patrick.net

above should read "have failed us..."

Why is my comment in moderation?

>>Have a great weekend too! Merry Christmas! God save us all.

WHAT? Isn't the free market going to decide who is saved??

###

"There are no atheists in foxholes," (Clear, Casey or Pyle, variously)

"Perhaps, then, there are also no libertarians in financial crises.” (Jeffrey Frankel)

Given the challenging economic environment, we’ve decided to cut costs at Mahalo.

Although we’ve got a significant amount of cash on hand, and the business is ahead of schedule in terms of traffic (4m uniques a month, double where we thought we would be at this point), we’re fairly certain that the advertising climate for the next two years will be severely depressed. To ignore this obvious fact would be irresponsible.

We’ve laid off a just under 10% of our full-time staff, cut our overhead by doing smart things like renting desks (we have six offices in Santa Monica fyi), and reorganized our editorial department to focus on freelance positions over in-house editors. The net result of the effort is we are giving Mahalo another year of “dry power” (or runway) to complete our mission.

We can now operate past 2012 even if we never make any advertising revenue, and truth be told building advertising-based companies is my specialty (the last two, Silicon Alley Reporter and Weblogs, Inc. each broke 10m a year revenue between their third and forth years). Perhaps we’re being too conservative, but I’ve rarely heard of companies that went out of business because they made cuts too early, and I’ve heard of many who have reported the opposite.

As the CEO of the company, the responsibility for these cuts are mine and mine alone. Obviously, I did anticipate that the market would correct and that is why we raised $20 million over two rounds of funding before we launched. That move ensures that Mahalo will be able to get to profitability and ride through what is sure to be a very deep and painful recession.

While I anticipated and prepared for the ‘internet winter’ we’re now facing (you’ve read my posts and e-mails about the startup depression I’m sure), I failed to realize how bad the situation would get. It’s much worse than I thought it would be, and ignoring market conditions today would only mean deeper cuts down the road.

It’s my responsibility to make this hard decision and I don’t take it lightly. To the people impacted I’m very sorry that I wasn’t able to anticipate this better. It’s my fault and I’m sorry that you’ve got to bear the burden of my inability to better prepare.

http://calacanis.com/2008/10/22/tough-times-hard-decisions/

Ad network Glam sees record 4th quarter, puts entire workforce on “variable” pay

Matt Marshall | December 18th, 2008

Glam Media, one of the newfangled content and advertising networks assumed by many industry observers to be vulnerable to financial meltdown, says it still hasn’t seen any marked decline in online display advertising. Yet, to be cautious, it is slashing salaries by moving to a system called “variable pay.”

Instead of resorting to mass layoffs, as many other Silicon Valley startups have, Glam is implementing an across-the-board cut in fixed pay. It is increasing the amount of “variable pay” its employees receive — in other words, pegging more of their compensation to revenue performance.

The management team of 12, for example — which took a temporary 25 percent pay cut earlier this year — will take a 25 to 60 percent pay cut in its compensation over the next year, depending on their exact positions. Glam’s top sales representatives, for example, will now only have about 25 percent of their compensation “fixed,” down from 75 percent. That means they’re more dependent on Glam bringing in revenue than ever before.

The rest of the company is also taking higher variable components of their pay. Functional managers will see 15 percent of their pay move to variable, and other employees will see between 3 and 10 percent of their pay become variable. The less an employee makes, the less their pay will vary.

This is a notable experiment. Most companies in Silicon Valley and elsewhere reward their sales executives with such a variable pay component, because salespeople should be entirely focused on sales and nothing else. It is unusual for companies to make the rank-and-file subject to revenue performance, however, in part because of the danger that short-term goals will be prioritized at the expense of long-term decisions (quality product development may be neglected, for example, because there’s no reward for it).

Frank, I am not advocating anything. I am just stating what happens in the real world when countries move towards free market capitalism. It is tried for a while and then when people realize it's tough and that there are no handouts, no welfare, no medicare, no social security, when you make a bad bet or investment you can lose, the country as a whole does an about face and becomes populist.

