SOPHISTICATED FINANCE

Don't be Perfect

Many entrepreneurs have a noticeable case of OCD (obsessive compulsive disorder), which probably explains in part why they are not running GE and work for themselves. The OCD frequently manifests itself in an extreme case of perfectionism. No detail is too small to scrutinize, from the color of the office, to the holiday schedule, to twenty versions of the financial model. If you avoid the trap of perfectionism, there are several benefits:

• You will be able to iterate new products faster because you know there will be a next iteration to make it better
• Staff will be more highly motivated because they will not have to fear and dread the boss' perfectionism
• You will stop doing constant revisions to everything which will lead to the whole business running better and people having time to do what is important--focus on sales

How do you know how to draw the line between "good enough" and perfect? No two people ever review something more than twice!! Here is an example: the analyst and the CFO prepare a financial model; the analyst prepares the model which is reviewed by the CFO (1) and then the analyst prepares a second draft which is approved by the CFO (2); the model is then reviewed by the senior management team (1); these comments are then incorporated by the analyst into the final model which is sent back to the senior management team for final sign off (2). The model is then final. I am not saying that these steps might not each take 2 weeks but the final model is produced with only 3 versions and hundreds of man hours are not lost in constant meetings.

The ability to operate with only two reviews requires certain discipline:

1. You have to give clear, complete and thoughtful guidance at the commencement of the project (helps to really know what you are talking about)
2. The review focuses on substantive points and major issues; format, making it pretty, etc. can be done by the boss between midnight and 2pm because only the boss knows the required level of prettiness (and normal people are sleeping or clubbing)
3. If this approach does not work, you either have the wrong people and they need to be replaced or you should have shown the person an example of what you wanted (good technique with trainees and young employees)

You might be saying this approach does not work for my company because we only have 2 executives and nine programmers. That's the point. The smaller the management team the less reviews and revisions you can take the time to make. Be particularly wary of multiple reviews of sales brochures, websites, vision statements and other activities that might be called m--k----g.

This was post was inspired by a post on Ben Casnocha's blog.

The Financial Summary

Daniel Cohen, an Israeli-based VC, has a good post up on how to present summary financial information in a first meeting with a VC. I always find it comforting that good practices are the same all over the world when it comes to finance, investing, valuation and due diligence.

A few of Daniel's hints:

1. You have to have a financial summary
2. Round numbers off to a significant number of digits (for example, $55,834,671.54 could be presented as $55 million)
3. Forget the graphs because VCs as a group are quantatative and don't need the training wheels of pictures; (hallelujah, hallelujah, hallelujah--maybe we could ban all graphs for ever given that most people pick the wrong chart type, don't label the axis, omit the unit of measurement, use ugly colors, etc.)
4. Present a logical scenario and avoid the hockey stick forecast

The one point that I wish Daniel had made was that the financial summary should show the growth driver(s) in the business and perhaps their economics. For example, instead of showing just new or total sales people or revenue per sales person, perhaps show EBITDA contribution per sales person. For more on growth drivers, see this post.

And remember, forget the graphs!!

A New Fashion Company

I almost always recommend that early stage companies have a blog, for three reasons:

1. It raises your profile, especially on Google
2. It gives existing and potential customers an easy way to interact with you
3. It documents how you think about the business for angels, VCs and other investors

Some very nice ladies have a startup blog, Inside Scoop, about their new online retail venture. Some of their previous experience includes building a blog with 50,000 readers, a noteworthy accomplishment. Given that the founder is Australian and moved all the way to NYC to start her new business, it should be both entertaining and educational to follow the trials and tribulations of this startup. Check it out!!!

Interviewing

Lately I have been doing a lot of interviewing to fill finance and accounting positions at clients, which suggested a subject I have not covered here.

Everyone always tells start up entrepreneurs to hire the best and the brightest. The unstated premise is that you know how to interview effectively. Most executives have never learned to interview a candidate well, partly because it is a skill that is not used constantly. Ten tips for better interviewing:

