The Haiku of Finance for 07/31/25

Overnight lending

Needs solid collateral

Full liquid basis

The Limerick of Finance for 04/06/14

Lending firms in a quest for high yield
Loan to Europe and spots far afield
Borrow dollars so cheap
Mighty profits to reap
Term sheet covenants set legal shield

US Lenders Seek Interest Rate Arbitrage With Europe SMEs

This WSJ article on US lending to European small and medium-size enterprises (SMEs) caught my eye today.  US funds are exporting the business development company (BDC) model of asset-based lending to the continentals.  These funds are combining a carry trade with interest rate arbitrage.  Hedge funds do that instantaneously but these private funds are lending with much longer durations.

The carry trade is easy money right about now while US interest rates are still at historic lows.  Borrowing in US dollars from US institutions and lending to European businesses that are hungry for capital is a lender's dream.  The euro is lower right now than it's been since late February, so US lenders who need to buy it just to loan it out are getting a decent deal.

It's no mystery why European banks can't fill the lending gap themselves.  Their balance sheets are overstretched with bad debt from the PIIGS and whoever else couldn't figure out how to run a healthy national economy.  European banks applying Basel capital tests have discovered to their chagrin that they can't afford to make more high-risk loans.  Those banks haven't figured out the US trick of moving bad assets into off-balance sheet entities and securitizing their cash flows.

I'm not interested in the details of these trans-Atlantic BDC clones.  They do not appear to be publicly traded (except KKR) so I can't evaluate them.  The news item is noteworthy as a bellwether for the US financial sector.  Funds that chase returns by making loans to European SMEs at double-digit annual interest rates are pretty desperate for yield.  Their investors may be running out of high-yield alternatives here in the US.  I still recall the headlines I read back in 2007 about how a collapse in the US high-yield debt market preceded the collapse of US equities by several months.  I watched it all from the sidelines, in cash.  

The Haiku of Finance for 04/03/14

Urban building boom
Banks lend to developers
Stack credit sky high

The Haiku of Finance for 03/24/14

Revolving debt door
Rolling short-term payday loans
Escalating fees

Checking Out VEDC Access to Capital San Francisco 2013

The VEDC Access to Capital Business Expo in San Francisco has become one of my perennial favorite conferences.  I had to attend and check out innovations in raising capital for small businesses.  The Hyatt Regency San Francisco never disappoints with hospitality.  VEDC renamed the conference this year as "Here's the Money!" instead of just asking where the money hides in years past.

Check out the awesome signage above.  You just can't go wrong with signs like that showing you the way to money.  I would posts signs like that around my home office but they would just get in the way of my daily moneymaking.  VEDC comes all the way up to San Francisco every year to show us the money, which is a long trek away from their usual SoCal partnerships with organizations like Golden State Certified Development Corporation.  They've been reaching out for partnerships with Mission Economic Development Agency here in town and the Nevada Microenterprise Initiative.  Where's the money?  It's here, there, and everywhere.  I noticed that the conference also coincided with an unaffiliated event, EO Alchemy 2013, at the same venue.  The entrepreneurs doing their alchemy may have had no idea that Access to Capital was just around the corner.

The introduction from VEDC announced their new venture, Aquaria Funds, specifically to operate outside Los Angeles.  I think it's great that VEDC created a vehicle that entrepreneurs can use to obtain capital in addition to other local microfinance partners.  They also offer more conventional SBA loans.

I started my morning checking out the session on startup financing.  Interstate Business Capital mentioned cash advances on purchase orders and other merchant advances but I'm pretty sure those are only options for revenue-stage companies.  No one can offer advances for purchases that haven't been made if the business is still trying to launch itself.  There just aren't accounts receivable to accelerate or accounts payable to defer at most early-stage startups.  Kiva Zip is enlisting its microlenders as evangelists for the non-profit projects they launch.  That's great for Bay Area do-gooders.  The Green2Gold guy, Bruce Blechman, mentioned CCVF's Clean Business Investment Summit and their founder's radio show on new venture money.  Bruce is a genius and his rapid-fire rundown of non-bank lending, licensing, collaborative co-ops, advance order funding, and sweat equity is like a five-minute MBA education.

I slipped in to the concurrent seminar on financing for existing businesses but it was mostly a panel of larger banks discussing their established loan programs.  Banks look at an industry's default rate in addition to a business' specifics, which will disappoint a lot of the aspiring restauranteurs and beauty parlor owners attending this conference.  It's good to know that SBA-backed financing covers a ten-year cycle for equipment instead of banks' normal five-year cycle considerations.  That was all I needed to know before going back to the last part of the early-stage financing panel.  I was pleasantly surprised to hear that Chinese entrepreneurs were successfully pushing their government to crack down on IP infringement.  I'd like to see more confirming evidence of stronger Chinese IP protection before I revise my low opinion of the rule of law in China.  In the meantime, there is such a thing as insurance against IP infringement.  It works just like other policies with premiums and deductibles.  Yeah, just don't tell the ACA exchange folks about it, or they'll force us all to buy it with another mandate.  Startups who want to protect their IP as early as possible should file a provisional patent application with the USPTO.

