Breaking away from centralization

Central banks. Central government. Central command. Central headquarters. What do all these have in common (besides the word central?).

The 20th century was the age of combination, globalization and centralization, the 21st will be the age of decentralization, localization and distributed networks. These cycles have happened before in human history. There was, in essence, a global economy – just with much slower transit times and information flows – during various periods in antiquity. We have had decentralized periods – such as when city states and kingdoms were prevalent. There have also been various periods of centralized bureaucratic states, such as the ancient Egyptians. Clearly none of this is new – the passions of man never change and thus everything goes in cycles.

“Nothing is new under the sun” per King Solomon.

What are some drivers of this change and possible outcomes, both positive and negative? Rather than a lengthy post all in one, we will be writing a series on different topics we believe are causes, correlations or effects of the trends. Generational trends generally do not change easily once in motion, so this will be more analysis – with some linking articles and interesting reading – rather than armchair quarterback recommendations.

Some topics we will cover in this series:

Supply chains

Automation

Political environment

Agriculture

Wealth creation and distribution

Information and Communication

Back from Hiatus

I have moved and changed jobs so have not been active on the blog as a result – when surroundings change sometimes routines do as well.

My new home is still metropolitan but much closer to farm and country than my previous one which I like – I have already started to read up on the local CSA (community support agriculture) operations and plan to join membership in one (or a few) as well as diversify to a local (very local) bank. My new job also allows for somewhat faster capital accumulation due to no income tax and higher base salary, so I plan on rolling into small investments soon as well.

Just some of my personal efforts toward decentralization and localization.

 

More to follow soon-

 

-The EU

Alternative finance part 2: Co-op Capital

As I write this, financial markets are in turmoil again including big banks (Deutsche Bank) but what is important this time around is that central banks, the ultimate backstop in the 2008-2009 recession/financial crisis, are far more impotent, having already injected trillions from quantitative easing rounds. The QE will continue but may have little effect as far as market psychology. This fomenting crisis will fundamentally change global finance and capital markets as we know it, as there will be little to stop the onslaught this time around.

We seek to develop ideas for local financial innovation, expanding upon our introductory post (here) in order to work toward a new financial system, one that may rise from the coming ash heap of the current global order. Decentralization and the reduction of fragility is a key theme here and this is one way we seek to reduce or even invert the fragility of financial systems.

How can one hold assets and/or generate a return on investment locally? Here are some tips. While in the past it has been difficult for non-accredited investors, the SEC has recently eased restrictions on private placements – but this is only a start. Yet there are many strategies to fund locally besides direct investment.

Enter Cooperatives

The cooperative is traditionally though of as a socialist or syndicalist (anti-capitalist) construct, but in the 21st century should be view as a method of pooling capital in a decentralized manner with direct accountability to the stakeholders and no more per se. There are two types that are of importance to local financial innovation. First is the consumer coop. These can generate a return in many ways but are not an asset per se. The most basic example is of a produce coop that allows local residents to buy shares in the harvest at a discount. Other structures may allow one to purchase membership at a coop store and receive discounts on purchases as well as a yearly share of profits (example: Sevananda in Atlanta).

The second, and in our view more powerful model is that of the worker-owned cooperative. A shining example is here with the Evergreen Cooperative Laundry. Think of it as a mirror image of the Zaibutsu model in Imperial Japan, with a core business unit (in this case an industrial laundry, in the case of Zaibutsu generally a bank) that finances and grows other units around it. The difference of course is that ownership, rather than being a familial hierarchy is collectively through  labor such that labor and capital are as one. This, in our view, has many benefits beyond philosophical.

Skin in the Game

Here is some fun reading.

One has a different set of incentives when there is “skin in the game” with respect to any undertaking. Simply put, if a worker has only employee status whereby they are purely at the whims of middle management, they can be expected to work at or below a level of their fixed pay. When there is incentive to outperform and add to the economic bottom line, workers will do so. Key to this is that there IS downside risk to the worker-owner, rather than in the case of the employee with the bonus who only has upside they can harvest without exposure to the downside. This is important in that perverse incentives – such as employees manipulating results for short term gain to the long term detriment of the company (i.e. quarterly bonuses) – are eliminated.

