Economic uncertainty: How did we get there and how do we get out of it

To put a label on the state of the economy has become somewhat of a pastime for many economist. Is it a slowdown, a correction or a recession? Because of how we got to this state of commotion, it is perhaps more appropriate to refer to the situation as a “Reality Check”.

How did we get where we are today?

According to The Heritage Foundation Index of Economic Freedom, Greece ranked 81^st in the world and second in the European Union (after Poland) with the lowest Index of Economic Freedom. But was known for having one of the highest “human development and quality of life indices in the world” (The Economist Intelligence Unit's quality-of-life index -2005). And that is impressive for a country with an economy based primarily on tourism, shipping, food and tobacco but not a strong industrial production. How did they do it? Simple, Greece issued sovereign bonds with a high yield return, thus receiving a great deal of cash that would help pay for many of their social programs.

In other parts of Europe, the aging and retired population outnumbered a smaller younger work force that had the burden of paying for a social security system that was rapidly accumulating massive deficits. The idea of investing in a sovereign bond with a high yield was appealing, it would provide a “cash flow” that would help cover costs.. After all, who would have thought that an EU country would ever face default? But it happened. And not only Greece was in trouble but also countries that purchased the bonds were about to lose their investment and their capacity to meet the needs of those that were counting on the Social Security benefits. Thus a “Reality Check” in Europe: Social Security must be reformed.

In the US, a similar situation has been brewing.  The “pay as you go” Social Security system is collapsing. With taxes as low as they (yes they are low), and over 9% unemployment it is very difficult for government to keep up with the demand for social benefits with less money feeding into the fund. This is a time bomb rapidly ticking away. The “stimulus packages” created by the Federal Reserve was needed after excessive spending by most financial institutions, but now the system has enough cash.

So, how do we get out of this mess?

We have to start by acknowledging a reality: We became too greedy to fast. And I have to say that Politian’s have not help in these past years.  

Now that the financial system has cash, it is not a matter of another “QE” round. The issue is what to do with the money and how to create jobs. So here are few suggestions that might solve several problems:

1.        CUT taxes on CORPORATIONS, but RAISE taxes on INDIVIDUALS. Companies create jobs, not people, so if you give corporations a real stimulus, they will most likely create jobs. On the other hands, as jobs are created, people will be getting a taxable paycheck that will help government with the Social Security debt.

2.       Modify the Social Security system to one similar as in Chile (for example), a mix between private offer and government sponsored, were both would compete for customers

a.        Individual capital Accounts would be created and managed by the private sector;

b.      The government would have to “compensate” those that switched from the “old” system to the “new’ one, via the issue of a bond with a real rate of return and in an amount equivalent to contributions already made by the individual to the “old” system. The effects of this are:

                                                               i.      Increase in domestic savings and investment;

                                                             ii.      Increase in formal employment.

1.       Financial institutions for example will need more people for this to work well;

2.       The money collected every month from individuals has to be invested somewhere, so financial institutions will start lending out to new projects.

                                                            iii.      A strengthening of the capital and financial markets.

3.       Housing. Financial Institutions should assume their losses in the mortgage sector, write them off, price the properties to their real current market value, cut all the foreclosure or “short sell bureaucracy and put them back on the market for sale making sure this time that proper mortgage procedures are followed.

Spending and supply side economics is not working because this is the 21^st Century and traditional Keynesian models must be updated. Savings, investing and valuing properties accordingly will create jobs and move the economy in the right direction. And please, keep Politian’s out of this; get real economist and financial experts on board.

Capital Sources: Venture capital deals are up in South Florida

A quarterly survey shows that venture capital outlays in Florida totaled $192 million in the first half of the year, 27 percent more than in the same period last year and the biggest six-month total since 2007.

Mike Seemuth

2011-08-17 12:00:00 AM

Scientist and serial entrepreneur Leonard Pinchuk runs a medical device company that attracted $2 million of fresh venture capital this year and could have gotten much more — part of a broader increase in VC investments statewide.

