chain of 250,000 (see Foxconn’s growth below: now larger than HP, Microsoft, Dell, Apple, Intel and Sony combined!).

    Yes, I studied Ricardo’s theory of Comparative Advantage in college that says that lower-skilled jobs should move to countries with lower labor costs, but Andy Grove’s point about loss of skills in manufacturing leading to a decline in innovation in the next technology wave is both real and troubling.  Here talking about lithium-ion batteries and the early lead we’ve squandered in that market:

    With some technologies, both scaling and innovation take place overseas.

    Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass-produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles…

    The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices…

    U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up.”

    I don’t agree with his protectionist solutions such as tariffs, but the problem seems both real and lasting.

  • Personal balance sheets are still stretched: The problem in the US starts & ends with “consumerism” that was fueled by artificially high real estate prices, which drove up spending and the stock market.  The reality is that we’ve spent beyond our means for years and the process of “de-leveraging” (increasing savings by spending less) has begun.  We took $2.3 trillion out of our homes and spent 2/3rds of it on flat screen TVs, trips to Hawaii, time shares, Apple products and everything else we couldn’t afford.  The spending contraction is inevitable in a period of declining real prices of housing, high unemployment and tightening credit.

    High unemployment, wage stagnation, lowering real estate prices and the lowering of demand for products may lead to deflation (where prices of goods & services decrease each month – i.e. the opposite of inflation).  This coupled with government intervention of companies “too big to fail” were the blight that led to Japan’s “lost decade.”  Sound familiar? Deflation is crippling because as consumers expect products to be cheaper tomorrow they hold off purchasing every month to see what happens leading to a negative spiraling economy.

  • The housing market is not recovered: Sales in existing homes in the US fell 27.2% between June and July 2010 (and 25% from a year ago).  Sales fell in every region of the country with the Midwest suffering the worst at 35%.  We also have an overhang of foreclosures either held by banks or consumers who have not yet “blown up” but are increasingly behind on payments.   Anybody wanting to understand how “oversold” the housing market is should read The Big Short.

  • Government programs led to the law of “unintended consequences”: Our housing slump now is continuing well beyond where many people had hoped it would be by now.  Some of the delay is just overhang of a bad market but we may be delaying true supply/demand matching through the well-intentioned government’s attempt to stem price declines.  The government had a tax incentive for first-time buyers that expired April 30th, which many people believe “pulled forward” demand rather than improved the market.
  • The same happened in autos and one could argue that the same has happened with the government stimulus overall.  Surely any retrenchment in Keynesian stimulus will lead to further economic declines going forward.

    The reality is that when governments try to intercede they often create “the law of unintended consequences” and to a certain degree assets prices just need to normalize.

  • Washington is in no mood to take stimulatory action – for a long time: While there was a momentary unity in the US government for bailouts & stimulus spending that were initiated in the Bush administration (many people conveniently forget this now) and continued under Obama, it is clear that this era of consensus is over.  Keynesians will argue that this is a bad thing and fiscal conservatives will argue that it is a necessary discipline.  Either way, the gridlock that is now the US congress will prevent any real economic responses and it seems likely that this political malaise will last beyond the 2012 election as the Republicans look to make big gains in the 2010 mid-term elections.
  • The Fed: That leaves the most likely response to any economic weakening to be dealt with by the much less political Federal Reserve. With interest rates near 0% the Fed can’t cut interest rates to try and stimulate the economy and drive good inflation (or avoid deflation).  They would need to turn to non-conventional means to spur the economy such as “quantitative easing.”
  • In fact, just last week Fed chair Ben Bernanke hinted that they would consider “unconventional measures” during his speech in Jackson Hole where he talked openly about the problems in the US economy:

    “Consumer spending may continue to grow relatively slowly in the near term as households focus on repairing their balance sheets. I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace.”

    While he is publicly saying that he expects a modestly improved economy in 2011, it’s hard to be too sanguine when you look at the data.  Consumer debt relative to incomes has risen to an all time high reaching 138% of 2007 (obviously that’s not sustainable!) and has recently come back down to 122% (said David Brooks on The PBS News Hour).  Historic averages were in the mid-60’s.  It’s obvious that consumers need to cut back spending.

