Friday, May 19, 2017

Chicken Little and the Stock Exchange

Today's market is flying high!  Investors are realizing unprecedented returns.  Virtual money that can be wiped away just as quick.  I watched a lot of friends suffer such a decline in 2008.  I watched from the sidelines back then,,  so now I am telling anybody who will listen that "THE SKY IS FALLING!" - again.

As any other farmer must do in harsh climates, we supplement our chickens to help them through difficult times.  The expected pay back for the supplements is more eggs in the future.  But what happens if the supplements continue?

The supplements given to the chickens are mostly low priced grains.  They are historically low priced at the moment, but that situation can change.  So it should be viewed as a reality that low priced supplements are finite in supply. 

The farmer happily supplies the low cost supplements and most of the chickens survive the tough winter.  A few chickens keep laying so there is some return realized.  When spring arrives the chickens are still struggling to produce.  No problem, the grain is still cheap so the farmer keeps supplementing. 

It isn't much longer before production improves.  To the casual observer, eggs are plentiful and easy to come by.  But when you sharpen the pencil and look a little closer, things are not quite as advantageous as they appear.  The returns are high, but so are the supplements (debt).

It turns out that the high earnings are being propped up by cheap debt!  When the supplements and low interest loans run out, the initial negative shift will not be too alarming, but things will get worse. 

The farmers gets impatient waiting for the return that he provided the supplements for and starts gathering more eggs.  When the chickens notice the fewer eggs in the nest boxes, they  start hiding eggs.  Other chickens follow and the hidden egg stashes attract unsavory foreign entities.  Racoons, skunks, feral cats, and other shady characters show up to take eggs from the once productive coop.

Propping up earnings with debt is a bad deal for farmers and investors alike.

Monday, May 1, 2017

How Debt creates a Bubble

There are plenty of big spenders out there that are dependent on creditors to live beyond their means.  Non-discetionary spending leads to enormous amounts of debt.  That behavior and all the hot air used to justify it creates abnormal financial bubbles.  Bubbles burst, eventually.  What have we learned from our past?

Remember the big real estate bubble only ten years ago?  When the big spenders were flying high there was a lot of hot air justifying the irresponsible spending and touting a "new" normal.  For a lot of political reasons, money was being lent at greater amounts and to more people than ever before.  The political correctness called them  "sub-prime" loans.  The lenders found out that they could make money off of loans that they didn't expect paid back.  They could profitably lend money to folks without the will or the ability to pay it back, so long as it didn't get out of control.

The typical bubble formation starts innocent enough.  A responsible buyer finds an interesting property and performs diligence in preparing a reasonable offer.  They weigh all the negatives against the positives and come up with a number.  But even before they can submit their offer, another buyer quickly appears without concern for the value.  With a pocket full of loaned money, they don't hesitate to make a full price offer.

The neighbors across the street take notice of how fast and how much the property sold for.  They decide to list their property with comparable amenities for ten percent higher.  It sells immediately.  The escalation continues and the bubble is formed.  Extra money in loose hands perverts the natural worth of everything.

Eventually, the loose money runs out.  The early careless buyers use all of their available credit and get to the point where they need to sell their house to continue their lavish lifestyle or avoid bankruptcy.  They are shocked and dismayed when they realize that nobody wants to buy it for what they paid for it.  Nevertheless, it becomes increasingly important to sell, so they drop the price.  When their neighbors get in the same boat, they lower their price too.  Almost as quickly as the bubble was formed, it begins to break.

Before everybody realizes what is happening, their property values have dropped significantly.  They don't want to continue paying on a property worth so much less than what they are paying!  Daunted, they just stop making payments and the foreclosure process begins.  The foreclosure system is designed so that the lenders still come out ahead, but only for a normal amount of defaults.  When the rate of defaults exceeds the designed system, the lenders find themselves in financial trouble! 

The business investors are among the first to see the significance.  They don't want their money invested in firms that will not be able to earn a profit in the fore-seeable future.  The mass hysteria from the total collapse of one sector, bleeds off into another sector.  The whole "house of cards" comes crashing down.

