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Recession 2007: Part I - Eric Janszen

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  • Recession 2007: Part I - Eric Janszen

    Recession 2007: Part I

    by Eric Janszen - October 27, 2006


    Riding a bicycle is an act of continuous, unconscious balance, the habit of turning right as the bicycle falls slightly right, left as it falls slightly left, in a series of minute automatic corrections. Recently spent a few hours trying to teach my seven year old niece how to ride. A few hours of pushing, running, and catching, and after she fell down a few times, were a lesson for me that I'd forgotten: this balancing act is learned and not innate.

    I've been riding bikes for nearly 40 years. Today I'm flying down the bike path in the chill autumn air. At least I feel like I''m flying, full throttle, without the obstacles that plague this course on a typical warm summer day: spaced out children whose parents have abandoned them to learn the US drive-on-the-right rule the hard way; a group of teenage boys re-enacting a segment of "Jackass" with a shopping cart; roller-bladers competing with each other for their own special category Darwin Award, flailing their legs–using the whole path–to the rhythm of the music streaming into their heads from little iPod ear buds, blocking the sound of equally oblivious car drivers at intersections; not to mention other cyclists ranging from the Lance Armstrongs on their 16.8 pound $3,600 carbon frame bikes who must imagine they're on an open stretch of road in Valkenburg, to the wide seat waddlers on their two wheeled Winnebagos.

    It looks serene in the picture to the left, but if you can imagine a typical day's third world traffic jam of donkey carts, rusting Toyota pickups filled with garbage, over-flowing busses, and pedestrians carrying food on their heads thrown together with BMW M5's and Mercedes-Benz SLK's on the autobahn, you have the sense of it. You can count Near Misses Per Hour (NMPH) rising well into the mid double digits the closer you get to town on this path on a Saturday afternoon in July. Even practiced old riders meet their match and lose their balance at the hands of a small children here. But this cold morning, even though the sun shines bright and inviting, leaves me more or less alone, free to pump the peddles at a steady pace and contemplate.

    I'm thinking about my own bicycle, one of several I own–variety is the spice of biking. Among my favorites, a vintage chromoly frame Fat Chance made by Chris Chance of Fat City Cycles in Somerville, Mass in the late 1980s, and the carbon frame bike I'm riding this day. If my Dad were alive, he'd marvel at this astonishing gadget that easily carries my own middle aged frame 35 miles into the city and back in less than two hours. If I could take it back to him in time, to 1992, he'd wonder what planet beamed it here. Same goes for the average car today. Send a Toyota Prius back to, say, 1980. What would they think? They wouldn't even understand the paint, never mind the hybrid engine. What would it cost to reproduce it then? $10,000,000 in 1980 dollars? More?

    Dad was a physicist and the inventor of the Janszen Electrostatic Loudspeaker. My brother David got the engineering genes and is now carrying on the family legacy. If you have some disposable income to dispose of well and want the best sounding loudspeakers on earth, see the modern Janszen Electrostatic.

    On iTulip we focus instead on the hard-earned wisdom our society seems to have lost on our path toward the best of all possible worlds, filled as it is with obstacles and lessons that we need to learn–and re-learn–such as that credit creation is not a zero sum game; you can have too much just as you can have too little. Credit can get out of balance, putting the economy and financial system at risk of falling over. An unexpected obstacle can trip it. But I am also keenly aware of how much better the world is today in so many ways than in the past. I appreciate technology, I grew up around it, and know that without so much credit we'd have less of it. We take for granted every day technology that lets even the poorest among us live better than kings 200 years ago. Fact is, most of these inventions are a product of our credit system. Credit is at the heart of the capitalist engine.

    Credit funds the work of inventors, trendily called "innovators" today. It supplies our world with more of them when credit is in excess to fund R&D and businesses on one side and consumption on the other. It makes the technology I'm riding on this day possible. But the question of credit is the same as in most aspects of life, like the act of riding a bike itself, a matter of balance.

    As I ride, I find myself wondering about my focus on the negative side of our credit system when others focus on the positive side, the fun stuff–the results credit enables–the businesses and technologies. Is my focus on the negative out of balance?


    Out of Balance: Household Spending


    Out of Balance: Household Borrowing



    Out of Balance: Foreign Borrowing to Fund Fiscal Deficits

    Dad was a physicist, Mom a psychologist. I grew up reading psychology books, a few very good and some not, but didn't read any Freud until college. He was out of vogue when I was a kid browsing Mom's books in the family room. "The wish is father to the fear," I'd later read from father Sigmund. Is my fear of a recession a kind of wish, or is it something I have come to see from years of research, the way a commodities trader knows to make a trade in gold or oil or currencies, living behind a computer screen, an arbitrage player, trying to defeat a thousand other guys doing the same thing using similar techniques on the other side of the trade, with access to more or less the same information at the same time, making their money off a combination of instinct that comes from years of obsessive attention to price moves, changes in market structure, judgments of market rumors, and decisive action in the face of ambiguity and contradictory data.