    Bernanke again:

    “the pace of spending will … depend on the progress that households make in repairing their financial positions. Among the most notable results to emerge from the recent revision of the U.S. national income data is that, in recent quarters, household saving has been higher than we thought”

    Obviously a “good news, bad news situation.”  People are lessening their debts but that decrease in spending slows the economy.  I expect this to continue.  In the long run it’s important but in the short-run I expect more volatility in the market.  As I like to say, “We were at one hell of a 25-year cocktail party, expect that the hang-over is just going to take some time.”

  • State & local governments are going to be hit:  One likely result of the economic crisis and lack of political alignment in Washington is further cut-backs at state and local levels because unlike the federal government they can’t print money.  This spells further unemployment, cuts in services and a further retrenchment in middle-class spending and housing prices.
  • In California the primary school education system has cut 10 days from the school year to save jobs.  Surely cut-backs are needed in every state but we’re going to have a heck of a debate going on about where to cut.  But as you can see from the graph below while private sector jobs in CA have contracted the public sector job rate has been static.  I doubt this situation will hold politically.  Oh, and one more politically charged issue we’ll deal with in our lifetime – the total “pension shortfall” across all states in the US is estimated at more than $1 trillion dollars.

  • And the tax changes for 2011 could cause a further end-of-year sell-off: Another factor often not discussed is that the capital gains tax increases coming into effect in 2011 are might just lead to a stock market sell-off in Q410 as investors “lock in” gains at a lower tax rate.
  • Stock market declines equal lowering of wealth effects which in turn equals lower consumer spending and hits on corporate earnings.   This affects M&A activities for startups, which with the reduction of the IPO market could spell lower returns in the short-term for technology startup investors.

    I try not to predict stock market prices are too much because I’ve lost track of what “normal” is.  I just checked and if you bought $1,000 of the S&P Index exactly 10 years ago it would be worth $700.64 today (and that excludes the effects of inflation).  But at a minimum it’s hard for me to sign up to a “bullish” stock market scenario.  I’ve heard them argued – I’m a bit circumspect.

  • The initial vulnerability will affect angel investors:  The stock market and real estate impacts usually hit angel investors (excluding angel funds) before they hit VCs so that is where the initial hit will likely come again this time.  This class of investors is more diversified across categories plus is investing personal money and therefore feels the hit in assets declines first.  Also, if there is a lowering of M&A activity this will lead to increased financing needs for startups driving higher failure rates or increases in “adverse terms” entering future financing rounds.  Either won’t bode well for angels if they’re also hurting on non tech investments.
  • Many entrepreneurs could be caught in the “series A&B funding gap” Equally worrying for entrepreneurs if the markets take a turn for the worse is that even if they managed to get angel rounds funded they may run into a VC brick wall.  VC funding is definitely back from the constipation that was 2009 replete with frothy valuations chasing dreams of the next Facebook, Groupon or Zynga.  But a double-dip recession couple with contracting VC market highlighted by Paul Kedrosky, a Kauffman Fellow, will surely bring back a period of inertia.

What does this mean if you’re an investor?

If we do have a double-dip recession or a “lost decade” the investors who have put money to work in capital efficient companies at reasonable (not frothy) valuations will fare the best.

The investors who in my opinion will be especially vulnerable are those who chose to spread too many bets or didn’t reserve enough for follow-on investments.  Massive market corrections require hands-on investors who are good at: building management confidence in tough times, encouraging costs cuts, performing triage so that the strongest survive and helping shepherd co-investors into writing follow-on checks.  You simply can’t do with with 50+ active investments for one person.  I saw this first hand in the first dot-com crash.

What does this mean if you’re an entrepreneur?

If economic times turns out to be worse than they are today entrepreneurs who raised enough money in 2010 to weather a storm will be best placed to survive the second dip or the long lack of recovery.  Additionally, those who run lean operations and raised money from supportive investor bases will be best positioned.  Having a combination of entrepreneur-friendly angels plus deep-pocketed VCs might be just what the doctor ordered.

In the end

I’m a venture capital investor so I will still be looking to make investments.  My time horizon for investing is 7-10 years so today’s economy doesn’t affect my exit prices BUT I need to be sure the companies I invest in reach the promised land.  I will continue to look for “lean” teams, co-investors on deals to help get through any rough patches and entrepreneurs who have the resiliency to make it through whatever the economic conditions throw at us.

The tech industry can help with job stimulation, but we’re not immune to macroeconomic trends.