That was all ten years ago; so what?  History doesn't repeat itself, exactly.  We have a lot of smart people whom instituted changes and laws so that can't happen again.  Perhaps the most significant of those are contained in the Dodd-Frank bill?  Aren't they currently in the process of dismantling that bill?

What is a bubble anyway?  How can we recognize it?  A bubble occurs whenever loose money and the hot-air accompanying it increase the value of property.

So what are some property values at today?  In many of our prospering cities, the median property value is at 16 times the average local wage.  If the average wage earner had the ability to pay half of their income on a mortgage, it would take about 32 years to pay it off.  The average wage earner can not do that due to interest, taxes, cost of living and OTHER debts!  The top three OTHER debts are classified as student loans, consumer debt and automobile debt.

Student loan debt can not be defaulted under current law.  However, legislation can be created by swaying public opinion and that has been in motion for over a decade.  I expect we will see some form of "foregiveness" at tax payers' expense in the next four years.

Consumer debt and credit card spending is volatile.  It is currently very high and that is never a good thing.  Often times, the higher levels of credit are anchored by home ownership.  That indirect relationship creates a covert property value bubble.

Automobile debt has grown to second place in the typical American household.  Not only is it high, but it has exceeded record levels.  This is alarming in itself, but the hot air from the "experts" are quelling concern because "things are different".

Loose money for auto loans has created an obvious bubble in vehicle valuations.  Consumers are borrowing more than ever for the vehicle they commute in to their underpaid jobs from their overpriced homes! 

Things are different.  How are these things related to the crash of ten years ago?  The warning signs are more covert.  The loose money is from other sources than the government subsidized sub-prime mortgages, yet the real estate bubble is still forming.  The loose money is perverting valuation and that is very similar to the circumstances that led to the last financial collapse.

Wednesday, April 26, 2017

Thinking like an Immigrant

What makes America so appealing that would encourage an individual to pull up roots, leave their home country, friends, and most of their family?  They are putting so much at risk: their livelihood, their relationships, and ultimately their lives.

Free Enterprise.

For most of the immigrants that I know the best personally, the chances offered by free enterprise are the highest motivation.  Most of us home grown Americans take free enterprise for granted.  There's a whole lot of other places in the world that inhibit opportunity with laws, culture, and corruption.

Just being born in the USA is like winning the lottery of life.  You are born into millions of opportunities for a better life.  Many immigrants arrive looking for employment, but are destined for self employment.  Free enterprise offers the best chance of success towards that goal.

Why do so many immigrants realize so much success in the USA?  Despite so many barriers - not the least of which being the language, they are able to surpass many homegrown Americans toward economic prosperity.  My observation is cliche', but it is because they work harder and smarter.

Work ethic is a requisite.  Nothing moves without being pushed or pulled.  I don't know of a single successful immigrant that is not a hard worker. 

Duty is held in high regards.  Duty of 365 days a year.  Duty doesn't take a holiday off, it doesn't call in sick, it doesn't offer excuses.  It is a complete dedicated effort.  No sandbagging allowed!

So many homegrown Americans are lacking that motivation.  Many are complacent underachievers.  Some are self defeating pessimists and others are malcontents.  A few spoiled children that never grow up and a few are overly ego-tistical.

A had a friend who was a talented bike racer.  He would train very hard for a race only to go out the night before and get drunk?  Some people have such big egos that they sabotage their own efforts so they have a ready excuse for failure.  They never have to look close and serious at themselves because of the obvious reason for failure that they provide.

There is no sandbagging among successful immigrants.  They don't play that way.  They were held back in their homelands.  Remove the reasons of failure that were beyond their control and LOOK OUT!

Although, hard work is essential, we all know that it is not the only ingredient.  You can work very hard on a treadmill without getting anywhere.  Successful immigrants don't confuse action with progress.  They are adept at working smarter.

They see hidden opportunities, they establish a goal, and then they go after it.  They are inherintly risk takers and don't fear failure.  But they do not expect immediate gratification.  They are measured optimistic and certainly not self defeating.

