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EJ
01-05-09, 11:01 AM
http://www.itulip.com/images/brokenplate.jpgDebt brings down venerable manufacturing firms, right on schedule

Here's the formula. Take one part debt bubble from 1% interest rates and financial engineering, two parts hubris and self-delusion, add a recession and a credit crunch two years later and what do you get? A wave of bankruptcies and unemployment.

Crystal, china maker Waterford Wedgwood collapses (http://biz.yahoo.com/ap/090105/eu_britain_waterford_wedgwood.html)
January 5, 2008 (Jane Wardell, AP Business Writer)
<table border="0" cellpadding="0" cellspacing="0" height="4"><tbody><tr><td height="4">
</td></tr></tbody></table>Waterford Wedgwood files for bankruptcy protection after failing to find a buyer

Wedgwood has been an iconic name in British pottery for 250 years, after its founder Josiah Wedgwood opened the first factory in Stoke-on-Trent, central England, in 1759. It began making bone china in the 19th century.

Waterford Crystal traces its lineage to a factory opened in Waterford, southeast Ireland in 1783, although that business failed in the 1850s. The brand was revived by Czech immigrant Miroslav Havel in 1947.

Waterford Wedgwood, which employs around 7,700 worldwide, is the latest in a burgeoning list of iconic British companies to succumb to the global economic slowdown and credit squeeze. Department store veteran Woolworths, the queen's tailor Hardy Amies, tea and coffee merchant Whittard of Chelsea and fellow ceramics stalwart Royal Worcester and Spode have all filed for bankruptcy protection in recent months.

AntiSpin: Didn't survive the last real Great Depression (see The Real Great Depression (http://www.itulip.com/forums/showthread.php?t=5720)) and hasn't survived this one, either, even in its early stages. Why did Waterford go out of business after surviving every downturn since the end of WWII? In a word: debt.
The company, which has net debts of €449 million, had been unable to raise €150 million of new equity it had sought in August.

Waterford Wedgwood has been forced to appoint a receiver, which it named as David Carson from Deloitte, the accountancy firm, after it missed a January 2 deadline to meet loan repayments. - Waterford Wedgwood collapses over debt pile, Times Online, Jan. 5, 2009 (http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_goods/article5449313.ece)How much debt is that?
The company last month reported pre-tax losses of €63.2m for the six months to October 4, up 13% from the loss of almost €50m a year earlier. Revenue fell by 15% to €207.6m, though the fall was only 6% when currency movements were stripped out. - RTE Business, Waterford Wedgwood runs out of time, Jan. 5 2009 (http://www.rte.ie/business/2009/0105/waterford.html)
What is a company with €207.6m in annual revenue doing with €449 million in debt?

Waterford Wedgwood also announced it had refinanced its debt through a new arrangement with a subsidiary of Wachovia of New York, but offered no details of the terms. - USA Today, Waterford Wedgwood wants to buy Royal Doulton, Oct. 12, 2004 (http://www.usatoday.com/money/world/2004-10-21-waterford-doulton_x.htm)
Without the debt, the company may have survived a 6% drop in revenue. How many more companies levered up during the 2004 to 2006 boom years who without debt might weather the economic storm but instead will go bust in the year ahead as they find themselves unable to make debt payments? Who could have known?

Add to the two generally acknowledged guarantees in life -- death and taxes -- a third: recessions after a massive speculative bubble has collapsed. And if we get a recession next year, as we've pointed out before, a bunch of uneconomical PE buy-outs will become even more uneconomical. It's not unlike the post tech stock bubble, except rather than the venture capital (VC) money drying up that's needed to keep uneconomical businesses running that were started during the boom, companies will be left trying to make huge principle and interest payments on debt. - iTulip, After the buyout boom: The bust?, Dec. 18, 2006 (http://www.itulip.com/forums/showthread.php?p=5373#post5373)
The USA's first and oldest outplacement consulting company is Challenger, Gray & Christmas, providing outplacement programs for executives, and middle managers, and key employees. When we interviewed Challenger CEO John Challenger, (http://www.itulip.com/forums/showthread.php?t=1578)June 13, 2007 (http://www.itulip.com/forums/showthread.php?t=1578) six months after our forecast he told us:

Janszen: Bond securitization, such as CDOs in the mortgage industry and CLOs in private equity, has for the past few years created new credit to fund commercial real estate growth and private equity deals. Now that the market for these debt products is slowing down, we expect a slow-down in these sectors. For example, the market for mortgage related CDOs declined from $30 billion in April to $2 billion in May. Are you seeing any indication yet of weakness in either commercial real estate market or in industries which have been the target of private equity deals?

Challenger: No indications yet, but a recession caused by an increase in bankruptcies and layoffs due to corporate over-indebtedness is a plausible scenario.

Janszen: Overall, what's your prognosis for the US economy over the next year?

Challenger: We are at the end of this economic cycle.
What impact will this have on unemployment? The AP story goes on:
Much of the business has now shifted offshore, where it employs 5,800 people, including 1,500 people at a plant in Jakarta, Indonesia, which produces most of the company's ceramics. The majority of its crystal production has been handed to Eastern European subcontractors.
They do not mean that the business has shifted offshore but that the jobs shifted offshore. If "globalization" meant post-industrial, FIRE Economy (http://www.fireeconomy.com/) based countries like the US and the UK outsourcing jobs while keeping the sales, marketing, distribution, and revenue collection at home, what are the implications for the countries to which the jobs were outsourced now that the post FIRE Economy debt deflation is putting these companies out of business?
The company employs a work force just a third of that size at 1,900 in Britain, including around 600 in Stoke-on-Trent and 800 in Waterford.

Waterford Mayor Jack Walsh said the closure of the crystal factory would deal a cultural and psychological blow to all of Ireland, noting that the crystal plant was one of the country's top tourist attractions and the product "one of only a handful of iconic Irish brands.'
Unemployment will rise rapidly in the countries, such as China and Indonesia, where the manufacturing jobs were outsourced to and goods manufacturing is a large part of the jobs base. In the US and the UK, where the manufacturing jobs were outsourced from, job losses will be just as high but in the sales, marketing, and distribution sectors of the economy (see Housing Bubble Correction Update: Here comes the jobs crash (http://www.itulip.com/forums/showthread.php?p=39709#post39709)). We believe that the collapse of FIRE Economies is putting "globalization" into fast reverse in 2009 (see Pop goes the Globaloney Economy (http://www.itulip.com/forums/showthread.php?p=67290#post67290)).

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™

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GRG55
01-05-09, 01:38 PM
http://www.itulip.com/images/brokenplate.jpgDebt brings down venerable manufacturing firms, right on schedule

Here's the formula. Take one part debt bubble from 1% interest rates and financial engineering, two parts hubris and self-delusion, add a recession and a credit crunch two years later and what do you get? A wave of bankruptcies and unemployment.

