False Dawn

in Silicon Valley:

…in applied research, all of those new discoveries are ultimately going to slow or stall because the ‘pull’ of innovators who want to put those technologies to work, is fading. Sure, some big and aggressive companies like Intel will put some these inventions to work. But the big pull has always come from the thousands of fast-moving, risk-taking new start-up companies who find unexpected (and sometimes vast) new applications for those technologies.

Those companies aren’t there anymore. The crucial center of the tech world – new and fast-moving companies – the meat in the technology sandwich – is gone. Under the press of an economic slowdown, government regulations that have handcuffed entrepreneurs and venture capitalists – and perhaps most of all, an Administration that increasingly seems actively hostile to entrepreneurship and small business – high tech is hollowing out.

It all still looks good – the new cars in Silicon Valley traffic, the announcements of exciting new inventions – but there is no there there. It is a comforting illusion, one that has us believing that good times are just around the corner, that the next Apples and Googles are waiting in the wings to help restore the country to economic leadership and prosperity, and that Silicon Valley will once more become the generator of millions of new jobs across the land.

But it isn’t true. Over the last couple months, I’ve seen some spectacular new start-up companies, some with finished products on the market. All of them are starving from lack of capital –and their business plans, which would have attracted tens of millions of dollars two years ago, earning only shrugs and apologies from straitened venture capitalists and banks. My guess is that several hundred new start-ups in Silicon Valley have already been lost, with no sign anywhere on the horizon.

SOX is a big part of it, but the general political climate, in which “profit” is a four-letter word, and we have a president who elevates “public service” and denigrates business is a big one, too. And we won’t be able to do much about either for another year. Though if the polls are looking good to throw the kleptocratic anti-freedom rascals out next summer, perhaps the recovery can start a little sooner in anticipation.

38 thoughts on “False Dawn”

  1. Perhaps, but at a certain point you decide to cut your losses. After all, at a certain point the Puritans gave up on Merry Olde England. Things may change, but I am no longer sanguine–sometimes things just don’t work out (often because people will not *let* them work out unless it conforms to their pre-conceived notions of how things are supposed to be done). Of course, one never knows, and, as the poet said, something ere the end, some work of noble note may yet be done.

    Nevertheless, I think it may be time to consider the works of Hayklut, and Gilbert, and Raleigh, and Calvert, and Penn, and govern ourselves accordingly. It can be done, and should be done, and perhaps sooner rather than later.

  2. Nationally funded healthcare actually helps leanly funded startups, since it’s one less cost they have to bear. But mandatory health care from employers would pretty much kill them. Depends on how it’s structured. (And startups have no revenue and low salaries, so taxes is a pretty minimal issue).

    The real killer is SOX and all the other regulations that make going public “just not worth it.” The lack of a way to get money out of start ups discourages anyone from putting money into them. The only companies getting much funding these days are the ones whose business plans end with “…and then we get purchased by YahGooMicroCisco.” Even Twitter and Facebook are going to have to wait until they’ve got billions in revenues before going public, and most companies never get that big.

    The SEC has protected the retail investor so effectively there are no new companies to invest in. On the up side, if there’s nothing to invest your money in there’s no chance of fraud!

  3. So the fact that the economy is sputtering has nothing to do with the slow rate of IPOs? If you look at the graph here, I think you’ll see a correlation between economic growth and IPO rate.

    I’m sure it’s not worth my time to note that a Republican Congress and President passed SOX in 2002. Nor is it worth my time to mention that the number of IPOs in the graph above was higher under Clinton than under Bush 43.

  4. So the fact that the economy is sputtering has nothing to do with the slow rate of IPOs?

    And why is the economy sputtering, Chris? Could it be because people are seeing all the potential reward of the free-market economy under threat because of President Chicxulub’s policies and rhetoric?

    Recovery depends on confidence. There is none.

  5. McGehee – the economy’s sputtering because we just went through a housing bubble and a bank crisis. The later event is still going on, in case you weren’t keeping up with current events.