Strolling the expo floor meant listening to bank loan sales pitches.  My eyes doth glaze over when I hear big banks say they have a community bank culture.  Sorry, but I'm not a believer.  Only two things determine a large corporation's culture.  Number one is the CEO's personality and expressed strategic goals, because other executives will model that behavior and push their business units to meet those goals so they can get promoted to the C-suite.  Number two is the HR department's policies on hiring, firing, promotions, and performance bonuses.  Those are the hard incentives that motivate human behavior.  Any big bank that aspires to live a community bank culture would have to devolve so much autonomy to its local branches as to make its corporate structure nonviable.

I sat in the next session introducing local resource partners.  The usual cast of characters from the SBA, SCORE, SBDC, Operation HOPE, and others were on hand.  The Renaissance Entrepreneurship Center, San Francisco Community Business Resources, Pacific Community Ventures, and OBDC's Bay Area Small Business Finance were also in attendance at the expo.   I would have preferred to see the San Francisco Center for Economic Development (SFCED) in attendance but alas, it was not to be this year.  Entrepreneurs from underrepresented demographics need to check out California's Veterans Business Outreach Center.  I'll give you this panel's best quote, free of charge:  "The one time a banker won't give you an umbrella is when it's raining."  That means banks won't give you a loan if your business is losing money or the microeconomic climate for your sector has a poor outlook.

The most valuable insights I got out of that local partners panel was from the SCORE guy who previously worked with Harvard Angels and Sand Hill Angels on early stage investing.  He said records of the term sheets and signed subscription agreements that support a startup's capitalization table are a must.  Banks and angel investors will want to review those documents during their due diligence phase.  Corporate structure is the key to determining capitalization structure because it must allow for selling equity shares.  The choice of an S-corp or C-corp IMHO depends on how rapidly the business expects to scale up.

One participant at "Here's the Money!" mentioned Wells Fargo's financial support of microfinance platforms, which I presume to be Grameen America.  I've blogged before about how SIFI institutions will eventually purchase microfinance and crowdfunding platforms to broaden their product offerings.  The consolidation won't start until the SEC finalizes the regulatory structure enabling the JOBS Act.  You heard it here first.

The keynote speaker after lunch was Kevin Harrington, a TV pitch innovator who brought you Ginsu Knives on shopping channels and infomercials before he joined the Shark Tank show.  I'll share his tips on "Creating Brand Success" pretty much verbatim because they apply to lots of different business types.

Kevin liked the "Three Steps and a Stumble" approach to raising capital and growing a business.  Step One is "curiosity overload."  Deep market research reveals product trends, so collect industry publications and attend trade shows.  You know what . . . that's exactly what I do.  Step Two is "hijack your habits."  Think outside the box.  Make things happen.  Don't do something the same way forever because business changes quickly.  Hey, I do that too.  Step Three is "build a brand for both the company and yourself."  Man, this guy must be reading my blog because surely he recognizes the pure unrivaled genius that is both Alfidi Capital and Yours Truly, Anthony Alfidi.

Kevin also laid out five skills for entrepreneurs.  Here they come.

- Skill One:  Create the perfect pitch.  Show healthy profits, exponential growth, acquisition opportunity, strong market, bootstrap capital from founders, uniqueness, powerful presentation using his "tease / please / seize" structure, the industry gap you fill (which I interpret as the pain points you solve), and your exit strategy.

- Skill Two:  Publish.  The business plan must have an executive summary, industry overview, competitive analysis, marketing plan, strong financials, and an exit strategy.

- Skill Three:  Productize.  Show your product's mass market, problem solving ability, uniqueness, magical transformation, celebrity endorsement, multi-functionality, credible testimonials, documentation and clinical studies, publicity, and value proposition compared to cost of goods.

- Skill Four:  Profile.  New media accelerates publicity.  Smartphones now have multimedia production capabilities equivalent to a full broadcast studio.  Shooting smartphone videos for YouTube will go a long way.

- Skill Five:  Partnerships.  Find parties with resources you need, and offer them resources they need.

Now for the "stumble" Kevin mentioned.  If you must fail, do it fast and cheap.  Make it up on the next venture.  Kevin shared videos of a lot of his very successful infomercial products and few that were disappointments.  No one remembers your disappointments if you recover and follow up with new successes.