1. Always define (understand) the job requirements in detail before you begin interviewing; a sample is here.
2. Screen prospective candidates for their experience with exemplary organizations (McKinsey, Price Waterhouse, World Bank, HBS, etc.) and interview these candidates first; 19 out of 20 times the new employee is in this small group
3. Always review a resume before the interview and prepare a short list of key questions to be asked; drill down with the candidate on their experience in the key skills the position requires
4. Always begin an interview with the question "tell me about yourself"; what the candidate emphasizes instantly tells you what is important in their life and it may not be work
5. Always ask "what type of boss do you work best with"; you are looking for the people who answer "the boss gives me a minimum amount of direction and then let's me work" because confident, self-directed people almost always make the best hires (rarely the answer given)
6. At the end of an interview ask the person "what don't I know about you from your resume"; once had a candidate say that she walked from Guatemala to enter the U.S. (she was a great employee)
7. Always split an interview up so you ask the questions for 2/3 of the time and the interviewee gets to ask questions for the remaining time; listen carefully to their questions because these are the things that are important to the candidate (no questions--no job offer)
8. Don't waste time trying to cleverly get information about subjects that are not legally permitted; you are just telling the prospective employee that you do not respect the law and discriminate in hiring
9. Always test for required skills--languages, Excel, programming, etc.
10. If you would not leave your children with the candidate for a weekend, don't hire them; after an hour you should know if the person is responsible, within the norms of social behavior and trustworthy

The most common mistakes people make in interviewing are:

1. They talk too much and do not listen carefully; interviewers like to show their "power", but the interview is not about the interviewer
2. They focus too much on whether they like the person and not enough on whether the person can do the job; this is not dating, this is interviewing
3. They hire people of the same nationality, race or gender; support for fellow immigrants is great but diversity brings different perspectives on issues and makes you more welcoming to others

My preferences in candidates:

1. I tend to hire people from the best universities; the smarter the better
2. I tend to hire people who began their careers with Fortune 500 type companies because typically they have been trained to do things properly and they may have good practices to impart
3. I tend to hire people who are self-motivated and do not need a lot of cheer leading (not one of my skills)

Know what kind of people you like to work with and it will help your interviewing.

Lastly, don't be afraid of people who "threaten" you by their qualifications, self-confidence and accomplishments. To build a great company you need some stars and some stars in waiting.

Miscellanea--II

The Miami Herald has a nice story today on the Entrepreneurship Center at FIU where I am on the Board. Story includes an interview with Mike Tomas, the Chairman. Given the recent issues with the AP and blogger quotes, I have decided to only include the link.

This morning I received an email from Daniel Chow in Hong Kong. He has organized a site called Financial Modeling Guide with a Ning community, Financial Modeling. I have added this site to my Google custom search engine, Sophisticated Finance Excel, so I definitely think these sites are worth checking out. The first few posts you see may be some re-posts from Sophisticated Finance but dig around and you will find some good stuff.

VC Confidential reported today that there were no VC-backed IPOs so far in 2nd quarter 2008, according to the NVCA. Since the NVCA started recording data this has never happened before. The post goes on to advise conserving cash and getting any deals done as soon as possible. Valuations are coming down! My thoughts in August 2007 on preparing for a credit crunch still look like good advice for what VC Confidential expects.

Need to find a title for these catchall posts. Recommendations welcome.

1 Year Anniversary

June 18th is the one year anniversary of this blog. During the first year I had 168 posts, or about one every other day. The most popular post with over 1100 readers was an article on the Microsoft acquisition of Yahoo and why I did not think it made good strategic sense for Microsoft. The most popular topic has been the use of Excel in financial modeling, which brings 20-50 readers per day through Google to the blog.

The best part of blogging for me has been the posts on academic papers on capital markets, economic development and venture capital. I feel very productive when I write them and they get read by a lot of the subscribers to this blog on the same day I post them.

The most enjoyable part of blogging has been meeting some very intelligent, well rounded readers. Tyler and Kendall come immediately to mind. They also have their own blogs, here and here, and I recommend you check them out.

What have I learned in the first year of blogging? I have a natural talent for picking post titles that Google search likes. No need for SEO (search engine optimization). I have also learned from several readers that providing critical comments is not enough and that positive recommendations are much more appreciated. I still need to work on this but I think I am getting better. Quite a few people have said the blog is funny, which I think is a good thing. Can't take that finance stuff too seriously!

I have not had a Google search hit from "Hooters' girl qualifications" in over two months but "Deutsche Bank brothels" still brings a few readers each week.. If you missed the original post on Hooters it is here.

I am very interested to hear from readers on topics that they would like to see discussed, especially in the area of Excel, modeling or business start up. Thanks for following me this year as I learned to blog.