Like the USSA and Bush. He was a free market guy and now he is a socialist. That is a real world example of what I am talking about. Free market not benefiting us and our buddies okay lets change to socialism, it also happens when you get a good percentage of people that don't win in the free market and they stage a coup or vote and install a more populist gov. Russia, China. Venezuela, Peru etc etc

Of course you can argue it was not a true free market to begin with., but in the real world you have to deal with degrees.

Frank,
Have a merry X-mas. I'll blog to you later.

>> Like the USSA and Bush. He was a free market guy and now he is a socialist.

As I said before USA is a "market free" society not a "free market" society. That is why this election I could not vote for Barrack Obama .. neither republicans ... voted independent.

>> Like the USSA and Bush. He was a free market guy and ...

As I said before USA is a “market free” society not a “free market” society. That is why this election I could not vote for Barrack Obama .. neither republicans … voted independent.

WHAT? Isn’t the free market going to decide who is saved??

Merry Christmas, justme! :)

"...and then when people realize it’s tough and that there are no handouts, no welfare, no medicare, no social security..."

What place/time are you talking about here, since we're talking about the real world.

"... when you make a bad bet or investment you can lose,"

Goodness help us! :-)

I would like to see eqiuty stripping regulated. How many more times are we going to let a company like Cerebus step in, take cash, load a company up on debt, and then move on?
In good years, the debt is a positive leveraging agent. In bad years, Cerebus just kills you. Take-overs by by companies with no business model are people just gaming the system. Time for this profit model to go to bed. Especially when the cost is a public bailout. . .

Isn't gold a sort of ponzi or pyramid scheme? Just a thought.

I would like to see eqiuty stripping regulated.

I would say you're going after a symptom rather than the cause of the problem. We need less regulation (which is prone to failure e.g. SEC & Madoff) and more free market.

Cerberus and other private equity funds are not in the business of wrecking the businesses they buy, but rather taking already wrecked companies (like GMAC and Chrysler) and deriving from them the most profit for their shareholders.

That that may result in the public having to bailout the remnants of said companies should not be addressed by disallowing companies like Cerberus.

Rather we should remove the government entities that allow all the conditions that cause huge company failures and then grant the public bailouts.

frank,

>>We need less regulation (which is prone to failure e.g. SEC & Madoff) and more free market.

By that logic, if a fox is set to guard the hen house, and things turn out badly, the lesson is that one should not have guards at the hen house?

I think not. The lesson is that it crucial WHAT KIND of guard that you have at the hen house.

Duke,

I don't disagree, but how do you implement that? I think the details will be important.

For example, one could instate a rule that one cannot take cash out of a company unless the company has paid off or funded all its liabilities (e.g. pension fund), or have a positive balance sheet.

Sounds simple, but I think that would kill the dividend of many a public company....
just for starters. So how do you do it?

There's three drivers in my household. All three of us drive four cylinder economy vehicles. We averaged about 33 mpg over the three vehicles, we only bought fuel at Arco Rotten Robbie or World Oil (lowest price).

We track our 30-day moving average fuel cost, it peaked at about $455 in the summer and is recently about $175.

The savings comes to about $3360. An annuity of 10 yr treasuries at today's rates would have to be close to 150K to cover that expense, not even including the taxes. Even if we could get 5%, that annuity would be about 65K, again, not even including taxes.

Our driving habits for three driver household are fairly modest for a household that is typically car-and-commute centric. So, the new wealth effect is even greater for others.

This new wealth should spur a wealth effect to goose the economy, let's hope so. I may need that new wealth effect wealth to cover my living expenses in case I lose my job so I will hoard my new wealth effect, but most other people can spend it for consumption, help us all of us out including our friends in China and Japan.

By that logic, if a fox is set to guard the hen house, and things turn out badly, the lesson is that one should not have guards at the hen house

No, you misunderstand the problem. I didn't say no guards are necessary. Rather that less [government] regulation is needed.