Crystal, china maker Waterford Wedgwood collapses (http://biz.yahoo.com/ap/090105/eu_britain_waterford_wedgwood.html)
January 5, 2008 (Jane Wardell, AP Business Writer)
<TABLE height=4 cellSpacing=0 cellPadding=0 border=0><TBODY><TR><TD height=4>


</TD></TR></TBODY></TABLE>Waterford Wedgwood files for bankruptcy protection after failing to find a buyer

Wedgwood has been an iconic name in British pottery for 250 years, after its founder Josiah Wedgwood opened the first factory in Stoke-on-Trent, central England, in 1759. It began making bone china in the 19th century...



My wife has ancestors from the Midlands. About 3 years ago, when we were living in London, we made a trip there with one of her cousins to tend to the graves and do the usual tourist stuff - pottery museum, etc.

We visited Doulton, Spode and the Leeds Pottery [famous for its creamware]. It was obvious even then that these businesses were in serious trouble, and like much of Britain I got the impression the crumbling industry was surviving on its reputation from the glory days.

Privately-owned Leeds still made all of its wares in the UK, but it was obvious the cost structure was uncompetitive, and the owners were trying to make a margin by compromising the quality of the product [I am no expert on pottery, but even I could tell]. Spode still made some of its lines in the UK [beautiful high-quality product, but priced accordingly], and Doulton had pretty well dumped everything to Asia. My wife and her cousin have some Doulton figurines made decades ago, and handed down in her family, that are exquisite - the hand painting on the Asian-made Doulton figurines in their shop didn't compare, even to my unpracticed eye.

I came away from that weekend with one more data-point reinforcing my perception that the entire UK economy was centred around the one-square mile know as the City, and the hedge fund headquarters in Mayfair. And that was when the official statistics showed the UK economy consistently outpacing that of France and Germany.

Chris Coles
01-05-09, 03:00 PM
The process of backing away from long term equity investment into UK industry has been going on for many decades. I delivered a 170 page report to the UK government in 1992 detailing the problems I had by then been able to clearly document regarding several attempts at capitalisation, one in conjunction with a major university where the answer came back to a very high level individual brought in to help by a Deputy Lord Lieutenant (Queens representative at the local level), "Research and Development old boy? Bottomless pit, never touch it with a barge pole."

The UK has been an accident waiting to happen for some time now. But my problem is, do I stay or go? Will the message get through this time, and thus is it at all possible to see a chance to establish something new now, or should I abandon the UK entirely and seek a better location to establish new business. And for that matter, where do we go?

Spartacus
01-05-09, 04:00 PM
whatever happened to what Ken Fisher was saying in late 2006 / early 2007 ?

The thesis that debt is good?

That "a few" Americans would be hurt by excessive debt, but that most Americans did not have enough debt, that more people should leverage up - take debt out on their houses and invest it.

http://www.amazon.com/Bloomberg-discussing-this-book-today/forum/Fx2UEN940H6OUS8/Tx38NGDR75ZHIU1/1?_encoding=UTF8&asin=047007499X

http://theaustrianaccountant.blogspot.com/2008/09/ken-fisher-loves-debt.html

Unfortunately a quick search didn't turn up the article being described in this last link.

believe it or not, this thinking is STILL (!!!!!) out there.

don
01-05-09, 04:17 PM
whatever happened to what Ken Fisher was saying in late 2006 / early 2007 ?

The thesis that debt is good?

That "a few" Americans would be hurt by excessive debt, but that most Americans did not have enough debt, that more people should leverage up - take debt out on their houses and invest it.

http://www.amazon.com/Bloomberg-discussing-this-book-today/forum/Fx2UEN940H6OUS8/Tx38NGDR75ZHIU1/1?_encoding=UTF8&asin=047007499X

http://theaustrianaccountant.blogspot.com/2008/09/ken-fisher-loves-debt.html

Unfortunately a quick search didn't turn up the article being described in this last link.

believe it or not, this thinking is STILL (!!!!!) out there.

We hear it everyday if we're not careful- a strict diet of no main stream media exposure, without exception :cool:

We just need to get housing values rising again...

0% financing right now at your GMC dealership....

He's off his diet again....

rchdenton
01-05-09, 05:15 PM
The UK has been an accident waiting to happen for some time now. But my problem is, do I stay or go? Will the message get through this time, and thus is it at all possible to see a chance to establish something new now, or should I abandon the UK entirely and seek a better location to establish new business. And for that matter, where do we go?

For what its worth I sold up in Skelmersdale in 1992 and moved down under. Today is beautifully sunny and it is a lovely place to live but the same problem exists here - property is the only game in town. I have now forsaken manufacture and adopted an "if you can't beat them, join them approach". My accountant (a very successful businessman not your usual type at all) said "Richard, it's time to move up the food chain."

Their is still a huge manfacturing potential left in the UK, even if it only a remnant of former days. I doubt if it is worth investing in though as there are too many resistances to change. My advice is sit tight a while and buy city commercial real estate when prices are devastated. The city will make a comeback when the world economy does. Anyway, if I still lived there that is what I would be looking at.

Manufacturing needs flexibility - if sales go down 50% you must be able to lay off 50% of your workforce immediately. Failure to do so leads to massive inventory building and the requirement for a massive wad of cash to pay for it, which is of course unlikely to be available. The unfortunate consequence of people friendly labour laws that protect the workers is it destroys the manufacturers. The UK is a horrid mess of endless layers of regulations laid on top of one another. It scares me when I visit. Everything is difficult.

Just listen to the conversations of the people around you. What are they talking about? Are they talking about real issues or nonsense issues about things that shouldn't be in the first place?

There is much that I love about the country I grew up in, which is why this issue stirs me so. I leave you with a kiwi joke:

"How do you know when an airplane from England has landed at Auckland airport?"

"When it keeps whining after the engines stop."



The question is why do they whine so?

Slimprofits
01-05-09, 05:23 PM
Is Ken Fisher the guy that inspired ad wizards to create the "Do you want to get away?" commercials for Southwest Airlines?

Learning To Love Debt (http://www.financial-planning.com/asset/article/528151/learning-love-debt.html)

rchdenton
01-05-09, 05:25 PM
whatever happened to what Ken Fisher was saying in late 2006 / early 2007 ?

The thesis that debt is good?

That "a few" Americans would be hurt by excessive debt, but that most Americans did not have enough debt, that more people should leverage up - take debt out on their houses and invest it.




Quite agree, debt is most excellent stuff, I thoroughly recommend it.

Let me explain. A sword is a tool. So is a circular saw. Used well they are most useful. Used badly they will kill you.

Debt is a tool. Trouble is most of us have difficulty knowing when and how to use it.

Easy to see in retrospect that during an inflationary 70s style housing boom those with the most debt win. Maybe that's why it was the baby boom generation who went so strongly into housing.

FRED
01-05-09, 05:31 PM
Quite agree, debt is most excellent stuff, I thoroughly recommend it.

Let me explain. A sword is a tool. So is a circular saw. Used well they are most useful. Used badly they will kill you.

Debt is a tool. Trouble is most of us have difficulty knowing when and how to use it.

