When banks can’t afford to foreclose

Evidence of bank tardiness in foreclosing on delinquent borrowers is continuing to mount. The author of a recent blog posting on the growing “shadow” inventory of foreclosures is getting very close to identifying the real reason lenders are reluctant to actually take possession of homes with delinquent mortgages.

Banks make more money by NOT foreclosing on homes. Banks are dragging out the
foreclosure process for their own selfish reasons. Until the day they foreclose, the amount of money owed to them is an asset…sure, it’s an asset that isn’t paying interest payments…but it is still an asset. The day they foreclose, a $400,000 asset
could become a $150,000 asset and a $250,000 loss.

All this is true, but the bigger point may be that lenders simply can’t afford to take the financial hit to their books that a foreclosure requires. My suspicion is that many lenders are in such dire financial straits as it is, that taking even more write-downs will force them into insolvency. This seems to be the pattern of dealing with the entire financial crisis: delay taking necessary actions, and pray that somehow asset prices will recover.

During my trip to Florida I heard about families who have lived in their homes as long as two years without paying, because the banks haven’t gotten around to foreclosing. And that’s a problem. Until the real estate market recognizes all its losses — including accounting for all foreclosures — it won’t be able to regain real stability and move on. Of course, that has implications for the broader economy as
well.

As of July, mortgage companies hadn’t begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn’t yet acquired the property. The figures don’t include home-equity loans and other second mortgages

Moreover, there were 217,000 loans in July where the borrower hadn’t made a payment in at least a year but the lender hadn’t begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren’t in foreclosure, up from 8% a year earlier.

With each passing day it is looking more and more like the US is following Japan down the path of deflation. Just as Japan’s decision to avoid taking the sharp pain of letting banks fail, and write-off bad loans, led to 20 years of zombie banks and corporations, America is doing precisely the same thing, but on a grander scale.

Multi-core CPUs: the end of Moore’s law

Mercer Island newspaper speaks with Michael about job search strategy

Pay for Performance CRM

One of the companies I work with (called IntranetSites) is looking for partners who might be interested in signing up, allowing us to create, and manage, on-line customer relationships for them. We work completely on a pay for performance basis (i.e. we only get paid for new business generation), so there are no up-front fees. Since we handle the entire web customer relationship (both recruiting the customers, and maintaining the relationship), there is no need for our partners to immerse themselves in a CRM system, or spend time with on-line marketing activities. Our partners can focus on whatever it is that they do best, whether it is running a restaurant, an auto repair shop, etc.

Companies that already have their own CRM solutions, and processes, may not need our help, but there are many firms that have basic web sites, but no actual active web marketing or customer relationship system.

Web design firms, that build web sites for businesses, can offer the IntranetSites web marketing service as an option to their customers. They would still build, and maintain, their customer’s web sites as they already do, but could also share in any revenue that results from new business IntranetSites generates. Customers of the web designers don’t have to pay anything extra to get this service (except when they get new business from it), and the web design firm gets an on-going stream of income from each customer who signed up for the service.

We do it all

For example, a restaurant that signs up with IntranetSites would agree to create 4 web specials a month (free entrées, 2 for 1 Thursday lunches, etc). IntranetSites will then promote the special of the week on the restaurant’s web site, and drive traffic to those specials from search engines. In order to take advantage of these specials, customers will have to click to redeem the web coupon code, and enter in some information about themselves in the process, where we also ask if they would like to be on the mailing list for a newsletter and notification of future specials.

These customers who come to the restaurant web site are now a part of the CRM system, and IntranetSites will start managing an on-going relationship with them. We will send out a monthly newsletter specific to our partner’s business (talking about specials, etc) to maintain frequent contact, and conduct surveys to better identify which promotions would be the most successful.

All of the web promotions, and customer relationship management services IntranetSites provides require no up-front fees. Instead, we work out a fee schedule based on how much business is generated from the web promotions, and customer management.

If any of our partners ever decide they would like to begin managing these on-line line customer relationships, and marketing activities, they are free to withdraw from our pay-for-performance offering and take direct control of our CRM tools themselves on a subscription basis.

If this sounds like a service that interests you, please drop me a note, and we can setup some time discuss your needs, and explain our business a little more. We are a startup business ourselves, and are quite flexible in creating business arrangements that work well for our partners.

Contraction of credit and money supply continue to break records

Credit, and the broader money supply, are contracting at unprecedented rates. This sure doesn’t smell like inflation to me.

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

Who says house prices always go up?

Anyone hoping that the real-estate market will see a swift rebound, let alone any kind of recovery, should take note of what’s happened in previous bubbles. The bubble in Texas property that burst in the early ‘80s still hasn’t seen a return to pre-bubble values nearly 30 years later.

Now that the myth of ever-rising house prices has been shattered, it may be time to
embrace another inconvenient truth: that prices can take decades to recover, at least when adjusted for inflation. A study in June by the Federal Housing Finance Agency, a regulator, pointed out that in parts of Texas house prices still languish some 30% below their 1982 peaks in real terms.

Windows 7: the grown up Vista

FHA leads the way towards sub-prime meltdown 2.0

The anemic economic recovery that is being talked about so much is resting on very week foundations. An astonishing 90% of all new American mortgages are now guaranteed by the US government, in one way or another. It’s as if the private economy has vanished.

Worse, the extraordinary growth of Ginnie Mae (which handles FHA loan guarantees) shows that risky lending continues to thrive, but now it is being handled by the government rather than private mortgage brokers, and investment bankers, driving luxury cars. Instead of taking a tip from the private sector, which tightens it’s lending criteria during recessions, the government is lowering its standards as fast as it can. The rising default rates on new FHA insured loans bears this out.

Prepare yourself for sub-prime implosion 2.0 in the years ahead, when masses of FHA insured borrowers default, and the government is forced to bail-out Ginnie Mae.

Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.

On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory.

Microsoft: the bold, yet timid, giant

Contrary to popular belief, Microsoft is an innovator. I myself participated in ground-breaking technological efforts in my years as a program manager and planner in the Windows division, and the projects I worked on are just the tip of the iceberg. Unfortunately, many of those innovations are in areas that never matter in the grand scheme of things, or are undermined by a simultaneous streak of timidity that courses through the organization. Microsoft is bold and timid, all at the same time.

It is not my intention to smear Microsoft. To paraphrase Tolstoy, every family has it’s issues, and Microsoft is no exception. My over-all experience at the company was a positive one. Much of the hostility, and consternation, towards Microsoft results from the simple fact that it is difficult for outsiders to comprehend the truly Herculean problems the company faces with creating and maintaining the most widely used software products in the world. So many people use Microsoft’s products, in so many ways, that almost any decision will wind up stepping on someone’s toes. Microsoft takes the commitment to prevent customer disruptions seriously (even if it doesn’t seem so from the outside), and moves heaven and earth in its efforts to do so.

That said, my purpose in this article is to outline some of the chronic problems I have seen in my tenure at the firm. I can count on my friends still at the company to do their job highlighting the company strengths (which are significant). It should also be noted that Microsoft is in no way unique with having engineering and corporate political problems. But the examples which follow will at least illustrate that the company is not immune from such issues.

By the way, I use projects I was directly involved with for most of my examples simply because I know so much about them, not to infer that these are the most egregious missteps Microsoft has made. I have great respect for the people I worked with on these projects, and know that everyone was always doing what they honestly felt was best for the company, and its customers.


Brute force innovation

The centralized control over software development, and world-class engineering processes, allows Microsoft to pursue massive undertakings that are simply impossible, or unheard of, in its competitors. Senior managers can (and do) create mandates which set whole armies of engineers in motion to ensure that new initiatives, or technologies, are thoroughly supported in every single line of code.

In Windows Vista I led an effort to drive adoption of IPv6 throughout the entire operating system. We created a massive effort to get every engineering team in the Windows division to test, and qualify, their code to work properly with IPv6. I am proud to say that the end result was the world’s first operating system that is nearly 100% IPv6 compatible (with only a couple unavoidable exceptions), and able to run on a network that has absolutely no IPv4 service.

This may be in the class of brute force innovation, but it’s innovation nonetheless. No other operating system has undergone the same degree of thoroughness, or dedication, to supporting IPv6. Linux hasn't done it, OS X hasn’t done it. No one has. Having gone through the experience of managing this massive transition effort, I can attest that supporting IPv6 is NOT as trivial as it seems. There are plenty of issues that were uncovered in tests with IPv6 only networks where we discovered strange (and unexpected) dependencies of IPv4.