You see, because the fox is sanctioned (and required) by the government, it makes the hens complacent and/or unable or less willing to look for alternatives.

In a free market (i.e. less regulation), the job would have been filled by the best qualified guard dog who offered the best price.

The guard dog knows that if it doesn't do the best job at the best price, that there be a line of dogs waiting to take it's place.

The fox doesn't care what kind of job it does because he knows he can't be replaced.

There were many contributing factors to this mess. But I remain convinced Greenspan's easy money policy was gasoline on the fire - causing the big firestorm.

He caused the runaway credit, which drove the real estate bubble, and resulted in the mortgage crisis. That was all that was needed. The other mistakes added modestly to the firestorm he created.

Isn’t gold a sort of ponzi or pyramid scheme? Just a thought.
I don't know Frank -- it seems to have done pretty well as a "when the SHTF" hedge.

Frank:
No, gold isn't Ponzi, because 1) there is a real commodity involved, and B) it isn't dependent on an ever-broader base of buyers, and probably also iii) you only realize your gain/loss when you sell.

Most Ponzis are buy-and-hold-a-paper-promise, like Soc1al1st Security.
Most Ponzis require an ever-broader base, like SS
Most Ponzis give great payout to initial investors for extremely small investment (like SS did), payout that is direct infusion from the current revenue from the new investors (like SS always has been), and then crash when the pool of investors stops growing, like SS in 3... 2...

Which is my ultimate answer to the question "Why are They (Demopubs and Remocrats) letting illegal immigration happen?" 'Cause they need new pyramid base, of course! To cover the promises to the Boomers, you need aout half the population of the planet paying in.

Gold? It'll be here when you get back.

BTW, that is also the answer to the question of why the Europeans are letting a culture that is inimical to the tenets of "Pluralistic Society" take over theirs. They need the warm bodies to finish paying out the promises of European Welfare State SoC!AL!Sm to this generation, and then who gives a damn what happens. Kids? What are those? All hail solipsistic nihilism!

Cathedrals will become Mosques, 'cause nobody is around who cares what a nave was for in the first place. You can watch it happen almost-real-time on youtube. Enjoy!

On equity stripping

Dunno how to do it. I feel as long as we are in a crisis and putting things on the table like our unfunded socialt security and medicaid liabilities, I shold bring up the ruin caused by equity stripping. It enrches the few to the great risk and probable harm to the many.

frank,

>>In a free market (i.e. less regulation), the job would have been filled by the best qualified guard dog who offered the best price.

Unfortunately, it somehow happened that it was the foxes that ended up hiring the guard dogs (foxes and dogs are close cousins), and the guard dogs struck a deal with the foxes that they would look the other way when convenient. In return the guard dogs would get some chicken scraps when nobody was looking. Dogs like chicken just as much as foxes do.

Case in point:

Hens = buyers of Mortgage Backed Securities
Foxes = investment banks that package said MBS for sale
Guards = the bond ratings agencies

Does this simple and very significant counterexample falsify your thesis? I think so.
The bond ratings agencies (Moody, S&P, etc) are exactly the form of private guard that we are talking about, and look how miserably they failed.

Bap33,

Dude, you really need to stop obsessing about Barney Frank's sexual orientation. I'm starting to wonder what is the underlying cause of this strong preoccupation, if you know what I mean.

For the record: Barney Franks's former boyfriend was a low-level manager (middle manager) at Fannie or Freddie, and no more than that.

You really should stop spreading these lies and propaganda, which by the way are the staples of the right wing echo machine.

I don't know why people still blame Free Market or the right wing for this mess. The problem was clearly caused by attempts of social engineering in the housing and financial markets.

DennisN,

And I 'still' maintain it was "THE" cause. The problem with "going there" is that it invariably gets lost in the political discussion that ensues and I have 'yet' to invite?