Many of them suffered defeat in their homeland.  Usually the fault was none of their own.  They were working hard and smart, but somebody changed the rules!  That kind of thing can happen in America too, but it is far less common.

Americans hate corruption.  We also hate anything less than fair play.  But we LOVE a figher and a winner!  Just ask General Patton.  A fighter, a winner, a smart, hard worker thrives in the free enterprise of the USA.

Thursday, April 13, 2017

Shopping Locally - for Sagacity

Financial success is aplenty if you look for it.  From an early age, I have been cognizant of learning from seemingly unlikely sources.  Business philoshophies and strategies have always peaked my interest.  So with my parabolic reciever aimed in that direction,  I have gotten a lot of repeat strong signals leading me to believe there is some truth to the matters.

"First, we find a way to make money, and then we just do that over and over again."  It is a local rancher's recipe for good business.  Seemingly simple, the first part can prove a lot more difficult than it sounds.  Especially in agriculture when it can be like hitting a moving target.

You can be profitable one year, do the same thing and lose money in consecutive years.  The lesson in that realization is to expand the definition by finding something that works more often than not. 

The second part of that strategy is just as challenging.  Controlling all of the variables to ensure a repeat performance can be very difficult if not impossible.  I think the key is in stocking away a surplus to help you make it through times when forces out of your control are against you. 

It might be stated in other more modern words: "Follow the money."  If you have found a profitable business, say in selling beef, don't modify your whole operation to start selling hay.  It sounds like simple common sense, but this mistake is made in all levels.

Remeber when Coke changed their original recipe?  They had an established winner, but thought they could do better with "New Coke".  The resulting fiasco caused a significant loss in market share and a prompt retreat back to what was working.

"First we ask how can we make it better.  Second, is how can we make it cheaper."  This was the simple guiding principle of a NW food manufacturing equipment manufacturer.  I fell in love with it's simplicity, but it is very difficult in application.  Especially in the high tech business they compete in.  Nevertheless, it focusses on two important business goals: quality and cost.

The competitive nature of business requires improvement.  How can you do it or make it better?  Creative thinking and engineering really pays off here.  But do not forget about the second part!

Anything in the world can be improved if money was no object.  In business, money is the objective - so making it better economically is what's important.  Making it better for less than the competition is a fundamental advantage.

"Now you boys always remember this:  It's not how hard you tamp a post, it's how many times."  That old cowboy at my very first paying job was referring to more than building fence.  Henry Ford implementing mass production as we know it comes to mind.  Quality gets so much press, but quantity is just as economically important. 

Many higher profits can be attributed to mass production.  High yields and big numbers can cover up a lot of little problems.  The bigger your production numbers the lower the cost per unit. Don't try to do things in one big effort.  It's the sustained effort that is going to add up.

"The more junk you've got, the more headaches you've got!"  I heard this repeated from the same local rancher many times.  It illustrates the importance of simplicity of design.  The fewer moving parts in your operation, the more robust it becomes. 

Accountants value this as return on assets (ROA).  The more efficient you are with utilization, the easier it is to be profitable.  It's not what you've got that counts as much as what you do with what you've got.  Make the most of what you have before you go out to upgrade your "assets".

"Grease is still cheaper than metal, last time I checked."  I saved this bit of wisdom spoken by another local rancher as my favorite for last.  My whole professional career was based on this premise.

The more sophisticated and better that I became at preventing problems, the greater my worth was realized.  "An ounce of prevention is worth a pound of cure."  is another way of saying it.  It's about working pro-actively to attend to small details before they multiply or grow into major events.

Grease is cheaper than metal and so is paint.  Wax is cheaper than paint.  Armor-all is cheaper than vinyl and molded plastic.  Do you feel like you are vainly wasting your time  by waxing paint or armor-alling seats and dashboards?

Why not change a hydraulic hose before it blows?  Waiting for failure is going to still cost the hose plus the oil spewed at $12/ gallon and worse it could cost you a new hydraulic pump if it runs dry long enough!

To summarize all these tidbits: Attend to details so you can fully utilize a few assets to mass produce a better product or service at a competitive price that you can usually make money at.  That's all you need to know to make a living in the intermountain northwest!