Audacious Goals

One of the common themes in venture capital is that you need a big, audacious vision to build a big company. When I built a billion dollar company in Indonesia the goal was "to be the Wal-Mart of Indonesia" or "to build 1000 stores", all of this in country with annual per capita income of US$ 600. Microsoft and Google both had big, audacious goals. Microsoft's goal was "to put a computer in every home". Google's goal was "to organize the world's information". None of these goals appeared realistic at the outset, but they definitely qualified as audacious and are well on their way to being realized in less than 20 or 30 years.

Lots of companies have visions but only the audacious goals inspire people by their special nature. These goals all put every one in the company on a journey. We may not know where we are going but it is going to be something "special". It is that mystery that moves us to join the project, to believe it can be realized and to put in super-human effort to achieve it. Not everybody needs to drink this Kool-Aid but the top people all should be addicted.

Large, resource rich countries like the U.S. or China also need audacious goals to give their populations a direction and something for the many to believe in. In my lifetime the U.S. has had two audacious goals:

1. to defeat communism
2. to put a man on the moon

"To defeat communism" was probably established by President Eisenhower.  It was a big, audacious goal that asked everyone to sacrifice to preserve our democracy, which had just been put at risk by Hitler and was then threatened again. In May 1961 President Kennedy made his audacious speech that we "need to put a man on the moon...and return him safely...within a decade". Both of these goals were achieved, although it took until 1989 for President Eisenhower's "defeat of communism" to be achieved.

Since 1989 the U.S. has had no audacious goals. We have become a country largely of self-interested politicians and citizens. Why has this happened? In part the reason is that no President since Father Bush has had any moral authority. Clinton squandered any moral authority he may have had and President Bush appears to not consider morality in his decision making or to think in terms of larger, national goals. Furthermore, the national dialog has focused on issues with no sense of a journey or a cause to take pride in or be motivated by. Despite people's keen interest in gay rights, abortion or gun control, none of these issues "move" a large part of the population to go on a journey which is moral and worthy of extraordinary efforts to achieve it.

The popularity of the Internet and Web 2.0 may also be making it difficult for the U.S. to find an audacious new goal. With these technologies commonly available, everyone is a spokesman and people are increasingly following the output of more and more minor functionaries (yes-there is a certain irony here). Consequently, it becomes more and more challenging for an audacious goal to be communicated and accepted by the general population. Never the less, the U.S. must adopt a new, larger goal that galvanizes the population. Failure to do so will leave this country at risk from countries with the ability to move their populations, achieve audacious goals and command the world's respect.

There are two reasons to be optimistic about the U.S. despite the 19 year hiatus in establishing a new goal:

1. Both Presidential candidates appear to have a moral compass albeit formed through very different circumstances and both are inclined to look at the bigger picture
2. Cleantech, alternative energy, or "green" America is the most obvious issue since World War II around which this country could come together to achieve a moral, audacious goal

Now all we need is for a President to recognize the need for such a goal, to articulate it and for this country to come together around the goal. Maybe there are other candidates for this goal but we can not succeed as a country without such a goal.

Private Equity Firm Mistakes

The private equity firms have been hugely successful for many years. However, two industries stand out as consistent failures for the PE firms--telcom and retail--two industries that I know something about. The PE firms lost a reported $50 billion investing in telcom in the late 90s and early part of this decade and now PE-backed Alltel is reportedly going to be sold one year later to Verizon at the original acquisition price . In 2008 six PE- backed major retailers all filed for bankruptcy, including Sharper Image, Lilian Vernon, Linens n' Things and Fortunoff. (Source)

Private equity firms employ a strategy of improved capital efficiency combined with revenue growth. In other words they improve working capital management, sell off excess assets and reduce operating costs in part by aligning management incentives with performance. While all of this is going on they are typically implementing programs to increase revenue and thereby cash flow. Improved cash flow leads to better valuations and exits for them. So what is it about telcom and retailing that does not allow their model to work.

The answer lies in the concept of the marginal capital required to generate an additional dollar of revenue. In manufacturing, to increase revenue you only have to purchase additional product inputs. In retailing to increase revenue you have to create a whole new department, completely re-merchandise a department or build a new store (with additional inventory). In each case there is a big capital requirement which reduces cash flow. In telcom the situation is similar. For every group of new customers, you have to add switches, ports, routers and/or interconnection capacity. All of this equipment requires additional capital in large amounts. In summary, both industries are capital intensive to generate marginal revenue. In both industries you also have to invest large amounts of capital upfront and then hope you get the customers. Misjudge the customer demand and the invested capital is almost a total writeoff. (Misjudge the customer demand in manufacturing and you typically have excess input inventory that can be used next month.)

