Bret Piatt

When I started this blog I thought I’d be talking about technology on a regular basis and so far I haven’t.  This is still somewhat business related but it is also very tech heavy.  The tech focused pieces I intend to explain at a level that an average “nerd” gets but the average adult can read.

Earlier today I spent an hour watching one of the Rackspace founders deliver a training video intended for new hires in 1999.  In the video they go through the complexity of ensuring hardware works properly together, that the OS is installed properly, and that DNS is configured properly. Now just 10 years later much of this is significantly simplified.  When is the last time you spent time dealing with an “IRQ conflict” or “checking jumper settings” (hardware related troubleshooting that is automagic today)?

Now as we move to cloud computing with pre-defined virtual machine images the “OS is installed properly” piece is going away.  Projects like TurnKey Linux will lead to one-click application stacks on top of an OS.  For much of the IT community their career has been performing these tasks.  Now instead of an application developer needing a system administrator to “build the server” they go to a web based control panel, pick the system type they want and click “create” and the server is spawned.

It isn’t that the system administrator career is being completely eliminated; rather instead of every company needing their own system administrators in the future the computing providers will need them and general business will only need to have an IT staff that works on their specific business applications.  Business won’t need to have many other “building block” level IT roles either: networking, desktop support, and storage/backup administrators.

Many in the IT industry think I’m taking things a bit far when we have this discussion.  I don’t believe it’ll happen over night but during the next 10-20 years it will. Looking back in the past nobody has a “typing pool” to type up hand written notes, a “courier” to deliver a message across town in a hurry, or a “research” department to go look up basic information we all have access to now through a search engine in a matter of seconds.

This is where the “evolve or perish” comes in.  If you’re within 10 years of retirement and focused on the building blocks you may want to consider a job at an infrastructure company or risk the business you work for now eliminating your position in a transition to cloud computing.  If you’re at the start of your career and focused on those building blocks you need to be the best and brightest in your field so you can obtain one of the service provider jobs in a much smaller market going foward.  Your other option is to evolve and move further up the application stack.  This could mean learning how to properly architect an application to make the most cost effective use of the utility priced OS clouds or it could mean going all the way up the stack to interface design.

This isn’t all doom and gloom.  Evolution and automation like this increase productivity allowing us to focus on moving forward more rapidly.  If you enjoy your IT industry job start asking your employer what you can learn above and beyond the building blocks to help out.  While you may not need to today it is much better to be ahead of the game rather than waiting around for a layoff to start learning in panic mode.

Our government is run by a jealous and power hungry group of individuals.  They want to be worshiped for taking care of everyone.  They put their faces on money, they build temples and monuments in their honor.  They don’t like the fact that when people are in need they turn to something other than them.  For many in America, they turn to God, and God warns them:

“You shall have no other gods before me. You shall not make for yourself a graven image, or any likeness of anything that is in heaven above, or that is in the earth beneath, or that is in the water under the earth; you shall not bow down to them or serve them; for I the Lord your God am a jealous God, visiting the iniquity of the fathers upon the children to the third and the fourth generation of those who hate me, but showing steadfast love to thousands of those who love me and keep my commandments.” (RSV Exodus 20:3-6)

Does this mean if you believe in God you can’t look to our elected leaders to help?  As long as they’re helping out of duty and service, receive the help.  If they’re helping out of a desire to be worshiped then you may be punished along with them for taking their false gifts.

^“1For I do not want you to be ignorant of the fact, brothers, that our forefathers were all under the cloud and that they all passed through the sea. ²They were all baptized into Moses in the cloud and in the sea. ³They all ate the same spiritual food ⁴and drank the same spiritual drink; for they drank from the spiritual rock that accompanied them, and that rock was Christ. ⁵Nevertheless, God was not pleased with most of them; their bodies were scattered over the desert.  ⁶Now these things occurred as examples to keep us from setting our hearts on evil things as they did. ⁷Do not be idolaters, as some of them were; as it is written: “The people sat down to eat and drink and got up to indulge in pagan revelry.” ⁸We should not commit sexual immorality, as some of them did—and in one day twenty-three thousand of them died. ⁹We should not test the Lord, as some of them did—and were killed by snakes. ¹⁰And do not grumble, as some of them did—and were killed by the destroying angel.  ¹¹These things happened to them as examples and were written down as warnings for us, on whom the fulfillment of the ages has come. ¹²So, if you think you are standing firm, be careful that you don’t fall! ¹³No temptation has seized you except what is common to man. And God is faithful; he will not let you be tempted beyond what you can bear. But when you are tempted, he will also provide a way out so that you can stand up under it.  ¹⁴Therefore, my dear friends, flee from idolatry. ¹⁵I speak to sensible people; judge for yourselves what I say” (1 Corinthians 10:1-16)

When our country was founded giving 10% to the church was very easy.  We had few taxes to pay to the government and in times of need people looked to their family, their neighbors, their community, their church for assistance.  This didn’t give the elected officials the power and worship they desired so over time they’ve collected more and more taxes to solve more and more problems.  People are then be thankful for the government and the officials that take care of them.

Now here we are 200+ years later with over half of our income going to the government.  Giving 10% to the Lord is now much more difficult as you’ve already had so much taken from you.  And why should you give to the Lord now?  If you need something you don’t have to ask God or your church community for it.  The government is there to take care of you with “public assistance”.

The difference between being helped by your neighbor or your community and a government entity is if your neighbor helps you, you’re inclined to try and return the favor.  If you get help from a non-descript government entity there is nobody to return the favor to.