On the other hand, as impressive as this achievement of reaching IPv6 purity is, one has to wonder why so much effort was expended in the first place? As far I know, no one is running IPv6 pure networks in anything other than a test lab. Sure, the US Department of Defense mandated that all products it purchased would have to pass tests in an IPv6-only environment, but they eventually rescinded that requirement, and most software firms (and operating systems) were able to play along just enough to provide sufficient IPv6 support to avoid being banned from government procurement lists. After all, there are really only a handful of services that most people really use, and the fact that some functions of Linux or OS X don’t fully support IPv6 has never raised an eyebrow.

It can certainly be said that this unparalleled extensive support of IPv6 has meant absolutely nothing to end-users, who won’t be using IPv6 networks at home (or at work) for many years.

To be fair, Microsoft is in somewhat of a unique situation in the marketplace which forces it’s hands into unnatural acts that competitors can slough off. The government isn’t a big customer of OS X, and Linux is free, which allows it to slip customer requirements without any trouble. The fact that Linux can be customized to such an extensive degree also means that it is possible for a vendor to provide a genuinely IPv6 pure version of Linux merely by never installing the components that aren’t IPv6 compatible.

Over-engineering

Another of Microsoft’s chief vices is to over-engineer things. Engineers are always looking for ways to overhaul old sub-systems with monster functionality, and breath-taking designs. This is akin to building a rocket powered scooter with fuel cells when all a kid wants is a skateboard to get across the street.

For my case study of this phenomena, I give you the Windows Filtering Platform (WFP) introduced in Vista. In conjunction with a completely rebuilt network stack (the value of which could also be debated), WFP represented the first time a comprehensive set of APIs were purpose built in Windows to allow software developers to manipulate, and control, packets. This was a laudable effort indeed. The network stack in Windows XP (which was based on the one in Windows 2000), was never designed to allow third parties to examine, manipulate, and control, packets. It was simply never conceived that software developers would have a need for low-level packet manipulation. This was before anyone considered that the security threats on the Internet would lead to the wide-spread adoption of host firewalls, all of which depend on low-level access to packets.

A few crude APIs for working with packets were tacked on top of the Windows XP stack as an after-thought, but software developers needing this kind of functionality were largely forced to adopt strange and unnatural strategies to achieve their goals. Firewall developers would often create fake network drivers, pretending to be network hardware. It was easy to make mistakes with this kind of hack. For example, how do you ensure that your fake network interface card driver properly sends the power-up and power-down commands the operating system expects, even though no network card exists? Consequently, host firewalls quickly became one of the primary causes of crashes in Windows XP. No wonder the engineers wanted to remedy this in Vista by finally creating some APIs that were designed from the ground up to allow low-level access to the network stack.

So far so good, but this is where things run off the rails. Instead of creating some simple to use APIs for working with packets, the Microsoft engineers (including myself), decided to take the bull by the horns and build an all-encompassing filtering engine that would keep track of, and manage, all the various requests for working with packets that might be sent from numerous applications. Instead of leaving users struggling in a world of chaos, with different security systems sending conflicting orders to the stack to drop, or allow, network traffic, the all-knowing Windows Filtering Platform would intelligently determine which of all the various instructions should win to give the user what they want (i.e. a pleasant, yet secure, experience).

The reality, however, is that no vendor of security software would ever want to leave the decisions of what to allow (and disallow) up to someone else. Well into the beta cycle of Vista it became glaringly apparent that few, if any, firewall vendors were willing to adopt WFP since it would mean giving up control over network activity to the operating system. Microsoft engineers reluctantly conceded the point and created a “veto” flag for filters, which would ensure that nothing could override it when the option was set.

In the end, WFP can legitimately be called a success. Virtually every firewall in existence now uses WFP, and crashes due to firewalls have dropped significantly. But the dirty secret is that most filters placed into WFP use the veto flag, which pretty much renders the beautifully engineered filtering platform useless.

If Microsoft had only set out to create some easier, comprehensive, APIs for packet manipulation, they could have achieved the same result with a significantly lower expenditure in resources. Further, the WFP APIs are needlessly complex for what they are actually being used for, thereby creating more expense for third party developers.

This is a classic example (amongst many) where Microsoft could have achieved the same goal by scaling down its ambitions and actually doing a little less innovation. There was nothing devious afoot with WFP. There was no grand scheme to undermine security, or put any partners out of business. Microsoft’s engineers were diligently trying to solve a real problem (i.e. the chaos of conflicting security systems messing with packets), but lost sight of the market realities.

Unfortunately, I saw similar situations occur in Windows 7, and have heard talk of other such ambitious schemes for future OS releases.

Fields of dreams

Luckily, the Windows Filtering Platform did not fall into the category of ignominy, reserved for ambitious technologies that never quite take flight. At least WFP has become widely adopted. By contrast, there are many significant technologies, and platforms, that are built into Microsoft’s products that are only ever used at the margins, and never see wide adoption. The details for why these failures occur are numerous, but the result is the same: a technology gets built that just collects dust but never gets removed, and still requires constant maintenance. This is what I call the “field of dreams” phenomena: a belief that if Microsoft creates something, then people will use it.

Picking on networking technologies again (merely because I know them so well, having worked in the network engineering team), Peer to Peer (P2P) networking and IPSec figure prominently here. Yes, you can point to examples of where some organizations have adopted IPSec to secure their network traffic, but the reality is that these significant engineering efforts have never really seen wide-spread usage.

P2P and IPSec are particularly good examples of how good innovations go awry. P2P is a whole suite of technologies, built on top of IPv6, which are designed to make peer-to-peer networking a tour de force in Vista, allowing 3rd party developers to easily incorporate peer-to-peer features. On paper this all sounds great, but constructing this on top of IPv6 (which no one uses), and the lack of key functionality make this unappealing for most developers to consider. The fact that only limited P2P functionality was introduced on Windows XP was also the kiss of death. Which software developer wants to adopt a technology that can only be used on the latest operating system?

IPSec has been suffering similar problems since Windows 2000. Over the years Microsoft has put a huge investment into creating innovations to make the management of fully authenticated, and encrypted, networks a reality. IPSec is an old IETF standard (supported by every OS in existence), but it is rarely used due to the sheer complexity of managing certificated, and creating policies. When IPSec is used, it is generally only for specific functions like VPN access. If you have a network with nothing but Windows Vista and Windows Server 2003 machines, it is quite possible to ensure that all network traffic is fully secured, at all times. The edge firewall is obsolete.

Despite many years of effort, wide use of end-to-end IPSec has yet to get off the ground. There are some very noteworthy case studies where organizations have fully deployed IPSec throughout their network (including Microsoft), but these are the exceptions. Poor cross-platform support has plagued Microsoft’s IPSec efforts from the very start. This is exacerbated by compatibility lags between each release of Windows. New functionality released in Vista (to overcome some IPSec deployment issues) was never brought back to Windows XP.

More importantly, Microsoft’s entire IPSec strategy ignored the needs and wishes of key players in the networking space (has anyone heard of Cisco?). Understandably, most network technology providers have always been luke-warm, at best, to Microsoft’s IPSec vision. What value is there for all manner of network security, and traffic management, products when all traffic becomes encrypted? When all traffic is gobbledygook, automated management tools can’t differentiate between traffic being used for Skype, accessing e-mail servers, or video games. So much for the ability of IT managers to give higher priority to particular types of traffic, or block others altogether.

Of course, Microsoft’s engineers have answers for most of these things (e.g. some 3rd parties build Linux plug-ins for Microsoft’s IPSec policy management system, and there are strategies for allowing IPSec to be deployed without encryption that allow traffic to be managed), but the end result is the same: IPSec is still only used on the margins. Most of these problems were foreseeable early on, but institutional momentum, and a grand vision that is too compelling to die, has kept Microsoft plugging away at it for a decade.

IPSec and P2P are yet more examples of Microsoft’s significant achievements in fruitless innovation. Who knows, maybe the Direct Access VPN feature in Windows 7 will be the technology that finally pulls IPSec out of obscurity, but I have my doubts. VPN usage is in terminal decline, as more and more corporate hosts get put directly on the Internet. Most organizations already allow access to e-mail directly from the Internet (which is the most common reason people need VPN access to corporate networks), and many other key services are being put directly on the Internet as well (e.g. CRM with Salesforce.com, etc). Direct Access also continues to suffer from the perpetual Windows curse of poor down-level and cross-platform support.

