Greetings, one and all. I'm bowing to a reality here that Google, in
its oh so infinite search engine wisdom, is still finding this
particular website more often than it is my Drupal
(www.metaphoricalweb.org) site. For the moment, I shall maintain both
sites, and see if perhaps something comes of it one way or
t'other.Lately, I find that far more of my reading has centered on
economic news rather than upon technical, though to be honest the
intricacies of many of the "investment credit vehicles" that have been
foisted off on the public frankly put the Obfuscation C Coding Contest
winners to shame. In most cases, when a financial fraud is perpetrated,
one of the hallmarks that jurors use as evidence is the degree to which
illicit cash flows are threaded above, below, and through more mundane
transactions. The intent of fraud is simple - make people believe that
they are financially safe when in fact their life savings are being
purloined.What your seeing each day in the big financial papers is
disclosures of "write-offs" of hundreds of billions of dollars of money
by banks, mortgage institutions, hedge funds and similar financial
players, largely because these organizations had become engaged in the
practice of ... well, fraud.Mortgage brokers initiated liar loans with
people who clearly had no means of paying back even the teaser rates,
then got those loans off their books and into "structured investment
vehicles" that sliced and diced these shaky loans and, with the
assistance of ratings organizations turned these loser portfolios into
alchemical gold by building highly leveraged hedges against them.The
banks that purchases these would then get them off their books by
selling them to investors, who generally had no idea that the "risk"
that they were buying was not safe, conservative debt but rather
investments into millions of loans that had about 50/50 chance each of
going into default.Not surprisingly, while many of the mortgage
companies and investment banks that perpetrated this nonsense are
either in bankruptcy or in financial distress, most of the CEOs who
should have put on the brakes early have reaped hundreds of millions of
dollars and golden parachutes that will likely see them well into their
retirement years.Of course, the same practices that made this possible
also have laid the same insidious seeds within most other credit
companies, including credit card issuers and corporate paper investors.
As the domino of subprime mortgages fall, its already begun to press
auto loan issuers, and there are indications that the commercial credit
market is also seizing up as dubious corporate investing also is
beginning to look ominously diseased.Now, I am not an economist - I'm a
programmer. While I find this a fascinating exercise to watch in system
theory, ultimately the questions that I'm having to ask have more to do
with the simple question of how it will affect me, my clients, and the
IT industry in general.Five years ago, the Tech Recession hit. If you
were in financial services, you might be forgiven in saying "recession?
We're in a recession?!" The effects on most other sectors was
comparatively light, though it was devastating if you happened to be in
IT. Fully 40% of IT jobs were shed at the height of the recession,
programmers who had been buying Starbucks coffee and making six figure
incomes suddenly found that the paper options they'd been paid in were
worthless, they'd given the best, most productive years of their lives
and their most innovative works for comparative peanuts, and they were
living in their parent's spare bedroom.Not surprisingly even now, five
years later, a lot of programmers have become skittish about accepting
stock options and they have become considerably more parsimonious about
how they spend their money (and what jobs they accept in the first
place) - and there are comparatively far fewer people entering into the
IT field. They've also become very good at watching economic trends,
and most programmers that I know who went through that period are
getting rather twitchy about now.Right now, the ill winds of recession
are blowing most heavily through the housing sector, especially in the
US. One of the things to consider about most recessions is that it is
actually quite rare for a recession to affect the entire economy.
Instead, in most cyclic recessions, what you have is a situation where
supply has temporarily exceeded demand, and the excesses of that supply
need to be worked off.The IT recession of 2002-2004 was a fairly
classical one - there was too much investment in IT, both in terms of
jobs and in terms of technology, and it took about eighteen months and
some fairly severe slashing before demand could catch up with supply.
By 2004, even though tech was still technically (sorry) in a recession,
there were already signs that things were beginning to recover, and the
market very quickly went from too few jobs for the number of workers to
too many - to the extent that finding good, qualified people is
becoming quite challenging.The housing sector is going through its own
recession, but unfortunately it will take more than eighteen months for
demand to catch up with supply; there are a number of reasons for this,
from speculators flipping houses who are now left with too many
properties and no buyers, to houses going into foreclosure due to
onerous adjustable mortgage rate resets, to a longer term demographic
switch away from large, costly-to-heat houses in the face of higher
energy costs and shrinking families.Yet by itself, the recession that
results from this will also would be at least somewhat self-contained,
if an oversupply of houses was in fact the only real problem.
