Despite going on New Year’s vacation to Las Vegas, Nevada to see family, the newspaper keeps tracking me down. I read this morning on growing unemployment, and I wanted to put up my notes on how we see this crisis, and we think it will play out in the real economy.

First truism: increasing unemployment reflects the inability, by firms, to make payroll. I do not have a sector-by-sector breakdown of where unemployment is occuring, so I do not know who is losing jobs, but it’s clear that operatives specially trained in mortgage operations, finance and real estate have been laid off as financial services entities divest employees. An excellent friend of mine, who operates a real estate/mortgage brokerage estimated, to me yesterday, that 90% of firms in his sector have closed down.

In these cases, clearly there are payroll issues stemming from virtual chapter-11 conditions. With unemployment rates increasing, there is reason for concern among America’s workforce. Here are my thoughts on our shared conundrum.

All corporations operate on a constrained revenue basis in a recessionary climate of decreased sales and income, quarter-to-quarter. Naturally, all firms with decreased cash and fixed liabilities will conside payroll a major expense category. Payroll stands out as a target for operational efficiency even in boom cycles.

In some industries, sucha s mortgage lending where incoming applications for loands have declined, this decrease in volumbe of business justifies management slimming down their workforce. But insofar as firms continue to operate, they will seek productivity increases as a means to optimize profit. Information technology is traditionally viewed as a means to streamline business processes and increase per-worker productivity.

Firms will not cease to consider talent as a primary means to implement high quality business processes. In fact, in a climate of declining sales volume, only the most productive workers will remain, due to superior skills and consistent contribution to any firm’s core business.

Given these fundamental, sound assumptions, these collaries are possible:

1. firms will employ a skeletal staff, capable of handling the greatest volume of business with the greatest quality
2. until the global recession halts, firms will emphasize hiring individuals who are competant to handle high productivity practices.
3. firms will therefore recruit with high scrutiny, and avoid taking on new workers unless they are the best they can find (and convince to join them)

In the case of collegiate hires, our system should capture the imagination of managers in this macro-climate of recession, continuing competion within their respective sector and declining consumerism. Managers will not hire mere ‘warm bodies’ in this climate; instead they will favor individuals with high likelihood of success.

Students in many majors represent optimal hires in times of stress, because they potentially possess high quality knowledge and skills, and are skilled at managing heavy workloads. The sole responsibility employers have is to qualify students who have limited industry experience. How will GEICO, for example, hire actuarial talent, when students may only possess a few months of intern experience, at best?

Qualifying student hires must take place on the basis of their experience. And within the space of masters’, doctorate or bachelors’ degrees, there is ample time for high quality research. We believe, as do our corporate peers, that a student’s term papers are a perfect indicator of their knowledge, skills, and potential for success. Term papers also indicate something greater: a commitment to a topic or domain of their discipline. Without the services of a Next Acropolis, it would be very hard to divine these facts with much accuracy, and will absolutely require mutliple campus visits.

So, for students still in university who are reading the news about our strange economic situation, we have several pieces of advice:

1. emphasize your term papers, focus your work on problems faced by real industry. Write for an audience beyond your own classroom.
2. Use your choice of term paper topic as a way to discover potential “industrial applications” for your skillset and interest. Remember that all major sectors of the economy are industries, such as health care, entertainment, law or finance.

Once you’ve located your industrial focus, locate a topic in that area that fascinates you. The more specific, the better. Moreover, students must seek out experiences where your industry knowledge deepens. Interview practitioners, perhaps as part of a qualitative study of their attitudes, using questionaires. Also, gain anecdotal knowledge through conversation with real industry personae. Collect piles of economic data related to your research problem. Make interesting charts and graphs, in an effort to put yourself in a position of serving information to your peers out there in industry.

Texas is reproving itself as a state that cares about education. University faculty in science, medicine, engineering and math are calling for a long term project to create a world-class education system in the state of Texas.

A cornerstone of this project is improving the infrastructure for supporting and training teachers. New York has done this, in support of a statewide increase in teacher compensation, and higher requirements to become a certified teacher.

Taiwan struggles, much like Texas, to retain its teaching talent, but at the university level. Canadian academics are being recruited to explore teaching in Taiwan, as universities there must alter their ambitions to compete with rival campuses in Hong Kong, China and Singapore.

Intel Corp has done much to promote the idea of building up the education system in america by pursuing the development of high school faculty. Intel must simply reach deeply into public education in order to cultivate its future workforce; Exxon advertises its own efforts to reach students through efforts to cultivate teachers, as well.