Little orphans

At least IPSec manages to sustain enough momentum to see continual improvements across multiple operating system releases. There are many other technologies that are not nearly so privileged.

There are numerous grand initiatives, with the best of intentions, which get built, but become orphans almost from the day they are released. Quite often these ambitious projects fail because the feature list is cut back so drastically to allow them to ship on schedule, that they lack critical capabilities that would make them popular. I know this is difficult for outsiders to understand, but many Microsoft engineering groups run on shoe-strings. I was a program manager for one technology in the networking group that had just one developer, when a small competitor with only $50 million in revenue had 10 engineers working on this. Is there any wonder that our spunky competition was so easily able to run circles around us, adding features, and capabilities, that we could only dream of?

These resourcing problems are particularly acute in Microsoft’s big products (like Windows and Office), since so much is bundled together. This makes it very difficult to know just how many resources should be devoted to any one area since there is no way to tell which features are most responsible for generating OS sales. When product teams make their cases to executives for resources, they are hard pressed to show how much doing a particular feature will contribute to increasing over-all revenue.

Any technology that doesn’t get widely adopted after its initial release is liable to find itself abandoned, and never improved upon later down the road. ClickOnce is an example of just such a technology. It was initially envisioned as a replacement for the Windows Installer (a.k.a. MSI), that would be free from the myriad headaches faced by application installation packages. However, ClickOnce functionality was pruned so much to allow it to ship on time, that it would only work for the most basic types of applications that had no need of using any kind of operating system extensions (e.g. the ability to automatically open an application with clicking on a designated file type).

It is far easier for developers to create ClickOnce installation packages than to do so with the Windows Installer, and ClickOnce applications are easily updated, and offer few nasty side effects for end users to worry about. Unfortunately, the limitations of ClickOnce render it unusable for most software.

The paltry uptake of ClickOnce, after its initial release, resulted in a virtual stop to the original vision of creating a grand new replacement for the Windows Installer. It was too difficult to make a compelling argument that more money should be spent on ClickOnce to actually realize the original intent since usage was so low. This is a circular problem. You will never get sufficient adoption without additional investment, but you can’t justify the investment without getting the adoption.

An unfortunate side-effect of all the prevarication over ClickOnce is that the Windows Installer itself (the veritable workhorse for installing the majority of software written for Windows) has been put on ice as well. Microsoft has made only the bare minimum of investments in both ClickOnce and the Windows Installer for many years. Yes, there are some minor improvements to the Windows Installer and ClickOnce in Windows 7, but “minor” is the operative word.

When Microsoft’s engineers decide that a given technology is too antiquated, and needs to be put to rest, they put it on life-support, even if they don’t have any viable alternatives in the immediate future (there is ALWAYS talk of building some amazing new technology that will replace all the old ones, most of which never sees the light of day). The Graphics Device Interface (GDI) is yet another example of this phenomena.

Sadly, this often means that key technologies (like the Windows Installer and GDI) can go through multiple OS releases, spanning a decade or more, with no real investments to speak of, when some very minor improvements could solve a lot of pain that developers (and users) are facing. Once the product teams reach a point where they feel that a given technology is antiquated, it is harder than pulling teeth from a rodent to get them to touch the code and make additional investments. Instead, energies will be spent spinning up proposals on the NEXT big technology that would replace everything.

Having seen enough of these grand schemes come and go over the years, I can honestly say that precious few of them ever amount to anything, and most wind up as instant orphans if they are lucky enough to get built in the first place.

Which brings me to a counter-intuitive conclusion: in many cases Microsoft would be far better served if it was less innovative, and really dug into the hard work of incremental improvements. I am not against taking risks, and making bold investments in new technologies. But if you know your new creation won’t be able to achieve a critical mass of functionality out of the gate, then you would be better off not even trying, and putting your resources into the tedious effort of improving what already exists.

NOTE: If you could spare about 10 minutes, I would love to get your input on a survey I am conducting about how the recession is impacting your IT spending.

Anatomy of a job search: the meeting

Since I already hang out at the library doing a lot of my job search work I have taken the liberty to book one of the conference rooms at the Bellevue Lakehills library for Monday, August 10th, to talk about job search strategies for anyone who might want to come.

I will go over my job search strategy that I outlined in my recent blog post, and open things up for a discussion on what people think is good and what they feel could be improved. By sharing our thoughts we will all come away with new ideas, and inspiration, for our own efforts.

This meeting is open to anyone in the Seattle area, whether they are looking for a job, or just wanting to keep their options open. Just bring your lunch along and join the discussion.

If you do plan on attending, please e-mail me.

Meeting Details:

Date: Monday, August 10th
Time: 12:00pm to 1:00pm
Location: Lakehills
Library in Bellevue

You can get directions to the library here:
http://www.kcls.org/lakehills/

You can look at my blog post about my job search strategy here:
http://surkanstance.blogspot.com/2009/07/tales-from-job-search-trenches.html

Tales from the job search trenches

As a newly minted member of the growing unemployed masses, I have jumped head-first into my job search efforts brimming over with enthusiasm (ask me in December if I am still so geared up). Things have sure changed from previous times in my career when I was looking for employment. Yes, there is a challenging economic environment, but the tools and strategies have changed as well.

When I saw the writing on the wall about my job several months ago, I was anxious about what I might wind up doing if I became unemployed. Considering how worried I was earlier this year, I am actually surprised that I am enthusiastic and feeling downright excited about the new opportunities that are lurking out there. I don’t claim to have found the magic solution to job searching in the post-modern era, but my hope is that by sharing my strategies, and thoughts, I might inspire others, and perhaps hear suggestions from readers that I can learn from. If nothing else, all the activities, and strategies, I am using have really lifted my spirits.

My current job search strategy is as follows:

1. Network like MAD!

Connecting with old colleagues, friends, and associates, is the cornerstone of my job search. I particularly love using LinkedIn. Several months ago I only had about 3 members in my LinkedIn network and today I have 228. I know that my LinkedIn network is pretty small compared to those who have many thousands, but I have already been seeing dividends from my networking efforts.

I started networking by searching for people I had worked with, both in my most recent, and past jobs. I was astounded to find out how many people I knew were on LinkedIn! I was able to connect to one or two people I had known from a job 20 years ago, and then discovered many other ex-colleagues when I looked at who were in my friend’s networks. Soon, I had re-connected with most of the people I had ever worked with, even folks I hadn’t spoken with in over a decade.

Once I connect to people on LinkedIn, I write them a note telling them what I’ve been up to, and mentioning that I am eager to hear about any opportunities in product or program management they might know about. I have gotten several leads this way, as well as good advice. As a bonus, I rekindled a lot of friendships that had lain dormant for far too long.

I am a BIG fan of using LinkedIn recommendations. In general, I write a short recommendation for anyone I have ever worked with for whom I can think of something positive to say. So far I have written 130 recommendations (some are more verbose than others). In fact, I quite often don’t even ask individuals to connect with me on LinkedIn, I just send them a recommendation. People can’t make recommendations visible on their LinkedIn profiles without first connecting to the person who wrote it, and I have noticed that very few people will decline the gift of showing a recommendation to the world (and thereby join my network). This also puts future conversations (e.g. asking for introductions) I have with my contacts on a positive tone, since I have done something nice for them. There is the added bonus that writing a recommendation for someone periodically inspires others to reciprocate (I now have 26 recommendations written for me).

LinkedIn searches for recruiters who work for various employers I am interested in have also been productive, and not only resulted in requests for my resume, but actual job interviews.

Groups on LinkedIn are also useful as places to look for information, and make new acquaintances in areas that interest me. I have joined a bunch of groups in the Seattle area, as well as some professional communities.

I have also started attending job seeker networking events in my area, and have met some really interesting people this way, who have a lot of ideas to share. Getting out of the house and meeting people is important. There is even a group of job seekers that meets at my church twice a month that has been been helpful as a support group.

2. Applying for jobs

There is just no substitution for the old fashioned slog of applying for jobs. I have been using a variety of job posting internet sites to look for openings, and then sending in my resume. Some of the job search places I have used are: craigslist, LinkedIn, SeattleJobs, and monster. However, it also doesn’t hurt to go directly to the web site of an employer I am interested in and searching for their openings.