Unfortunately, what is now emerging is that this is the domino falling
that seems to be catching other dominoes with it. Risk is being
repriced much higher, because the same lending practices that made it
possible to get a loan for a half-million dollar house with an income
of less than $20,000 was also at work in the hedge-fund space, the
commercial paper space (which affects corporate buy-outs, business
expansion), credit card paper, student loans, re-insurers ... indeed,
just about everyone out there is suddenly discovering that the
foundations that they were building on was made not of concrete, but
quicksand, which has many of the same properties but a rather
disturbing tendency to be lethal.This is the real recession, and the
last time that something even vaguely similar happened, Herbert Hoover
was president. Credit, which has replaced cash in just about every
transaction that occurs today, is rapidly disappearing. Indeed, it is
worth it to understand that credit is itself simply a measure of
risk. "I will let you take out a loan because I believe you to be a
trustworthy individual," the banker should say, "you pay back your
loans on time and reliabily, you have open accounting, you have shown
good judgment in how you spend your money. "The problem comes with the
next part - "Even the most reliable person occasionally runs into
problems. As a banker, I should be compensated for the small chance
that you will be unable to pay your loan under the terms you and I set
out. That compensation is the interest on the loan."So what's a
reliable rate of interest? This is where things get tricky. The more
risky the investment, the higher the rate of return should be, so the
higher the rate of interest, and the harder it becomes to qualify for a
loan. The problem of course is that the banks make money on that
interest, and in good economic times it becomes easy to fudge the
credit-worthiness of an individual or two, if higher returns is the
desired goal. Of course, once risk becomes high enough, it becomes far
more profitable to initiate the transaction (be it mortgage, credit
card application, or small business loan) then sell off that risk to
someone else. That proved SO profitable that the process got repeated
many times, with the same questionable risks getting packaged and
repackaged to the point where there was no real way of determining
where the risks were - or, more to the point, what they were.Now, that
whole edifice is going through a slow motion crash, and despite
everything you hear in the Wall Street Journal or CNN/Money, it is
going to continue to crash into other sectors. Right now, it really
hasn't fully impacted the consumer (though there's another factor
working there) but it will. If no one has any idea what the real value
of risk is anymore, no one will initiate loans. Companies are already
finding it increasingly difficult to get funding that used to be
routine. Companies can't expand beyond the reserves that they already
have on hand, and already accountants at many companies are beginning
to question just how stable those reserves are. More than one company
has been forced to delay even paying their employees or their accounts
because their banks have frozen all accounts.In the late 1930s, the
FDIC was established in order to avoid a credit crunch like the one
that wiped out the economy in 1929. It stipulated that banks always
maintain a fixed percentage of assets (originally 10% of total capital
lended) in order to insure that in the event of a bank run, there was
enough operating capital to keep the bank afloat until help could be
arranged. Additionally, many banks were required to honor the first
$100,000 of deposited funds. The problem is that lax regulatory
oversight has effectively eviscerated most of the FDIC's mandate, to
the extent that it is unlikely that most banks could in fact meet 1% of
total capital extended if they had to.Of course, in order to look like
they were in fact complying with these strictures, many financial
institutions put much of their assets off the books into secondary
corporations that were not then subject to the limitations, meaning
that the actual debt that a financial institution had was generally far
greater than what they showed on the books. So long as no one looked
too closely (and when the money was great enough people would not look
too closely) this meant that banks could make incredible returns by
lending money that, for all intents and purposes, didn't really
exist.The problem is a Schroedinger Cat crisis. In quantum mechanics,
there is a classical thought experiment in which a single atom of
uranium is placed in a special trap that would, when the atom decayed,
release a toxic gas that would kill a cat locked in a box. Quantum
theory states that what is at work here is a wave function, and as
such, the cat could simultaneously be both alive and dead, and the only
way that you could actually tell (well, besides the obvious yowling of
a pissed boxed cat) was to open up the lid. Once you had opened the
lid, then you had collapsed the wave function, and there could be only
one solution.The banking industry has been build on the same wave
functions, and so long as no one looked in the box, then there could be
an infinite amount of money there. Once you open the box,
unfortunately, reality steps in, and the reality is considerably more
disappointing than anyone could have hoped.So what happens this time
around to IT. The credit crunch will hit in a number of ways:
- No money available for expansion of companies, beyond existing funds.