These VEDC events are highly condensed equivalents of college seminars in finance and marketing.  So where's the money?  Well, here's the money, in my wallet.  It's yours too once you line up investors and creditors who have confidence in your business prospects.  Don't ask me for money.  Go out and find it with the local partners VEDC lined up for you.  

Saving College Really Means Saving Securitized Student Loans

The Administration has a bold plan designed to keep American youth flowing into the post-secondary education pipeline.  This plan will rate institutions of higher education on the quality of after-college careers their graduates achieve and steer more federal grant money to those colleges that score well.  I think this plan is brilliant in several ways (from a plutocratic perspective, anyway).

It will reward those universities whose graduates gravitate toward high-paying occupations.  The Ivies and Seven Sisters alumni who go into law, finance, and corporate management will see their schools richly rewarded.  The for-profit diploma mills whose grads head back to the fast food counter will get nothing.  This will accelerate the college market shakeout that is long overdue.  A large number of people don't belong in college, so fewer colleges means more workers don't need to waste their time with something beyond their ability.

The next part of the plan's brilliance lies in its perpetuation of student loan indebted servitude.  It does little  to control students' costs.  It continues funding Pell grants and does not make student loans dischargeable in bankruptcy.  Helping economically disadvantaged students is nice but it will come at the expense of middle class students who will continue to be priced out of college unless they take out enormous loans.

Most significantly for the financial markets, the plan grandfathers pre-2008 loans as ineligible for income-based repayment plans.  This preserves the value of cash flows from students to loan servicers to holders of securitized student loan pools.  The Administration's plan is thus a backstop (or "bailout" if you please) for the valuations of collateralized Sallie Mae securities in the portfolios of every pension fund in the US.  That is the single most important thing to know about any plan for education reform in the US.

I like the plan's allowance for experimentation with competency-based models and MOOCs.  Those concepts will succeed just fine without federal funding so this federal "help" will probably end up corralling them into something the educational establishment can control.  That control will never succeed, of course, but regulators are going to try.  Information wants to be free and much of what we know as education will soon be free thanks to MOOCs.

The myth that credentialing leads to rising income and social status has served the nation's elite well as a cash cow.  It will disappear only after much resistance and probably a round of hyperinflation.  

The Haiku of Finance for 07/22/13

Stupid college grad

Thought that loan was a good thing

Now you owe for life

Texas Ratio Versus Capital Adequacy Ratio

Banks are not the safe havens of yesteryear, if there ever was a yesteryear.  The 2008 financial crisis showed us all that banks often have no clue about the risk they take when making loans.  Investors have a few tools to evaluate bank risk before they stroll up to the teller window or click "buy" in their brokerage account.

The Texas ratio is explicitly focused on those asset categories that immediately threaten a bank's solvency.  The capital adequacy ratio (CAR) is a more complex assessment of a bank's ability to survive impairment of several asset categories.  The Texas ratio is simple and straightforward.  The CAR's utility depends on how closely the bank adheres to several accounting principles and whether it caveats its exposure by adjusting the risk weights.

A bank with a poor Texas ratio must make it healthy by making operational changes.  It can increase its loan loss reserves, sell off its REO inventory, pursue delinquent loans, or sell non-performing loans to third-party collectors.  In other words, the Texas ratio requires a bad bank to solve its problems.  The CAR requires its own set of fixes that probably take longer to execute than those for the Texas ratio as they require significant shifts in the bank's strategy.  It is important to note that Basel rules allowing a risk weighting of zero percent for government debt in the CAR may be unrealistic in an era when governments allow their central banks to devalue currencies with quantitative easing.

The bottom line is that understanding the Texas ratio and making changes to improve it are both easier than doing the same for the CAR.  Both metrics are useful and I don't intend to buy stock in any bank until I understand how they stack up in each ratio.  

Financial Sarcasm Roundup for 07/01/13

The year is half over.  I predict the second half of 2013 will require a record amount of sarcasm.

The EU is pretending to be angry that the US might have been reading its mail while it was vacationing in Cyprus.  Really?  Come on.  There is no way that heads of state don't know what's really going on.  The frustration that Europe's left-leaning blocs are venting could be bought off if Europe weren't so indebted.  Negotiations for trans-Atlantic trade deals may be delayed but they won't be cancelled.  Trade deals benefit business elites who underwrite political campaigns.  That's why they get done.

China continues to miss its growth targets.  Even China's official statistics, false as they are, can't hide the slowdown anymore.  I ignore alarmism over China setting export quotas for rare earth elements.  Industrial output will easily fall under any material export targets it sets.