  6. It was expected that all the political games from Fanny Mae/Freddy Mac pushing the mortage and realestate industries off a cliff, wallstreet and insurence adn banking be pulled down with them, etc. Obama election – even before that the expectation of his being elected, threw a match to all this tinder.
    .
    So the crash was long expected. Whats scaring the crap out of me is that rather then clean up and move on, Washington just wants pour more tinder on the fire, and attack any part of the economy that could possible lead to a recovery. Stagering new federal expenditures and pork – rather then fiscal responsibility or economic stimulus. Broad based attacks and efforts to suppress or control all parts of industry and economy. Congressmen and senators throwing away their careers in order to do all this.
    .
    I’m not clear how long it would take any government to undo all the systemic damage done just in the last year? I’m also not clear if its possible to elect any likely set of republicans or democrats who would try? Plus Obama would almost certainly do anything in his power to suppress any reforms. Unlike most presidents, he is a true beleaver – and will sacrifice his career and public image for his vision.
    .
    Generally politicians are whores, doing anything to get reelected. Now its like they all got religion in a suicide clube.

  7. I’m sure it’s not worth my time to note that a Republican Congress and President passed SOX in 2002.

    Since I’m not a Republican, no, it’s not.

    Nor is it worth my time to mention that the number of IPOs in the graph above was higher under Clinton than under Bush 43.

    Of course it’s not, since Clinton happened to preside during a tech bubble. That popped at the end of his administration…

  8. The later event is still going on

    Yah, this is the part that’s a little weird, Chris. Keep in mind the financial meltdown happened more than one year ago, and Team Obama and the Democratic Congress have been on the job for ten full months, workin’ hard, passing trillion-dollar rescue packages in such a frenzied hurry no one has time to read them…

    With net results so far pretty much zilch. According to you, and various other measures like bank failures, the financial crisis is still rolling on. Unemployment continues to climb, IPOs to evaporate, foreclosures march on, GM is still not turning a profit, the state and Federal red ink is metastasizing faster than even the worst nightmares, and meanwhile Barack “Nero” Oprompta is fighting the fierce battle against Fox News, Rush Limbaugh, and Tea Partying Grandma’s, when he isn’t golfing, chillin’ to jazz at White House soirees, jetting off to deliver a statesmanlike speech full of promise and plans in Copenhagen, or taking Michelle out on the town for a hot date.

    Can we be forgiven for wondering whether all this very expensive noise and heat from Washington is actually doing something? Or thinking that possibly it’s just one giant bullshit-artist witch-doctoring leech-bleeding con game by people who haven’t a clue but are arrogant or cynical enough to, nevertheless, claim they do?

    At what point can we get a little cynical? As I recall, your side got cynical about the Iraq War (for example) in about 90 days flat. Where are the results? What’s the exit strategy? Isn’t this a quagmire already?

    Welcome to the quagmire of the biggest collection of arrogant economic stupidheads since Franklin Roosevelt’s”Brain Trust” left their lecture halls, rolled into town, and destroyed three decades of prosperity in a single year. Oh, and before you mention it, I’m not necessarily excluding George Bush and the 2001-06 Republican Congress from honorary membership in this august company. The whole lot manage to make Bill Clinton look like an economic genius, forsooth, because had enough wit to fuck only with things he could grasp, so to speak.

  9. What polls are looking good? It was my understanding that approval for the Congressional GOP was at an all-time low:

    Approval ratings for Republican congressional leaders now stand at 24%, which is down slightly from March (28%). This is the lowest approval measure for GOP leaders in 15 years of Pew Research Center surveys.

    The same poll has Obama’s approval rating at 52% (i.e. the 76% who disapprove of the GOP aren’t pining for a less statist government).

  10. Carl Pham – is there some reason to expect that the largest economy in the world is somehow going to turn around on a dime? Especially since it never has before?

  11. Oh dear, Chris. Here’s Wikipedia for you:

    According to economists, since 1854, the U.S. has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. However, since 1980 there have been only eight periods of negative economic growth over one fiscal quarter or more, and four periods considered recessions:

    July 1981 – November 1982: 14 months

    July 1990 – March 1991: 8 months

    March 2001 – November 2001: 8 months

    December 2007 – now: 22 months and counting

    Now I’ll leave it to you to define “turn around on a dime.” Maybe you mean in less than a decade? Half a century?