Decentralization of capital

Often worker cooperatives will have equity limits. One can accumulate equity but cannot buy up shares to the moon. Why is this important? In the corporate sector, especially ones exposed to public markets, there is risk of capital concentration by capitalists that have incentives anathema to the vast majority of the organization. While this can be useful in creating efficiencies within otherwise inefficient companies, it can also hold the entire lives of countless individuals hostage to the games of a few mega-capitalists (i.e. corporate raiders / asset strippers).

At a smaller scale, such as “Main Street” businesses where the founder is the largest capitalist, concentration of capital creates the risk of complete dependency on individual solvency- so if the founder were to say, owe too much in back-taxes or go through a harrowing divorce, he or she is also inadvertently putting everyone in the operation at risk. Yet if there are multiple sources of additional capital, concentration risks go away. A shortfall in working capital need not be funded by a founder or a sale of shares to outside investors, but can be funded from within by the many owners. Risk is decentralized. The same pitfalls can occur to any given individual – back taxes, divorce, medical bills – and do little to no harm to the whole operation and thus the livelihoods of others.

Role of the Entreprenuer

True to our title, we must elucidate upon the role of the entrepreneur. While in the worker cooperative a single large capitalist is not needed, an organizer of all elements to create a firm is – the entrepreneur. The entrepreneur would, as in any business, design the model and coordinate resources to execute. He or she would be the first worker-owner and would recruit one or two others to start and grow accordingly. It is preferable that a cooperative – especially one following the Cleveland / Evergreen model – start out in an established field with a relatively predictable rate of profit. This is because innovation is more in the organization of the firm itself rather than the product. With talented people product innovation will follow, but in our view it can be far too risky and unworkable to have democratic organizational structures and untested innovative products. This is especially true with products that have a long delay until revenue is generated (such as many a tech startup). Sometimes, a creative strongman is needed.

Socialist, smocialist

Socialism and capitalism are so 20th century, at least as commonly articulated and executed. Markets and will always exist, and it is futile to try and do more than perhaps harness or temper their waxings and wanings. We believe there is significant room for innovation in economic and financial structuring in the 21st century and that we must try and think beyond the constructs of the past two centuries. How shall markets be organized? Let the entrepreneur and risk-taker be at the forefront of the unknown.

 

 

 

 

The Hustle, in its various forms

First off, this post is inspired by this excellent blog post by an acquaintance – read here.

The parallel entrepreneur can expand beyond as the investor as well. But not the investor in the sense of the word we are accustomed to by Wall Street propaganda. The investor simply invests ones money in search of a return – they can have fancy names such as “angel investor”, “venture capitalist” etc but are at the core the same thing.

A good example of the investor-entrepreneur – one who blurred the lines between being a consumer and a producer of capital investment – was Cornelius Vanderbilt. In his early years, while running his own ferries he also invested excess capital in business associate’s ferries. For example, he would invest 50/50 with another operator and take a percentage of the profit from the fares and 50% of the take from the on-board bars (the real cash cow from the business). This allowed him to earn in parallel to his own operation. This in essence is a form of diversification away from just scaling one’s own business to earning favorable capital returns from other businesses. Often the marginal gains to capital might be better at a certain point investing in someone else with different ideas and talents. Vanderbilt, of course, snowballed his gains into ever greater enterprises and constantly had streams of cash rolling in, so to him these were but merely elements in the money sieve. He ended up as a railroad tycoon and, as a percentage of economic output, one of the top 5 wealthiest men in history.

It is up to one to decide the value of their time at any given point. As the linked article states, the idea is to optimize how time is spent on something – once one project is in the testing and data collection phase, there are fewer gains to time investment and it is preferable to work on another project. The same applies with capital allocation – you may have excess capital from a venture that is otherwise time intensive, and it may be better spend reinvesting in another entrepreneur’s idea vs.  scaling your own at a certain point in cycle. Or it may not. But even the robber barons/gilded age tycoons had times in their careers where more money was to be made investing with others than pure scaling and reinvestment, as the timing might not be right with the decision to scale while the capital is in excess.

 

 

 

 

 

Alternative finance, capital formation and inequality

Here at Entrepreneurial Underground, one of our main themes is that of market innovation, especially that which departs from the status quo or the current “system” however broadly one may define it. Evolution and change in the state of systems are the key drivers of organic growth.

While we are in an age of rapid innovation, including finance (specifically financial technology), one space that is behind due mostly to antiquated regulation is the realm of private investment and capital formation. The standard formation system is of large capital markets with public issuers where the supply of capital is essentially the savings of the public. This model works by funneling capital to business supported, in effect, by Wall Street and its related institutions.