The bond market is slipping as the Fed starts to lose control of the long end of the yield curve.  Investors are responding predictably by fleeing to cash.  Fleeing to cash now is not a bad move unless investors stay there when policymakers start pushing inflationary solutions.

Student loan interest rates just doubled.  This is good news because it will price a whole bunch of non-intellectuals out of worthless college degrees that they should not be pursuing.  America needs STEM graduates but not everyone is smart enough to handle the work.  America also needs plumbers, carpenters, mechanics, and electricians who do not need college degrees.  Cheap trade schools have better ROIs than expensive liberal arts colleges.

I didn't spend my whole day today looking up sarcastic things on the Interwebs.  I got out of the Alfidi Capital headquarters complex to hear some expert wisdom.  The Urban Land Institute's San Francisco chapter held a seminar with a noted local developer.  His best point on financing was the importance of a long-term, fixed-interest, self-amortizing, non-recourse loan.  That's important to remember whether you're buying your first home or launching a 400-unit residential development.  His other lesson was the importance of timing.  He began his most successful developments when the real estate market was soft, and they were ready for occupancy by the time the local market had turned favorable.  That's a lot like buying low and selling high in the stock market.  Some things never change.

I also went to a Commonwealth Club lecture on FDR's pre-WWII diplomacy.  He didn't trust the State Department's professional diplomats or even his own ambassadors' cables.  He relied on the personal diplomacy of hand-picked aides, all of whom had long Establishment family pedigrees and sharp political sensibilities, to develop relationships with potential European allies before America entered the war.  There isn't much room for sarcasm there, except to note that the American hereditary aristocracy will never relinquish its hold on policymaking.

Fed Inflates Auto and Housing Double Bubble

You've got to be kidding me, Bloomberg, if you think the Fed's ZIRP is a job stimulus.  The Federal Reserve's record low interest rates encourage reckless borrowing but you wouldn't know it from reading conventional media.  I look past cursory forecasts of job creation in the automobile and housing sectors.

Read the Federal Reserve's G.19 series data on consumer credit.  Pay particular attention to note #6 on new car loan data:

6.The statistical foundation for these series has deteriorated. Therefore, publication of these series is temporarily being suspended. The statistical foundation is in the process of being improved, and publication will resume as soon as possible.

Even if you ignore the Fed's own admission that its data on automobile loans is worthless for analysis, you can see from previous years' data that new car loans peaked in 2009 and have declined since then.  Any surge in loans since then is statistically questionable.  Auto sector executives who base their hiring forecasts on hope for loan growth are asking for trouble.

Purported growth in home mortgage lending is also questionable.  Read the Federal Reserve's Mortgage Debt Outstanding data; I selected December 2012, the most recent month available as of this writing.  Outstanding mortgages have been declining for "all holders" and "one- to four-family residences," the main categories that matter for homebuilders who want to forecast demand for new developments.

I ignore happy talk touting job growth from new bubbles.  I strongly suspect that whatever growth in demand automakers report is the result of subprime lending that pulls forward their future quarters' sales at unsustainably low financing costs.  I do web searches of phrases like "all cash buyers" for housing demand and get a similar feeling.  Home loan demand is collapsing across sectors for many reasons.  Banks have tightened credit standards and cash buyers are looking to flip properties rather than build equity.  These are not real sources of future job growth in two of the economy's biggest sectors.

The Fed's desperate ZIRP has not spurred overall lending but what little activity it does encourage is unhealthy.  Things look like 2007 all over again.

Winning at VEDC Access to Capital 2012 in San Francisco

The Valley Economic Development Center (VEDC) cares enough about small business owners to link them to sources of investment.  I liked their San Francisco event so much last year that I had to come back for a second helping.  I thoroughly enjoyed attending the VEDC Access to Capital Business Expo 2012 in San Francisco and was lucky enough to be selected as a panelist for one of their "Where's the Money?" expert workshops.  I was the only blogger on a panel full of institutional financiers and did my best to show off my genius . . . er, I mean, enlighten the audience about post-modern innovations in raising capital.

The other panelists were pretty cool.  They were from banks and other institutions that offered products running the gamut of SBA-backed loans and accounts receivable factoring.  My turn to explain myself came after everyone else had pitched their value propositions.  I explained crowdfunding in the context of its immediate predecessors, microfinance and P2P lending, and predicted that any crowdfunding portal that could offer a combination of debt, equity, and exotic project finance options would be a very attractive acquisition target for a major broker/dealer someday.  I threw in a couple of details about the JOBS Act's definition of an emerging growth company and how startups that want to benefit from its registration exemptions need to use only the handful of portals that have registered with the SEC.  I finished off by proposing four best practices that can help a startup maximize its chances for successful fundraising and reduce its chances of incurring lawsuits or criminal penalties.  Here they are, and perhaps they'll start some kind of movement toward standardization.  The first three practices describe documents a startup should post on its crowdfunding portal, and the fourth is something to execute daily.