A quarterly survey shows that venture capital outlays in Florida totaled $192 million in the first half of the year, 27 percent more than in the same period last year and the biggest six-month total since 2007. The survey by the National Venture Capital Association and professional services firm PcW shows that venture capital sources invested an average of $6.85 million in 28 Florida deals from January through June.

One of those VC deals was engineered by Pinchuk, co-founder and chief executive of Innfocus, a Miami company that is developing a drug-eluting stent inserted in the eye to treat glaucoma.

"We think we have the world's best treatment for glaucoma," he said, and some VC investors apparently agree.

Pinchuk said after he made a presentation at an investment conference last January, several venture capital firms offered to pay $10 million to $15 million for control of Innfocus. "The venture community began to realize that we were going to win this war on glaucoma, so they started throwing money our way," Pinchuk said. Innfocus is working closely with the Bascom Palmer Eye Institute at the University of Miami on clinical development of the company's glaucoma treatment device, which could be approved for sale in Europe before the end of the year.

But rather than sell control of Innfocus for more money, Pinchuk agreed to a $2 million follow-on investment by Saints Capital, a San Francisco-based venture capital firm that already had invested in the private Miami company. Pinchuk said he and other Innfocus insiders personally invested $300,000 in the company at the same time. Pinchuk said the company declined offers from other VC firms because they wanted to "dilute you by 75 percent and then fire you and your vice presidents … We decided not to take their money."

Deal Velocity on Rise

Along with institutional VC firms that seed Florida enterprises, some individual investors of venture capital, commonly known as "angel investors," are becoming more active, too.

New World Angels, an angel fund with about 40 individual investors in South Florida and the Tampa area, recently led an $8.3 million Series A capital raise for VirtualWorks, a private Boca Raton software company. VirtualWorks is led by Edward Iacobucci, co-founder of publicly held business software developer Citrix Systems in Fort Lauderdale.

Jonathan Cole, a co-founder and director of New World Angels, said the investor group also plans to close a $3.5 million investment in another South Florida company and a $1.2 investment in a Gainesville business by year-end.

"We have seen an increase in deal flow, which means we have seen an increase in the number of applicants and an increase in the quality of the applicants," said Cole, senior partner in the Fort Lauderdale office of law firm Edwards Angell Palmer & Dodge. Like other funds that provide venture capital, New World Angels is likely to hold onto equity positions for years. Investors in the fund "are looking for a liquidity exit within five to seven years," Cole said.

Mature companies may be attracting more venture capital than young startups.

"There is so little capital available for early-stage investment in Florida," Cole said. "There is more money available for expansion capital."

An investment in expansion could happen later this year at CareCloud, which sells information technology services to small businesses in the medical services industry. Started in 2009, Miami-based CareCloud has raised about $8 million from angel investors and has expanded its operations to 20 states.

Albert Santalo, CEO of CareCloud, said the company plans eventually to operate in all 50 states and to finance growth by raising another $8 million or more from an institutional venture capital firm.

"There is a lot of interest right now from the venture capital side," Santalo said. "There will probably be an institutional investor here shortly … We're bringing on states very quickly."

FoxyP2 Inc., a Miami company that provides English instruction online, got a $4.25 million follow-on investment in the spring from Flybridge Capital Partners, a Boston-based VC firm. FoxyP2 is "in a growth phase. The revenues are growing nicely," said John Karlen, general partner of Flybridge Capital. "This capital is being used for a couple of purposes: to fill out the [management] team and to expand aggressively across Latin America."

Karlen said five-year-old FoxyP2, doing business under its trade name Open English, is one of many technology-oriented companies in the Sunshine State that could qualify for further VC investment: "I probably am in Florida every two months, three months, meeting with companies. I just view it to be a really interesting market."

Karlen will be one of the speakers at a venture capital conference that Florida International University will host in November. More than 300 people are expected to attend the second annual Americas Venture Capital Conference Nov. 16-17 at the Biltmore Hotel in Coral Gables.

Money seekers and sources also will convene next Jan. 31 to Feb. 1 at an annual statewide venture capital conference in Naples organized by the Florida Venture Forum, a not-for-profit group.