Unfortunately, there doesn’t seem to be any single place to look for job openings. I see jobs posted on Craiglist that never show up anywhere else, and vice-versa.

When I do find a job posting that interests me, I always go to LinkedIn and search for people who work at that firm. Invariably, I usually find that at least someone I know has a friend working at the prospective employer (which LinkedIn makes it easy to see when viewing the people it finds in searches). My goal is to get an introduction to someone at the firm, and give that person my resume. Recently, I even discovered that my next door neighbour was a friend of a hiring manager at a local firm that had a promising job opening. I have asked my neighbor to make introductions.

3. Lending a hand

I am a huge believer in the reciprocal benefits of helping others. Certainly, people are more willing to help me if I have helped them, but there are many other ways that volunteer work can reap dividends. I first picked up many of the skills I use in my career through volunteering. I worked for free at a computer store when I was 13, since the employment laws prohibited me from doing ANY work and that was the only way I could get the experience I wanted. Over the years I have continued to do volunteer work to pick up new skills even while I was gainfully employed elsewhere. I posted on USENET (the early Internet community) back in the early ‘90s offering to setup NetWare 4 servers for free, and found myself working late at night in server rooms of San Francisco area bio-medical firms, setting up their latest systems.

Recently, I have started a community on LinkedIn, called “WorkFree”, just for this purpose. Individuals can post messages about their interest to do free work in particular areas, and employers can advertise their interest in getting some free work done.

I have found other opportunities to lend my expertise, and ideas, to everyone who is interested in talking. Even though a recommendation a good friend made to an analyst firm discovered they had no openings, I took advantage of the contacts to offer my services to provide insights on the technology industry for free. Who knows what the friendships I am building through my conversations with various industry experts will lead to, even years down the road…

I also love helping other people with their careers. One of my friends recently became unemployed himself, and I suggested that he write a paper on an open source IT project he had been doing at his previous employer. I will help edit this paper, and then promote it on newsgroups and blogs that deal with this kind of technology. My friend has picked up a huge amount of valuable expertise, that could get him noticed by many potential employers. We just have to get the word out. This also helps me by making it possible to bask in the glow of my friend’s expertise. It doesn’t hurt me one bit to be seen (and noticed) as someone who finds great new technologies, or people. Hey, marketing is something I do, and being able to successfully promote my friends only helps grow my portfolio of show-case marketing efforts.

I am now actively looking for other such opportunities to help people in their job searches.

4. Becoming an entrepreneur

As if my job search, and volunteer, efforts weren’t taking up enough of my time, I have also taken on the task of helping a good friend with his web startup. He has spent years, and a lot of his own capital, building a very impressive project and business management system. I am helping find beta volunteers willing to manage their businesses on this system, building real-world case studies that will allow us to get more investment.

My ability to make any money from my efforts are slim, but this gives me yet another opportunity demonstrate my marketing skills, as well as create a great way to do more networking.

5. Home grown research

On top of all of this, I have also undertaken the task of starting up my own market research project. I have been keenly interested in understanding how recessions impact technology for many years, and now that I am between jobs I am free to indulge my curiosity to its fullest, in exploring this subject. I had started the “Recession Study Group" club at Microsoft, back in 2005, which has grown to over 200 members, but this was always just an extra-curricular effort and my ability to openly investigate this subject was limited.

Now, however, I have constructed a survey that asks both consumers and IT professionals how the economic downturn has changed their spending (and posting it to newsgroups, and contacting IT bloggers asking if they would be interested in posting it). I am following up with interviews of a dozen or so consumers and IT professionals to flesh out the results. I will be writing up a full report, with analysis, on my blog in the coming weeks.

One of my theories is that deep recessions can act as catalysts for permanent changes in the use of technology. When times are good, people are content to keep spending as they always have, but when times are tough, they will more seriously consider alternatives that might have been easy to dismiss in happier times.

Conducting this research is definitely fun, but I hope it will also further help in my networking efforts, and serve as yet another showcase for my work. It’s not like I can use the research studies I did at Microsoft as examples of my work, since all that data is proprietary.

What doesn’t work

1. External recruiters

I spent a lot of time getting in touch with recruiters, doing searches on LinkedIn and writing template introductory notes to some 200 people in this field. I have had a lot of positive responses from these external recruiters (and even spoken with over a dozen of them on the phone or in person), but almost no solid leads have resulted from all this effort. I get the definite impression that external recruiters are becoming increasingly frozen out of many employers, who are reluctant to pay high fees when the volume of candidates applying for jobs DIRECTLY to their own web sites is so massive.

Some recruiters have given me good advice on my resume, and how to focus my job search efforts, but not a one has come up with promising job openings.

2. Posting resume to on-line job boards or applying to jobs on employer web sites

Just throwing my resume into the mass of CVs swamping HR databases won’t get you anywhere. In my situation, in particular, my lack of official credentials or a college degree almost certainly means I will flunk any automated screening system. The only way to get noticed is to use my network to find an acquaintance or friend who can recommend me to someone they know in a company I am interested in.

From here to eternity…

I am sure that my job search strategy will change over time. I might be biting off more than I can reasonably chew by undertaking all these varying projects, but for the moment I think they complement one another. Ask me again in a couple months how well that is turning out.

There are many other things I need to consider adding to my repertoire. A number of people have suggested I start using Twitter and Facebook as part of my networking tools, but I have been reluctant to invest the time in still more social networking tools. Facebook, in particular, seems to be much more of a tool for socializing than “networking”, and has become incredibly busy with trivia. Still, maybe I should give it another look.

NOTE: I have posted some of my techniques for using LinkedIn as well as a podcast on how to contact people at firms you want to work for and build relationships. Also, you can listen to my series of my "Anatomy of a job search" podcasts where I interview fellow-job seekers about their search strategies and brainstorm ways to improve their effectiveness.

Mikhail's LinkedIn tips

Linked in tips:

• Put your e-mail address in your name, so that people can easily contact you without having to send an invitation.
• Write recommendations for everyone with whom you have had a good work experience (even if it was short term).
• Join groups for your region, and professional areas.
• Put effort into building your profile into a de-facto resume, with details about your job experience and skills.
• Search for recruiters at employers you are interested in and contact them about opportunities.
  

Feel free to check out my own LinkedIn profile for an example. You can also read a more in-depth description of how I am using LinkedIn (and other tools) as part of my job search strategy.

Deflation strikes Doritos

The deflationary forces keep sneaking up on us. Here is an example of how some super-market items are finally starting to see deflation. It’s telling, however, that prices for these items haven’t changed. Instead, producers are simply offering more goods for the same amount of money.

Your eyes are not deceiving you in the grocery store. Yes, your bag of Doritos just got
bigger. No, the price didn't change.

Last year, food packages
shrank as food-makers, dealing with record high ingredient costs, struggled to
maintain their profits. But the weakened economy has caused a slump in demand
for ingredients such as corn and oil, pushing those prices back down. With lower
ingredient costs -- and higher consumer demand for more value -- some brands
such as Frito-Lay are shifting back to bigger packages, and doing it without
raising prices.

This fits a pattern I’ve been seeing lately. Deflation is indeed rearing its, head, but it doesn’t always show up in the list prices. For example, many private schools are offering far more generous financial aid packages (to a much greater portion of students) rather than reducing their official tuition rates. We see a similar phenomenon in other areas where list prices remain high, but increasing numbers of add-ons are offered at no extra cost. A five year warranty? No problem it’s built into the price. You can get almost anything upgraded these days without paying a “premium” price.

At some point overt deflation will break out in even these laggard areas of the economy. House builders tried to stave off price reductions for years by offering ever more expensive inducements (including outright cash kick-backs), but eventually there was no alternative but to just drop the prices. Everyone else is just catching up.

The recession and you: has the economy changed your IT spending?

If you can spare about 10 minutes to take a survey I would love to hear about how the global recession is (or is not) changing your personal or organizational IT plans.

http://www.surveymonkey.com/s.aspx?sm=Co3CDMHC47_2fTCyYvGNSa_2fA_3d_3d&&c=64

This is part of a study I am conducting for my own blog (http://www.surkan.com/), and I will be making the results freely available in the coming weeks. I am doing this as part of my own private research effort, and it isn't being done on the behalf of any corporations or clients. This subject (i.e. how the economy impacts IT trends) is something that has fascinated me for years while I was employed as a market researcher at Microsoft, and now that I am no longer with the firm I am free to really explore the subject.