1.  Business plan.  Post your two-page executive summary, mega-slideshow of your business model's execution, and two years worth of projected monthly cash flows on the crowdfunding portal.  

2.  Prospectus.  A good business attorney can help draft an offering memorandum that will comply with the JOBS Act and the rules the SEC should publish sometime early in 2013.  

3.  Term sheet.  Use the free term sheet generators that major law firms have built for free on their websites as part of their offerings to entrepreneurs.  

4.  Social media campaign.  Entrepreneurs need to get savvy about using social media to drive investor traffic to their crowdfunding portals.  

I admitted to the audience that the crowdfunding environment is kind of like the Wild West where anything goes right now until the SEC publishes its final rules.  The sector reminds me of where e-commerce was in the 1990s when eBay and PayPal were just gaining traction.  I still remember rival companies pushing "digital cash" solutions back then that ultimately went nowhere once secure portals figured out how to accommodate traditional cash.  That kind of shakeout is coming to crowdfunding, so it pays for both investors and entrepreneurs to be reputable from the start.  I got a few laughs when I mentioned that I blogged about crowdfunding last night, so they had a healthy sense of irony about my blatant self-promotion.  

The audience members were pretty sharp and had some good questions.  One guy asked me if U.S.-based crowdfunding portals were open to investors and companies from outside the U.S.; I admitted I had no idea.  That is really the kind of thing the SEC should seriously consider through public comment on its rulemaking process.  Internationalizing a U.S. crowdfunding platform would make this country a leader in financial market innovation (and no, hedge fund algorithms don't count as innovation in my reckoning).  Another audience member asked about the best time to bring angel investments into a startup.  I said words to the effect that investing should be a natural outward progression from one's own capital (savings and couch pillow spare change), to friends and family money, then crowdfunding, then angel investors, and finally VCs.  I truly believe crowdfunding can bridge the financing gap between personal sources and the larger world of professional investors.  

I also stuck around for the next "Where's the Money?" panel on fundraising.  I liked what Youth Business America does with microfinance and what Midland American Capital does with invoice factoring.  My recollection of the panel's responses follows.  Banks have many credit channels:  practice finance, SBA, and equipment finance to name a few.  Relationships matter in lending because banks consider their clients' exit strategies.  Non-bank lenders often bring technical assistance with business planning, plus outside partners from SBA, SCORE, SBDC, and others.  Non-bank financiers can also help a startup become eligible for more stringent bank lending by putting cash on its balance sheet.  One audience member at this second panel asked about crowdfunding, and a panelist said it's useful for projects with ROIs that are hard to define (like a music album or art project).  He was correct and I didn't speak up to interrupt because it wasn't my panel anymore.  I know when someone else deserves to shine.  

Lunch at the Hyatt Regency San Francisco was as terrific as I remember from last year, with salad greens,  chicken in cream sauce with rice pilaf, and some kind of carrot cake dessert thing.  I hung around afterwards to snag some extra biscuits and rolls that others foolishly left behind.  Yeah, I'm frugal like that if it spares me the expense of dinner.  I'm ultra-cheap and proud of it, woo-hoo!  

There were only a small number of hot chicks at this entire forum.  I got into a conversation with a really hot gal from Europe who wanted to digitally self-publish research on politics and diplomacy, and I kept thinking about how cool it would be to make out with her right there at the conference.  Well, unfortunately business comes first.

The lunch speakers were pretty good.  The Wells Fargo lady talked up her bank's support of the nation's "recovery" but I remember hearing the same kind of talk last year and evidence for said recovery is still spotty if you track data from Shadow Government Statistics.  She did have some good insights about using critical thinking to challenge our assumptions and get beyond simple choices between positive and negative extreme outcomes.  I'll do that the next time I have to choose between a blonde, brunette, or redhead and ask them if they'd all like to date me simultaneously.  Yes, I'm serious, I really do think that way.    

The next lunch speaker was the regional SBA guy.  He had some good advice, like getting whatever business licenses you need early in your startup process or you'll pay twice as much for them later (presumably through opportunity costs of lost business).  His charge to the crowd was to max out the use of free resources like SBA and VEDC.  I hope the audience appreciates these free goodies, because the federal government's fiscal pressures will put all taxpayer-funded business programs in jeopardy very soon.  