  • http://www.howardlindzon.com howardlindzon

    I most like how you are an optimist and always will be but can still be negative and make investments.

  • Kylepearson

    I agree with Howard. The thing I love about reading VC blogs vs a lot of other finance blogs is that VCs and entrepreneurs can understand reality (i.e. bad economy and probably getting worse) but can also say at the same time “screw the economy, this won't hold me back from doing what I need to do to accomplish my goals”. This kind of energy in more sectors could revitalize a lot of the way business is done currently.

  • http://byJess.net Jess Bachman

    Another angle that people don't seem to be talking about is student loan debt. The US now has more student loan debt than credit card debt and default rates are 20% on average, 30% at community colleges and a whopping 40% at 2 year schools. This is inescapable nasty debt and no doubt is trapping many would-be entrepreneurs into inflexible financial states where their resources go to serving their wage garnishment rather than building new companies. Obama's loan over haul really does not address this.

  • http://foodzie.com Nik Bauman

    Agreed. Fear is no good (and what many VCs and entrepreneurs can get caught up in), but I don't hear any fear. Just pragmatic strategic thinking. Kudos. I wish more macro-trend economic articles took this sort of approach.

  • http://bothsidesofthetable.com msuster

    Thanks, Howard. One local angel argued with me once (summer 2008) saying “how can you be so bearish on the economy and a VC? That makes no sense.” I had just read “The Black Swan” and sold my whole public portfolio. My comment, “I'm not supposed to be a cheerleader. I'm supposed to be a realist and tell entrepreneurs what I *think* is really going to happen.”

  • http://www.howardlindzon.com howardlindzon

    yep. if they are lucky they will trust you…prob is most VC's dont have
    your attitude. it's all about getting the percentages right on the innnn

  • http://bothsidesofthetable.com msuster

    100%. I spoke about this once why I don't think MBAs are a good idea for entrepreneurs. You become an indentured servant because you owe $150k.

    re: debt – I was going to include some stats on credit card debt here but the post was getting too long. When you look at credit card debt in addition to mortgage debt the economy looks even scarier to me.

  • http://twitter.com/PhilipHotchkiss Philip Hotchkiss

    Epic post – the interlacing of a realistic macroeconomic view (one that I support) and its impact on startups, angles and VCs.

    For entrepreneurs, the most critical piece is that it's actionable. I've seen two recent examples where attractive VC financing was available to startups who were determined to hold off to avoid dilution, yet both companies had considerable monthly burn rates. Bad move. Even if Mark's economic view is wrong, it's still a bad move.

    Entrepreneurs – lean? yes. Undercapitalized when the window to raise money is open? just say YES and raise more than you think you need.

  • http://www.victusspiritus.com/ Mark Essel

    If there isn't a US market to sell to in 5-10 years, I'd have no problem entertaining global offers for acquisitions (if and when it makes sense). What's your experience with sales to businesses outside the US?

    No doubt this post took real effort and research, and I appreciate all the financial channels you explored and represented with charts (with back links). I'm afraid it doesn't paint a pretty picture for Jekyll and Hyde founders (those who work part time or freelance to support building something bigger).

    My experience with a startup has been full time research on product and zeroing in on a market my team (me and Tyler) can best serve. You're familiar with our situation and our current burn rate is balanced against part time work to scrape by.

    Since jobs have become scarcer (my position is over end of Sept), the funding vehicle of part time work to support our business search addiction has become less reliable. I have about 4 months of runway before I go off a cliff, and if nothing else it's made my time line crystal clear.

    If I wasn't willing to put everything on the line to conjure an idea into a real product and business, then I wasn't the right person for the job.
    I'm more than willing, so now it's a question of:
    1) can we build an attractive alpha (Tyler is close, I'll assist)
    2) can I connect with my chosen market in two months (I have a plan)
    3) can I leverage that for funding in two months (I'll find out)

  • http://bothsidesofthetable.com msuster

    Thanks, Philip. The thing is … I remember seeing this situation 2x before so for me it's about pattern matching. In late 1999 my co-founders were arguing we should take longer to fund raise to get a higher price (our A round was “only” $15 million money). I argued for closing and moving on. I won. We closed last week of Feb 2000. The market crashed one week later. The world was littered with startup companies who “almost” raised.