In the early days of venture capital the firms invested in a wide range of industries. Then the VCs learned that high tech companies were the best fit with their model (high risk, high return). PE firms need to realize that retail and telecom do not fit the PE model. If you are considering an acquisition or a new strategic direction make sure to carefully examine and understand the marginal capital required to increase revenue and whether this profile matches your model (and capital resources).

Understanding the Customer

I try not to use the "M" word on this blog because I think it confuses more than it helps. The best definition of marketing that I have seen is: "the acquisition and retention of the customer". I like this simple definition because it focuses on the customer--get the customer and keep them. To get the customer you have to understand the customer needs.

Gerald Zaltman, an emeritus professor at HBS, has just published a new book Marketing Metaphoria. While this book focuses on developing product innovation, Professor Zaltman's research interests are in the area of understanding customer behavior. Zaltman believes that there are seven metaphors, at the subconscious level, that explain 70 percent of human behavior (as quoted from HBS Working Knowledge):

1. balance (equilibrium)
2. transformation (changing states or status)
3. journey (as in life)
4. container (keeping things in and keeping things out)
5. connection (feelings of belonging or exclusion)
6. resource (providing survival)
7. control

While at first glance this list may look like Maslow's hierarchy of needs I think it formulates a better way to understand customer needs, as opposed to human needs. (Yes--I know the distinction may be subtle but this is not a biology blog). Given that defining the customer need is the first step in formulating a new business, it may be appropriate to pay attention.

Zaltman believes that 80 percent of new product introductions fail because they do not satisfy one of these seven needs. Simple interviewing only probes the conscious level and never reaches the real needs at the sub-conscious level, which is why customers do not behave the way they say they will. By probing at the sub-concious level one finds the metaphors that truly explain human behavior and define customer segments.

Examples of metaphors applied to successful product introductions might be hybrid cars (transformation), social networks (connection) and Crocs (balance). There are many techniques to identify customer needs. I like this technique because it requires deeper thinking to identify the metaphor (need).

Early Stage Financing Site

Through a post by Brad Feld I came across a very informative site on early stage investment, angel financing and venture capital. The site is Angel Blog and is written by Basil Peters. Mr. Peters is a former tech CEO who achieved sufficient success to become an angel investor and then started managing technology oriented hedge funds. He writes very coherently about seed financing in all of its variations. His current posts are on friends and family financing.

Before you bombard him with requests to finance your startup, please note that he is located in Vancouver and not likely to finance a startup very far from there.

Due Diligence

I have spent a good part of this year doing due diligence on acquisitions for clients and today I began my fourth project. The client sent me a copy of their proposed due diligence information request and asked for my comments. After reading the client's attempt at such a list, I decided it might be useful to my valued readers to discuss due diligence.

In the way that I approach due diligence for an acquisition, there are five parts:

1. Financial
2. Tax
3. Legal
4. Operations
5. IT

Many people would probably limit the scope of their due diligence to 1-3. While discovering undisclosed liabilities, shareholding discrepancies and misstated financial statements in parts 1-3 obviously is important, the real value added part of due diligence is not in parts 1-3. When you buy a company there are three questions that should always be on your mind:

• Are there any operating risks which if they were to occur would severely catastrophically affect the business, e.g. loss of a customer, distributor, license, etc., and thereby lead to a re-examination of valuation or to walking away from the deal
• How are we going to integrate this acquisition into our existing operations and what will it cost
• What will be the cost in capital and management time to execute the post acquisition strategy (while you should have addressed this issue when you did the original valuation, in due diligence you are confirming the accuracy of the hypothesis)

While parts 1-3 of due diligence may identify some of the operating risks in a business (customer concentration from an AR aging), they do little to address integration or the capital requirements of the go forward strategy. Therefore, an equal or greater part of due diligence should address operations and IT. It is a big mistake to limit due diligence in these areas because you know the industry, had extensive pre-LOI (letter of intent) discussions or the existing management has a continuing financial interest post acquisition.. The real opportunity to understand in depth the acquisition target's operations and IT begins during due diligence.

To clarify what I mean by "operations", we are basically talking about understanding the market and the industry. In other words, sales, marketing, distribution, pricing, new technology and competition. Looks very similar to the analysis of the growth drivers in the business, but in due diligence one should be equally focused on the upside and the downside risks.