The founder of Chasing Lions Cafe told us how his home equity loan financed his first cafe; his home ended up underwater while his business stayed profitable.  The keynoter from ZinZin talked about branding because that's what the firm he founded does for a living.  I'll summarize his main points.  He said succeeding in a down economy tells you that you did something right, while doing it in a good economy means you never know the true cause.  Great branding doesn't just happen; it must be debated and advocated as a compelling narrative.  He challenged us to ask ourselves the following questions about the core of our brand identity:

     1.  Who are you / What do you do / Why should anyone care?

     2.  What's the great promise of your brand?

     3.  How will your brand change the world?

The ZinZin dude said competing on price and features makes your business a commodity; I'll bet he's been reading Harvard Business Review.  He also said a strong name, memorable story, and business actions that back up your story make a great brand.  Be bold!  Have a disruptive name and message that force people to slow down and pay attention.  Make a big bang.  End of story.

Okay, mister ZinZin, I'm taking you up on those challenges.  Here's how I answer your big three questions for the Alfidi Capital brand.

     1.  I'm Anthony J. Alfidi, Supreme Super-Genius / I make people angry with my obnoxious blog articles / People who are easily offended should care about how I ridicule the stupid things they do with money.

     2.  My brand advocates unlimited freedom, radical honesty, and side-splitting humor about finance.

     3.  Alfidi Capital will change the world by humiliating dishonest financial "professionals." 

I didn't hand out any business cards because exchanging contact information with other people isn't part of my self-publishing business model.  I did make one serious mistake by writing my name on some contact sheet when a clueless woman asked for a way to reach me.  I told her to Google my name but frankly I shouldn't have gone to that much trouble for her because I have no intention of getting in touch with her.  Maybe I should have rudely told her to get lost (you know, the whole business actions in support of my brand story thing) but some people are just so clueless they tug at what's left of my heart strings.  In the future I'll just spell my name once and people need to be quick enough to write it down for reference and move along.  I told quite a few other inquisitive people to look up my name printed in the program and they figured it out, geniuses that they all are.  Business professionals don't need my card anyway because I'm pretty visible around San Francisco.  I'm branded as an independent blogger and I need to minimize direct human contact to succeed.  

There you have it.  I plan to attend Access to Capital San Francisco next year as a keynote speaker.  I promise I'll make it unforgettable.  

Nota bene: None of the companies or institutions mentioned have given me any compensation or consideration for this blog article. My recollection of this conference is provided as a public service. 

Maturing Thoughts on Borrowing for Non-Productive Purchases

I have been a lifelong opponent of assuming personal debts.  I have never maxed out a credit card or applied for a loan.  The handful of times I've been late on a bill payment in my life are some of my gravest mistakes, and the tiny finance charges I paid each time for my oversights are a source of shame.  I hate debt.  That was the mature attitude to have during normal, boom-bust business cycles marked by productivity-driven growth and inventory-derived recessions.

Times have changed.  The historically normal boom-bust model is giving way to its once-in-a-lifetime deformed cousin, the hyperinflationary depression crisis.  An overindulgence in government, business, and household debt is driving the Fed to quantitatively ease away the dollar's value.  This will destroy dollar-based fixed income assets.  That's bad for savers, bondholders, banks, and hedge funds holding fixed-rate notes.  That's good for debtors owing fixed-rate loans, as the devaluing dollar enables them to pay off old debts with dollars of lesser value.

My point is that now is the time for previously debt-averse people like me to seriously consider taking on debt as a time-based arbitrage strategy for a self-destructing currency.  I scoffed for years at consumers who  took out automobile loans.  Owing money on a consumer good that immediately loses half of its book value upon purchase ought to be financial suicide.  Buying a vehicle with debt is good if said vehicle is used as an income-producing asset, i.e., a taxi cab, delivery van, ice cream truck, or urban safari tour bus for the hills of San Francisco.  I thought that way until very recently.  Now I think a loan of any kind, even for something as unproductive as a new car, is a useful way to acquire a hard asset with an increasingly worthless liquid asset.

I've been window shopping for a new car for some time.  My 2003 Ford Mustang still hums but at 80K+ miles it's getting long in the tooth.  When I turn the ignition key on a brand new sports car of some sort (another Ford Mustang or a Porsche are my leading contenders), it will be with the help of a fixed-rate loan that I will be happy to owe.  Watching the loan lose its value in the years ahead as hyperinflation enables me to pay it off in today's equivalent of pennies will be great for my net worth and my stellar credit rating.  Why, I may just pay that five-year loan off a month early as a show of generosity just to ensure I'm not the final nail that drives Ford Credit or its hedge fund syndicate into bankruptcy.