Stanley G. Jacobs, a shareholder in the Fort Lauderdale office of law firm Greenberg Traurig, said participants in the Florida Venture Forum conference earlier this year were more optimistic than they were in 2010 and 2009 because the pace of VC deal-making has picked up.

"There is a lot of momentum toward getting [venture capital] deals done," said Jacobs, whose practice centers on VC investments and other types of financial transactions.

"I'm seeing a lot more early-stage companies come back to the market and look for capital," Jacobs said, citing venture capitalists' interest in companies that focus on "social media, health care and anything that's a business in the 'cloud,' as they call it."

Robin Lester, executive director of the Florida Venture Forum, said more investors have accepted venture capital investment as a viable alternative to holding such mainstream portfolio assets as stocks, mutual funds and real estate.

At the same time, however, many venture capital firms appear to be taking a more incremental approach to investment.

"A lot of people are playing it safe … The old $5 million round [of venture capital financing] is now a $3 million round," Lester said. "The old $10 million round is probably a $7 million or a $5 million round."

Lester said economic uncertainty and volatility in securities markets also have rattled some individual investors: "I had an angel investor who told me, 'You know, I used to be able to write a check for $50,000. But now I have to ask my wife for permission.' And I think that says a lot about what has happened to all of our 401(k)s."

the pace of VC deal-making has picked up

A quarterly survey shows that venture capital outlays in Florida totaled $192 million in the first half of the year, 27 percent more than in the same period last year and the biggest six-month total since 2007. The survey by the National Venture Capital Association and professional services firm PcW shows that venture capital sources invested an average of $6.85 million in 28 Florida deals from January through June.

venture capital conference that Florida International University will host in November. More than 300 people are expected to attend the second annual Americas Venture Capital Conference Nov. 16-17 at the Biltmore Hotel in Coral Gables.

Money seekers and sources also will convene next Jan. 31 to Feb. 1 at an annual statewide venture capital conference in Naples organized by the Florida Venture Forum, a not-for-profit group.

The downgrade: A political matter, not economic

One advice many of us got as we started a family was that we should never argue or vent our differences in public or in front of the children. Unless you are J-Lo or Marc Anthony, then your affairs can bring in a lot of money if published!

Since 1962, the debt ceiling in the US has been raised 74 times. President Reagan raised it 18 times, President Clinton 4 times and President Bush 7 times. Did you see a “great debate” then? Not that I recall.

There is only one other country in the industrialized world that has a debt ceiling, and that is Denmark. But it has been established so high that it is virtually impossible it will ever be reached. Its 2 billion Danish Kroner or 115% of the country’s 2010 GDP.

Think about it. Every time any government submits a budget proposal, isn’t it like asking for a raise in the debt ceiling anyhow? After all most governments have expenses that exceed income. The recent approval of the new US debt ceiling represents about 100% of the nation’s 2011 GDP. In Japan, debt is 228% of its GDP, and I don’t see credit agencies making a fuss about Japan’s credit rating. Let us not forget that these same agencies are the ones that in 2006 gave a AAA rating to bonds backed by subprime mortgages that later defaulted and started this economic mess.

Some “analysts” are now talking about other currencies as possible substitutes for the US Dollar. The Euro? Right! With all that are going on, and with real, true and meaningful downgrades of debt in some of the countries members of the Euro zone. Others have talked about the Chinese Yuan; do they know that the Yuan is a controlled currency that cannot be “exported” from China as stated by their Central Bank? Moreover, who has financed the Chinese factories or who buys most of what is produced in China? The US!  I challenge any one to travel oversees with Yuan’s (if they have them) or Euros and see which currency is widely accepted. It’s a no brainer, it will always be the US Dollar.

The question is not whether the US can pay its bills, but rather will our politicians be able to work for “the good of the people” and never forget that we are a “nation of many who stand as one”. That is why our credit rating was downgraded. Not because there is any doubt the US would not honor our debt, but because there is doubt our politicians would be able to work as a team, “E Pluribus Unum” (From the many, one).

My Grandfather used to tell me that a measure of the maturity of an individual lies in his/her capacity to pay the bills. And the US is a mature country; it will always pay its bills. No doubt we will overcome this mess, but it will take some time and effort by all of us.