The “disruptor” to the status quo, we believe, is set forth in many ways by this book and is a wealth of introductory knowledge for both entrepreneurs and prospective investors alike. The basic premise is that nearly all household savings goes to Wall Street, with very little toward Main Street when it accounts for about half the economic output of the country, and is in many ways just as good if not a better investment. The description is as follow:

Americans’ long-term savings in stocks, bonds, mutual funds, pension funds, and life insurance funds total about $30 trillion. But not even 1 percent of these savings touch local small business—even though roughly half the jobs and the output in the private economy come from them. So, how can people increasingly concerned with the poor returns from Wall Street and the devastating impact of global companies on their communities invest in Main Street?

In Local Dollars, Local Sense, local economy pioneer Michael Shuman shows investors, including the nearly 99% who are unaccredited, how to put their money into building local businesses and resilient regional economies—and profit in the process. A revolutionary toolbox for social change, written with compelling personal stories, the book delivers the most thorough overview available of local investment options, explains the obstacles, and profiles investors who have paved the way. Shuman demystifies the growing realm of local investment choices—from institutional lending to investment clubs and networks, local investment funds, community ownership, direct public offerings, local stock exchanges, crowdfunding, and more. He also guides readers through the lucrative opportunities to invest locally in their homes, energy efficiency, and themselves.

We are not here to advertise or sell this book and nothing is gained personally from recommending it (though I recommend reading it, its a quick read), but it forms a starting point for the basis of thinking we will be developing extensively here as it aligns well with our motto – “commerce, decentralized”.

How does this relate to inequality? The basis of wealth creation is capital formation and asset accumulation. Capital formation is the demand side for capital – entrepreneurs. Asset accumulation is the supply side of capital – investors and “capitalists”. Business owners in many way intersect with these two as they are usually the entrepreneurs, but often with Main Street businesses are also the largest capitalists in their firms. Wealth inequality stems from the basic segmentation of asset ownership. The current system of channeling the vast majority of savings to Wall Street (with their fees and plethora of unknown tail risks) is, in our view, the biggest factor in exacerbating the wealth divide from a causal standpoint. Think – in the idyllic 50’s and 60’s, that golden age of the middle class, Wall Street was a backwater and much of the country’s savings was tied up locally (Jim Rogers interview).

We will be delving into this topic with more specifics in the coming weeks, but in our mind this is a synthesis of systems that may be able to satisfy those who cherish market entrepreneurship and liberty with those who are concerned about wealth inequality and creeping oligarchy.

How to survive in a deflationary world

For almost all of the 20th century that anyone currently alive remembers, and all but a few months of the 21st century, inflation has been a given. Everyone talks about inflation in prices – what a movie used to cost vs. today, the price of a candy bar back in the day, the menu at restaurants rising a few cents etc. While there are different causes, in general a steady expansion of the money supply to match increasing demand and GDP growth have made this a reality. Prices and incomes in the 60s are compared to those of today. Some costs that are not included in the CPI have risen at a rate much higher than inflation – you know them – housing (rent, prices), medical care and education. These have risen for reasons other than standard demand or money supply pressures (oligopolistic behavior, debt bubbles).

Welcome to the coming age of deflation. What is key is not the price level, but the debt level. Debt is fixed, and thus extremely fragile with respect to a decrease in cash flows and asset prices. The ability to service the fixed debt declines in a deflationary environment. This in turn creates waves of defaults and elimination of cash flows, furthering the “deflationary spiral”. There is additionally the secular trend of the “fourth Industrial Revolution” (hat tip to Davos..) that may mean further deflationary pressures due to increased productivity and further segmenting of incomes between the skilled and the unskilled. I use unskilled here not to mean those without a college education, but those without the tech skills needed to reap benefit from the so called rise of the robots.

We then must ask what are some ways in which one can survive this age of deflation and shift in the workforce?

Pay down debt – now!

Debt becomes harder to service and the real return on investment of every dollar toward debt increases. One of the best investments you can make is to pay down your debt NOW! In an inflationary environment, specifically one in which nominal wages and returns on capital are increasing, debt becomes relatively cheaper to pay off so one can often defer paying more than minimum requirements and invest their money in better alternatives. Any excess cash over what is needed for an emergency fund should be put toward paying down debt – specifically credit card and other high interest debt. Reducing these cash outflows so one can stockpile more cash is extremely critical, especially at risk of lower wage pressures.