Nah, just kidding on that last count.  I'd never accelerate my payment schedule or do anything else to give a brain-dead counterparty some temporary advantage.  They'd probably assess me a prepayment penalty just to reach for my wallet one last time from beyond the bankruptcy grave.  Don't think a creditor wouldn't resort to that if a post-hyperinflation political regime allows it in one final act of financial repression.

I'll be checking with my local auto dealers soon to see what kind of financing terms they offer on new, flashy sports cars.  I'll also be checking with my bank's loan desk to see if they'll let me max out some one-year consumer loans just before this hyperinflation show gets rolling.  The Godfather of Soul, James Brown, once sang "Papa's Got a Brand New Bag."  Well, Tony here needs a brand new car, paid for by creditors dumb enough to loan me money as the dollar goes down the drain.  

The Haiku of Finance for 08/14/12

Greece delays default
Bad loans push spiral down hard
There is no fix plan

Helicopter Ben Sentences Millennials To Penury

The American generations coming up just behind mine (Generation X, for the record) are wringing their hands about their dire economic prospects.  Younger folks are putting off purchases of cars, homes, and other marks of adulthood because they are crushed by a dearth of opportunity.  A major contributor to this malaise is the pile of student loan debt that college admissions counselors and banks begged them to accept.

The ruling elite's response to this distress is to trot out its chief financial officer, the Fed Chairman, to explain to the younger folks that their crushing student loan burden is a wonderful blessing.  Helicopter Ben is telling the teachers of these impressionable youth that student loan debt is not a problem for the economy.  I guess Ben didn't read the link in my first paragraph about how new graduates devote their incomes to debt service instead of investment.  I feel sorry for the next crop of students/suckers who will hear their teachers repeat this nonsense.

The Fed daddy's assurance that federal government backing of student loans is dangerous in the extreme.  One trillion dollars is still a lot of money.  A bailout of that magnitude would dwarf the size of TARP and send foreign central banks sprinting away from dollar holdings.  Ben probably assumes a bailout won't be necessary as long as student debt remains exempt from liquidation in personal bankruptcy.  Our rulers think they are too clever by half, counting on naivete and financial repression to keep debt service payments coming their way.  A debt-destroyed peasantry won't put up with such smugness indefinitely.

Nota bene:  I have never had a student loan, or any debt of any kind other than the single credit card which I pay off in full every month.

The Haiku of Finance for 04/21/12

Profligacy done?
People in debt can't save more
Student loans must crash

The Haiku of Finance for 04/06/12

More loan guarantees
Wasting time, cash, energy
How dumb can this get?

College Aid Overhaul Must Start With Bankruptcy Law

No one likes overpaying for a product of questionable value.  College costs are now so exorbitantly high that elected leaders are calling for cost controls.  Great idea.  I know exactly where we can start.

Federal lawmakers should amend bankruptcy laws to allow student loans to be discharged in a personal bankruptcy.  Right now they sentence college graduates to decades of indentured servitude because they're not dischargeable.  This key reform will of course drastically reduce the amount of student loans that banks will write.  That will be good news.  Too many students attend college who really shouldn't go, so removing this financial enabler of future failure will free them to focus on more suitable career paths.  Not everyone should be a surgeon, but society always needs good bricklayers and mechanics.  Demand destruction happens in other commodified sectors and is now long overdue for higher education.

The federal plan mentioned in that article has details reminiscent of 1970s wage-price controls but at least it gets the topic on the table.  An effective plan would not focus federal aid on arbitrary metrics like numbers of college enrollees who graduate.  It should focus aid on academic subjects that will renew America's R&D edge.  That means aid for science and engineering students only, and even then priority will go to universities with productive laboratories.  Humanities students should get nothing, regardless of need.  Our great nation is ill-served with an excess of English majors, multicultural organizational social dynamics consultants, and underwater basket weavers.  

Impressions From VEDC Access To Capital Business Expo In SF

I can't resist free conferences on financial topics.  I saw an ad for the third annual Where's The Money? Access to Capital Business Expo in one of San Francisco's weekly magazines.  I signed up for a free pass out of curiosity, wondering what the Valley Economic Development Center from SoCal was doing holding an event so far up north on Nov. 19, 2011.  Don't they have enough SBA lenders in SoCal?  It was worth attending for the free lunch (thanks Chase Bank for sponsoring) and yours truly even learned a couple of new things. 