Easy to see in retrospect that during an inflationary 70s style housing boom those with the most debt win. Maybe that's why it was the baby boom generation who went so strongly into housing.

We follow a simple principle of debt use here.

Use debt to finance appreciating assets, like rent producing real estate.

Avoid using debt to purchase depreciating assets like autos and consumer electronics.

rchdenton
01-05-09, 06:19 PM
We follow a simple principle of debt use here.

Use debt to finance appreciating assets, like rent producing real estate.



Thanks Fred, my take is in a little while I will be able to tell the cream from the dross. The cream will have paying tenants, the dross will not. The return will be good. It is not easy sitting on my hands in the meantime.

I do have a question though.

I used to believe in manufacturing. That it was a "good thing", that it provided jobs, which led to a productive society. I now feel that was partly due to my upbringing in socialist Britain. Socialists and communists all blather on about industry and manufacturing and rights on so on (they are childlike in their lack of experience).

The trouble is the jobs created are pretty unfulfilling. They are repetitive and de-skilled. People's thought turn to rights not usefulness. In short we treat grown ups as children and they behave accordingly.

In my wilder moments I have declared that employment is for kids. My friends do not like this as they think it arrogance on my part. They are of course correct, but there is something in the argument nonetheless.

So, as I mention above, I have forsaken manufacturing, at least for the time being. My friend (the accountant mentioned above) has introduced me to the obscure pleasures of commercial real estate. The tenants are hard working independent business people for the most part. New Zealand is blessed with a lot of hard working small business people.

My question is this, is there a food chain?

As a manufacturer or farmer you feel that everyone feeds off you, that you support everyone else. Is that in fact so? If there is a food chain, how does it work? Who is at the top? Is it The Banker, ie the bank owner. Who is it? How do I become one? Should they be at the top? Should I become one?

These and other questions pussle me exceedingly.

Spartacus
01-05-09, 06:21 PM
the whole point of Eric's article is that ANY debt is now an accident waiting to happen.

Even if one took out the debt with the most solid reasoning and the most solid balance sheet accounting and income positions, it can now kill you regardless of how good you think you are at using it.



Quite agree, debt is most excellent stuff, I thoroughly recommend it.

Let me explain. A sword is a tool. So is a circular saw. Used well they are most useful. Used badly they will kill you.

WRONG, wrong, wrong. if everyone has an excessive number of hammers, hammers don't suddenly take on extreme danger they did not possess before.

but if everyone has excessive debt, it transmogrifies into a toxic agent and becomes dangerous for everyone - it becomes an altogether more dangerous, unpredictable beast than the one you thought you had - a tiger cub that has grown exponentially to a giant tiger.

Chris Coles
01-05-09, 06:28 PM
a lovely place to live but the same problem exists here - property is the only game in town.

I well remember my accountant, (senior partner top 100 firm), telling me that they had never seen anyone raise significant funds for anything other than a property deal.

Existing financial institutions are staffed by people that will never change their ways. It often crosses my mind that the only way forward is to create completely new financial institutions that set out, from day one, to invest savings in the productive industrial society. I do not have the financial resources to bring such thinking to fruition without access to royalties owed but unlikely ever to see.

Sorry about the whining and nice of you to make me laugh while opening my eyes to the noise.....:):):)

GRG55
01-05-09, 06:29 PM
Thanks Fred, my take is in a little while I will be able to tell the cream from the dross. The cream will have paying tenants, the dross will not. The return will be good. It is not easy sitting on my hands in the meantime.

I do have a question though.

I used to believe in manufacturing. That it was a "good thing", that it provided jobs, which led to a productive society. I now feel that was partly due to my upbringing in socialist Britain. Socialists and communists all blather on about industry and manufacturing and rights on so on (they are childlike in their lack of experience).

The trouble is the jobs created are pretty unfulfilling. They are repetitive and de-skilled. People's thought turn to rights not usefulness. In short we treat grown ups as children and they behave accordingly.

In my wilder moments I have declared that employment is for kids. My friends do not like this as they think it arrogance on my part. They are of course correct, but there is something in the argument nonetheless.

So, as I mention above, I have forsaken manufacturing, at least for the time being. My friend (the accountant mentioned above) has introduced me to the obscure pleasures of commercial real estate. The tenants are hard working independent business people for the most part. New Zealand is blessed with a lot of hard working small business people.

My question is this, is there a food chain?

As a manufacturer or farmer you feel that everyone feeds off you, that you support everyone else. Is that in fact so? If there is a food chain, how does it work? Who is at the top? Is it The Banker, ie the bank owner. Who is it? How do I become one? Should they be at the top? Should I become one?

These and other questions pussle me exceedingly.

What do these hard working small business people do? Run accounting, law and property management firms for commercial real estate investors [the quintessential "service" economy]? Are any of them involved in manufacturing? ...

rchdenton
01-05-09, 06:41 PM
the whole point of Eric's article is that ANY debt is now an accident waiting to happen.

WRONG, wrong, wrong. if everyone has an excessive number of hammers, hammers don't suddenly take on extreme danger they did not possess before.

but if everyone has excessive debt, it transmogrifies into a toxic agent and becomes dangerous for everyone - it becomes an altogether more dangerous, unpredictable beast than the one you thought you had - a tiger cub that has grown exponentially to a giant tiger.

Thank you Spartacus, I guess I meant that timing is important. There are times to take on debt and times to discharge it.

As I understand it, and my reason for posting is that you can point out the error in my thinking, is that during times of asset price inflation debt is useful as it magnifies your gains. The danger is that during times of asset price deflation, such as we have now, it is to be avoided as it magnifies your losses.

The difficulty is getting out the door ahead of the crowd and knowing when to do that.

However, I have a lurking suspicion there is an aspect to this I'm missing.

The article starts with the demise of yet another iconic British business (assuming Wedgewood bought Waterford that is). Brought about apparently by excessive debt.

I understand that debt in a business becomes a fixed cost that you cannot get out of and part of the essence of manufacturing is to hammer your fixed costs as they do not go down when sales go down. You must design the business so it can cope with the ups and downs of the economic environment.

I get the feeling you have identified something about the nature of debt that I have not. That it is not just a matter of timing.

rchdenton
01-05-09, 07:10 PM
I well remember my accountant, (senior partner top 100 firm), telling me that they had never seen anyone raise significant funds for anything other than a property deal.

Existing financial institutions are staffed by people that will never change their ways. It often crosses my mind that the only way forward is to create completely new financial institutions that set out, from day one, to invest savings in the productive industrial society. I do not have the financial resources to bring such thinking to fruition without access to royalties owed but unlikely ever to see.

Sorry about the whining and nice of you to make me laugh while opening my eyes to the noise.....:):):)

Thanks Chris,

I was a bit concerned I might have been a bit too negative about Britain. One of the things I like about this site is it drew my attention to separating my thinking about finance and real estate from production and consumption. There is much more to learn I think.