The government doesn’t make money on its own.  The help you recieve from it is really from your neighbor or somebody else’s neighbor and we need to treat that assistance with the same respect and gratitude.  Don’t take more than you need, greed is one of the seven deadly sins; and repay what you are given when you can.

Government should focus its energy on matters of the state — our national defense, our military, and laws to maintain order among society.  The social and entitlement programs that make up much of our debt should be sold to the private sector and they will run more efficently and take better care of the people looking for assistance.

A quick first step could be changing the charitable donation tax laws.  Instead of it being a deduction after 2% of your gross income it should be a tax credit up to 10% of your gross income starting from the first dollar you make.  Capital will find its way quickly into the hands of organizations looking to help their fellow man and they’ll spend it right away.  It won’t go into an entitlement trust fund to sit not contributing to the economy.

The idea of a social safety net is great, nobody wants to see others homeless, hungry, and in need.  The drawback is it eliminates the need for people to really give it their all.  If you could go to work and take an entry level job, if it pays you the same as the safety net – why do it?

This does have an upside.  True entrepreneurs can risk everything without fear of being left with nothing.  If they go bust, wait a few years again building up another nest egg and try again.  Just like buying a lottery ticket, you keep swinging for the fences until you get it and if not the safety net isn’t a bad place to be until then.

For tech related Web 2.0 style startups with access to utility style computing they may not even have to wait between attempts.  As long as the safety net gives them enough money for Internet access, food, and shelter they can keep trying idea after idea without the need to wait between ventures.  Eventually one of those ventures pays off and they skip right over the middle class.

It is horrible for marginal entrepreneurs because they won’t commit everything to success as they know they have a safety net to catch them.  This may cause businesses on the edge to fail as the thoughts of 100 hour weeks trying to save your business sounds worse than relaxing on the safety net.  This is where the safety net robs people of success, if given no other option for support they would have overcome.

When the safety net put you in a shelter or a public housing development most people were willing to work as hard as they needed to improve their quality of life.  If the safety net moves up to saving the $800k home of a bus driver most people will be perfectly happy relaxing on the safety net not trying to improve their life or if they do try for improvement they’ll swing for the fences.

Through this the middle class workforce will slowly be eliminated and in order to attract people to the jobs that really keep everything running we’ll have to start paying significantly more.  While on the surface this sounds good dramatic shifts in the average wage will cause hyper-inflation.

Inflation isn’t just the government printing money increasing the money supply.  A significant increase in the velocity of money is how we’ll end up in hyper-inflation, not through the printing of money alone.  If the M3-M2 money only fractionally changes hands each year it doesn’t have a lot of purchasing power; it doesn’t drive the prices of goods and services.  If those large pools of investment dollars now have to be paid out to workers in salarys to attract personnel capable of performing the job M1 and M2 will increase as the average worker doesn’t save — they spend what they make.

So if you are in control of those M3 dollars do you spend them on higher salaries to attract workers, knowing it will lead to hyper-inflation, causing your fortune to diminish in purchasing power? Or instead, do you instead let the economy fail causing deflation as unemployment increases and the M2 supply decreases which in turn increases the power of your fortune?

We have a number of financial statistics quickly heading to 0.  The top linked pair of statistics I’m tracking are per capita income and population.  As long as both of those numbers aren’t declining then we’ll eventually burn through the excess inventory in the “bubble” markets.  I’ll define “bubble” as where the rate of supply is increased faster than the long term rate of demand.

Housing starts, existing home sales are both at the lowest levels since WWII and at the current rate of decline they’ll be effectively 0 before summer.  For perspective we’re at an annualized rate of 466,000 new homes each year down from 1.7 million in 2005.  The US adds around 2.5 million people each year with the average family size of 2.6 meaning we need somewhere in the ballpark of 900,000 new homes.  I can’t find the number of homes destroyed on an annual basis due to fire, flood, redevelopment, etc.  We can agree that number if always somewhere at or above 0 so it’s also eating into the inventory.

Auto sales are down to less than 10 million annual units and still declining.  For some perspective approximately 13 million autos are scrapped each year.  This means around 1 in 50 households have 1 less car each year we keep this up.  I’m not sure on the sustainability of the reduction of the number of cars.  Do we have less need as more people move to alternative transport, as our population ages and the retirees don’t need a commuter car each plus the weekend fun car?

For equity markets 0 isn’t really 0.  You’ll hit an effective 0 somewhere above the actual 0 when the price = real book value.  I use the term “real book value” because a number of balance sheets even with mark to market have many arbitrarily valued assets at a book value above what you could sell them for in a liquidation.  Hopefully we don’t go that low, rather we stop at somewhere above “real book value” based on cash flow that can be obtained from operating + RBV.

So when is the time to invest?  When you believe things are cheap enough and cash becomes risky.  Cash is the next “bubble” (a lot of people are talking about this as a T-Bill “bubble”, short term T-Bills are effectively cash).  While the relative value of the dollar may get stronger globally when we inflate our way out of the debt we’re creating the value of an individual dollar is going to decline. As long as the governments of the world are in debt and can print money we’ll have inflation.

I thought we’d see a bottom in the equity markets in February.  That has been wiped out by the threat of common stock equity destruction through intervention.  Once the intervention ceases and the future value of an equity investment can be modeled we’ll see a broad market increase.  1 out of 4 S&P500 stocks is up over the November 21st, 2008 bottom as they aren’t likely candidates for interventionist destruction.

With the way current policy is going now our market bottom could drag out to Q3, anything beyond that isn’t possible as long as the population and per capita incomes keep going up.  If they start going down 0 really can become 0 for everything (-89.6% from the GD is pretty darn close to 0).