I don’t have any fancy prizes, or incentives, to offer you for taking the survey (i.e. I don’t have any kind of research budget), but I can promise the reward that comes from helping your fellow man, and making the world a better place.

Ok, that’s a little over the top… But your contribution (through answering the survey questions) will go towards helping the tech industry understand how to better meet your needs in a changed world. If nothing else, the results of this study should prove to be an interesting read for anyone. :)

Thanks,
Michael Surkan

P.S. This survey is designed so that people who say they have an IT related job will be shown enterprise-type questions. Everyone else will see questions about technology spending in the home. You are free to take the survey twice if you are particularly ambitious, answering both the enterprise and consumer IT sections.

P.P.S. If you are are interested in publishing a link to this survey on your own blog, or publication, please e-mail me directly at msurkan at hotmail.com and I will send you a custom URL. This will allow us to track the responses from your own readers, allowing you to see how your audience responses differ from the over-all total. I am happy to share the raw results with you (excluding any private information), so you can write your own stories.

Free at last!

Now that I am footloose and fancy free (i.e. on a hiatus between jobs), I am going to use the coming weeks to explore some ideas I’ve been working on regarding how the PC, and software industry, are going to evolve in the coming years. I am finally able to put some thought into things that I was too busy to contemplate in depth during recent years. In particular, I will discuss how the global recession (which will likely get considerably worse in the next few years) could act as a catalyst for significant change.

When times are good, consumers and enterprises are willing to keep doing things the way they always have. When times are lean, and unpredictable, people are willing to explore new alternatives that may help them better deal with the new environment. New inventions are rarely created during depressions (i.e. there is a substantial decline in patent filings every time the economy contracts), but the depressions themselves can often lead to the widespread adoption of technologies that had previously only been on the periphery.

Many of the biggest changes we may see occur are in areas that gurus have long foreseen as ripe for transition, but where predictions have consistently been proved wrong due to the momentum older product enjoyed during the salad days.

Stay tuned!

Seeking software developer guinea pigs for on-line project management

If you are interested in finding a way to manage your software development projects, helping improve communications, efficiency, and timeliness, please write intranetsites@surkan.com to enquire about being a beta tester for a new end-to-end on-line project management tool. This software has already proven itself as a great help to one small distributed web software development team (with team members in places as diverse as the Philippines, Canada, and Russia).

• Track entire projects, including e-mails, customer requirements, and specifications from the beginning to end of project. Everyone on the project stays on the same page.
• Complete versioning and history on every document in the system (can easily revert back to whatever previous version you wish).
• Handle project and task management, automatically determined delivery dates and assigning tasks to the appropriate people. It is easy to tell when things are falling behind (and automatically re-adjusting schedules in real-time) before they get out of hand.
• Automatic costing, easily showing how much a project will cost (with labour, materials, etc) and the profit margins.
• Completely web-based architecture doesn’t require any local software, and can be easily used by an team-members wherever they are in the world.
• Serves as core of your own public web site, allowing you to automatically turn any document into public web pages.
• Granular permissions allowing administrator to define how much, or little, of system each individual participant can access.

There would be no charge for using this software for at least 6 months from first registration. Future prices for beta testers will be capped at nothing more than the cost of hosting the servers for a year after the first 6 month trial (e.g. if you setup a web site that has huge amounts of traffic and downloads your costs will rise accordingly). To give some perspective, this software has already been licensed to some small manufacturers for upwards of $40,000 a year. Being able to use this for free is a steal.

The prime motivation for making this offer is to because we want to move into the software development market. We expect our beta users to put some effort into creating project template definitions defining the standard tasks in their development process, which we can then use to create a generic turn-key solution for future customers. Just imagine that we are giving you some spreadsheet software, but want you to create a detailed spreadsheet template that can be used by others who want to do similar things.

In the interests of full disclosure, the UI is rough around the edges right now, and wouldn’t be appropriate for rank technology novices (for doing the actual setup and definition of the projects that are being managed, day-to-day usage could be handled by many people). This software works best for small organizations with less than 200 developers or testers. You can check out more details of the features of this product, and watch a demonstration video.

the BIG event

Today (July 10th, 2009) Microsoft and I parted ways, and I will no longer be sharing the hallowed electronic ether with the great community of people I have come to know and befriend in my 8 years at the company.

I have sure had a lot of fun in Product Marketing (back with SMS & MOM), Program Management (blame me for the Windows Firewall, the Windows Filtering Platform and Teredo), and Product Planning. I am actually looking forward to finding new opportunities. Microsoft feels like a BIG company these days, and I am looking forward to working somewhere with a little less process and role specialization. Frankly, I understand that it is necessary for a company of Microsoft’s size to adopt a more methodical process, and bureaucracy. I look forward to working in an entrepreneurial environment.

I will certainly miss the discussions and debates of the Recession Study Group (a club I setup at Microsoft back in 2005).

I feel like I have done some of the best work of my career over the past year. Some of the initiatives I started are bearing real fruit (e.g. putting plans in place to FINALLY manage our Windows APIs), and my research around 64-bit computing and the needs of web developers have gotten real traction. I see lots of groups using my research in their presentations. At least I can leave feeling proud of my work, and knowing that I have made a real impact.

If anyone wishes to reach me just write michael@surkan.com. Feel free to join my network on LinkedIn (http://www.linkedin.com/in/msurkan). You might want to also check out a new group I created on LinkedIn called “WorkFree”, to help people find pro-bono work to further their careers.

Cheers,
Mikhail

P.S. I am certainly looking for job opportunities right now, and would love to hear any ideas as to people or organizations that might be interested in a scrappy program or product marketing type. I will likely do some contract work in the short-term, while looking for new opportunities, so I am open to temporary projects too.

Rosenberg says the bear market is here to stay

This is one of the best overviews of where there economy is, and will be headed in the coming years, I have heard anywhere. David isn't alarmist, and he uses rational arguments (with facts and historical comparisons) to explain how we are in the midst of a long term cyclical bear market that will experience a lot of volatility in the coming years. This is no prophet of the apocalypse. Life will go on, we will eventually get through this, but things will be rough for many years.

It's very sobering to hear how there have been lengthy periods where bear markets prevailed, despite large rallies along the way. I laughed when I heard the warning to bond bears, pointing out that US treasury yields fell in the '30s DESPITE massive government stimulus and spending.

Of course, it only stands to reason that such a level-headed perspective on the economy would come from the mouth of a Canadian.

The Never-Ending Bear Market

Before we get too excited about the possible end of the recession, and an economic recovery, it is important to get a bit of perspective. Deflationary depressions (which is what we are experiencing) can be long-drawn out affairs. The 1930s was one of the most volatile periods for the Dow Industrials on record. More recently, Japan has been experiencing one massive bear market since 1989.

The chart below says it all. There has been at least 5 major rallies in the Nikkei since 1989 (depending how you count), only to have the market tank even lower lows. Some of those rallies even lasted for a good period of time. The rally in the 2000s lasted over 5 years (rising some 140% from the 2003 bottom) , before new 20 year lows were reached in 2008.

If the US in entering a lengthy period of credit deflation (which is a theory I subscribe to), then there is a good chance the rally of 2009 will fail, and the markets will reach new lows. Unfortunately, I don’t think we will have the luxury of years before this rally peters out.

If anything meteoric rallies are sure-fire sell signals. Swift rallies (that cover a lot of ground in a short period of time) almost always occur during bear markets. The great rally of 2009 isn't any different.

The Job Market: Zero Sum Game?

Over the past month travelling around Europe, I have been truly amazed by the general belief, even by otherwise reasonable folks, that there are more or less a fixed number of jobs available and that automation and delayed retirement can only ascerbate unemployment. These same intellectuals recommend, of course, that we avoid modernization of factories and encourage early retirement to make more jobs available to those entering the work force. The coup de grace is the misguided belief that automation causes wages to fall.

Such logic fails on a number of levels. First, there are unlimited number of potential jobs in a free market, otherwise everybody since Adam would have been unemployed. Given that there are millions more jobs available now than there were 100 years ago illustrates the point.

Secondly, it is healthy that some jobs disappear. The wagon wheel manufacturers and blacksmiths are not missed, nor are the scythe-wielding farmers. In terms of comfort, life was considerably harder back then, and more precarious. A doctor was as likely to make you better as he was to inflict additional injury via misguided treatments.