There has been a British diaspora (if that's the right word, never used it before) going on for centuries. These are the very issues that have caused it. I find Michael Hudson's insights are very helpful but there is a part of this picture that eludes me.

rchdenton
01-05-09, 07:24 PM
What do these hard working small business people do? Run accounting, law and property management firms for commercial real estate investors [the quintessential "service" economy]? Are any of them involved in manufacturing? ...

A good question. Bars, motels, finance, retail, govt. The service economy. But it could easily be engineering, fish processing, etc, but that would be industrial property rather than commercial.

Our local economy is based on fishing, farming, forestry and tourism in roughly equal parts.

The question I am fumbling to pose has to with whether there really is a food pyramid in economic terms with these good basic things at the bottom, then services and construction on the next layer, then finance at the top (land ownership being part of finance). Is this a useful or daft analysis?

brucec42
01-05-09, 08:10 PM
whatever happened to what Ken Fisher was saying in late 2006 / early 2007 ?

The thesis that debt is good?

That "a few" Americans would be hurt by excessive debt, but that most Americans did not have enough debt, that more people should leverage up - take debt out on their houses and invest it.

http://www.amazon.com/Bloomberg-discussing-this-book-today/forum/Fx2UEN940H6OUS8/Tx38NGDR75ZHIU1/1?_encoding=UTF8&asin=047007499X

http://theaustrianaccountant.blogspot.com/2008/09/ken-fisher-loves-debt.html

Unfortunately a quick search didn't turn up the article being described in this last link.

believe it or not, this thinking is STILL (!!!!!) out there.

Ironically if this whole mess leads to hyperinflation those with fixed rate debt may benefit from it, assuming they used it to buy something tangible and useful

Spartacus
01-05-09, 08:11 PM
it seems to me you're not clearly separating speculation from commerce


As I understand it, and my reason for posting is that you can point out the error in my thinking, is that during times of asset price inflation debt is useful as it magnifies your gains. The danger is that during times of asset price deflation, such as we have now, it is to be avoided as it magnifies your losses.


This needing to "get out" is the trademark of speculation, not "business".

what FRED wrote was, the best use of debt is to produce business income. Pay off the debt with that income.

Using debt to purchase assets that may or may not appreciate in value is leveraged speculation. This was the cause of the current mess - leveraged speculation on housing, cmmercial property and the associated derivatives and asset-backed securities.




The difficulty is getting out the door ahead of the crowd and knowing when to do that.


As would be true of any speculation, as opposed to a business that is a going concern.

If you find some web resources on Hyman Minsky, you 'll see that at the start of a business cycle, debt is invariably used prudently to finance "going-concern" businesses.

As people become more comfortable with debt, it creeps into higher and higher risk uses.

toward the end of the credit cycle, a stage that Minsky called "ponzi finance", people come to believe that huge debt loads are the norm, and vast quantities of debt are used for speculation, not for regular business.

I don't know the Wedgewood story, but it appears to me someone must have leveraged up that company to speculate elsewhere. I suspect it was a target of private equity - why would a century old company in a staid industry have that much debt? Someone raided it (loaded it with debt) to "free up capital" for speculation.

rchdenton
01-05-09, 08:26 PM
This is speculation, not business.

what FRED wrote was, use debt to produce business income. Pay off the debt with that income.

Using debt to purchase assets that may or may not appreciate in value is leveraged speculation. This was the cause of the current mess - leveraged speculation on housing, cmmercial property and the associated derivatives and asset-backed securities.




As would be true of any speculation, as opposed to a business that is a going concern.

If you find some web resources on Hyman Minsky, you 'll see that at the start of a business cycle, debt is invariably used prudently to finance "going-concern" businesses.

As people become more comfortable with debt, it creeps into higher and higher risk uses.

toward the end of the credit cycle, people come to believe that huge debt loads are the norm, and vast quantities of debt are used for speculation, not for regular business.

I don't know the Wedgewood story, but it appears to me someone must have leveraged up that company to speculate elsewhere. I suspect it was a target of private equity - why would a century old company in a staid industry have that much debt? Someone raided it (loaded it with debt) to "free up capital" for speculation.

I think I follow you there.

My problem is that the value of any asset is derived from its income flow. So, for example, I buy a commercial property and pay off the debt, or I buy it for cash, or I buy three, sell one later and pay off the debt on the other two. Putting aside tax considerations, what you suggest will mean my income goes down dramatically as my tenants hit difficulties, but my money will be in a real asset not a pretend one (such as cash in the bank) and hopefully I live to fight another day. The risks are greater with the more highly leveraged strategy. I still think I'm missing something.

Is there a distinction between business and speculation as is commonly supposed? Doesn't business imply speculation.

Spartacus
01-05-09, 09:05 PM
IMHO most business profit should come out of markups, not asset appreciation.

And you are right, there's no absolute clear-cut demarcation between commerce and speculation. There are clues, heuristics, signs and portents.

needing to get out at a particular time is a clue (not fool proof) that some activity has gone out of "normal business" into speculative territory.

When various business ratios stray outside of historical ranges (like rent versus ownership costs did recently in housing) is another clue


I think I follow you there.

My problem is that the value of any asset is derived from its income flow.

not strictly current cash flow - expected flow into the future is also part of it.

And when asset prices stray away from this type of normal valuation (like internet stocks in 1999 and rental properties recently), it's a clue that speculation has taken over a some segment of the economy.


So, for example, I buy a commercial property and pay off the debt, or I buy it for cash, or I buy three, sell one later and pay off the debt on the other two. Putting aside tax considerations, what you suggest will mean my income goes down dramatically as my tenants hit difficulties, but my money will be in a real asset not a pretend one (such as cash in the bank) and hopefully I live to fight another day. The risks are greater with the more highly leveraged strategy. I still think I'm missing something.

It sounds lke half way through the post you switched to asking and answering a different set of questions.

"realness" of different assets and asset classes is a separate issue from the prudent use of credit.

Predicting which assets and income streams will do well in a recession is also another issue entirely. commerce and asset speculation do merge in this last exercise (the exercise of deciding where to put your investment dollar).

rchdenton
01-05-09, 09:32 PM
IMHO most business profit should come out of markups, not asset appreciation.

And you are right, there's no absolute clear-cut demarcation between commerce and speculation. There are clues, heuristics, signs and portents.

needing to get out at a particular time is a clue (not fool proof) that some activity has gone out of "normal business" into speculative territory.

When various business ratios stray outside of historical ranges (like rent versus ownership costs did recently in housing) is another clue



not strictly current cash flow - expected flow into the future is also part of it.

And when asset prices stray away from this type of normal valuation (like internet stocks in 1999 and rental properties recently), it's a clue that speculation has taken over a some segment of the economy.



It sounds lke half way through the post you switched to asking and answering a different set of questions.

"realness" of different assets and asset classes is a separate issue from the prudent use of credit.

Predicting which assets and income streams will do well in a recession is also another issue entirely. commerce and asset speculation do merge in this exercise.

Okay, I think I have got the message.

When speculative activity has come to dominate normal business criteria this is a warning sign. So for instance, if the long time average capitalisation rate is 8%, (which seems a fair rate of return, if there is such a thing) and property is priced at 6% then do not buy. Consider reducing debt by selling. This seems to me to be the basics.