  12. Post-script: Chris, I also notice you are once again arguing by metaphor, in this case equating a “large” economy with some kind of lumbering beast, with enormous inertia.

    And what makes you think this metaphor makes any kind of actual sense? That the dynamcis of economic growth have anything in common with Newtonian mechanics, so that a concept like “inertia” is useful?

    You could, instead, argue equally metaphorically that the US is the most “muscular” economy, and why wouldn’t you expect the most muscular economy to rebound with the fastest spring from a misstep? Carl Lewis, 100m gold medal winner, would be up off the sidewalk after a tumble about fifty zillion times faster than an arthritic 98-pound granny with a pair of artifiicial hips and a pacemaker.

    See? With metaphors you can argue anything at all.

  13. Carl Pham – does the phrase “worst recession since World War II” in any way confuse you?

    More to the original point, why would anybody expect IPO activity to be high during an economic downturn?

  14. No one seems to have noticed that Herr Geithner was pulling out all the stops to bring venture capital firms under the same reporting and regulatory requirements as retail investment firms. This would have been the end of venture capital, a fact not lost on those firms. Barney Frank, of all people, yanked a legal mandate for such regulation out of recent legislation. However, VC is no longer safe. It is in this Administration’s sights.

    To all those VCs who helped finance Obama’s campaign, all I can say is: you got what you paid for.

  15. It was my understanding that approval for the Congressional GOP was at an all-time low

    And then good old Nancy and Harry sent those numbers even lower.

  16. the economy’s sputtering because we just went through a housing bubble and a bank crisis.

    Caused by…? Perpetuated into the 3Q 2009 by…?

  17. We are in the beginning stage of a another depression, number 8 since the founding IIRC. There is a whole lot of bad debt in the system (business, personal and gov’t) that needs to be written off. Debt that has no or declining collateral. This is why there is a credit crisis affecting all lines of business, not just IPOs and venture capitalists.

    The sooner banks and and the Feds recognize and bring that bad debt back on the books, the sooner we will recover. But for now all that Repulocrats are doing is kicking the can down the road a few more yards, delaying the inevitable and making the end result even worse.

  18. My view is that there’s some truth to Chris’s claim that the US economy has something resembling inertia. There’s two matters that play a role. Expectation is the first. It’s the perception of what the economy is doing and your ideas of what’s good to do in the perceived environment. Generally people are reluctant to change an expectation when that viewpoint worked for them in the past. The second is the lag in changing your actions when your expectations change. Large companies and organizations will require more time to react. Deep or illiquid investments that are no longer profitable in the new environment take some time to unravel.

    Even in an ideal free market environment, a big change in collective expectation can take a while to manifest in the markets, especially if some sector has gone mostly bankrupt in the process. But we don’t live in a free market. There is considerable regulation at many levels that slows down the economic response to any change in expectation. Further, government interference often changes expectation too (for example, the moral hazard that comes from rescuing “too big to fail” businesses).

    My view here is that the length of the current recession is due to a combination of a deep recession, government regulation, and vast uncertainty about future government action. I think the current administration has acted irresponsibly to aggravate the two factors which they have control over.

  19. McGehee – the banking crisis was caused by sub-prime loans written largely by unregulated mortgage brokers. These flaky loans were then collateralized by Wall Street. To allow these loans to be sold, the New York state legislature had to pass a law exempting that activity from the state’s gaming (AKA “casino”) regulations.

  20. It is always interesting to see the Obama lap dogs run over here and claim “but but the Rethuglicans…”. One would think that many people who read Rand around the 2006 time frame were rooting for the Republican Congress.

    Some of us recognized Democrats would be worse, and they indeed have been. However, now, as we were then, don’t think Republicans have got the message on fiscal responsbility. Might I suggest noting what is going on in the NY 23rd Congressional race before rushing here with ignorant comments about how people hold Republicans innocent of the current economic situation.