The focus of the investigation in IT is typically on integration--how easy will it be to integrate the automated systems, procedures and accounting of the acquired company into the acquiror. Understanding the importance of any proprietary software and its role in operations is also a key issue in order to fully appreciate the human resources and related costs to maintain it. Of course, you also want to have a complete understanding of back up procedures and network security. (You would be surprised at the number of companies that keep their backup in their head office.)

To further illustrate my concept of due diligence I have posted below a sample due diligence information request. While it is a generic request for information, and may occasionally need to be edited, resist the temptation to edit or delete. The list is designed to be open ended in the hopes of encouraging the receipt of new and complete information. Resist editing out subjects that "do not apply". You may be surprised what shows up.

Several years ago I found on the web Arthur Andersen's standard due diligence list. Many years later I still think it's the best basic information request for due diligence that I have seen. Click to download a copy.

Download due_diligence_list_for.doc

ICE

A story on NPR this morning reminded me of this helpful tip which I have used for several years. ICE stands for In Case of Emergency. In the contacts list on your cell phone you should add a contact called ICE. In this listing add the contact information for your emergency contact in the event of an accident or medical emergency. Paramedics and first responders are increasingly being trained to check cell phones for an ICE contact. May save your life.

CWI Strategic Reorganization

CWI, the historically dominant fixed line and wireless telephone service provider in the Caribbean, announced their financial results last week. With EBITDA margins of over 30 percent on $2.4 billion in revenue, the results look pretty good. However, the company announced a strategic reorganization in the face of increased competition from Digicel in both the Caribbean and in Panama (CWI's fastest growing market). Digicel was awarded a cellular license in Panama earlier this year.

CWI's reorganization is along geographic lines with the entire Caribbean as one region, Panama as a stand alone region and operations outside the western Hemisphere also grouped geographically. By managing the entire Caribbean as a single market, CWI believes they can utilize pan-Caribbean products to take back market share from Digicel. Such an approach is expected to reduce the cost of new product development and reduce operating costs in marketing and administration. The headquarters for Caribbean operations will be in Barbados, wherein lies the problem. (Patience--we will get to the management point in a few more paragraphs.)

Barbados is a small island with a population of only approximately 280 thousand, which makes it a small market for CWI. The major markets for CWI in the Caribbean are Jamaica and Trinidad, which have a combined population of over 3.8 million. Barbados has little air service to other Caribbean islands except by changing planes in Miami, which will naturally reduce management's desire to visit other markets. As a small market, Barbados will not be the initial market for any new product offerings from competitors such as Digicel.

So why did CWI pick Barbados for its headquarters. I think the only reason is that expatriate staff will live in Barbados. It is very difficult to get expatriates to relocate their families to Jamaica or Trinidad, the more logical locations. You might ask why CWI, who has been operating in the Caribbean for over 150 years, is still relying on expatriates, but this post is not about British colonialism. (CWI used to be called Cable & Wireless and they had the telephone monopoly in every British colony.)

In this day and age of high tech telecommunications, rss news feeds and other information technology, you might be tempted to say that it is no longer necessary to headquarter in a major market. I would disagree because I think it leads to losing touch with your most important customers. Driving to work, watching local television and after work socializing provide much richer information about the changing needs and economic well being of customers than rss feeds and sterile demographic information. CWI appears to have missed this important point when they decided to headquarter in Barbados.

Where would I have located my Caribbean headquarters? I probably would have put administration and customer service in Trinidad and put marketing and network operations in Jamaica, thereby achieving senior management in both the major markets. Alternatively, I would have located headquarters in Panama. The fight between CWI, Digicel and America Movil in Panama will be very insightful to any manager for application across all the markets where CWI and Digicel go head to head. Also, Panama has good air service to the major Caribbean markets, a bi-lingual management pool and is in the heart of the fight for control of the Central American cellular market--where product innovation is imminent.

I spent years in Japan doing organization work to support new strategies. It always amazes me when companies adopt good strategies (CWI) and then implement the wrong organization structure (CWI). Organization structures have to follow strategies and not be tainted by personal or personnel issues. This is the most common mistake in developing an organization structure and CWI appears to have made it.

Google's View of a Startup

ReadWriteWeb has a very good post in which they "interview" Tom Duterme from the New Business Development Group at Google. The theme of the post is what does Google look for in their acquisitions. Reading between the lines, Google is looking for things that bolt on easily to their platform, make use of large, cheap data storage and utilize high speed bandwidth effectively. If you are not doing these things correctly, don't call Google.

In order to commercialize an idea, Duterme had this advice, which I quote:

* Collaboration - get the right people on your team.