The wild card is the availability of credit - the best laid plans are entirely de-railed if loans cannot be rolled over at any price (or the bank reduces the loan to value ratio). Hence the panic to preserve the banks.

FRED
01-05-09, 09:35 PM
Okay, I think I have got the message.

When speculative activity has come to dominate normal business criteria this is a warning sign. So for instance, if the long time average capitalisation rate is 8%, (which seems a fair rate of return, if there is such a thing) and property is priced at 6% then do not buy. Consider reducing debt by selling. This seems to me to be the basics.

The wild card is the availability of credit - the best laid plans are entirely de-railed if loans cannot be rolled over at any price (or the bank reduces the loan to value ratio). Hence the panic to preserve the banks.

Recommend: Time at last to short commercial real estate (http://itulip.com/forums/showthread.php?t=4307)

rchdenton
01-05-09, 09:51 PM
Thank you Spartacus. Sorry to be so slow, but the confounding factor is that commercial real estate, like most businesses, has one foot in the production/consumption economy and one foot in the real estate/finance economy.

Adapting Michael Hudson: the building is part of the production/consumption economy, it provides a service, the usefulness of which changes with supply and demand; the land value is part of the finance economy and its value changes according to credit availability.

labasta
01-05-09, 10:02 PM
Father-in-law worked in manufacturing (yarn maker for denim) in Ireland in the 70s and 80s. Amazing he actually had a job at this time. He said every year that the machines were upgraded someone lost their job (replaced), and it was never someone from management. Then in the early 90s they shut up shop and moved to China. A great way to increase employment... not. Machines have made for repetitive and dull work, but I suppose most work must have it's fair share of repetitivesness in this world of standardised products. Maybe it doesn't have to be so, or maybe menial jobs can be kept at a minimum. I don't know. How do we create fullfulling careers might be the right question.

At last, the race to the bottom has broken the bottom and there's nothing they can do to fix it. No bullshit economics will work this time. Finally, the fraud of globalisation is over.. and it is going to be one hell of a smack in the face.

They will begrudgingly have to race to the top now, and not a moment too soon.


People on the property pin were wondering how Waterford Crystal was still in business. Question answered.

Louie.G
01-06-09, 02:04 PM
Today is beautifully sunny and it is a lovely place to live but the same problem exists here - property is the only game in town.



Property has been the only game in town there for years but I feel the kiwis might move out of their denial stage soon unless there is a massive immigration to save their high property prices. My company specialised in Product development and in the early 90's I tried to raise capital in NZ. Deal was, buy a bond from one of the 2 largest banks, return was inflation plus 3% after tax. If my company failed, you took your bond to the bank and got your initial investment back. Kiwi investors all said no because it was too risky. None of them could explain to me how a Bank guaranteed investment was risky other than to say, we were in product development. However I would have to agree that these days I would not trust a bank guarantee lol.

Thus I now do a lot of my R&D here in the US and it is tax deductible as against having to be capitalised in NZ.

Hold the nice sunny days there please. I am due back in a few weeks and it is cold here in Santa Fe, but at least I can go snow skiing lol.

Cheers

jtabeb
01-06-09, 03:00 PM
The process of backing away from long term equity investment into UK industry has been going on for many decades. I delivered a 170 page report to the UK government in 1992 detailing the problems I had by then been able to clearly document regarding several attempts at capitalisation, one in conjunction with a major university where the answer came back to a very high level individual brought in to help by a Deputy Lord Lieutenant (Queens representative at the local level), "Research and Development old boy? Bottomless pit, never touch it with a barge pole."

The UK has been an accident waiting to happen for some time now. But my problem is, do I stay or go? Will the message get through this time, and thus is it at all possible to see a chance to establish something new now, or should I abandon the UK entirely and seek a better location to establish new business. And for that matter, where do we go?


Galt's valley?

rchdenton
01-06-09, 03:25 PM
Thanks Louie,

Its not just house prices, land prices are massively overvalued too. But hopefully the rest of the world will continue to find our food useful even if they can do without iron ore for a while.

Chris Coles
01-06-09, 04:09 PM
Galt's valley?

Atlas does not shrug around here and mythical valleys in the minds eye of a far right wing author have no place in the search for a long term business location. But thanks for the thought.... :D

Louie.G
01-07-09, 03:42 PM
Thanks Louie,

Its not just house prices, land prices are massively overvalued too. But hopefully the rest of the world will continue to find our food useful even if they can do without iron ore for a while.

I agree, land is crazy too. It is difficult to get a reasonable return on a dairy farm even with the huge payout last year. And now I understand the payout has dropped about 30% odd from last year.

Unless other countries introduce tariffs (like the USA with their 100% lamb tariff a few years back, and France with the striking farmers.) then Agriculture should save the day somewhat. The drop in the NZD will also help.

However NZ is, IMHO, still just a C & C economy (Cows and Construction) Dairy products are our major export, and their stuff up in China with the milk powder scandal may come back and haunt them.

Construction. Well with many workers moving to Aus because of no work, then that ain't a growth industry. Unfortunately, there is no real industry in NZ to speak of. I guess it will be back to the old bring on the immigrants policy to save the day again, like the 90's and Rah Rah up the Tourism. Unemployment should stay low because of all the kiwis moving to Aus.

NZ is one of the most highly indebted developed countries in the world, (as say RBNZ) so that isn't a good thing, yet Christmas eve had the highest recorded credit card sales in history. Foreign debt at 130% GDP hmmmm

So what is going on, are they all still in la la land, or has our new ex Wall Street Prime Minister pulled a rabbit from the hat?? I note that household debt has increased even more in the past year, and NZ has officially been in recession for most of the year. Don't know what it is but NZ seems to keep defying gravity as regards logic and economic sense. lol.

Ahhhh. I know the answer, I shall return to NZ penniless, rent a house on the beach (cause there will be no work there and Social welfare will pay the rent), then go on the dole (unemployment) and retire my days away watching the sun come up and the tide come in. Do a spot of fishing to catch dinner, dive for my quota of seafood and to hell with economics lmao. Door will be open for all Itulipers, with the key under the mat in case I am out fishing when you arrive.

You will know I am out fishing because the 45 ft launch will not be moored in the bay.

Cheers

rchdenton
01-07-09, 04:19 PM
However NZ is, IMHO, still just a C & C economy (Cows and Construction)...

Unfortunately, there is no real industry in NZ to speak of.

Whilst this is largely true we are more diversified than that. Construction is an industry that can get turned off for a while, which is why the govt are keen on road building and such like to keep the productive capacity and to provide employment. 5% of exports in recent months has been oil of all things and 15% of our electricity is exported as aluminium. I live in Nelson so seafood is a big regional export earner, as are forestry and apples from time to time.

As Wayne Lochore observed, there are worse places to be than a country of 4 million with food for 55, and it is still sunny.

Debt-freeTICer
01-07-09, 05:04 PM
I think I follow you there.