Thursday, April 6, 2017

Mined Over Matter

There are numerous studies about the reduction of food value in our modern fruits and vegetables.  It seems that the carrot you eat today is not as packed full of our bodys' essentials as it was years ago.

Modern ag practices have shouldered much of the blame.  The trend has been bigger and bigger and quanity over quality.  Yield is the primary concern and minute compromises of quality are ignored.  If the customer can not see the difference then it is not a significant difference?

Ever increasing yields by means of genetic manipulation, high rates of synthetic fertilizers, and high rates of herbicides and pesticides are all commonplace.  But the often overlooked result of those practices can be the root cause of substance depletion in our food supply - the resulting depletion of soil organic matter (SOM).

SOM has been mined out of our soils for decades.  That practice has necessitated replacing those nutrients with high levels of fertilizer to maintain economical yields.  The trend for big ag and everything getting larger and more expensive creates the demand for evolving crops with higher yields.

Yield is king!  To make margins profitable in the modern ag economy, you must continually improve yield.  There is zero tolerance for imperfections that would compromise yields.  High rates of herbicides and pesticides to the rescue!

All of those practices destroy the biology at work in the soil.  Improving the soil has not been a concern of big ag.  Could that be the reason for the decline in nutrition of our food supply?

I have been taking steps and making decisions to improve the soil on my farm for five years now.  I started out with an average SOM of less than one percent.  This is typical for my area of farm ground that is continuously tilled.  Ironically, our farms was certified organic for six years and that contributed to the destruction of organic matter.  Organic farmers have few options for controlling pesky weeds, so they often resort to additional tillage.

Pulling iron through your top soil kills the micro organisms at work trying to reproduce and increase your SOM.  It's analogous to raking scars on your skin.  The health of your skin and body would seriously be compromised from that continual practice.

For five years I have been instituting conservation ideas and the SOM appears to be responding to those efforts.  This laboratory data that I am basing this assumption on was the source of some controversy last year.

My field man has a lot of years of experience in this valley.  He has not witnessed such improvements in SOM and immediately concluded that the laboratory erred.  I suspect that I am his first "no-till" client.  I base this assumption on looking at farmers' fields whenever I have to drive somewhere (without running off the road!).  This areas farmers are prominently traditionalist, so it wasn't a surprise when he told me that he has not seen much change from one percent in SOM.  "The ground here is not capable of that much improvement."

He went on to educate me of the massive amounts of dump truck loads of importing material that it would mathematically require just to raise a single acre by a single percentage point.  I didn't offer any argument to the contrary because you cannot be too sure about these things initially.  Time will ultimately tell the truth, but a related university study came to mind that illustrates the great mass that life can accumulate out of "nothing-ness".

This particular agricultural university study was to identify the source of the mass required to grow a massive tree.  Measures were regularly recorded of the contained soil, the water added, and the mass of any added fertilizer.  They concluded that the mass supplied to grow the massive tree came out of the air!  The masses recorded from the soil, water, and fertilizer were negligible.

This leads me to believe that the magic in nature can create tons or living matter from the air that we breathe.  Providing of course that we do our part to keep conditions favorable for life.  So that has been my fundamental guiding principle: provide favorable conditions to support life in the soil.

Food, shelter, and clothing?  Life in the soil is not all that different.  It needs food, water, and sunlight.  What it doesn't need is harmful disturbances: tilling, poisons, or pH imbalances.  It's taken a lot of patience and tolerance for less than perfection to improve conditions for the soil life.  The explosion of earth worm populations are a good indicator.

My most recent laboratory tests, along with other observations, lead me to believe that I am on the right track.  My SOM has improved from less than one percent to average about three percent.  Another macro-indicator, the Cation Exchange Capacity (CEC) has also improved from single digits to average in the middle teens.  These improved numbers along with field observations of the soil composition and our increasing yields with lower additional fertilizer inputs all point to improving conditions for the matter that really matters on our farm.