* Fulfilling user needs should be the focus - 70-80% of ideas that fail do so because of lack of user focus. Google places a lot of emphasis on this, said Tom.

* Iterate often ("Big will not beat small anymore. It will be fast beating slow"; quote from Rupert Murdoch).

This advice got me thinking about how do you manage collaboration to iterate often. The CEO who has to do everything their way, the quest for "perfection" and constant minor changes are all in conflict with collaborative iteration. Why hire the best people and then micromanage or nitpick or ask for multiple do overs. The time constantly reviewing the best thinking of a smart employee is time lost that could be used more productively. If a decision will not immediately severely impair the company (bring on imminent bankruptcy) why beat it to death. The only factor necessary to consider in most decisions is whether it advances or is consistent with the strategy. Otherwise, remember this management principle which is little publicized: there is usually more than one right way to do things .

Follow this principle and your company will generate product iterations much more quickly. If you do not trust your employees enough to follow this principle, you have a recruiting problem or you (the CEO/manager) are the problem. The two problems are probably interconnected. People that do not trust typically are lousy recruiters who hire mousy people without initiative who do not challenge them.

A few signals that your corporate culture is not conducive to collaborative iteration:

1. You spend three months developing a product brochure because it's not "right"
2. Nobody can make the decision on when the next product version is ready or when it is finished
3. Nobody has the time to recruit the new sales people, programmers, ....
4. The mood in the office improves noticeably when the CEO goes out of town

Note: Duterme believes that 70-80 percent of ideas/businesses fail because there is insufficient focus on the customer. I think the percentage is correct. As I have said countless times on this blog, focus on the customer and their needs and don't waste time over thinking decisions, nitpicking the staff and re-doing things that are not key to the strategy.

Commodity Prices and Monetary Policy

I have been troubled for some time about the declining value of the dollar, high oil prices and the affordability of food in the third world. I have read quite a bit on the subject but most articles were superficial or presented analysis which was not supported by the underlying facts. A paper released this month by International Monetary Fund staffer Noureddine Krichene entitled Recent Inflationary Trends in World Commodity Markets provides a very comprehensive explanation. Mr. (Dr.?) Krichene's expertise and specialization is in the area of the relationship between oil and gas prices and monetary policy and he works on the Africa Desk at the IMF.

Key points from the paper are:

1. The All Commodity Price Index has increased 23 percent per year in the period 2003-2007, the highest rate of inflation since World War II
2. The Consumer Price Index (CPI) in most developed countries showed comparatively small increases of 2-3 percent for the same period
3. The depreciating dollar has not lead to higher prices in the U.S. or to an improvement in the U.S. trade balance
4. The CPI is the principal indicator of monetary policy for most central banks and government monetary authorities and may have mislead them in their analysis of price stability and the correct monetary policy

In summary, we have two major economic anamolies--high commodity prices that are not flowing through to the CPI and a declining dollar which is not leading to a better U.S. trade balance. Krichene believes that excessive expansion of the U.S. money supply and resultant low real interest rates in the period 2003-2007 have produced a "demand shock". Effectively, there is too much cheap money chasing too few goods.

To correct the situation Krichene proposes a Milton Friedman like approach whereby the U.S. government should tighten the money supply and raise interest rates. Such an approach would raise the comparative value of the dollar, lead to lower domestic oil prices and reduce speculative and organic demand for commodities. It would also lead to a recession, depress asset values and bring on a major wave of bankruptcies in the U.S. In other words, it's time to pay the piper. We have been living high on cheap borrowed money and at some point fundamental economic forces have to be recognized.

If I was running a company today I would be looking at reducing debt, tightening up on credit policies for customers and staying liquid. I think the next President, whoever the winner is, faces a very complicated economic situation and will probably be a one term President (we do not re-elect Presidents who have bad economic performance). And in closing, remember that we have not yet paid the bill through higher taxes for a very expensive war in Iraq. This little discussed fact complicates the economic situation even further. Buckle up--the ride is going to get even rockier!

Update: Steve Forbes, owner of Forbes magazine, appears to agree with the analysis and role of monetary policy, according to a post on Fractals of Change today. Maybe I should run for President :).

Note: In a post on global capital markets in January of this year I stated that because of investor liquidity I thought interest rates would stay low. I am changing my position. In the medium term (1-2 years) I think the Federal Reserve will have to raise interest rates fairly dramatically and strengthen the Dollar.

I found the Krichene paper on Research Recap .