 

Start a high cash flow business

This should be a business with a focus on good positive cash flows NOW rather than a growth proposition with high upside but high uncertainty (such as many a tech startup). Much of these rely on asset price inflation, and that is one of the first “givens”This is more about survival than growth, but survival in this sort of environment will often beget thriving. Holding too much cash in a normal low-inflation environment is not ideal as there are many alternatives and the opportunity cost of cash is too high. In a deflationary / disinflationary environment, cash is King. These can be (and often are) relatively boring businesses such as vending machines, coin laundries, low-overhead food business (such as a taco stand), car wash, simple online businesses etc.

Invest in Bonds?

This one is tricky. While on the one hand bond prices tend to go up in a deflationary environment, so often does default risk – especially on corporate bonds (lower revenues) and EM debt. US short term bonds look to be the best bet here as they will continue to be a magnet for capital inflows with uncertainty abounding throughout markets worldwide. But as for traditional investments, USGOV bonds look to keep shining.

**NOTE** The author is not to be taken as giving any direct investment advice.

The Recession 2.0

Here we are folks, four years later. I actually looked back over some of my old posts and realized that I was in many ways a better writer while still in school. In other ways I was a bit long winded for blogging. Oh well.

I started this blog -light in content as it is- as a response to financial panic and economic decline. In the interim, there were years of “recovery” and an uneasy peace, but no more. Except with this decline/collapse comes social consequences such as heightened racial tensions and deepening ideological divide (hardcore xenophobia vs. hardline PC culture).  Such is the natural consequence of terminal decline, a la Rome. However, this is not another doomer blog. My intent is to build a network of economic mavericks and hustlers to share experiences, thoughts and solutions while working as a source of alternative content and media.

Welcome to Recession 2.0.

 

Personal Diversification

Markowitz/Fama portfolio theory is shaky in its assumptions and reliance 0n estimating parameters that are difficult to fully understand (especially with tail events), but one insight is useful – diversification. However, blind diversification is foolish and securities are really their own form of derivative – a derivative of the business operation itself. You can, however, diversify cash flows that have correlations that are easier to estimate than asset prices, at least heuristically. However, there is little need to over-analyze or “forecast”  – I advocate a loss limit on any new venture and conservative testing methods of a change in the business model or decision process. In many cases, common sense and intuition can drive your diversification strategy.

For example, I tutor and run a vending route, and also run a frozen drink machine rental company, Atlanta Freeze. My cash flows are diversified in that downsides to one does not hurt the state of another, and they sometimes share the upside. For example, vending is fairly steady overall, but many individual locations are very seasonal. The business self-diversifies around the seasonality by having a certain selection of clients/locations.

Tutoring and AF are almost inversely seasonal – the colder months tend to be when students are in school and need math or physics lessons, and the frozen drink rental business has far higher sales in warmer months, when people tend to party or vacation more often. If cash flow from one source diminishes, often the other will pick up the slack. On top of this, gains can be made from transportation economies of scale, i.e. stopping at a vending machine or two on the way back from tutoring (and locating new machines alone usual tutoring routes) to optimize profit per gas mile across jobs. An additional gain from networking is available – clients in one business/profession that have benefited from my work are more likely to use another product/service through me.

I will be writing a review on Nassim Taleb’s new book, “Antifragile”< but I want to process my thoughts on the book a bit in order that I may write a comprehensive review. Many reviewers tend to focus on one aspect of the book as it relates to their viewpoint (i.e. medicine, business, politics) but the book is really a much deeper concept about the properties of systems and interactions. It is essentially the decentralizationists “manifesto” at this point and I have held this view in an incoherently constructed form until this book, so I have much more to say on it than most and will be writing a lengthy review.The following is based on some of the concepts from this book.

This diversification of cash flow essentially makes the entrepreneur resistant to large shocks, gives him information and should ideally be constructed to be dynamic with decision heuristics rather than strict business plans and guidelines. In contrast, the “all-in” entrepreneur (often a “tech” start-up that faces very unique parameters and highly asymmetric payoffs) and the 9-5 worker are more fragile – the “all-in” entrepreneur suffers both from early instability and risk of total failure (as subsequent losing of life savings), and the 9-5 working is very stable until you lose your job, then it is again a total loss of all income streams less unemployment pay – a blowup. Now, the “all-in” entrepreneur is usually the one that has the largest positive payoffs, but the problem is that people tend to start with too little backup/cushion capital. Learn business at a level where you can tinker a bit and perhaps integrate concepts and ventures so that negative shocks are offset but you can gain positive emergent properties across ventures.