  • http://bothsidesofthetable.com msuster

    Good luck! Keep us posted. As you know, I'm never a fan of part-time work on startups for too long of a period of time.

  • Len Williams

    Thank you for your article, very interesting and useful information. I also liked Kyle's comment and I also think that reading bad news about the economy (and news tend to be worse, as I have noticed) should not prevent anyone, not even those less-motivated, to give up their unique ideas and start their own business. You have to look for the good side of things and try to accomplish your goals, however hard it may seem. The tech industry will never die, innovations are necessary and there are enough ideas to be put forward, all they need is the necessary business capital. And yes, it will help job stimulation. Your optimistic view on investing is very encouraging, despite any discouraging surveys.

  • http://twitter.com/wfjackson3 Willis F Jackson III

    I am in the same boat. I was predicting double dip from the get go, but much less eloquently. At some point, don't you think certain consumer sectors really need to live with some deflation? At the minimum, some sectors need to have significant overall contraction in order for us to correct other areas, like overvalued homes.

  • http://bothsidesofthetable.com msuster

    boy, I wish I had all the answers!

  • http://www.victusspiritus.com/ Mark Essel

    Testing the new version now. I have to prime it with a steady stream of more moving sales before it's ready for mainstream.

    After working to support a startup for 10 months, I couldn't agree more. My efforts and motivations are divergent between day job and startup.

  • http://www.victusspiritus.com/ Mark Essel

    Doh, just found out its not functioning in IE. If you check out our garage sale app, try another browser.

  • davemc9ee

    A big takeaway from TBS was that the startup world is one of positive black swans, so it makes sense to stick a bit of money there when downside chaos reigns in stocks (recall the barbell strategy). Being a VC and having a negative outlook on the whole economy doesn't a case of cognitive dissonance.

    Another Talebian note: Bulls and Bears are backward-looking, only trick the mind in present/looking forward.

  • http://www.missi.com/ Peter Beddows

    Not only do MBA students become “indentured servants” by virtue of the current-day expense of achieving that goal but also, judging by a considerable number of papers and articles commenting about the actual career value/benefit of an MBA that have been published over the past several years in places such as the HBR and other authoritative sources, many suggesting that MBA programs have become most suited for those who dream of a Wall Street and Fortune500 career path rather than an entrepreneurial one. Hence following the MBA path may now be seen perhaps as a case of spending money on an education stream that may even lock one out of a freer form career path of innovation and creativity.

    This reminds me of a conversation I had with a very wealthy/successful British entrepreneur in the UK many years ago where he informed me that he was actually sad and sorry for me because I was “educated”! He said that he believed he owed much of his own success to the fact that he had never been “educated” to evaluate all possible risks and outcomes relative to any business decisions and choices he made: “Some are winners; some are losers but I don't worry, I just go where my intuition tells me there is an opportunity” he said. I suppose, like Babe Ruth who made his success by always taking a risk in swinging at the ball thus frequently striking out on his way to also building a winning record, this individual was following the same philosophy as Ruth.

    So perhaps it is true that the greatest entrepreneurial education may be had by working for another entrepreneurial outfit such as Google, Facebook, Foursquare or Hunch rather than spending time furthering academic achievement?

    Would that be a fair assessment, given your comment here, of what you think is the larger case against pursuing an MBA based upon your own experiences across the board of all the different ventures and looking at the performance of their respective teams in which you have invested over the years?

  • Adam

    Mark- Tremendous post. I couldn't agree with your assessment more. In fact, at OpenView we focus on the exact type of companies you highlighted- capital efficient companies with hopefully reasonable valuations. Ultimately my big concern is that we could end up with a new normal unemployment rate in the 8% range. If you look back at historical data, our economy has gotten progressively more human efficient after each set back. When you have 77% of GDP driven by the consumer and the consumer doesn't have a job, that could spell very tepid growth and possibly deflation.

    Adam Marcus
    OpenView Venture Partners

  • Dan Munro

    Great post. Still wondering how much of a double dip this winds up being if we take out the “cash-for-clunkers” and first time home buying stimulus $'s (guess we'll know in 2-3yrs?). The risk to quantitative easing (gotta love money created “ex nihilo”) is that banks simply pocket the infusion to increase capital reserves. If the history of the last 2 years is any indicator – not encouraging for that strategy. Great point too on indentured servitude through student loans. FYI – Frontline did a great piece on that back in May – called College, Inc. [ http://to.pbs.org/c4o515 ].

