Monthly Archives: January 2010

This is the disclosure gap worrying the SEC?

In what we first took to be satire from The Onion, the SEC has ruled that companies should warn investors of global warming risks.  The story can actually be found in the 1/27/10 New York Times.

After a couple humiliating years of being behind the curve on protecting investors, and despite being still short of manpower, the SEC has nonetheless found the time to address one of the most alarming deficiencies in corporate disclosures that exists today: the absence of boilerplate in every 10-K addressing the problem of global warming.

A better idea: let investors know that “legislation concerning global warming” (as opposed to global warming itself) poses a risk to business.  But given that 10Ks can’t possibly be long enough to encompass all the bad potential legislation out there, maybe companies just need to disclose that “Your government poses a myriad of potentially devastating threats to our and all businesses.  Please call your Congressman if this worries you.”

UPDATE: this video from 1/29 at WSJ’s News Hub makes our points and even steals our opening quip:

UPDATE II: (4/13/10)

AFL-CIO President Richard Trumka doesn’t like the restructuring that sometimes occurs when a company is purchased by “Wall Street,” and believes “It’s Time to Restrict Private Equity.”

Under current law, private investment vehicles—hedge funds, leveraged-buyout and venture-capital funds—function with virtually no oversight. Despite managing trillions of dollars and employing millions of Americans, they operate as a shadow financial system—in secret, free to take on out-sized risks, and make huge bets with no outside supervision.

Since the SEC is very busy worrying about global warming, wouldn’t it just be easier to legislate that businesses can’t fire workers?  It’s done wonders for job growth in Europe.

Well, to really get control of it all someone would have to explain to Mr. Trumka the difference between hedge funds, leveraged-buyout firms, and venture capital:  hedge funds invest in already public companies, leveraged-buyout funds use financial engineering to drive their investment return, while venture capital funds invest in small private growth companies that hire new workers – companies that produce most of the new jobs in this country.

Twitter Weekly Updates for 2010-01-16

  • The science (& art) of determining the Next Great NFL Coach. We see parallels for the Next Great Entrepreneur. – #
  • “Hitting the Boards”. Couple of useful ideas for better boards, but c’mon. CEOs = rats jacked up on amphetamines? #

The love of taxes is the root of unhappiness

A recent study in Science magazine indicates that states with the highest taxes also have the least happy residents.  The Wall Street Journal, reporting on the study, argues that the causation is high taxes = unhappiness.  While we are certainly sympathetic to that point of view, we also have to wonder if it runs vice-versa, or at least cuts both ways:  unhappy people like to raise taxes.

We are… happy.  And happy to report that’s true for our region as well.  Here is a *totally random* sample of states’ rankings on the happiness of their residents.  See below the jump for the entire story.

3. Florida
4. Tennessee
12. North Carolina
16. Texas
19. Georgia
28. Virginia
43. Massachusetts
46. California
51. New York


Sloppy eater or efficient pitch?

VC Dispatch says that to pitch correctly requires not one but 7 cocktail napkins, one for each of the following:

Pitch, People, Pain, Product, Players, Projections, Proposition

Economics and Inflation: A puzzle

The monetary base is exploding, but so far Wall Street is betting against a resurgence of inflation.  The consensus seems to be that banks are sitting on their new reserves instead of lending, and the Fed can remove that cash from circulation at the right time and avoid inflation.

One of our favorite sources on economic thinking is Greg Mankiw’s blog.  Professor Mankiw (of Harvard) recently argued that when banks’ reserves earn risk-free interest, they’re virtually identical to Treasurys, and so the monetary base as a statistic loses its predictive value.  The issue for Mankiw isn’t technical, but the time-honored political one:  will the Fed have enough strength and independence to do the right thing and “take away the punch bowl” at the right time.

Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University and author of this article on inflation in Reason,  responds to Mankiw here.  She counters that it would indeed be a remarkable achievement if the Fed had discovered a new method to increase the money supply without creating inflation; instead it is more likely to have simply replaced one asset bubble (housing) with another (Treasurys).

An anonymous reader replied to de Rugy that an asset bubble is not the same thing as a rise in the general price level, and that the money supply – properly understood – has not, in fact, dramatically increased because the money multiplier remains low.  In other words, feel free to worry about asset bubbles but not inflation.

We assumed that we weren’t the only ones fascinated by this puzzle, and turned to one of our personal favorite thinkers to help solve it:  Will Harrell, founding partner of Capco Asset Management here in Tampa.  Will’s email response, below, qualifies him as Navigating Venture’s first guest blogger.  (We also link to Will’s thoughts on the topic of risk here.)