    As I ride closer to town, I stop to take the shot above. A conversation I had with a reporter for the Wall Street Journal pops into my mind. It's 1998, not long after I started iTulip.com, while also working as Managing Director of Osborn Capital. She's jaded, as any reporter must be after a few years of dealing with the public. This is especially true for the financial press. She is trying to get my angle. As I go on about the tech stock bubble and where it's going, I can sense the wheels turning in her head: "How's he going to make any money at this iTulip thing? And if not money, what does he want?" The analysis and guidance of market conditions were part of my job, but sharing it via iTulip part wasn't. I'm telling her that tech stocks are a bubble that will pop in a year or two, followed by some kind of recession, followed by reflation and recovery, followed by a really bad recession. "Yeh, end of the world, right?" "No," I said, "Although there will be times when it may feel that way." After a few more minutes of conversation, she hangs up, satisfied that I'm a crackpot. No story. Not until 1999 did the iTulip message start to look more presentable.

    I ride into town and recall a conversation in 2001 with a woman who at the time was running a massive bond fund for a major investment bank as she had for 14 years. We are flying first class to London, worthwhile not so much for the food and drinks but for meeting interesting people. She mentioned that the credit bubble was at that time taking a breather but was due to resurge with a vengeance. However, she warned, ultimately the market for bonds had to cope with the fact of too many of them, that when the US was no longer able to produce enough income to pay them off, a period restructuring was inevitable. A recession will correct the difference between supply and demand for all kinds of US bonds that was artificially maintained increasingly by the need of foreigners to buy them to keep the US afloat. A recession will bring them back into balance.

    I sit by the river to take a short break and munch a Powerbar to get my blood sugar up for the return ride home. The carbon fibers embedded in the frame glisten in the sun through the transparent resin that holds the carbon fabric together as a light, rigid tubes.

    Balance. Falling left and falling right. Corrections, but no spills, not for many years.

    Incredible inventions on one side, too much credit on the other. Dodging obstacles. Re-learning hard-earned lessons about how to avoid falling over.

    What a tragedy if a failure of our credit system leads to a decline in invention and puts a major dent in our living standards because we forgot the lessons of the past. We have seen this happen recently in the high tech industry where the capital structure remains dysfunctional after a stock market collapse and depression in the tech industry followed the extremes of the tech stock bubble. In the VC industry, five years after the collapse, capital input-output within the system suffers a worsening impeedence mismatch: lots of money to go into deals but less return for entrepreneurs and VCs, fewer entrepreneurs seeking venture capital, lower deal quality of early stage deals, and over-pricing of later stage deals on the input side of the circuit; on the output side, few IPOs or other major liquidity opportunities. A system once in balance, then in unbalanced bubble hyper-growth, malingers years later–wobbly, out of balance.

    Once the credit markets roll over, many of the credit bubble driven mega-deals you read about in the paper for the past couple of years, now reaching a crescendo of greed, will go the way of the AOL-Time Warner merger that closed in January 10, 2000, near the top of the equity bubble. Instead of dysfunction in equity based financing as we experienced after the tech stock bubble, we will see dysfunction in credit based financing, the heart of capitalism. Distressed debt will be the order of the day. Every credit dependent industry, especially construction and real estate, will fall hard, but the advertising driven media industry will suffer, as well. Some industries and regions of the US are already in recession, such as the automotive industry, and others are entering recession. In a diversified modern economy, many regions and industries must be in decline together for the entire US economy to be called officially "in recession," but this definition is academic and of little use to most of us.

    The weather forecast for the coming week is for more clear, cold weather. Next time I'll take the Fat Chance for a spin and contemplate the timing and character of the recession coming in 2007, material for Recession 2007: Part II.
    _________

    For a layman's explanation of financial bubble concepts, see our book americasbubbleeconomy
    For guidance on how to play the coming currency corrections, see "Crooks on Currencies"
    To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

    Copyright iTulip, Inc. 1998 - 2006 All Rights Reserved

    All information provided "as is" for informational purposes only, not intended for trading purposes or advice.
    Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Last edited by FRED; 01-28-07, 11:55 AM.

  • #2
    Re: Recession 2007: Part I - Eric Janszen

    Very nicely written piece, EJ. You are skilled, and I enjoy your work.
    Jim 69 y/o

    "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

    Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

    Good judgement comes from experience; experience comes from bad judgement. Unknown.