  • dshen

    ugh you beat me to a post on this very topic! ;-) however, my focus was on what entrepreneurs should do in this climate, and why they should examine the economy a lot closer to develop their strategies. hope to get to it soon…but thanks for posting this great analysis. someone should do this on a regular basis for entrepreneurs (or everyone). you put it in concise and relevant terms – most financial writers write way way too much and with too technical language. thanks again!

  • http://www.missi.com/ Peter Beddows

    Mark, I'm not sure if you are dealing with a mobile app development or a web browser app from your comments here; however, we've also recently had occasions where a few clients have experienced problems when using IE v7 and/or 8 to access our web site.

    There are two distinct elements we have incorporated into our site that apparently are sometimes incompatible for some people (not all users) when they use IE to access our web but this is not a problem when they are using Apple Safari, Google Chrome or Mozilla FireFox.

    We have found, in particular, that in a situation where the pc's being used are on a Windows based network, those with IE security tightly locked down have problems while those on same network but with looser security have no problem.

    In our particular case, the problems are around including the fbxml of the Facebook “Like” button and also some anti-clickjacking javascript code ~ probably it is the combination of these two features that give IE conniptions in some cases. We have not found a solution yet other than recommending that clients use Firefox or Chrome or otherwise loosen security which is really not the best solution. Obviously this does need to be resolved so it is a work in progress.

  • http://www.missi.com/ Peter Beddows

    Completely agree with Mark S on this issue: However, while part time effort may be unavoidable in order to get started, what would be of far bigger concern here is the idea of having only 4 months of runway time!

    Not to be alarmist but, given the very well stated scenario that Mark S has outlined here which we also believe to be most likely realistic presage of things yet to come, somehow or other it would behoove you and your partner to find some Angel funding NOW: You must give yourself and your venture enough sustenance to go well beyond 4 months because even if it takes of into amazing early success, cash-flow is always critical and demand goes up rather than down as business begins to flow.

    I also agree with Mark S in wishing you and your partner good luck: However, if you follow my postings for long enough, you are will find a familiar theme ~ “hope is never a strategy”; success is met by planning, preparation and the ability to keep on swinging at the ball.

    Can you send me a link so I can perhaps be more constructive towards what you are doing?

  • http://www.twitter.com/mweb Mike Weber (@mweb)

    I never thought of it that way but 100% agree. The fear that rolled through Wall Street and its surrounding markets was the focus, not “how do we move forward.”

  • http://www.victusspiritus.com/ Mark Essel

    Will do Peter, appreciate your feedback. I put out a quick post to gauge usability. You're in the UK so it may not be of much use to you, but you can explore USA sales. Feedback thus far has been for a larger map area (besides getting over an IE problem, and having it be mobile friendly out of the box).

  • http://www.victusspiritus.com/ Mark Essel

    It could be a security issue with javascript. I'll know more later with testing and feedback from other people that use IE.

  • http://www.missi.com/ Peter Beddows

    Mark, as usual you have produced a very commendable analysis and commentary on this topic. Thank you for that.

    Housing has always been, and most likely will continue to be, a principle driver of our consumer based economy since so many other industries and businesses depend upon it for consumption of labor and services ~ far more so than any other element in the economy other than defense spending but even defense spending is now under demand for reduction which, in turn, will lead to further job losses.

    But just sticking with housing for a moment, and particularly with the current lack of growth in housing activity, we are faced with the fact that an area of business that traditionally employs a very considerable number of people in so many ways is currently moribund and those workers are thus currently un-, or at least under, employed. With no income, obviously there will be no consumption.

    Living here in the San Diego area of the country where housing prices reached unbelievably stratospheric levels, incidentally while quality of product also tended to be diminished (we looked at many of the new homes in construction just out of curiosity), even though those prices have now comes down, they are still, in the median level, above the real level of affordability for the greater proportion of buyers and the demand for rental property has been escalating along with the price for renting.

    So, aside from the harm experienced by those now under-water in their mortgages here, the fact is that overall wages/salaries in this area have not increased during this several year period of local housing price run-up/run-down in any way that would be commensurate with the still elevated cost of housing here or in any way that would enable a significant proportion of people who would like to buy to be able to obtain and afford a qualifying mortgage.