  21. More to the original point, why would anybody expect IPO activity to be high during an economic downturn?

    Your grasp of the simplistic is stunning.

    Now, what would be an indication that the economy might be recovering? Or in this particular case, what is an indication that the economy isn’t recovering?

  22. Leland – my argument is that the Republicans were following libertarian ideals with regard to the housing market and collateralized debt obligations. They degregulated the market and let it run. That resulted in a massive crash that we are still trying to get out of.

    The other factor in this crash is risk. For an investor with cash, there are a lot of opportunities available. One can pick up a failed bank very cheaply. By getting the bank assets at pennies on the dollar and/or FDIC risk sharing, the risk to the new investor is limited. If you don’t like that, distressed real estate is available at pennies on the dollar. Either one of these options is less risky than floating a tech IPO.

  23. my argument is that the Republicans were following libertarian ideals with regard to the housing market and collateralized debt obligations. They degregulated the market and let it run. That resulted in a massive crash that we are still trying to get out of.

    As you pointed out, it was the Republicans that passed SOX. The facts you bring to the table don’t support your arguments.

    The other factor in this crash is risk.

    Yes. Other people have made that point far better than you have.

  24. > Chris Gerrib Says:
    > October 28th, 2009 at 5:48 am
    >
    >== the banking crisis was caused by sub-prime loans written largely
    > by unregulated mortgage brokers. ==

    Actually the bad loans were not caused by unregulated actions (i.e. gov didn’t stop fools from doing this) but by regulated action (i.e. gov forced them to do this against the banks and mortage groups better judgment) voted into law (pushed most directly by Sen Chris Dodd and Barney Frank) in order to “put all Americans in their own home”. The mortgage lenders sandwitched between the gov demanding they don’t discriminate against folks who can’t pay, and public groups like ACORN protesting (and in some cases using strong arm tactics) to get the mortages lent.
    .
    The eventual collapse was completely predictable, and widely discussed, so they insured themselves and handed off what they could to the government Fanny Mae/Freddy Mac, stocks, sold off the risk in chunks. Fools watching restate prices skyrocket were fighting to get in to these markets (how many crazy “flip this house” tv series were on the air?) But predictably it just ment a collapse dragged more folks down when the bubble burst.
    .
    Course it extending as far as the car industry, small businesses, etc – was a surprise (dead bank buried with mortgages they aren’t sure will be paid back, can’t legally or reasonably make loans for cars, small businesses, etc. And predictably, Washington – explicitly Sen Chris Dodd and Barney Frank – are claiming not only did they make no mistake – but the programs should be expanded!! And Washington and others are pointing fingers on the companies that did what the gov told them to do.

  25. Chris, if you look at your graph, you’ll see that IPO activity drops before economic activity does. Sure it is correlated, but it is a leading indicator, sometimes leading economic downturns by a couple of years. So if we currently see low IPO activity, that’s not a good sign for the near future.

  26. Kelly Starks – I don’t know how to say this more clearly. I work at a bank and am quite familiar with CRA. There were and are no laws that require banks or mortgage companies to lend to people who can’t pay. ACORN did not and could not “strong-arm” banks or mortgage brokers to make loans. CRA merely requires that the loan / no loan decision be based on financial factors, not racial. Lastly, Chris Dodd does not regulate mortgage brokers – they are (lightly) regulated by individual states, and were never subject to CRA.

    We got in this bubble by old-fashioned greed, namely paying people to produce loans and selling them off before the first payment was collected. If you can sell a loan and not keep it on the books, there is no incentive to even care if it’s good or bad. If the person who’s buying it thinks it won’t go bad, they may not even look at it.

    “Flip this house” shows were a symptom of the bubble, not a cause. In every bubble from Tulipmania to 1929 to now, at the top of the bubble “everybody” is in the market.

    (All of the above is my personal opinion and not that of my employer.)