Personal cash flow and the non-linearity of time=money

The fiscal cliff continues to loom and panic has set in. While unemployment is steady at 7.9%, real median wages have been falling (and the distribution of real wage losses are heavily skew right). Much of this is a function of the structure of the economy. For most employers, well developed, specialized skills are in greater supply than demand, so companies are able to be fastidious and  will usually not hire based on potential. No need for long term investment in training; just hire someone with the skills in the present that can be thrown right into the field.

Like most strategies in the corporate world, this makes significant short term sense at the sacrifice of long term benefits. But that is not the point of this post. This is a reality that no institution or powerful individual can change – a force much like demographics; long term cyclical progressions without recurrence at the same state due to dynamic parameters of economic existence. The more appropriate response is to accept this fact, and develop skills and cash flows accordingly. While many in the “9-to-5” grouping tend to never think of themselves as “entrepreneurs” or “business people”, these are ultimately just labels for difference cogs of the same general machine/system. They are simply the group that has traded time for money in a linear fashion. This is often a great idea- nonlinear functions tend to have regions where the response functions grows (or decays) much more slowly or with more uncertainty than a linear function. While the goal in entrepreneurship is to reach the point where input time is almost decoupled from profit output, it often works against you where a massive input of time can lead to very small, uncertain profit output.  I consider “risk” to be simply the transformation of money as a nonlinear mapping of the time=money function.

Yet the two are not mutually exclusive. A steady income is important, and should be sought after for educational purposes, discipline and capital. However, do not fall into the trap. The wanna-be entrepreneur who dreams of starting their own business simply to “be their own boss” will probably lock his or herself into a comfortable, low-risk track. However, the true entrepreneur-at-heart will simply see his or her “9-to-5” or at least steady employment as a moat of safety, a further education, and a means of building capital. They will parlay all these resources into other ventures, assets and cash flows. This is in a sense the ultimate form of diversification – a portion of your “time” portfolio is dedicated to a linear occupation (hopefully one that is selected to grow the individual) while another is dedicated to the nonlinear pursuits.

So how does one do this? I am not an expert – I am merely in the thick of the journey. First, build you core competency and skill-set. Try to not tie your degree toward a direct career path, but toward a specific skill that will serve you in an uncertain world – one with economic value that you can turn to when needed to scrounge up meals and stay liquid. Build a tree of skills around this core competency and integrate. This will make you more adaptable in finding a job that will suit both you and the employer. For example, I gained a B.S. in Economics and a minor in applied math, but have focused heavily on the mathematical skills to parlay my education rather than let it go to waste. I made the mistake of student loans for an out-of-state school, so I need my education to at least pay me knowledge dividends. If the ability atrophies, it was all for naught. Keep my mistake in mind and go forward accordingly. I am doing independent research in a variety of fields and spend time learning R, Python and Excel for data analysis and SQL for database management. This tree of skills fits well into both personal pursuits and the skill requirements of employers with a core of mathematical understanding.

Further dividends can be extracted if one is resourceful and hard-working, with a heavy dose of creativity. I tutor part time, which allows for a very flexible schedule, gives me a skill I can turn to in order that I may pay bills and build capital , is fulfilling, and keeps my mind sharp. I also build a de-facto network that, if I add significant value, is more than willing to listen to me about other things (for example, I have had referrals for other businesses from satisfied tutoring clients). This is just my personal example – be creative and choose to spend your time building your “skill shell” around your “core competency”. In my next post I will list some possible examples for a few different possible “person-states” I can think of that are congruent to my model. The only requirement is to be hard working and strong willed, not lazy or easily discouraged.

 

Happy Holidays

-the UE

 

 

 

Back with a Vengeance

I’m gonna start this old blog up again… Internet needs moar original content, there’s way too much content reproduction and aggregation these days. It seems like every month the (Recycled Content/Original Content) ratio becomes larger and larger. And im 50% smarter and 23.8% more math-y, so itll be ~ 36.28% better.

As Jeezy says, Lets Get it