My problem is that the value of any asset is derived from its income flow. So, for example, I buy a commercial property and pay off the debt, or I buy it for cash, or I buy three, sell one later and pay off the debt on the other two. Putting aside tax considerations, what you suggest will mean my income goes down dramatically as my tenants hit difficulties, but my money will be in a real asset not a pretend one (such as cash in the bank) and hopefully I live to fight another day. The risks are greater with the more highly leveraged strategy. I still think I'm missing something.

Is there a distinction between business and speculation as is commonly supposed? Doesn't business imply speculation.
I have questions in a similar vein. I own 4 commercial NNN leased properties, debt free. If my tenants remain strong and my cashflow continues, how will my investment depreciate? I purchased these one year ago on the strength of the new 10 year leases at 7.5% Cap rates. Two of the tenants are Family Dollar (up 14.5% today). These are all single tenant, new construction, corporate backed leases.

rchdenton
01-07-09, 05:33 PM
Yes, as Spartacus points out there are a number of issues.

One is my tool analogy for debt was flawed - I should have said debt is like a sword which may be useful, may cut you or may break in battle: or a circular saw which may be useful, cut you, or unexpectedly electrocute you.

The "realness" of an asset that Spartacus referred to is interesting and I suppose in a general way that is what itulip is principally about. In this world of smoke and mirrors when things are not as they were and may or may not still perform their intended function what the f do you actually do.

Recent commercial real estate deals here, including my last one, were done for 100% equity. Basically if a building appears to represent some sort of value there are a lot of people who would rather have their money in a physical asset than a virtual one, despite government bank guarantees.

Personally I'm still trying to make sense of the issue of realness, so any help would be most welcome.

Spartacus
01-07-09, 06:10 PM
Too soon to tell. I think you made good moves (I am NOT a great businessman, so my pats on the back are worth the electrons they're printed on ...).

Everyone today would tell you that being debt free and not relying on lines of credit (subject to arbitrary denial) for continuing operations was a good idea.

if there is some kind of general debt forgiveness you made a mistake ... you "should have" loaded up on the leverage. But if you had loaded up on debt and the debt crushed you BEFORE the debt forgiveness comes about, you again made a mistake.

Again, it does look like you made a good move. In the current climate a debt cancellation / amnesty is extremely unlikely. The banksters have spent the last who knows how many generations turning non-payment of crushing debt into an unforgiveable sin, where in ancient times the lenders /usurers were the sinners.

Even if your assets decline in nominal value, It's possible you will be in a position soon, using that as collateral, to get credit at extremely favorable rates, if the FED & government convince the banks to start lending again at the current low, low rates.


I have questions in a similar vein. I own 4 commercial NNN leased properties, debt free. If my tenants remain strong and my cashflow continues, how will my investment depreciate? I purchased these one year ago on the strength of the new 10 year leases at 7.5% Cap rates. Two of the tenants are Family Dollar (up 14.5% today). These are all single tenant, new construction, corporate backed leases.

Sharky
01-07-09, 11:47 PM
It seems to me that looking at wealth as dollars tends to confuse people very easily. Wealth is not dollars; wealth is the net inward flow of purchasing power. Look at the stereotypical lottery winner -- they have a bunch of money dropped in their lap, and after a few years of living it up, they're right back to where they used to be. That's not wealth.

A key insight here is that the source of wealth is production -- you can't spend your way to wealth, because the dollars are flowing away. You can't use debt by itself to become wealthy, because with interest, again the dollars flow away. Unproductive asset appreciation, by itself, is also not wealth. Since there is no production, there is no dollar flow. Of course you can sell an asset after it's appreciated, but the act of selling is fundamentally different than holding and waiting for appreciation.

Another important aspect of true producers is that they have wide leeway in setting the prices of whatever they sell. In particular, they're able to increase prices as fast or faster than inflation. This excludes most hourly workers, since they don't have that ability.

I like the concept of "moving up the food chain." To me, what that means is owning producers. BTW, Socialists understand this, which is why ownership of central sources of production plays such an important part in their strategy. Whoever owns the sources of production in a country controls its true wealth; by setting prices and policies appropriately, whatever money that might be held by others will flow to them.

What does it mean for you and I to own a source of production? It means identifying those industries that are at the foundation of the global economy. Farms, mines that produce key materials (like iron or copper, not gold), and energy sources are examples of bottom-tier production. I think the trick is to identify businesses with a solid-enough position, including a lack of significant government controls, that their long-term cash flow can be treated almost like a bond, independent of fluctuations in currencies, interest rates, inflation, etc.

A simple-minded thought experiment might be useful. Imagine an economy with one completely self-sufficient farm and lots of buildings, businesses, land and other assets. Given enough time, no competition, no intervention, and the will to do so, the farmer will end up owning everything in the town. Everyone has to eat; he is the only source of food. He can increase prices as much as he wants; all money will flow to him, regardless of how much people borrow, inflate or otherwise tweak the money supply. The same can't said for lawyers, doctors, accountants, commercial property owners, etc. If they raise their prices beyond a certain level, their customers can find another way or do without.

Regarding the discussion on commercial real estate, the question I would ask is: do the current tenants have other options (your competition)? Can they trim-down or do without entirely? Can you raise your rents to keep pace with or exceed the rate of inflation? How isolated are you from changes in the economy or interest rates? Are you producing anything?

One of the aspects of deflation that I don't hear discussed much is that it facilitates massive transfers of wealth. Where inflation transfers wealth from net savers to net debtors, deflation does the reverse. But whereas loans used to purchase appreciating assets are the mechanism of choice during inflation, buying income-producing assets at the artificially-low prices that come about after the collapse of a debt bubble is the mechanism on the other side. And of course from the above discussion, buying sources of real production at those low prices would be one way to truly "move up the food chain."

GRG55
01-08-09, 01:03 AM
Whilst this is largely true we are more diversified than that. Construction is an industry that can get turned off for a while, which is why the govt are keen on road building and such like to keep the productive capacity and to provide employment. 5% of exports in recent months has been oil of all things and 15% of our electricity is exported as aluminium. I live in Nelson so seafood is a big regional export earner, as are forestry and apples from time to time.

As Wayne Lochore observed, there are worse places to be than a country of 4 million with food for 55, and it is still sunny.

Since I discovered New Zealand apples a few years back at a Waitrose store in London, UK, I go out of my way to try to find them. Not only the now ubiquitous Braeburn, but especially the Cox Orange Pippin which one could find in season in the UK, but requires a lot of effort to source here in western Canada.

rchdenton
01-08-09, 01:23 AM
Since I discovered New Zealand apples a few years back at a Waitrose store in London, UK, I go out of my way to try to find them. Not only the now ubiquitous Braeburn, but especially the Cox Orange Pippin which one could find in season in the UK, but requires a lot of effort to source here in western Canada.