We can get wrapped around the axle of playing the chicken or the egg and endless partisan finger pointing but I've seldom had an adult conversation on this issue. Let's face it, why blame a hole in the tax code you can drive a Mac truck through when it's so much more juicy to blame now defunct mortgage firms?

It's the same people that insist it wasn't a factor at all that lobby to maintain it ( just in case they stumble into a windfall down the road? ) Again, this is something that by it's very nature wouldn't likely be discovered until -after- the "autopsy". I'm more than comfortably vindicated. With or without that "$10,000 shower curtain moment". :)

And I ’still’ maintain it was “THE” cause. The problem with “going there” is that it invariably gets lost in the political discussion that ensues and I have ‘yet’ to invite?
I still think a "turn in cousin Fred the speculator" program at the IRS (maybe an 80/20 split with the whistleblower) would do wonders for the federal gov't coffers and give us a start on understanding how much this indeed contributed.

So what's the difference between pay as you go and ponzi? For example, for college tuition, I am planning pay as you go, since I don't have an excess of cash and I don't want to borrow anything. That seems like a reasonable approach. But since so many of you equate social security with ponzi, perhaps you can answer. I always hear this charge, but to me it is a very reasonable approach if you have a reliable stream of income, and don't want a lot of money sitting around doing nothing.

EBGuy,

Pffftt, even at 90/10 I'd never have to work again. We'll never know how many MEW/Walk $'s evaporated into thin air? Basically the same scam only you got the money "fronted" to you and didn't pay tax on it.

Course now we're ALL f@cked until the end of time ( and a day ) It's also assured that bottom-feeding will be pretty much pointless as we continue to bottom grope and the only people that 'might' be able to take advantage of it haven't been born yet. The rest of us won't have any lead left in our pencil and will have long since given up on trying to impress women. ( The primary reason for having choice diggs )

The gals that were hoping to one day own the "envy of the neighborhood" will be more concerned with their oxygen delivery guy making it in time.

Dinor,

I have read your posts here before and shared your overall view of things since I was introduced to patrick.net.

I also figured that remarks like yours coming from persons like you would signal a bottom. I remember such gloom expressed here about residential real estate in 1994.

sybrib,

Thanks, I've learned a lot from the many other posters over the years as well. I certainly wouldn't want to leave anyone w/ the impression I've got everything figured out? I don't.

When you do a Column A/Column B side by side comparison of an IRA and a "primary residence" there's simply no freaking way an IRA can compare. If people had to wait until 59 1/2 to access their home equity or face some pretty stiff penalties, maybe their would be some parity?

It's just a good thing that it's even part of the discussion at all. Where I feel the one study that David Leonhardt cited was a little "off" was the one w/ 19 different cities all within commuting distance to freaking BOSTON! Uh... unlike Portland, OR they actually have j-o-b-s in Beantown and you can count the people on the west coast with a Boston accent on both hands. Those people are born there ( and 'most' will die there! ) Then add in all the old money where they needn't "tap" their home's equity just to take a vacation.

Where's the Equity Decimation Meter currently? 2 tril? At that rate it puts the debate on the back, back burner. So while things have cooled considerably it by no means indicates it wasn't a factor.

The bond ratings agencies (Moody, S&P, etc) are exactly the form of private guard that we are talking about

Quite the contrary! The bond rating agencies are a government sponsored cartel and you're right about how miserably they failed, proving my point.

Hey, Lost:

your College Tuition is a price for a commodity: the privelege of being in those classes, and, one assumes, the eventual certification of your competence. It comes to an end. It is a single thing, and you are a single payer. $X for $Y class time, and that's it. You can choose to pay cash "as-you-go", or you can take out a loan, or your state can offset some of your tuition through taxes on the populace, which many do. It is a pretty simple value for value transaction.