The winner for me was the panel discussion on "Sources of Unconventional Financing."  The stars of the show were Greg Salomon of Capital Partners, Dave Kocharhook from Riviera Finance, and Alan Tratner of Green2Gold and the California Coast Venture Forum.  Thanks to moderation from Antonio Pizano of Pacoima Development FCU, Dave and Greg were able to explain the nuances of asset-based finance (primarily factoring accounts receivable and merchant cash advances) and vendor finance (primarily purchase order financing).  Fully utilizing asset-based finance is a must for businesses moving physical goods.  Entrepreneurs need to check out ABF Journal for tips.  Retailers need to know that factoring breaks down into recourse and non-recourse factoring, where recourse factoring leaves the company liable for unpaid receivables.  I'm not a retailer, so I enjoyed hearing for the first time that a factoring transaction is priced according to sales volume, average invoice size, payment timing, and other elements. 

Alan wowed the crowd with awesome tips, as follows . . .
   - Forming a C-corp structure provides flexibility when you need to grant sweat equity to minority investors or get funding from VCs or angels.  VCs don't like to invest in LLCs or partnerships. 
   - The financial food chain for entrepreneurs includes both debt and equity funding.  It runs from the 3Fs (friends, family, fools) through crowd funding, VC/angel backing, and even licensing and co-ventures.  I had always considered licensing to be a form of revenue for a mature product rather than a financing option for something unproven, but some startups can apparently make a go of things by inventing stuff just to license out production.
   - The success rate for businesses that spring from a formal business incubator is 90%.  That got my attention.  You can find an incubator focused on your business's sector at the National Business Incubation Association. 
   - Doing a patent search before you file for a patent of your own will help determine whether you'll end up reinventing the wheel.

I did hear one other comment during the panel discussion that I had never heard before.  Alan said a business's brand identity counts as intellectual property.  This is a twist on the old definition of a brand as an intangible asset.  Apparently academic thinking on the subject of brand identity and ways to protect it has matured since I got my MBA nine years ago.  Copyrights, trademarks, and service marks can now constitute a brand portfolio.  How about that. 

I needed to talk to a few of the banks who staffed expo booths here because I'm wargaming whether I'll need a small loan to fund a business project I have in mind.  Please note that this project is super top secret and I will reveal it when the time is right.  Let's just say it's a practical application of the resilient community paradigm.  Anyway, Wells Fargo and TMC Financing were particularly informative.  Wells Fargo offers cash-secured commercial and consumer loans that are useful for equipment purchases, and TMC Financing offers SBA 504 loans for purchasing real estate.  I asked specifically if the SBA 504's requirement that a business facility be 51% occupied referred to the human proprietor's physical presence or merely the presence of continual business activity.  It appears that mere activity is sufficient; if correct, that will be key to execution of the 24/7 presence my remotely-monitored project will involve.  Hey reader, please don't take this as legal advice.  Check with your own banker and lawyer when you start investigating loan terms and requirements. 

I mentioned the free lunch already, but I will state for the record that the Hyatt Regency San Francisco prepares a decent chicken with risotto.  I went nuts for the cheese biscuits and I would have scored a second apple tart if some latecomer hadn't sat down at the last minute.  The keynote speaker, Dane Boryta of Bottle Cap restaurant, implored us to respect the cooking by cleaning our plates.  Entrepreneurs know good stuff when they see it.  VEDC needs to invite me to be a panelist next time so I can score some more free food. 

Nota bene:  None of the companies or institutions mentioned have given me any compensation or consideration for this blog post.  My recollection of this conference is provided as a public service. 

IMF Understates Its Potency, Europe Overstates Its Unity

Mme. Lagarde seems fairly sure that the IMF doesn't need any more boosts to its financial firepower.  This is not comforting in light of a mounting Eurpoean political logjam.  Greek politics are in paralysis, stifling any pro-austerity vote and emboldening civil servants who refuse to do their jobs and citizens who refuse to pay taxes.  German officials are dialing down expectations for next week's EU summit, telegraphing to all parties the high price Germany will charge for acquiescing to even a minimal bank bailout plan.  Europe's inability to stick to the details of an agreed-upon plan has made staving off sovereign defaults much more difficult to solve.  Both debtors and creditors are unwilling to meet in the middle.

If the IMF has already secured a promised backstop from the U.S. then Mme. Lagarde has every reason to be confident that no further reserves are necessary.  The Fed has already established a precedent of unilaterally offering swap lines to foreign banks, which amounted to $16T worth of loan guarantees during the last round of this crisis.  On the other hand, if European political leaders think that tighter vertical EU integration will be the deus ex machina needed, they must know that it will not fit this timeline.  One week is not enough time to both forge a revised EU constitution and ramrod it through every member state's parliament. 

The most probable result of next week's action will be another toothless agreement in principle, followed by noncompliance from the PIIGS and immediate sovereign debt downgrades.  We will then see whether the IMF activates its pre-existing swap lines with the Fed, and whether those loans stay locked into Eurpean banks' reserve requirements as non-hyperinflationary balance sheet decorations.