Some jobs evolved, while others disappeared and millions of new jobs like those involving information technology and the modern service industry appeared. Flight attendants and computer programmers were unimaginable 100 years ago. Any attempts to artificially keep wagon manufacturers in business beyond their usefullness would have led to enormous resource misallocations.

By allowing wagon manufacturers to slowly disappear as cars displaced horse and buggy, a sudden mass layoff was avoided and wagon manufacturers could gradually be integrated into other occupations as they became redundant.

As machines reduce the burden of repetative tasks, and populations become more educated and skilled, life gets better. Hong Kong and Singapore were the havens of low-paying, ¨sweatshop¨ labor only fifty years ago, but their populations have risen to become among the wealthiest and best-educated in the world as their skills and technology improved. At the same time that they have become wealthier, we in the West have not become poorer, nor has the total number of jobs in the West fallen. The common belief that low-skilled manufacturing in China and elsewhere will reduce quality of life world-wide has no foundation in history.

The number of available jobs and potential wages are limited only by restrictions on the elimination of redundant jobs and legal barriers to entry for new competitors or enterprises. Regulations restricting layoffs, working hours and days of operation, like Sunday opening restrictions, can only reduce employment. The true cause of unemployment and reductions in living standards is the lack of free market competition.

I come to praise Ben Bernanke

With all the opprobrium being dumped on the hapless Federal Reserve chairman, a little balance is in order. Ben Bernanke is not some evil spirited monster, salivating at ways to nationalize the economy, or enable world domination. I fully believe he is honestly trying to prevent economic catastrophe by the best means he knows of.

Neither do I believe that Ben is a mental midget. Not only does he have PhDs, but many of the studies he has written show a deep intellect and sharp mental processes.

I don’t even blame the Fed chairman for the financial crisis and recession. For that matter, I don’t really blame Alan Greenspan either. I think a quote from the CalculatedRisk blog sums it up nicely.

It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.

Of course, this doesn’t mean I am in agreement with the chief US central banker on much (although his suggestions that congress reign in spending are welcome). To a great extent I see the leaders of the Federal Reserve in much the same light as the technocrats who tried to steer the Soviet economy. I am sure that many Soviet officials were true believers, and many of them were highly educated, but that still didn’t make their belief in communism as the solution to economic problems correct.

Likewise, US central bankers (and treasury officials) may well believe that stimulus and loose credit are good for the economy, but that doesn’t negate the fact that they are only succeeding in making the recession worse, and saddling future generations with even larger debt loads. The solution to the economic mess requires a purging of bad debt, and a return to savings. Unfortunately, these are the very things that policy makers are trying their level best to avoid. It’s akin to a heroin addict taking more narcotics when the start to feel the pangs of withdrawal. It may help you feel a bit better in the short term, but it is no solution the underlying problem.


That said, the vilification of Ben Bernanke, or other economic officials, is counter-productive in the larger debates over policy. Casting aspersions on the motives, or integrity, of the people you disagree with merely serves to undermine your own arguments. Let’s just admit that it’s possible Ben Bernanke really is a nice person, trying to do good for his countrymen. Then we can engage in a real debate over the efficacy of the policy measures being taken (or the very existence of the Federal Reserve itself).

Iron Ore Producer Drops Prices 28.2%

Here is yet another example of the budding deflationary process at work. And yet there are people still scared of inflation? From where I'm sitting, prices just keep dropping. Sure, we've had a bit of a bounce with the summer bear market rally, but the signs that prices will just keep falling when this rally fades just keep growing.

Vale SA, the world’s largest iron- ore producer, said it agreed to cut
prices for the steelmaking raw material for ArcelorMittal by 28.2 percent

Of course, don't forget to check out my classic in-depth podcast on the case for deflation.

Another Bubble in the Making - FHA Backed Loans

It looks as if another bubble is being teed up, this time in Federal Housing Administration (FHA) insured loans. The government’s eagerness to pick up the slack in mortgage lending will almost certainly saddle tax-payers with massive losses in the not too-distant future.

One has to wonder just how the government can feel that insuring loans with extremely low fees is good business when the private won’t touch them (at least not with the cut-rate insurance prices FHA charges)? The massive expansion in FHA backed loans is nothing more than another misguided government effort to stimulate the economy, and prevent a further deterioration in asset values. Unfortunately, such efforts only serve to prolong and deepen the depression by blowing still more bubbles, which inevitably lead to more defaults and foreclosures.

Already we are seeing defaults in FHA backed loans spike, with a tripling in the number of so-called “instant” defaults, where not a single payment is ever made on the mortgage. Far from leading the mortgage industry to a new era of prudent lending and risk management, FHA is doing its best to take on as much risk as possible, and plug the holes left by the loss sub-prime lending.

The simple fact is that US housing is still vastly over-priced, and things aren’t going to turn around until either incomes start increasing or prices fall to the point where housing is once again affordable.

Record-high demand for government- backed home loans is overtaxing the Federal Housing Administration and may weaken the integrity of Ginnie Mae mortgage bonds, a U.S. inspector general said.

The freeze in the mortgage markets has driven FHA’s market share to 63 percent this year, from 24 percent in the fiscal year ended Sept. 30, Donohue told a House Financial Services Committee panel on Oversight and Investigations.

The volume of single-family mortgage loans insured by FHA, which is overseen by HUD, more than tripled to $180 billion in 2008, he said.

With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency's overall growth in new loans, according to a Washington Post analysis of federal data.

More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis. The pace of these instant defaults has tripled in one year. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week.

loan modifications aren't helping anyone

Policy makers should abandon the clearly futile efforts of keeping struggling mortgage holders in their homes. The massive default rates on modified loans show that most of the people who run into financial trouble with their homes are unable to make payments even with assistance. It would be far better to just let these suffering debtors walk away from their homes, and find accommodations they can actually afford (which are usually better than what they had).

The only thing all these loan modifications accomplish is to waste everyone’s time and money (including the taxpayer, which is picking up much of the tab), while preventing the real-estate market from adjusting to more reasonable price levels.

Fitch found that a conservative projection was that between 65% and 75% of
modified subprime loans will fall delinquent by 60 days or more within 12 months
of having been modified to keep the borrowers in their homes. This is an even
worse result than previous reports by federal regulators. Even loans whose
principal was reduced by as much as 20% were still redefaulting in a range of
30% to 40% after 12 months.

Socialism: Idealism meets Cynicism

Curiously, socialists both want to create a utopic society where there is no suffering

sometimes it pays to be wrong

In a recent newsletter, the financial analyst Bob Prechter, makes a great observation about the perils of always relying on statistical probabilities. A given event, or occurrence, may be rare, but that that is no reason not to plan or prepare for it. That 200 year flood or hurricane may be rare, but when they do occur the consequences are disastrous. When the consequences of a given event are huge, it is far better to plan for the worst, even though the chances of dire circumstances occurring anytime soon are slim, rather than do nothing until the inevitable actually does occur which destroys you.

In Bob’s example, he talks about a restaurant which terrorists have attacked several times over the years. Sure, the restaurant patrons might only be killed one out every 500 days, but on that day when the terrorists come, it’s game over. It might be worth while avoiding the restaurant for 50 days of every year that have particularly higher odds of attack (due to special commemorative dates, etc), even though most of those days will wind up seeing no violence at all.

Prechter goes on to explain that economists often fall into this trap of playing the odds. Economic contractions are rare, so it is usually a safer call to predict expansion and growth. However, when contractions do occur they are often severe, and can be utterly devastating to businesses (and investors). What use is an economist who is right 99% of the time (predicting blue skies and growth), if they can’t be relied on to give insights as to when a disastrous economic upheaval may occur? It would be preferable to have an economist err in crying wolf 20% of the time if they manage to advise people correctly about avoiding the next wipe out.

US Treasury as Loan Shark

The financial news almost seems to come straight from bad fiction lately. Who else but an author of pulp fiction could have imagined the US treasury playing the role of a loan shark (although I am sure that anyone who has been on the wrong side of the IRS won't find this too much of a stretch)?

In statements that almost seem impossible to believe, the treasury secretary is now making it clear that banks which received special government bail-outs are NOT even allowed to repay the loans. Not only were many banks forced to accept government funding in 2008, with officials using all manner of threats to cajole reluctant financial institutions to take public money, but now the government refuses to let any of these firms repay the money. It would seem that policy makers see value in forcing companies to remain indebted to them. After all, these loans have given the government unprecedented power to make demands. No bank who's hands are tainted with public bail-outs can ignore ultimatums on executive compensation, or even lending practices.