Tuesday, March 7, 2017

The 3 R's and 3 D's of Decision making

To determine your Risk to Reward Ratio requires an adherence to Data Driven Decisions.  Good decisions are made when they are based on data instead of emotion and the potential risk to reward ratio is weighed in the favor of reward.  But it takes time to perform this type of analysis. 

Born leaders are of the personality type who pride themselves on making snap decisions.  They are notoriously bad score keepers, so in their minds they are always winning.  I have always been at odds with the dominant director types.  Unfortunately, their personality traits drive them to rise into management positions.

This was the root cause motivation for my desire for an early exit from corporate America.  Financial Independence (FI) was the only long term solution to the problem of constantly being down-graded to work under the direct supervision of an imbecile.

It's not that I didn't have good bosses.  I worked for quite a few  outstanding leaders.  I benefitted greatly from them.  But I began to recognize the pattern that good leadership was not enduring.  Peter Lynch coined the phenomenon with his famous quote, "Invest in a business that can be run by an idiot, because some day it will!"

It was enjoyable and fulfilling to work with good leaders.  You spent most of your time doing something worthwhile.  You were given tasks aligned with your strengths.  There was cohesion among the team.  With purpose, you are highly motivated and committed to do your very best.  That was why it was so disheartening to have a new leader take things south.

"We don't have time to do the job twice."  All too often, snap decisions were not planned out well enough.  We'd have to re-address the same problem, duplicating effort and time. 

So much of life comes down to good decision making.  Recognizing there is a choice to make is the first step.  Identify the alternatives, and use sound methods to choose the most beneficial direction.

Data Driven Decisions are the best.  Removing the emotional aspect, the gut feel, and not shooting from the hip is the best reaction.  That will ensure you are not influenced by bias and prejudice.

After slowing things down so you can gather data, you have to examine the data.  You have to weigh your data and give it magnitude so a clear winner can be declared.  As a final test, it's best to employ risk management by pitting the potential rewards against the risks.

Sometimes what seems like a good decision is rebuked when you realize the risk heavily outweighs the reward.  If there are additional steps you can take to mitigate those risks then you can get closer to the balance that requires further consideration.

"What you do not know, can hurt you!"  Try not to be biased in the beginning.  You have to have some optimism, but don't let that stop you from searching out all the risk involved.  Overcoming risk takes the right level of commitment.  Don't avoid risk, identify it, evaluate it and ultimately weigh it against the potential rewards.

"We are going to fail, but we are going to fail better!"  There are going to be things that slip through the cracks.  Things will go unexpectedly and you'll find your rewards out of reach when the risks have become real.  Failure is such an ugly word!  Ultimately though, it is only a temporary state.  Nearly every problem can be overcome given enough investment.  Failure can just be a bump in the road.  It is almost always a mere learning experience.  "Well Shit!  That didn't work!?"

There's some great comedy rooted in identifiable suffering!  We have all suffered defeat and when we recognize that in others, it can evoke laughter.  Watching an effort and struggle result in disgraceful defeat, the best implied intentions gone awry, can be quite funny.  If others are laughing at your humiliation, you should start laughing too.  Then, get back to work!

Take a new approach and try again.  Fail, learn, and try again - repeat.  Winners are only good failures!  They don't give up easily!  Of course, you can only keep trying if your failures don't sink you, so that is the importance of the Risk to Reward Ratio.

Monday, March 6, 2017

A Tough Act to Follow

In every workplace, in every work group, there occasionally exists a prototypical employee.  They are born leaders by example.  Their efforts and history earn respect from all of their peers.  They become tough acts to follow.

Rich Cilantro was my first tought act to follow.  He had a great rapport with all the workers all the way up through management.  He was able to fix problems quickly and efficiently.  He made equipment operators' jobs easy and performed his task with a flair that left everybody in a great mood.

Suffice it to say, when I was the new guy on that job, my immediate expectations were unachievable.  There was one person in particular who was especially critical of my early failures.  She expected me to walk on water the same way that Rich did, and would accept nothing less.  Even as my experience grew and I gained respect from her peers, she was still holding out.