  27. > Chris Gerrib Says:
    > October 28th, 2009 at 9:04 am
    >
    >== There were and are no laws that require banks or mortgage
    > companies to lend to people who can’t pay. ==
    .
    Sure there are, and they did. Though they weer phrased as anti-economic discrimination efforts – not “forcing banks to loan to those who can’t pay”. You can’t redline districts as economically risky – even though they are. etc
    .
    >== ACORN did not and could not “strong-arm” banks or
    > mortgage brokers to make loans.==
    .
    If your a bank and you have a couple dozen ACORN folks in your lobby, or on your front lawn, throwing a fit – and promising to do so until you losen up. Senators and Congressmen on the phone throwing their fits – and with a lot more ability to threaten..
    .
    .
    >== Chris Dodd does not regulate mortgage brokers =
    .
    No, but he, and B Frank are the leeds in the committees that do. And if they want tresury to do something (like last year when Bank of America was ordered to buy Lehman even after they realized it was insolvent), or orderd the banks to take gov loans.
    .
    Just because it isn’t legal – doesn’t mean that can’t adn don’t do it.
    .
    >==
    >“Flip this house” shows were a symptom of the bubble, not a cause. ==
    .
    Agreed – that was my point.

  28. Uh huh, I read about it here.

    “But we don’t think that rate of growth is sustainable because it is distorted by all the government stimulus.

    “The challenge here is to get organic growth – growth that isn’t helped by fiscal steroids.”

    What is meant be distortion?

    Spending on durable manufactured products soared at an annualised rate of 22.3%, the highest quarterly amount since 2001, led primarily by the impact of the cash for clunkers scheme lifting car sales.

    Cash for clunkers is over. So that artificial rise is gone.

    And remember that housing bubble stuff you wrote earlier:

    The housing market also improved, with spending on housing products up 23.4%, its largest quarterly jump in 23 years.

    Analysts said this big leap was sparked by the government’s $8,000 tax credit for first-time house buyers.

    The $8,000 tax credit ends in two months.

    And let’s not forget other sources of artificial inflation:

    Fed’s overstated stimulus jobs by thousand.

    Rand’s title is bearing out. False Dawn indeed. Let’s look back at what Chris Gerrib said:

    why would anybody expect IPO activity to be high during an economic downturn?

    Well wait a minute… now the Gerrib is saying that the economy is on an upturn and not a downturn. If that was true, and his other statement is true, then wouldn’t IPO activity increase in an economic upturn?

  29. to answer your question about when the economy might start growing again: GDP Expanded 3.5% in 3rd Quarter.

    A lot of that was from the Cash for Clunkers fiasco, which wasn’t real growth — it just stole sales from the fourth quarter.

  30. Leland – your post sounds very much like a case of sour grapes.

    I probably wouldn’t like getting billions of dollars in easy money.

  31. Sorry Kelly that dog don’t hunt, as you people say – I think.

    I suggest you do a little research on the debt default rates and the locations thereof and then cross compare to where you THINK the bad loans were made.

    I suspect you’ll be a little surprised at the results.

    Here’s a free hint: the first tranches of so-called “sub-prime” mortgages are actually doing ok.

    The problems came several years later with no proof of income, no valulation re-fi deals which didn’t happen in previously poor areas.

    Oh, that and allowing banks to insure themselves against losing money on these deals.

    I mean, for crying out loud, didn’t ANYBODY think that was a bad idea? The rot started in Bush 1, was expanded by Clinton and consolidated to catastrophe in Bush 2. At this stage the republicans should have no residual political capitol with anybody.

    Oh, and yes, you need a national healthcare system, even if it’s a completely private one like the Swiss.

  32. as you people say

    What people do you think Kelly is?

    I suggest you do a little research

    Why, you never have.

    I suspect you’ll be a little surprised at the results.

    Sure, yeah, whatever…

    Here’s a free hint

    You get what you pay for…

    The problems came several years later with no proof

    No proof? From Daveon? Nothing surprising there.

    allowing banks to insure themselves

    Really? Got proof? Oh wait, you already said you didn’t.

    I mean, for crying out loud

    We’re sure you do that regularly.

    you need a national healthcare system

    No. Not everybody embraces fascism.

    And there, I managed to debate in the style of Daveon. Pretty easy task, debating without substance.

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