Anyone considering accepting government funds in the future would do well to remember this. Once you let the government into your business, they will own you. Talk about a deal you can't refuse!

Treasury Secretary Timothy Geithner indicated that the health of individual
banks won't be the sole criterion for whether financial firms will be allowed to
repay bailout funds, a position that might complicate their efforts to give back
the cash.

In an interview, Mr. Geithner laid out some broad
principles, including the need to consider the overall health of the financial
system and the flow of credit in judging whether banks can repay their
government investment.

The Depression You've Never Heard Of -- 1920

The global economy suffered a major contraction in 1920. In a single year US production fell by 21%, US GDP declined 24% and unemployment shot from 4% to 12%. Nevertheless, the economy had begun a significant recovery in 1921, and a long term depression never occurred.

As Tom Wood outlines in this tremendous presentation, the key factor that aided the swift economic rebound was the decision by policy makers to stand aside, and let the economy work out mal-investments by itself. In fact, the President (Warren Harding) embarked on a policy of cutting government spending and advocating deflation. What a complete contrast to the stimulative efforts employed in the 1930s and in 2008 and 2009.

Eerily, it turns out that Japan's response to the 1920 crash was massive stimulus which led to a "lost" decade, and even greater economic ruin in the late 1920s.

I can only shake my head in disbelief to hear the leaders of 2009 argue that the only problem with Japan's failed stimulative efforts of the 1990s was a lack of aggressiveness.

Newer Home Loans Defaulting Faster Than Ever

We are now starting to see evidence that defaults are rising substantially on even the newest vintage of loans. I've long suspected that the worst performing home loans are going to be the most recent ones, as the depression picks up steam. Not only are job losses increasing in the broader economy, but the recently purchased homes are winding up under-water almost immediately (i.e. being worth less than the price of the mortgage) when prices are dropping 3% to 5% in a single month. It is the amount of equity which is the biggest predictor of default, and the newest purchases typically have the least equity.

Troubled borrowers continue to default at high rates even on home loans
that have been modified by lenders, according to a government report issued
today. The report also found that an increasing number of borrowers default on
their loans before making a single payment.

Of the borrowers who had loans modified early last year, for example, about
35 percent had missed at least three payments nine months after their loan was
modified. About 57 percent had missed at least one payment.

The report also found that an increasing number of homeowners, about 1.44
percent during the fourth quarter of 2008, are falling

behind before making a single payment on their mortgages.

http://www.washingtonpost.com/wp-dyn/content/article/2009/04/03/AR2009040300813.html?hpid=topnews

lenders ignoring defaults

Here is further evidence that nothing is really what it seems in the financial system. The statistics we see on defaults (and foreclosures) are becoming increasingly meaningless as lenders simply decide to look the other way, and allow deadbeats to default without any consequences.

I am not saying that creditors are doing the wrong thing by not seizing assets (i.e. there might be little real value left), but this sure messes up the statistics. The phenomena even occurs in residential lending, with many examples of delinquent home-owners who have been in their homes for a year or more without being kicked out. Even once lenders foreclose, some institutions are reluctant to actually sell the assets at current market rates. It is far better to keep unrealistically high valuations on the books, and just sit on a dead property, than to be forced into insolvency by booking severe losses after selling for cut-rate prices.

There is so much rot going un-reported that God only knows how bad things really are…

Under normal circumstances a company with as much past-due debt as General
Growth would have been forced into Chapter 11 bankruptcy protection by now.
Creditors so far have been willing to let deadlines pass because they believe
there is little to be gained and much to be lost through a bankruptcy.

http://globaleconomicanalysis.blogspot.com/2009/04/commercial-real-estate-limbo-lenders.html

Bottom Feeders Beware

The very explosion in the number of buyers looking for great real estate investment opportunities, through foreclosure auctions and short sales, virtually guarantees that we are far away from a recovery. The field is already littered with the corpses of value investors who jumped in too early. Just look at how the big investment funds who bought into financial institutions like Washington Mutual wound up seeing their stakes wiped out.

While savvy investors have long profited from dealing in distressed properties,
the soaring rate of U.S. home foreclosures over the past few years has
attracted mainstream interest and crowds of new bidders.

The experience of all these novice investors jumping into the market is likely to end in tears, as prices keep falling in the years ahead. Those 30% discounts (from peak prices) won't look so good when prices drop another 30% to 60%. There were plenty of people who bought Japanese real-estate in 1994, after it had dropped some 40% from the'89 peak, only to find the prices fall much further over the next decade. There is no reason such a thing can't happen in the US.

When we finally do hit a bottom in real-estate, there will likely be such a level of disgust with the market that few people at all will be interested in purchasing for investments.

O Ye Of Little Imagination

The "Oracle" of Omaha has once again demonstrated that his crystal ball doesn't work so well. According to Warren Buffet, the economic downturn is as bad as he could possibly have predicted. He follows up by saying he doesn't see how things can get any worse.

My response is simple: Warren clearly lacks imagination if he can't conceive that things can get worse (which they will).

Buffett said economic developments have been very "close to the worst case" that he had imagined,

As I've written before, the great business people of the last 60 years are getting their come-uppance now. The principals that have served them well for decades (e.g. "value" investing) just don't work in a protracted depression with crashing asset values.

A bull market at last! Storing crude.

Finally there is a bull market to invest in: storing crude oil. Traders, and producers, are awash in such a surplus of oil that the costs of storing the stuff is going through the roof.

as storage units on land have filled up, the companies that own the tankers have profited. Tanker companies charge an average of $75,000 a day, three times as much as last summer, to hold crude, said Douglas Mavrinac, an analyst with Jefferies & Co.

As I wrote a while back, speculators are betting that crude prices will be higher in a year or so. But with volumes of stored crude rising dramatically, I wonder how well that game will work out.

Meanwhile, oil-producing countries such as Iran have pumped millions of barrels of their own crude into idle tankers, effectively taking crude off the market to halt declining prices that are devastating their economies.

Traders have always played a game of store and sell, bringing oil to market when it can fetch the best price. They say this time is different because of how fast the bottom fell out of the oil market.

“Nobody expected this,” said Antoine Halff, an analyst with Newedge. “The majority of people out there thought the market would keep rising to $200, even $250, a barrel. They were tripping over each other to pick a higher forecast.”
Now the strategy is storage. Anyone who can buy cheap oil and store it might be able to sell it at a premium later, when the global economy ramps up again.

So much for peak oil. Demand for energy is much more elastic than almost anyone realized.

Would you trust this man?

According to the recent financial report from Warren Buffett's holding company, "
Berkshire Hathaway reported today that its net worth fell in 2008 by $11.5 billion, a decline reducing its per-share book value by 9.6%. That was Berkshire's worst result in the 44 years that Chairman Warren Buffett has run the company."

Is this the kind of financial performance we expect to see from one of the world's greatest financial minds? According to Buffett's own words, he made a “major mistake” in buying shares when oil and gas prices were near their peak. Worse, Buffett made a bone-headed maneuver in selling derivatives, betting that markets would recover, putting Bershire on the hook for up to $37 billion dollars. And this is the same guy who called exotic financial instruments weapons of mass destruction!

Warren's great trick was buying stocks at the beginning of one of the greatest bull markets in history. Unfortunately, it looks as if the skills that had served so well in past decades are leading him astray in the new world of economic depression, and the prospect for long-term deflation.

Love it or hate it, bank nationalization is inevitable

All the gnashing of teeth of a possible bank nationalization misses the real point- it is inevitable, regardless of whether anyone wants to do it or not. The major US banks (like Citigroup and Bank of America) are technically insolvent, and unless some miracle occurs that turns their non-performing loans back into gold then these institutions are doomed.

Sure, it’s theoretically possible that the government would just stand by and allow a Citigroup to keel over, and wind up being liquidated in a bankruptcy, but policy makers would never allow such a disorderly crash. Show me just one congressman (other than Ron Paul) who would be willing to allow all the depositors in Wells Fargo to lose their savings?

Instead, the government will be forced to step in and supervise an orderly dissolution, much as what occurs with FDIC conservatorships. I find it strange to hear so many critics about nationalization when nary a complaint is uttered when the FDIC seizes lenders and proceeds to find buyers, and disposal of assets. That’s all we’re talking about here. The only difference is that the big banks are of an order of scale larger than anything the FDIC has hitherto dealt with, potentially saddling the government with enormous liabilities as they pick up the pieces.