Too many companies have been "living beyond their means", using their
existing reserves as collateral against loans. As those loans begin to
dry up, they are forced into using those reserves, which often may be
tied up in existing investments and thus are less than completely
liquid. When you are forced to sell to meet costs, you often get a far
less than ideal value for your assets, especially when everyone else is
doing the same thing.
- Illiquid third party investment. VCs and other investment companies
will have more demand on their moneys from more traditional sources,
which may be good for the VCs (in the short term) but it also dries up
much of the money that IT startups in particular count upon. Moreover,
many of those VCs represent funds that may also be fairly heavily
hedged, and so the same repricing of risk that is going on in the
commercial sector will make it harder for them to pull together the
funds necessary to complete deals.
- Strapped consumer spending. Don't pay too much attention to all of
the sighs of relief after Black Friday sales. People are strapped for
cash, and they are as attracted to a bargain as anyone. The problem
will come soon enough, as people can no longer take out much money via
a second mortgage, will be facing stagnant wages and unemployment in
December (one of the highest months for force restructuring) and will
find it difficult to get credit extensions on their credit cards. I
expect that consumer spending will plummet in the next couple of
months. Sales from Walmart are done from last year, but so are the
sales from high end luxury brands. This will mean that spending on
consumer software and hardware will also in general be declining pretty
dramatically in the next few months, which directly impacts people in
IT.
- Declining dollar. As the economy becomes more distressed, calls will
be made increasingly to cut interest rates. The problem with that is
that the dollar's value is declining relative to other currencies as
rates go down, making American goods and services cheaper ... but also
making American companies cheaper. This will reduce the attractiveness
of outsourcing (a definite plus for developers, who've often had to
compete with foreign developers) but will make it more likely that
companies in other countries may start outsourcing to American IT
workers. On the other hand, this will likely only happen once American
wages become competitive with those in countries like China or India,
which means that programmer's standards of living will likely be
dropping for some time before you see a massive influx of capital, and
that capital will likely mean that the "parent company" of your company
is not even in your hemisphere.Note that the carry trade in currencies
will likely intensify as people move money out of both hard assets
(short term, commodities will likely stall somewhat, though the long
term outlook is still somewhat bullish) and financial assets (nearly
all classes, long term) but seek even some returns. The downside is
that this will likely lead to greater instability in the currency
markets, with the possibility that one or more countries could "crash"
- the US being at a very real risk of this.
- Energy costs. IT has generally been a net consumer of power, though
that's changing. In many ways, IT has been working towards applying
technology to reduce their energy footprint for financial reasons
rather than ecological ones, but of all departments in a given company,
IT is often the "greenest". On the other hand, a significant amount of
energy costs are due to a declining dollar (along with considerations
for peak oil and other geopolitical issues) which means that the
relative cost of oil (and hence gas) will affect the prices of goods
that need to be transported (nearly everything at this stage) and hence
will mean that computer infrastructure (which has generally been
declining at a rate consistent with Moore's Law) will likely start
getting more expensive again relatively speaking (though it may end up
spurring additional investment into local hardware production
infrastructure such as chip fabrication plants).The cost will also
accelerate the decade long trend of distributing the corporations into
islands of loosely connected individuals who may actually work half a
world away from where they live. If your workers are spending four
hours a day on the road and are forced to pay an increasing premium for
the privilege, they will go elsewhere where they can telecommute
instead.
- No (immediate) bloodbath in IT. Corporations are going to be
considerably more loathe to trim their IT staff, in part because that
staff has only begun to recover from the last bloodletting, and in part
because in many cases existing infrastructure has been pushed for about
as long as it can be, so the imperative for improving core
infrastructure will likely remain strong even in the face of slowing
sales. On the other hand, its unlikely that you will see a lot of
companies do anything beyond low cost pilot projects for R&D,
especially after the first quarter of next year. As the recession
spreads to other industries, I think that IT could be vulnerable on an
industry by industry basis, but some of that may be mitigated by
investment from foreign investors seeking firesale prices on companies.
