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Mixed Thoughts on Markets – Part 1

Capital markets have been swinging wildly and amongst all this chaos it is difficult to focus and spot trends. There is a lot of noise out there. Here are some thoughts that should help me to structure my thinking:

This post is about the Stock Market. Thoughts about inflation and commodities to follow later, even though all of these are connected, which makes my head spin. Let’s start with the stock market nevertheless.

The stock market is down 50% since its high. Or you could say, 50% of the gains of the bull market that started in ’82 have been eliminated. I see a lot of comparisons of this market decline to other bear markets, including the bear market during the Great Depression. Compared to the Great Depression we would have to go another 78% down from current levels to reach the low. It seems to be in the human nature to look for patterns and compare in order to understand. But are these comparisons valid or interesting? I do not think you can make a decision on the direction based on those past bear market charts.


I think more a long these lines:

1. Negative Feedback Loop

Is the economy getting worse than already expected or not? I think we will see more negative surprises. And those will come from outside the US. January exports in Japan fell by 45% (!) creating a trade deficit. That is pretty shocking. Similar numbers across Asia and Europe. It shows how hard consumers are clamping down on spending. And this hits those export orientated economies (China, Japan, Germany) that were a bit removed from the financial turmoils. This will lead to a further hit on domestic consumption in these markets as people will get laid off leading to shrinking consumption there as well. All markets are connected – no decoupling anywhere in sight. I think we have a negative feedback cycle right here. And no local stimulus package can address that easily. So without going into more details, I think that this has not been factored into corporate earnings.

2. D-Process

Here is a link to Ray Dalio from Bridgewater. I fully agree with him. While most recessions are triggered by either supply shocks or monetary policy to fight inflation, we are today in a process where we have to restructure nearly all economic sectors, because they are over-leveraged (and some are just bankrupt): Banks, Corporations, Consumers, Governments. This de-leveraging process takes some time and will bring us to lower stock market prices.


These two effects will bring us to lower stock market levels – slowly and steadily. I am short with an unlevered (!) ETF ($SH)for long-term holding (Never hold an leveraged ETF for more than 48h if you do not want to get bitten by compound performance effect). However, there are as well factors that will lead to higher stock market (at least nominal) such as inflation. The whole inflation topic is related to the policies implemented in regards to the D-Process but I feel this post has been too long already. Eventually the stock market will recover, when the negative feedback loop has been reversed, earnings expectations have been adapted and the D-Process has worked its course (but before it is finished).

By the way: Follow the stock market, and my inverse ETF $SH with Alerts4All – Real-time alerts. Real Simple.


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Little quote from Howard Lindzon

“Next year will have oodles of ‘Could Have Should Haves’ but that’s ok. My goal is to avoid the ‘What The f#$#$k was I thinking?’”

Here is the full article:

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The Myth of Cheap Web Startups – the Noise Problem

Today Hank Williams wrote a post on his blog that I can relate to. Starting Internet companies has become more expensive over the last years according to Hank. He argues that even with open source frameworks and on demand cloud computing becoming cheaper and more linear in their cost impact, the main cost driver for building and operating still is human resources.

I agree: having a team of bright developers is still the prerequisite to building a competitive web application/service. This has not changed over the last years. Even offshoring in my experience does not reduce the cost significantly. For me offshoring is a necessity to get access to required technical resources attached with a lot of risk and overhead to identify and manage the right people you want to work with.

One development in the Internet economy is responsible for making the launch of a new Internet service more expensive: There is a lot of competition for the users attention. Countless companies coming up with services that are thrown at users who have to try to comprehend what each service is about and whether it generates value or not. To be on top of this Startup Noise is a challenge. You either have to buy yourself in front of your audience – too expensive for startups and arguably not an efficient use of capital – or you have to find other ways to virally get your product spread.

But why do we see much more Internet startups these days than just a couple of years ago? In my opinion to get a working product out of the door is much easier and cheaper than it used to be 8 years ago. And there are a lot of people that have the skills and have been part of an Internet culture for some years where it seems to be natural to at some point in your life try to launch your own product/application.

So while I do not completely agree with Hank that starting a new service is as expensive as it used to be (otherwise we would not see so many new startups) I do agree that getting your startup in front of your audience is more challenging which makes it ultimately more challenging to start a successful Internet company.

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Cities to live in

Today I read a blog post from Paul Graham about living in major cities like New York, Paris, SF etc. Though I do not agree with everything he says, I like the way he is pointing to the different messages that a city communicates. I have come to New York 6 years ago primarily because I heard a message when I visited NY the first time in 1996. Since then I knew that I had to live in NY.

Over time I lived in many different neighborhoods and the message still keeps changing and keeps attracting me. I agree with Paul’s assessment that NY is a lot about money. Not only because of the cost of living but as well because of the cities focus on its prime industry: Financial Services. Building a technology startup in this environment is hard as your main currency is inspiration and ideas. Both of which do not translate well – in the short-term – into money.

But then there are many other sides to NY that are not about money: The arts (yes most artists still come to NY, though they might be visiting and not living here anymore), the sense of community in small neighborhoods (maybe not so much in Manhattan) and the search for the newest in nightlife (Food, Performance, etc.). I figure that in the end one will have to move somewhere else to summarize and compare to somewhere else. I am not at this point right now.

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Open Source Health Records

Google launched their Google Health service yesterday, that allows me to build my medical profile online in one central location. I guess I would be able to connect to my doctor and have a more efficient exchange of information. This might even allow doctors to ‘connect the dots’ across different diagnoses from different doctors, creating in the end a more complete picture and hence improved health care for me as the patient.

I am by nature wary about providing to much information about myself in one central place (probably related to my German/French background with its inherit distrust to governments and other centralized institutions). Therefore it struck me when I read on Fred Wilson’s blog a post where he wrote about his motivation to make is medical profile public (though Google does not allow for this).

He received critical comments back outlining the problem of insurances rejecting certain people based on their existing medical conditions or medical profile which might place applicants in a high-risk group. Now insurance companies try to make their decision on accepting to new policy holders based on information disclosed by the patient. The patient might hold back some information with the risk that this might endanger his coverage in the future (if the insurance company finds out). This whole game of information disclosure upon application is an interesting game under asymmetric information. The question is, would it be more efficient for the patient and/or insurance companies if all parties had perfect information?

As long as health care is organized around private profit maximizing insurance companies, perfect information would allow health insurance companies to optimize their risk portfolio leaving high-risk patients without insurance. Therefore providing perfect information in conjunction with private insurance companies is not Pareto-Efficient and does not increase aggregate welfare. However perfect information would lead to a better, Pareto-Efficient market in case of a universal insurance scheme, which would be either public or public regulated (There are however inefficiencies ingrained with public service schemes – the question is if these are offset by the overall gain in public welfare).

The launch of Google Health and the discussion around centralized and even public health record are interesting in the light of the presidential election and the plans of the two Democratic candidates. Depending on who wins the elections in the fall Google’s service could take off.

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