Of course, I personally favour the hands-off approach, allowing depositors to be completely wiped out (this would definitely stop any moral hazard in its tracks, when everyone realizes they have to take personal responsibility for putting their money in safe institutions), but I know it will never happen.

Sooner or later the federal government will be forced, kicking and screaming, to seize the nation’s big banks. I am sure this is not what Messr Geithner would like to do, but he won’t have any choice. Unfortunately, judging by the collapse in bank share prices it looks like this will happen sooner than later. As we’ve already seen in many other bank failures over the last year, depositors start to withdraw their money when their bank’s stocks are in the sub $5 range, which creates a dynamic that drives the institution into the ground.

We’re all Keynsians now

I just watched a Charlie Rose interview with several well known economists about the new US administration’s bailout efforts and was struck by the absolute unanimity in agreement that such policy efforts are a good thing. In fact, all of Charlie’s guests insisted that even larger bailouts are in order to avoid having a “lost decade” such as Japan saw. I suppose I really shouldn’t be all that surprised considering how this is exactly why people become economists- in order to be technocrats who craft policy. Still, the fact that no one questions the logic of interventions is incredible.

The Frontline documentary on the crash of 2008 also plays right into this general belief that running the economy is all just a matter of good, level-headed, policy making. The documentary infers that the financial crisis could have been stopped in its tracks if only policy makers had used a more comprehensive approach early on, and appeared more confident.

Of course, I can understand the natural desire we all have for hope. We also don’t like to think that events are out of control. It is far more comforting to believe that the only reason bad things happen is because some person’s incompetence, or mistake, than to consider that there was nothing anyone could have done.

But now is not a time to ask such questions. Instead, everyone ought to just be greatfull that our governments care, and are trying to do something to fix the economy. After all, it’s the thought that counts.

Canadian economy bites the dust

So much for the theory that Canada's economy was going to go right on sailing the high seas when the US tanked. Yet another nail in the coffin of the de-coupling theory. If anything, the bubble in Canadian real-estate has been even more spectacularly insane than that of our neighbours to the south.

As I've said for a long time, the economic fall-out from the global credit bubble is going to be far worse in most other nations than in the US.

Economic problems in the U.S. have always been keenly felt in Canada. But
until last fall, Canada looked positioned to weather the storm better than its
southern neighbor. Low corporate and consumer debt levels, no subprime-mortgage
crisis, and surpluses in the federal budget and trade balance placed it on
sounder footing. Economists expected slower growth but no recession.

Last fall, as economic problems multiplied in the U.S. and elsewhere in
Canada, Alberta's oil-and-gas industry briefly remained a bright spot. Then the
bottom dropped out of the oil market, as the global downturn suppressed demand.
Tightening credit compounded the problem. Almost overnight, oil companies
started postponing investment plans.

Rick George, the chief executive of Calgary-based Suncor, which in January
postponed site-expansion work worth C$14 billion, estimates that 35,000
temporary workers employed around the Fort McMurray oil sands will be reduced to
fewer than 10,000 by the end of the year. Given how frenetic the boom was, he
says, "we needed a correction. What we didn't need is a collapse in the banking
system and the world economy to get it."

http://online.wsj.com/article/SB123500580587718267.html

financial bail-outs just add to deflationary pressures

Ironically, the latest attempts to jump start the US credit markets are actually just adding to over-all deflationary pressures by increasing debt. Debt must be repaid, and leads to major economic contractions in downturns as we have seen in 2007 and 2008. All these efforts to create even more debt policy makers are just driving us towards an even deeper decline of asset valuations and an increase in the purchasing power of the dollar.

I guess the new US administration hasn’t heard about the Hippocratic oath.

In the new consumer-lending program, the Treasury provides $100 billion of
capital and the Fed uses that as a cushion against which it could make up to $1
trillion of three-year loans aimed at jump-starting markets and spurring
consumer lending.

http://online.wsj.com/article/SB123440381495875583.html?mod=testMod

Economic Crises Stimulate Community and Interdependence

When times are good, we are quite happy to share in the rewards of prosperity, willingly accepting more in bonuses and pay than they may have actually deserved. We even spend money we don't yet have, based on optimistic valuations of our homes and other assets, not to mention projected future income. We don't need to rely on friends or family or unions because we feel self-assured that we can get another job easily and pay for whatever services we might require without the inconvenience of reciprocating. We somehow feel we can afford to neglect nurturing our relationships to family and neighbours.

As times get worse, we have less money and feel more insecure about the future. New jobs are scarce as many employers layoff workers while others hire new workers at the lower wages of an increasingly competitive labor market. We look for ways of supporting each other by sharing time and resources and helping our neighbours. Suddenly, we can't count on paying for all of our needs with cash and must rely on our relationships with friends, neighbours and relatives. A natural, healthy community spirit becomes essential.

While we draw nearer to our own select communities, we become less tollerant of others that we deem to be outside of our community and who we perceive to be encroaching on our prosperity. We become more nationalistic. We spend more time with our neighbours, but vote for protective tariffs to discourage trade with "others." We criticise immigrants, especially illegals, because they are willing to work harder for less compensation than we are. Instead of recognizing that jobs and wealth are unlimited in the world (if not, then all new entrants to the world since Adam and Eve would be unemployed) and that all humans have equal value, we fall into fallacious economic assumptions about a zero sum game (jobs and wealth are arbitrarily limited and must thus be distributed among us) and actively cultivate categorizations of "us" versus "them."

Many of us are suddenly unwilling to accept the possibility of failure and considerable loss, even though we were quite willing to accept the unreasonable prosperity of recent times. We rejoiced when our investments miraculously rose by 50% over a brief period, but find it somehow intollerable that they should fall by the same amount. We want to savour the benefits of free markets without accepting the associated risks.

Political propositions of security, where the government promises that nobody will be allowed to suffer too much or fall too low become very attractive. During crises, security trumps potential future prosperity and people are willing to trade the latter for the former. Alas, freedom comes with responsibility. Like the farmer, if we want to reap the rewards of his bumper crops we must also accept our lot in times of drought. Voluntary associations can ease the risks, but ultimately, we cannot have freedom without responsibility.

Institutional Instincts Deepen Crises

As we move deeper into the current economic crisis, it is becoming increasingly clear how instinctive responses to the crisis can be counterproductive, both at the national and institutional levels.

At the national level, officials move towards protectionism when their intent is to expand trade and economic activity. Protectionism, including "buy American" policies, reduces trade and production by inducing trading partners to restrict our goods from entering their markets.

Governments also try to encourage easy credit and aggressive consumer spending when those are precisely the reasons for the economic crisis in the first place. The cure for excessive borrowing and spending is saving, but while savings help long term economic growth, they discourage near term consumption.

Individuals and families naturally save more and spend less when they feel that their assets are declining in value or that their sources of income are at risk of decline. The governments are actively discouraging this natural instinct because it means a decline in consumption in the near term which causes declines in perceived economic strength and hence government popularity. Without savings, however, there is less capital available for creating new companies and providing productivity-enhancing capital to workers in the medium to long term.

Because individuals cannot be easily discouraged from saving when they sense economic troubles, governments resort to taking the money individuals invest in government bonds and spending it for them. Instead of these savings going into the most productive industries and investments, it is turned into government make-work projects like bailing out poorly run companies and inefficiently building unneeded infrastructure projects. In short, these savings are diverted from achieving their natural role of encouraging long-term economic growth into short-term make-work projects.

The same short-sighted mistakes are made at the institutional level. Rather than simply reducing spending and production, organizations often choose to provide a lower quality product, thus diminishing their reputation and hurting their long-term growth. This is especially true of service organizations like private schools and colleges where it can seem more attractive to accept lower quality applicants who can pay full tuition than it is to offer scholarships or simply lower tuition so as to enable more high quality students to be able to attend. This latter requires some belt tightening, but it ensures that the quality of the product is maintained or even raised. Above all, customers demand value for their investment during crises. Schools and similar service-based organizations need to both reduce their prices and raise their quality.

Whereas the individual instincts to save money and look for better value during crises are very healthy, institutions and governments with short term economic objectives tend to make decisions which seem to be compelling in the short term, but which ultimately diminish the health of the country or organization. The role of crises is to improve value and savings, and resistance these ends will only protract and deepen the economic suffering.