The catalyst that won her over was extreme.  She saw something noble in my efforts to help a co-worker who nearly lost her life getting tangled up in a machine.  From that moment forward, she became one of my strongest supporters.  We became friends, allies, and teammates.  I pity the fool who tried to fill my shoes after that!

My next workplace had a hero named Larry.  On top of all the qualities that Rich had, Larry had a very long tenure - 19 years!  He had gained mastery of his position and kept everything running as smooth as a Swiss watch.  Luckily, I was not to immediately follow his act, that was Tony.  Tony turned out to be the polar opposite of Larry.

Tony could not endeavor to meet the expectations that Larry established and nor would he even try.  His purpose was purely self-serving.  He didn't make any effort that would not benefit himself in short order. 

All the other workers were quick to catch on and would not do much to further his selfish goals.  The machines that he was responsible for performed very poorly, the operators didn't care, and for a long two years it was a dreadful work environment.  He'd finally made things bad enough that the union would stop covering him and worked with management to expel him.  I was hired shortly after that.

What a mess that I inherited!  The machines and operators were all down trodden and looking for hope.  A few of the managers who were only told highlights of my resume had hoped that I was Larry "re-incarnate"!   One of them introduced me to a group as the "next" Larry.

Being the new guy, looking for direction, and trying to make quick friends - I accepted the idea.  I vowed to do things the way Larry did.  Little did I know all that entailed!

It was like a campaign promise.  I was sold to the spirit of Larry's contribution, but not the letter of the law!  Whenever I started to do something a little different than Larry, I was quickly set straight.  In almost every circumstance, I would humbly listen and learn Larry's way.  Until one day it became preposterous.

"Paper towels are used around here to clean lenses -lenses for cameras.  Cameras are electrical, so that is an electrical expense."

"Okay?"  I responded to the manager's directive.

"I want you to go to supply, charge paper towels to the electrical department, and I want you to keep those dispensers full."

"I don't think paper towels can be classified as electrical?"

"That is the way Larry did it.  Didn't you agree to do things the way Larry did?"

"Yes.  But this seems to be ridiculous.  Or at least it seems that way to me, but I can check with my boss?"

"I am your boss and I am telling you to maintain those paper towels!"

"No.  I won't do it.  Not without checking with my boss."

"What?  Did you say 'No'?  That is insubordination!"

"Maybe so?  I will go and discuss this with my boss right now."

My boss was more than a little perturbed to discover that his department was financing paper towels.

"and furthermore, what is your pay grade?"

I wasn't familiar with the union's stratification of laborers, but I knew where he was going.

"You are a twelve.  We don't pay grade twelve to change paper towels!"

My campaign among the managers and operators took a step sideways.  They were not sure if I was more like Larry or (heaven forbid) just another Tony.  Un-deterred, I proceeded to to my best and follow the ways of Larry, for the most part.

A few months later, I would get the opportunity to meet Larry.  He had kept in touch with friends at the plant and agreed to spend a day with me to help me with some idiosyncrasies.  He was greeted with many smiles and hand shakes.  I knew that I was in special presence.  I absorbed everthing he shared with me like a sponge.

I was not there long enough to ever achieve Larry status.  Nevertheless, I made quite a significant impact during my short time there.  A new opportunity more aligned with my long term goals had come up and the next "Tough Act to Follow" was waiting there for me.

Terry was a living legend.  The more that I got to know him, the more I learned to admire him.  He was not only the prototypical technical employee, he was a great role model.  In the short five years that I worked with him, I learned so much.  Not just the tangible technical items of which he was an authority,  but many intangibles like work ethic, honor, and character.

Unfortunately, there were managers at that place that were disheveled by the respect bestowed upon Terry.  Amongst working men, there are two modes of respect: respect from title and the greater respect that is earned and proven.  Those managers wanted greater respect for their titles.  When Terry would inform them of follies in their directives, they percieved it as a threat to their status.

Depsite that caustic environment, Terry always kept his chin up and his nose to the grindstone.  He personified the indomitable spirit.  Everything he did was to the best of his ability.  His ability was substantial!  And above all of that, no matter what the situation, he was always kind.  He left a very tough act to follow!

Lucky for me, I ended up leaving before he did!