    Hence, the double-dip scenario is going to be further encouraged as the next wave of home-owner bankruptcies begins and with resultant further decrease in effective marketable value of property, deflation potentially becomes an even bigger probability.

    It is going to be a long road back to stability and growth for our economy unless something can be done to solve the housing market issues without triggering yet another financial fiasco but if this problem could be solved intelligently, then most likely things will begin to turn around overall.

    When all is said and done, people need to know they can rely upon having a source of livable-wage income before they will now commit to spending on anything but necessities. It's a conundrum: Our fundamental economic problem is really that simple but not that easy to resolve.

  • http://www.missi.com/ Peter Beddows

    Thank you Mark: I'm actually now in San Diego, CA and been in the US now 31 yrs which means that I do not even know if they have Garage or Yard Sales in the UK. However, if you've ever watched “Keeping Up Appearances” on PBS of BBC America, you may know that they do have “Jumble Sales” in local church halls ~ there could be a call for your app there.

  • http://www.victusspiritus.com/ Mark Essel

    My apologies Peter. There are plenty of sales in California State (location is finicky atm).

    We need to add more sales to have a shot at Craigslist or the 800lb gorilla of local classified newspaper listings. And we need a brilliant marketing plan to get in front of a non-techie audience.

  • http://www.ryanborn.net ryanborn

    You should publish a book. That cart on the household debt to income ratio is insane. Any solution(s) you care to propose to help prevent the next dip?

  • http://www.justinherrick.com Justin Herrick

    Wonderful post Mark. Its both very somber and also very sobering reminder of the situation we are in economically. I can say that I hope you are wrong and that by some miraculous turn of events we are able to pull through this, but I think that would be just another temporary fix. I like your saying about the hangover, and from all I've read about the financial and economic factors in our country from the past few decades, we are due for one.

    The other day I came across this lecture by Elizabeth Warren on the collapse of the middle class, and although its a little long, I think you will find it interesting. I was shocked when I realized she had given this speech in Jan of 2008. What really stuck out in my mind was the comparison between households in 1970 and 2005. Her conclusion is that our 'consumerism' as a nation has been exaggerated and hasn't led to this issue as much as we think. ( http://www.youtube.com/watch?v=akVL7QY0S8A )

  • http://bothsidesofthetable.com msuster

    Thanks, Adam. Violent agreement.

  • http://bothsidesofthetable.com msuster

    I think it's either “double dip” or “lost decade” but I don't know which. Either way not great news. I don't think CFC or home buyer stuff skews it that much. More the $700 billion stimulus money

  • http://bothsidesofthetable.com msuster

    thanks, man. I have written a post on what angels should do but haven't posted it yet. I think it will resonate based on our past discussions.

  • http://bothsidesofthetable.com msuster

    wish I had solutions. if bernanke can't figure it out I can assure you I can't! ;-)

  • bob d

    Even more telling than the typical unemployment figures is the stat the WSJ recently reported … 25% of males in the US between 25-65 are unemployed, not even partially employed.

    RE. Lithium batteries … eventually electric cars will have enough range to really replace a car, at least teh second car in the household. With volume, maybe 1/2 of the asset value of the car will be a battery…hard to believe that value won't be created mostly in countries the have key mining resources plus the minerals for super batteries. Where does the US fit in. This is not much different than bring importing tremendous resources to make a 1/4 fruit instead of making it where the raw materials are plentiful.

  • http://www.shoplocally.com Colin @ ShopLocally.com

    The solution that makes the most sense to me is to focus on strengthening our local economies and then worry about participating in the global economy.

    There are too many leaks and the level of abstraction is so great in such a complicated system that *truly* solving problems (not just masking them) is overwhelming and next to impossible – hence why 'experts' can be 'surprised' 50 times in a row.

    When programming, the way we solve problems is to isolate variables. I don't see why it's any different in economics.

    Focus on your city and your own personal spending, encourage others to do the same. Build up a strong local model w/ low unemployment and a high local multiplier effect (http://www.localmultiplier.com/) that increases the velocity of your local capital and then focus on helping others do the same in the communities.

    Once a stable 'build' has been developed, then focus on trading efficiencies between communities.

    It's not the easiest thing in the world, but the path we're on is completely unsustainable. By comparison, it's pretty straightforward, IMO.