Couldn't agree more. Cox's orange pippin is the apple that started it all here and for me its flavour has never been surpassed. Sadly the apple industry is dependent on constantly finding new varieties that look good in supermarkets and keep well. To my mind they are hardly worth eating and I have to be very careful what I say when chatting to apple growers here. They have a particularly hard time financially and only the those who are very competent and have very deep pockets survive. Every 10 years or so they make a fortune and then are back in survival mode.

rchdenton
01-08-09, 01:53 AM
It seems to me that looking at wealth as dollars tends to confuse people very easily. Wealth is not dollars; wealth is the net inward flow of purchasing power.

A key insight here is that the source of wealth is production -- you can't spend your way to wealth, because the dollars are flowing away.


I like the concept of "moving up the food chain." To me, what that means is owning producers. BTW, Socialists understand this, which is why ownership of central sources of production plays such an important part in their strategy. Whoever owns the sources of production in a country controls its true wealth; by setting prices and policies appropriately, whatever money that might be held by others will flow to them.

What does it mean for you and I to own a source of production? It means identifying those industries that are at the foundation of the global economy. Farms, mines that produce key materials (like iron or copper, not gold), and energy sources are examples of bottom-tier production. I think the trick is to identify businesses with a solid-enough position, including a lack of significant government controls, that their long-term cash flow can be treated almost like a bond, independent of fluctuations in currencies, interest rates, inflation, etc.


One of the aspects of deflation that I don't hear discussed much is that it facilitates massive transfers of wealth. Where inflation transfers wealth from net savers to net debtors, deflation does the reverse. But whereas loans used to purchase appreciating assets are the mechanism of choice during inflation, buying income-producing assets at the artificially-low prices that come about after the collapse of a debt bubble is the mechanism on the other side. And of course from the above discussion, buying sources of real production at those low prices would be one way to truly "move up the food chain."


Thank you for that very well reasoned post. Yes, ownership of the means of production sounds good and your point about buying assets that bring an inflow of purchasing power is spot on. In practise I find it a little harder to apply. The trick is presumably to buy counter cyclically.

Commodity businesses seem to have a massive boom and bust cycle, very profitable for a year, then in survival mode for the next 5 to 10 years.

Most manufacturing and distribution businesses are profitable post recession as they are in a supply shortage due to the destruction of productive capacity in the recession. That's also why NZ and the US did so well post WW2.

When supply starts to exceed demand, as we are currently seeing in the car industry, manufacturing is a very dangerous place to be. Haemorrhage of cash occurs. Each item of useless inventory has to be paid for and it is essential to get the place shut down immediately. Obviously this is awful for your employees. You have fixed cost to cover (if debt is present you are dead) and your products and assets are unsaleable. The fixed costs are in proportion to your highest level of production achieved and have to be reduced dramatically. Desperate times. There is no profit margin on what you make as your competitor's inventory is being liquidated.

If you survive, and the odds are against you, then profitability can eventually be rebuilt and the production facility slowly expanded as the cycle repeats.

Obviously I'm missing something here as I'm not seeing the opportunities.

Am I looking for the right thing or the wrong thing; in the right place or the wrong place; at the right time or the wrong time? Only one out of the six possibilities works - right thing, right place, right time. Are there other variables?

Sharky
01-08-09, 03:25 AM
Obviously I'm missing something here as I'm not seeing the opportunities.

It seems to me that "conventional" investment wisdom is broken in many ways, which fuels confusion in this area. Rather than seeking continuous asset appreciation or income, for example, I think the opportunities during recession / disinflation / deflation are more along the lines of strategic acquisition and positioning. Acquire high-quality productive assets that are well-positioned to prosper during the upcoming recovery / boom. My thinking is similar to Kondratieff in the high-level sense of buy/sell timing, but with a focus on productive assets rather than generic "stocks," etc. Part of the logic here has to do with relative safety in uncertain times; in the new investment environment of today, risk mitigation is more important than total return.

BTW, I didn't mean to imply that all productive assets are good investments. All the usual guidelines in that area still apply.

Maybe an example would help. I've been following Pike River Coal (NZX:PRC). They have a government-granted monopoly to mine high-quality metallurgical (coking) coal from an area on the west coast of NZ. They went public a while back at NZ$1/sh, then peaked around $2.50/sh last July, and they're now back at $1 again -- but now the new 2.3 km mine has reached the coal seam, and they've started to pull coal out of the mine, so risk is much less than it was when the company first went public, and yet the price is the same. They have stated their intention to pay an annual dividend based on their profits. Even though the price of coal might drop due to declining demand for steel, the supply of coal is dropping at the same time, so the company is well-positioned for the economy's recovery phase. Coal prices, which are set annually, tripled when they were negotiated last year, due to supply issues.

So here's a company with good management, with a solid productive asset, a commitment to pay dividends based on profits, the ability to raise prices to match or exceed inflation, that is supplying something for which there aren't any decent alternatives, into a global market, with the local protection of a government-granted monopoly. The main uncertainty is the price they can get for their product, and my claim for bottom-of-the-pyramid producers like this, is that they will do well regardless of the broad economic picture, because their product has a limited supply and plays an important role in many up-stream manufacturing processes. The end result of a properly-timed investment should be both significant capital appreciation and income along the way -- fed by real earnings and real production, rather than bubbles and speculation.

Chris Coles
01-08-09, 05:55 AM
It seems to me that "conventional" investment wisdom is broken in many ways, which fuels confusion in this area. Rather than seeking continuous asset appreciation or income, for example, I think the opportunities during recession / disinflation / deflation are more along the lines of strategic acquisition and positioning. Acquire high-quality productive assets that are well-positioned to prosper during the upcoming recovery / boom. My thinking is similar to Kondratieff in the high-level sense of buy/sell timing, but with a focus on productive assets rather than generic "stocks," etc. Part of the logic here has to do with relative safety in uncertain times; in the new investment environment of today, risk mitigation is more important than total return.

BTW, I didn't mean to imply that all productive assets are good investments. All the usual guidelines in that area still apply.

Maybe an example would help. I've been following Pike River Coal (NZX:PRC). They have a government-granted monopoly to mine high-quality metallurgical (coking) coal from an area on the west coast of NZ. They went public a while back at NZ$1/sh, then peaked around $2.50/sh last July, and they're now back at $1 again -- but now the new 2.3 km mine has reached the coal seam, and they've started to pull coal out of the mine, so risk is much less than it was when the company first went public, and yet the price is the same. They have stated their intention to pay an annual dividend based on their profits. Even though the price of coal might drop due to declining demand for steel, the supply of coal is dropping at the same time, so the company is well-positioned for the economy's recovery phase. Coal prices, which are set annually, tripled when they were negotiated last year, due to supply issues.

So here's a company with good management, with a solid productive asset, a commitment to pay dividends based on profits, the ability to raise prices to match or exceed inflation, that is supplying something for which there aren't any decent alternatives, into a global market, with the local protection of a government-granted monopoly. The main uncertainty is the price they can get for their product, and my claim for bottom-of-the-pyramid producers like this, is that they will do well regardless of the broad economic picture, because their product has a limited supply and plays an important role in many up-stream manufacturing processes. The end result of a properly-timed investment should be both significant capital appreciation and income along the way -- fed by real earnings and real production, rather than bubbles and speculation.