    Comment


    • #3
      Re: Recession 2007: Part I - Eric Janszen

      Why the hell aren't you writing a book? Your writing is immensely enjoyable, the ideas fresh and timely, your (relatively small group of) fans are rabid, and your grasp of the subject matter is facile yet digestible.

      Start the damn book, okay?

      (Yes, this is a compliment.)
      "The test of our progress is not whether we add more to the abundance of those who have much it is whether we provide enough for those who have little." - Franklin D. Roosevelt

      Comment


      • #4
        Re: Recession 2007: Part I - Eric Janszen

        Riding a bicycle is an act of continuous, unconscious balance, the habit of turning left as the bicycle falls slightly right, right as it falls slightly left, in a series of minute automatic corrections.
        You might want to rethink your directions there EJ, I think you'll end up flat on your ass pretty quick following that strategy.

        Comment


        • #5
          Re: Recession 2007: Part I - Eric Janszen

          Originally posted by JamesP
          You might want to rethink your directions there EJ, I think you'll end up flat on your ass pretty quick following that strategy.
          Jim,
          Thanks. Coming from the Wise Man of the iTulip forums, that means a lot.

          Jeff,
          I'm working on a piece of fiction. It's about the economy. ;)

          James,
          Forty years of riding... so that's why I keep falling down!

          Comment


          • #6
            Re: Recession 2007: Part I - Eric Janszen

            Originally posted by JamesP
            You might want to rethink your directions there EJ, I think you'll end up flat on your ass pretty quick following that strategy.
            James,

            Whoever is responsible for having taught you reading comprehension should be proud, and you proud of yourself for having learned.

            iTulip should have a "best comment of the day" forum, and today for me, you would get it.
            Jim 69 y/o

            "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

            Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

            Good judgement comes from experience; experience comes from bad judgement. Unknown.

            Comment


            • #7
              Re: Recession 2007: Part I - Eric Janszen

              Thanks for sharing that and making this site possible , best regards to you.
              I one day will run with the big dogs in the world currency markets, and stick it to the man

              Comment


              • #8
                Re: Recession 2007: Part I - Eric Janszen

                Outstanding piece, EJ! Insightful portrayal of the economic outlook as a tension between the upside of American technological innovation versus the parlous state of the financial system (IMO due mostly to the meddlings of its central planners). I also like your "impedance mismatch" metaphor; that's one of my favorites for characterizing the problems of trade balance between countries with different economic systems. Also, appreciate your connecting your Dad with the Janszen Electrostatic Loudspeaker. To a long-time hi-fi buff like myself it's a familiar name, but it didn't occur to me that you might be related to its inventor. Must be some serious smart genes in the family...
                Finster
                ...

                Comment


                • #9
                  Re: Recession 2007: Part I - Eric Janszen

                  Originally posted by Jim Nickerson
                  James,

                  Whoever is responsible for having taught you reading comprehension should be proud, and you proud of yourself for having learned.

                  iTulip should have a "best comment of the day" forum, and today for me, you would get it.
                  I feel like I ought to fix it and note what James' comment was about. Any objections, anyone?
                  Ed.

                  Comment


                  • #10
                    Re: Recession 2007: Part I - Eric Janszen

                    Originally posted by Fred
                    I feel like I ought to fix it and note what James' comment was about. Any objections, anyone?
                    Doesn't bother me, though leaving it unchanged would serve the purpose to those who read the lead post first, and the subsequent posts later would discover as I did, that they easily miss details, and that is not a bad lesson to have recalled to one from time to time.
                    Jim 69 y/o

                    "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                    Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                    Good judgement comes from experience; experience comes from bad judgement. Unknown.

                    Comment


                    • #11
                      Re: Recession 2007: Part I - Eric Janszen

                      Very nice.

                      Thanks for the little bit about the family background, by the way. It turns out we have something else in common (besides economic skepticism): my dad is also a physicist for Naval Research.

                      Your point about the productivity and utility of credit is central. The societal problem comes when credit itself is anthropomorphized, being seen as an end in itself, and an actual source of wealth. In the early part of the last century, Frederick Soddy sought to abolish such a misconception by defining true (or legitimate) credit as the relinquishment of wealth by one party so that another party might generate new wealth. This of course explicitly excludes the generation of credit by fiat, and certainly the excess of same. Soddy considers these behaviors fraudulent.

                      Soddy's book, "Wealth, Virtual Wealth, and Debt" was written in 1926. It essentially warned of the Great Depression (and also quite directly warned of other things, such as over-dependence on Middle-Eastern oil, and nuclear weapons). The insights about the nature of wealth and credit are very deep, and still generally unacknowledged today. I was directed to this wonderful gem by a reader of my "1995" article on this website.