- Shakeout of vulnerable companies. There are a fair number of
mid-sized IT companies in certain sectors that managed to survive the
Tech Winter, but that are increasingly becoming vulnerable. Even a year
ago, these companies would likely have been bought up by larger or more
successful companies, but as the available moneys for buyouts dry up,
what will more likely happen is that the less successful of these will
be forced into bankruptcy instead, without the "Get Out of Jail" card
that seems to be the privilege of companies in other sectors.The irony
is that a lot of new startups may actually end up surprising relatively
intact. While there is some fluff in the startup space, it never
reached the level of 1999, and a lot of the companies that started in
the last five to six years are generally very lean (and fairly heavily
open source-based, from all indications) and for the most part are
considerably more pragmatic about the market. On the other hand, there
will be relatively few IPOs for the next several years out of this
sector (though this has been a trend since around 2000).In the face of
all of this, what can the astute developer do? Having gone through this
a few times now, I've found the following strategies can help.
- Save money when you can, and reduce spending on extravagances. If you
currently have any debts (especially credit card debt) pay it off and
get out of those cards, highest interest first. Debt ties you down and
reduces your cash-flow, which will be threatened at the best of times.
- Stay as liquid as possible, and if possible diversify your funds out
of US dollars, at least for the next year or so. If you can land one or
more clients that are out of the US, even better, though try to
negotiate in funds out of US dollars if at all possible. It's likely
that 2008 won't be quite the rout for the dollar that 2007 has turned
out to be, but it is also likely that you still will likely turn out
better in foreign funds, even with conversion rate charges.
- On a similar note, for the short term, if you are invested in
equities, resource and energy stocks will likely be the most solid for
the foreseeable future, though you are looking there less for
significant gains but to minimize losses.
- Diversify your client list as much as possible - and be fairly
ruthless in negotiating. They will be. Assume the likelihood of a
default by one or more clients is at least a possibility, and plan
accordingly ... its possible that all of your clients may go belly-up
at once, but in most instance, if you have three or four clients, you
should be able to maintain steady work. On the other hand, work hard to
deliver as promised ... the ones that do survive generally are ones you
want to keep.
- If you do find yourself between clients, spend that time getting
caught up on skills that you didn't have the chance to work on while
you were too busy with clients. Unless you are fairly new to the
programming field, you're best served by increasing the depth of your
skill rather than the breadth, unless the shift to the new field is
part of a larger move into that technology as a base. Be thinking a
year ahead in terms of where tech will be.
- In boom-times, programmers generally find recruiters to be pests. In
bust-times, recruiters find programmers to be pests. Find a few good
recruiters at various companies and get to know them, even refer people
to them when you're offered a job you can't or do not want to take.
They'll be more inclined to use you when times get tough.
- Recessions generally happen for reasons that you have little or no
control over, but it is easy to become stressed, bitter, depressed or
angry during those times, often making it harder for you to get
motivated to work or look for work if there isn't any. It's worth
remembering that programmers in general usually tend to have very
desirable skill sets. If you have the time, join and contribute to open
source projects - not only will you keep your skills up to date and
work on interesting (and occasionally even useful) projects, but you
stand a better chance of making contacts, developing your interpersonal
network and gaining early proficiency in new technology by doing so. It
will also let you combat the tendency to want to crawl up in a ball and
whimper all day. Indeed, staying connected in general is a good idea.
- Keep alert and informed. In general, diversify your news sources
(especially economic and political) and verify what's going on with one
from another. Assume that no one knows the exact timing of when
the "recession" or "recovery" first hits until after it has
happened.This was not meant to be a doom and gloom post. The coming
recession is much like a Class 5 hurricane - it's coming, it will
almost leave quite a trail of damage in its wake, but it will also have
cleared the air enough for some major reforms to get instituted, and
life will go on.-- Kurt Cagle

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Posted By Kurt Cagle to Metaphorical Web at 11/26/2007 08:40:00 PM

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