I too am riveted by the problem.  By coincidence, I was reading a chapter of Friedman last night where he provides a bunch of proof for his “inflation is always and everywhere a monetary phenomenon.”  Incredibly compelling, example after example, growth of money supply tracking closely with inflation over decades, country after country.

I am the first to admit I don’t fully understand the mechanics on this issue, and it would be hard to say inflation is breaking out.  But I am unwilling to believe that an agency of government has figured out (1) how to successfully fix prices (interest rates) without screwing up supply and/or demand; or (2) some simple new trick that dispenses with Friedman’s armada of historical examples.

How do these mechanics work anyway?  The Fed pays a rate that crowds out private demand – so where does that newly created cash interest payment go?  Either into the money supply, or back to the Fed, for more compounding, ie still more artificially created money supply.  How do we get out of that happy loop?

And the solution of the Fed dumping some of their 500 B in treasuries and 1250 B in mortgages – how do they get 100 cents on the dollar back, when they were the marginal bidder that drove them to that price to begin with?  Last year the Fed wasn’t in the market for mortgages – it was the market for mortgages – who are they going to sell a bunch of 5% coupons to?   To make matters worse, I suspect that most of us who refi’d last year will NEVER give up those rates, so the expected duration of the bonds should be higher than normal, and therefore the decline in price relative to a given increase in interest rates should be higher than normal.

The CPI as a measurement has a litany of failings – here’s another one: if many businesses are getting more efficient at what they produce (and they certainly are, and have been), shouldn’t the inflation baseline be negative rather than zero?  In that case, maybe a 2% CPI could actually imply 4% (or whatever) inflation.

The failure of bond prices to anticipate inflation also mystifies me.  I could certainly be wrong about inflation, but it’s at least possible the bond market is – current bond prices don’t seem to accept even the possibility that inflation will average over the next 30 years even the 3% that we all have come to consider “normal.”  Of course, it’s possible that 500 B of Fed purchases had an impact – and that folks who might otherwise have bought mortgages were pushed by the Fed’s 1250 B of buying there, into buying treasuries.

UPDATE 5/27/10

A contrarian view from In a debate between European monetarists using an unpublished monetary measure (M3) and traditional Keynesians, who can you trust…

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Promising update on the battle over taxing the carried interest

PE Hub is reporting that Mark Heesen, president of the NVCA, believes the proposed tax on carried interest will not pass this year.

“It doesn’t mean that [Senator Max] Baucus [chair of the Senate Committee on Finance] and [Representative Charlie] Rangel [chair of the House Ways and Means Committee] won’t hold exploratory hearings, hoping that in 2011 they can push on tax reform,” says Heesen. “We’ve seen a number of hearings on carry; there could be others. Those building blocks could be put in motion again.”

Still, says Heesen, asking Congress whether it “wants to hit this area of the economy when everything else has been in decline in terms of job creation and technologies that the administration says are important — life sciences, IT, education, healthcare,” appears to have worked — for now.

“We’re not out of the woods, but that argument is winning a lot of converts,” says Heesen.

We’d like to thank all the VCs and entrepreneurs who wrote their senators and congressmen – and ask you to keep your powder dry.

Alligator Alley and the Flagler (?) Dolphins

One of our favorite documentaries is Land of Sunshine, State of Dreams: A Social History of Modern Florida by USF professor Gary R. Mormino.  (See the Land of Sunshine link under ‘Sites of Interest’ on this blog’s main page.)

In this brief segment, Professor Mormino describes how America’s love affair with the automobile contributed to Florida’s growth in the Fifties.  Those of a certain age can probably recall the mystical sounding names and exotic reptiles from the pop culture of their youth.

Jack Davis, a Florida environmental historian, echoes and elaborates on the theme, positing that a synergy between the automobile and air conditioning shaped the nature of that post-WWII growth.

Florida East Coast Railway, Key West Extension. H.M. Flagler's Special, first train to cross Long Key Viaduct. Post card published by J.W. Chamberlain.

H.M. Flagler’s Special, first train to cross Long Key Viaduct.

Before we loved cars, though, we loved trains – and it was the Florida East Coast Railway which led to the first great wave of growth in Florida.

Henry Flagler has not been immortalized in pop culture but he bulit a railroad all the way to Key West and punctuated it with hotels,  establishing the tourism and agriculture industries in the process.

When the city of Miami incorporated in 1896, its citizens wanted to honor Flagler by naming the town after him – he declined the offer.  (With our thanks…  The Flagler Dolphins?  CSI:Flagler? Flagler Vice?)

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