                      Soddy was also a physicist (or "chemist", in those days). He won the Nobel prize in 1921 for various discoveries and theories of radioactive decay; but later turned to political and economic matters.

                      The only note on the Nobel site about Soddy's "political and economic theories" after winning the prize for chemistry is that they gained no acceptance.

                      How true this is, and how tragic for everyone.

                      Comment


                      • #12
                        Re: Recession 2007: Part I - Eric Janszen

                        Originally posted by JamesP
                        You might want to rethink your directions there EJ, I think you'll end up flat on your ass pretty quick following that strategy.
                        James,

                        Good catch, fixed it.

                        To curious readers, James found an error in the sentance: "Riding a bicycle is an act of continuous, unconscious balance, the habit of turning left as the bicycle falls slightly right, right as it falls slightly left, in a series of minute automatic corrections." He correctly noted that if you are riding a bicycle and turn away from the direction in which your bicycle is leaning, you will soon be glad you are wearing gloves and a helmut.

                        The corrected version is:

                        "Riding a bicycle is an act of continuous, unconscious balance, the habit of turning right as the bicycle falls slightly right, left as it falls slightly left, in a series of minute automatic corrections."
                        Ed.

                        Comment


                        • #13
                          Re: Recession 2007: Part I - Eric Janszen

                          Thank you for sharing a very intimate portrait of who you are, where you came from, how you think, and your own personal struggle with understanding these very complex issues. I thought the article was beautifully done.

                          I would love to see the charts you presented recast in constant dollars, or constant percent of GDP, or ...? I know there's an inescapable element of arbitrariness in doing so, but it would yield another estimate of the current situation that I think would be worth viewing.

                          What is it about human behavior that always forces excellence to the limit? One crude example is how close all of the NASCAR racers have to get to the wall, just to stay even with the competition. (I love watching the segment before the race where Wally Dallenbach drives an otherwise brave sports hero to screaming fits of terror with a single lap around the track). So it seems to be with our credit system, that we drive ourselves to the absolute extreme limit of capitalization of (estimated) future wealth creation, and then noisily overshoot and undershoot around that extreme. The fiat money system that has evolved optimizes our ability to do this.

                          I believe that markets determine this estimate more accurately than we might think, even within the fiat system. Markets are massively powerful learning machines, evolved from the human cognition that evolved from that granddaddy of learning machines, the DNA-based evolutionary system. They are certainly not infallible, but they are the best learning mechanisms available to determine economic outcomes for humans. And they are proveably better than the world's smartest man in determing value.

                          I agree with the guess/forecast that we've overshot our ability to pay off current credit, in all its various guises. But I also know that the scale of the current system is unimaginable, that contemplating interactions betweens billions of humans is about as easy to do as counting the stars.

                          The beauty of your article, to me, was the very personal insight you gave us into how you resolve all this uncertainty, and find the courage to take a stand on what you believe and understand, in the midst of all the uncertainty.

                          Comment


                          • #14
                            Re: Recession 2007: Part I - Eric Janszen

                            Fall is great in Boston. In college I painted houses in Lexington - it's a beautiful town.

                            Wondering if any of your thoughts have changed vis-a-vis kapoom theory, specifically the deflationary "ka" element. On a YOY basis, it looks like nationally homes will lose value nominally as well as in real terms. This seems at odds with some of itulip's earlier predictions about the housing market. By your estimation, is the nominal decline in housing at all an indication that deflationary winds may be stronger than forecast?

                            Our sagacious friend the bond market seems to be unhappy with growth right now. Inflation, at least during this part of the cycle seems poised to go lower, despite the fed's supposed vigilance against it. How entrenched a recession do you see?
                            check out the charts at blog.myspace.com/dannycharts

                            Comment


                            • #15
                              Re: Recession 2007: Part I - Eric Janszen

                              State sales taxes flash recession warning
                              By Joan Gralla - Analysis

                              NEW YORK (Reuters) - About half of all states are collecting less from their sales taxes than expected, which could signal a recession lies ahead as the home market fades.

                              The receding housing boom could then reveal the underlying economic weakness it had camouflaged, according to Philippa Dunne, a co-editor with the New York-based Liscio Report, published by an economic research firm.

                              To Dunne, the recession warning light is flashing yellow.
                              "There are a lot of unknowns, but the state sales tax receipts are pretty much at recession levels," she said, adding about 25 states are seeing disappointing sales tax revenues.

                              It's not just jobs in construction, lending and real estate that are at risk. Less demand for materials, from cement to carpets, could cause malls and manufacturers to slash workers. more...
                              Ed.

                              Comment

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