  • http://www.shoplocally.com Colin @ ShopLocally.com

    Mark, this is one of the best summaries of the current economic quagmire I've come across. Nice work.

    There are no easy answers unfortunately, and the current policies of printing more money and increasing levels of government bloat only postpone (if not multiply) the pain.

    Entrepreneurial ingenuity and voluntary protectionism (aka conscious consumption) are the only sustainable paths to economic recovery that I can see.

    Now more than ever do we need capital deployed to the next generation of socially-aware and responsible entrepreneurs so that they have the resources they need to make solid long-term decisions and ultimately lead us out of this mess.

    This is not the time for VCs to stop funding innovation or to put working capital into traditional safe havens while they attempt to ride out the storm.

    The true leaders in the industry will see this as an opportunity to strategically deploy capital to the best and brightest knowing that no matter the economic outcome, the prospect for social gains (the currency of the future) have never looked better.

  • Mike H

    I concur with most of what you wrote, with the exception of deflation being bad. There are two aspects: (1) the possibility that declining prices will delay purchases; (2) the impact on debtors. With regard to #1, consider technology where falling prices has been the norm. People still buy PCs, TVs, etc. With regard to food, people will not delay food purchases either. It will impact home purchases and to some degree will impact auto purchases (but if you really need a car, you'll buy anyway). So I don't buy the “falling prices” is bad (as opposed to deflation which is a monetary issue). With regard to #2, debtors feel a lot of pain during deflation, especially in a scenario where we already have ZIRP (zero interest rate policy). Normally, in deflation, rates would decline, we have artificially forced them down already. But debtors need to pay back with more valuable dollars, which is painful. More importantly (for the government) as asset values (homes, stocks, etc.) decline the tax revenue to the govt declines a lot. At the same time, they often feel inclined to do QE (Keynesian quantitative easing) thus increasing the debt level. THIS is a killer for government, but it is not really a bad thing for the people, unless of course they are deeply in debt…which we are now. But deflation would result in a cleansing of the system through debt destruction through increased savings and debt write downs. Otherwise, I concur with your perspective. Personally, I think we are in for a very rough patch in the economy and market this Fall.

  • http://twitter.com/r0b3rta Roberta Romero

    Very comprehensive and informative post. Yes, from personal experience I agree with your statement on unemployment in California “we’re downright hurting.”

  • Luke H Lee

    Good analysis, but what is the real cause of the current economic crisis? Many economic experts have tried hard to find the answers, but to no avail. It seems that nobody still knows what that is.

    If somebody insists that he has discovered the real cause of the current economic crisis– and, moreover, developed a clear solution – what would you do?

  • http://is.linkedin.com/in/balakamallakharan Bala

    Very good post Mark, well articulated and based on Facts… I wish more journalists would do the same rather than write what everyone wants to hear. Keep it up…

  • Luke H Lee

    Mark, a few years ago, I created and developed a system like the Internet in the real market process. As I was developing my invention I realized we had a serious structural problem in our economy. The longer we took to correct this problem, the more I felt the economy would stall. The longer the situation was left as it was, the worse employment conditions would become for lower- and middle-income people. On both counts, I proved correct. Unfortunately, I could not arrive at a clear explanation of the causes of these economic problems because I lacked sufficient econometric data, for no such data existed. I am a business man, not a professionally trained economist. So I hoped, and expected, that economic experts would find the answers and suggest a solution to our economic woes. Furthermore, I hoped that their solution would be along similar lines of the system I developed, and that it would match their analysis.

    But to my surprise nobody was able to see clearly that our economy was rapidly falling into a dangerous situation. Now it appears to be too late. I have tried to warn the country that our economy was in peril these past some years. But, sadly, my message did not reach the right people or they simply refused to listen. Things are now unraveling just as I predicted.

    Many economic experts have tried hard to find the answers, but to no avail. I believe the system I invented has the answers that could have averted this economic collapse. It could still save us from further catastrophe.

    I would like to pose this question to you directly: Wouldn’t you want to be part of that discovery and disclosure of the answers for the causes and solution to our current economic crisis?

    If you wish, please contact me right away. [luke.h.lee@gmail.com] I will share with you my thorough research on the real causes of the current economic crisis and disclose all the details leading to a solution. We can also discuss the real economic “rescue” that’s right for the country and also for the entire world.

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