Now instead, think about getting a bunch of kids working their lemonade stands to support your going to school. Lets say you need 30 kids (entrepreneurial little suckers!) to tithe to the Lost Cause College Fund and get you through your four years, you paying nothing. This is the usage of pay-as-you-go that is current: they pay, you go. Now that younger generation comes up for their college years, and they expect the same deal. Now you need 900 lemonade entrepreneurs to cover it. Now you see the pyramid. That third generation need 27,000 fourth-generation lemon squeezers to make it work. Etc. The first in line get a sweet deal, the bottom of the pyramid gets screwed.

This is exactly the situation with Soc1al1st Security. The first recipients only paid in very minimal amounts, and received great benefits, made possible because there were thirty workers to every one SS recipient paying-as-they-went. Now there are four. In twenty years there will be two or fewer. We have been spending the supposed SS surplus on other things for the last 40 years, and there isn't anything in the "Surplus" but further fiat debt instruments.

Not only will that last generation be paying each for his own personal retiree, but they'll also be redeeming the debt for the last 50 years of spendspendspend.

It can't work. It's gonna break. Period.

No matter how you slice it, the retirees have to supported by those who are working.

Whether prefunded, underfunded, or not funded, the consumption by retirees and workers comes from the same pool of goods and services that the workers produce. And more retirees and fewer workers means less for everyone to consume. We cannot consume that which is not produced.

"It is stunningly ridiculous to expect regulation to solve major problems when it is regulation that caused every major problem we have!"

Mish

http://globaleconomicanalysis.blogspot.com/

We cannot consume that which is not produced.

So true, and where deflation comes in. It was so easy during the runup to use bubblebucks to acquire the big screen and other trinkets produced by modern day coolies. Add to that the ability to bill to your future self (or to your children) for present day consumption of bigger bling, such as pools, pergraniteel, SUVs and mufferless Fat Boys for fat boys.

The excessive expansion of credit will cure itself with the rapid contraction of credit. This deflation will occur despite the politicos attempts to stop it. Thier two main tools seem to be to either (1) spend our way out (infrastructure repairs) or (2) devalue the currency through OO style "raw print." That seems to me to be like a drunk trying to prevent a hangover by either (1) continuing to drink, or (2) increasing the proof of his beverages. The only hope for the drunk is to get the hangover over with, and vow not to drink so much the next time.

Companies like Dell, Buget/Thrifty and UPS seem to get the idea. They are using devices like across the board pay cuts, lessening of benefits, and a week of mandantory unpaid vacation rather than layoffs to trim costs. I think that instead of the massive unemployment the politicals keep screaming that deflation will bring, I think we will just see pay cuts, and a rebound back from an unemployement that will only hit about 8%.

For the "Big Three" to stay in business, they had better find a way to produce cars that people can afford. "Afford" meaning able to buy with prevailing wages and a lack of absurdly easy financing.

A report at CNN/Money this afternoon notes the sharp increase in sales of trucks and SUVs in recent months, the combination of cheap energy and huge dealer incentives apparently pushing hesitant buyers over the edge - at least those who managed to survive the last year with their job and credit intact.

Trucks and SUVs are now outselling those gas-sipping hybrids that dealers couldn't keep in stock just a few months ago. Prius owners don't look nearly as smart as they did over the summer when Hummers would sit and sit in their owners' driveways, the once-proud driver of the monstrosity not able to summon the courage to watch those number spin round and round at the filling station as others looked on.

At the peak, it cost between $150 and $200 to fill up one of those big Suburbans or Lincoln Navigators (see the SUV Fill Up Index from July 16th), but now you can fill up a bone-dry tank for $50 or less.

now you can fill up a bone-dry tank for $50 or less.

True, and that $50 will still fill the tank in summer 2009. But that $50 will represent a larger share of one's disposable income in 2009 than it did in 2007. I wouldn't write off economy cars just yet, nor would I think "low" gas prices will cause a resurge in the SUV/Pickup market.

Frugal will be the new "black."

I just filled up my car for $19.50. A lovely experience.

Some of us love little gas-sipping cars. Though mine is not a Prius.