Tuesday, August 31, 2010


This is quite stupid to write, since we all know how the current Administration feels about business and businesspeople, but.......Policymakers should be focused on how to accelerate new-business formation.

If we aren't nurturing startups, we are not creating jobs.

The debate rages on about how to jump start job creation. Will interest rates at zero spur lending? (No.) Will a more stable policy environment encourage expansion? (Perhaps.) To clarify your thinking, I highly recommend you read "The Importance of Startups in Job Creation and Job Destruction" from the Kauffman Foundation.

Their research demonstrates that new startups accounted for all net new job creation over the last 33 years. Encouraging and/or depending on large companies to expand employment will be a failing strategy. This makes imminent sense, since large companies are the primary beneficiaries of the productivity improvements that enable them to do more with less. We should expect large, slow-growth companies to be shedding employees. Meanwhile, these resources become the raw material for new businesses to be created and grow.

Policymakers should be focused on how to accelerate new-business formation. There are natural limits, of course, since the process of thinking up new products or services simply takes time. Furthermore, many prospective workers have skills that are mismatched with the needs of new industries. Nonetheless, if we aren't nurturing startups, we are not creating jobs.

Most policymakers will point to small-business loans as the source of capital for startups, but in a de-levering and risk-averse environment, this capital pool will be limited at best. Our best policy prescriptions will be tax law changes that encourage venture capital, merchant banking and angel equity investments.

For example, one effective change to unlock and accelerate venture investments would be a capital gains holiday on venture deals. For the next year, any purchase of equity in a business in which the cash went to buy new shares, not take out existing shareholders would not pay any capital gains on the eventual sale of the investment. A tax holiday like this could unlock a rush of capital into new businesses. (Note that this is much more targeted than a general capital gains tax cut.)

Sometimes, nothing is the best thing you can do.

The quickest way to double your money is to fold it over and put it back in your pocket.

This statement perfectly captures the investor mood in America, I think. No one has risk appetite anymore... and for good reason.

Analysts (and perhaps the Fed) are mystified that generationally low mortgage rates are not spurring a refi boom. True, many won't qualify due to negative equity, but there is another issue that seems to be ignored by the punditocracy: duration.

Rates are quoted for 30-year fixed loans and, yes, they are attractive. However, after years of refinancing to get lower rates, lower payments and, perhaps, cash out, homeowners are noticing that the mortgage-burning celebration keeps getting pushed out another 30 years. For homeowners in their 20s and 30s, this may not be a problem. For baby boomers in their 40s, 50s, or even 60s, the prospect of paying a mortgage well into your 70s or 80s holds little appeal.

Of course, the natural response is to check on a refi into a 20-year or 15-year loan. These often have even lower rates... but the rapid amortization can sometimes lead to a higher monthly payment. Few folks are seeking higher payments at the moment, even if they ultimately pay less over the life of the loan.

Cash is piling up on corporate balance sheets.

Expect a series of special dividend announcements within the next 12 months.

America may finally be shedding its get-rich-quick schemes. We under-saved for years, figuring we'd fund retirement with gains from Internet stocks, then real estate, then perhaps commodities like gold and oil. Now we are saving more and concentrating on keeping what we have.

One economic bright spot is the cash piling up on corporate balance sheets. Pundits may moan that the cash is not being recycled into expansion, but I think we should give the companies some time. They are all recovering from post-traumatic stress syndrome! We are finally starting to see some action, with stock buyback announcements from QLGC, HPQ, RMBS and FOSL.

Extending this theme, I expect to see a series of special dividend announcements. The current environment is feeling a lot like 2003-2004, when companies were similarly piling up cash after massive cost-cutting in the previous recession. There were dozens of special dividends paid in that period. Look for similar behavior in the next 12 months.

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