Another long term success story is publishing. Have any of you heard any negative news about any of the major publishing houses?

In truth, I discovered publishing by pure chance. I was challenged to write a book and then discovered the book was unpublishable due to the controversial nature of the subject, gravity. But in the follow up process of self publishing which of itself was completely unsuccessful, I discovered why publishing has fundamentals that make it very attractive for the long term.

The design of the product can be completed on a home computer with zero overhead and the finished design is a simple PDF file you can carry around in your pocket. The strength of the copyright, protected by international law, means you do not have to spend a penny on defence of your IP held in that simple PDF file. It is a CRIMINAL offence to infringe copyright.

Book manufacture is an international and VERY competitive business. You can get a fine paperback copy of your PDF file produced for not very many pennies when purchased in bulk from a wide variety of book printers and you are not restricted to local production, you can transfer the PDF file to anywhere in an instant for reproduction anywhere.

Transport is always a very competitive business.

Yes, there is one wrinkle if you start small. Book distribution is not competitive when you try and distribute books below a certain volume of sales, but turns in the opposite direction when the volume exceeds a certain value. In essence you need to aim at more than 100,000 book sales per annum.

If you look at the very large success stories, they branch out into theme parks where they enjoy the ability to sell their own production direct to the punters with no intervening distribution beyond their internal costs. And if they are really astute, they will also create their own range of "support products" to also sell alongside the books.

Needless to say, I own a very small publishing company.

GRG55
01-08-09, 08:57 AM
Too soon to tell. I think you made good moves (I am NOT a great businessman, so my pats on the back are worth the electrons they're printed on ...).

Everyone today would tell you that being debt free and not relying on lines of credit (subject to arbitrary denial) for continuing operations was a good idea.

if there is some kind of general debt forgiveness you made a mistake ... you "should have" loaded up on the leverage. But if you had loaded up on debt and the debt crushed you BEFORE the debt forgiveness comes about, you again made a mistake.

Again, it does look like you made a good move. In the current climate a debt cancellation / amnesty is extremely unlikely. The banksters have spent the last who knows how many generations turning non-payment of crushing debt into an unforgiveable sin, where in ancient times the lenders /usurers were the sinners.

Even if your assets decline in nominal value, It's possible you will be in a position soon, using that as collateral, to get credit at extremely favorable rates, if the FED & government convince the banks to start lending again at the current low, low rates.

At this point in time it would appear imprudent to be carrying debt of any significance. The banking system is so desperate to shore up its balance sheet that it is calling the loans of otherwise solvent going-concern companies, and in many cases putting them out of business. We even have the perverse situation that the banks would rather be exposed to lower quality credits that now have a government guarantee than higher quality credits without.

As for debt forgiveness or "low, low rates"...I doubt either is in the cards for businesses in any quantity, anywhere. Credit availability is shrinking [while more and more desperate governments try to jawbone their banks into lending more of the taxpayer dollars they are piling up in their reserves accounts], and the real cost of credit is rising.

Chris Coles
01-08-09, 09:14 AM
At this point in time it would appear imprudent to be carrying debt of any significance. The banking system is so desperate to shore up its balance sheet that it is calling the loans of otherwise solvent going-concern companies, and in many cases putting them out of business. We even have the perverse situation that the banks would rather be exposed to lower quality credits that now have a government guarantee than higher quality credits without.

As for debt forgiveness or "low, low rates"...I doubt either is in the cards for businesses in any quantity, anywhere. Credit availability is shrinking [while more and more desperate governments try to jawbone their banks into lending more of the taxpayer dollars they are piling up in their reserves accounts], and the real cost of credit is rising.

I very well remember back in ~1992 a major UK High Street bank was reputed to be paying its staff bonus for any funds it could repatriate and I can easily relate to the same thing happening all over again. The money given by government permits the banks to use that as pseudo income so they have even less reason to lend. Oh!, Sure! They will wave their collective hands about and make all sorts of noises; but the whole system has collapsed under a mountain of lending....

But what really concerns me is that no one in the FIRE economy knows anything about the role of capital, having treated borrowings as capital for some decades now and thus there is no sign of anyone recognising the potential for re-introducing capital as the only recognised mechanism for creating long term financial stability in any business.

This is classic. Until there is a complete collapse, no one will admit that it is not working. Once it has collapsed, we can start with new leadership as the old will be completely discredited.

Spartacus
01-08-09, 01:19 PM
As for debt forgiveness or "low, low rates"...I doubt either is in the cards for businesses in any quantity, anywhere. Credit availability is shrinking [while more and more desperate governments try to jawbone their banks into lending more of the taxpayer dollars they are piling up in their reserves accounts], and the real cost of credit is rising.

like I wrote, the outright cancellation is extremely unlikely. Inflationary cancellation is much more likely ... it's what Bernanke is trying to do right now.

The low rates, though ... somebody is borrowing right now at near zero ... the US Treasury. And the FED is lending near zero too.

If the government really wanted, they could force lending.

If (and it is a really big if) they get their act together, IMHO there will be a lot of low-rate lending.

Debt-freeTICer
01-08-09, 01:34 PM
I very well remember back in ~1992 a major UK High Street bank was reputed to be paying its staff bonus for any funds it could repatriate and I can easily relate to the same thing happening all over again. The money given by government permits the banks to use that as pseudo income so they have even less reason to lend. Oh!, Sure! They will wave their collective hands about and make all sorts of noises; but the whole system has collapsed under a mountain of lending....

But what really concerns me is that no one in the FIRE economy knows anything about the role of capital, having treated borrowings as capital for some decades now and thus there is no sign of anyone recognising the potential for re-introducing capital as the only recognised mechanism for creating long term financial stability in any business.

This is classic. Until there is a complete collapse, no one will admit that it is not working. Once it has collapsed, we can start with new leadership as the old will be completely discredited.

Bravo Chris! You have made a very important statement which needs to heralded from the housetops, "Borrowings are not capital". It may warrant it's own thread. Savings provide capital. Home equity as ATM is not capital. I feel this is one of the major problems for both personal and business crisis now.

After the collapse, what do you see as the new leadership and the new system?

D-Mack
01-09-09, 01:14 PM
Waterford's German unit files for insolvency (http://www.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUSL9758420090109)
Fri Jan 9, 2009 12:09pm EST

LONDON, Jan 9 (Reuters) - German porcelain maker Rosenthal, a subsidiary of Irish china maker Waterford Wedgwood (WTF_u.I), said on Friday it had filed for the opening of insolvency proceedings.

Waterford Wedgwood called in receivers on Monday and placed two of Britain's most venerable china makers, Josiah Wedgwood & Sons Ltd and Royal Doulton Ltd, into administration, a form of creditor protection.

Rosenthal was initially exempt from those proceedings.

"Despite intensive efforts of the Board of Directors of Rosenthal AG and the involved parties, a sale of Rosenthal AG as a whole outside an insolvency proceeding could not be completed," Rosenthal said in a statement.