Here is my point: entrepreneurial activity on a social level requires a similar allocation of capital, time, talent, and human resources to produce key results. It was not long ago that the Chinese realized they lacked the home-grown talent to pursue competitive industrialization; they had to recruit teachers from Japan and other advanced economies. Now, a generation after this undertaking, there are ample students capable of training China’s next generation scientists.

One of the broad goals of our company has been to be a tool of entrepreneurial growth, social, economic, and cultural. Entrepreneurialism is characterized by giving — reaching out to others with a proposition that is mutually beneficial, and stirring up activity, not waiting for anyone to assign you a task. This self-starting culture can be activated by any organization, governmental, private and non-profit. Indiana’s own university base is also active in building up its instructional infrastructure, offering its outstanding graduates from schools like Purdue incentives to teach.

Entrepreneurialism is inherently an activist enterprise, and we support the entrepreneur wherever she shows her colors, recruiting critical talent to support the endeavor.

Rural areas need doctors. Babies are being born, accidents take place, and people get sick. But in the countryside, everything gets harder. Specialists need airplanes to get to patients and they must drive hours to serve the public. Governments are getting the point — they’ll need to recruit doctors out of school, fund entirely new medical colleges, and move resources to “the bush,” as the Australians call it.

Rural americans experience similar crises, needing to drive hours to find care, and commute to centers of excellence. My own mom knows this fact — she was recruited from her masters’ in social work (MSW) to serve in a university research hospital. Folks from northern michigan, hours away, would commute south to our city to get help on cancer, and other life-threatening illnesses.

We are pleased to be able to offer a service, for no cost to the public as they  face the challenge of the new millenia. Moving critical services to the public requires an investment in human resources, knowledge workers, and mobilizing capital to make these new services possible. But the outcomes are moving. In the above case of the Australians, babies being born with sufficient care is a huge motivator. We think that young people with new career options will embrace the opportunity to serve the underserved, and volunteer to build their career with an episode of public service.

The second idea that strikes me, as an executive, is the commonality of social goals between countries, independent of geography: the project to extend medical services to rural populations spans Africa, Australia, India and the Americas. The call for knowledgeable people to spend the first years of their career in rural areas will be compelling.

As an institution designed to serve the needs of human resources, it is heart warming to be able to participate in helping others beyond our own humble country. The internet is delivering on its conceived promise, of unlocking the potential within each individual, and allocating resources, like labor, to solve social issues. This inherently social aim of the internet can’t be deemphasized.

We believe that the world’s economic recession exposes the transitional nature of our leading industries, and the increased need for industries that serve emerging needs, for medical, energy, communications, natural resources and transportation. As historic companies like General Motors groan to a halt, unable to continue on their own steam, we face the reality that the public needs new products to survive. People do not desire vehicles that do not respect their economic means, and they fear being attached to an economy of low efficiency, power-consumptive vehicles. I know that I depend on a vehicle to support my students, clients, and family members, and that the run-up in the cost of living (housing, medical care, fuel, energy, water, electricity), deeply undermines my ability to spend loosely. So long as people live to support the many material needs, and the growth of employment, globally, depends on consumer spending, when those of us in the spender-nations (US, Europe) pull back, and cannot afford luxuries associated with discretionary income, we disrupt networks of production world-wide.

Chrysler and GM preparing to wind-down, or enter an unrecoverable bankruptcy, are emblematic of a larger recycling of industrial capacity. Those plants will be turned over to companies who manage themselves with greater energy-efficiency (Ford, Daimler, Toyota). Labor already has shifted away from the Michigan region to manufacturing centers in Alabama, in pursuit of a general growth in the regional economics of the new South.

The megatrend that students and corporations must embrace is the long-term futurism of this provisional economy. Companies that will excel in this crisis-slash-opportunity will address the needs of the new economy, not the old, and will offer the public goods and services that are meaningful to them right now, and do not hold their prosperity back in the future. Right now the greatest fear of General Motors is the bankruptcy they must face, simply because the public will avoid purchasing cars that no one will be able to repair in three years. The public is, after all, a provident entity.

The discipline of quantitative finance has really taken a beating this year. With so many economists blaming risk management techniques, and the roles financial engineers played in the credit bubble, this sector of the financial industry has suffered a major decline in confidence.

Nassim Taleb’s recent podcast interviews with Bloomberg’s Tom Keane couldn’t hold back his disdain for quantitative finance models. Rely on Taleb to be an iconoclast, especially since his funds have prospered during the downturn, and expect him to pitch his latest work, but what he says is of great pertinence to folks in mathematical finance, and to the rest of the workforce, as corporations retool and respond to drastic turns of fortune.

First of all, to sum up Taleb quickly (something he will detest), his point is, the use of historical analysis to predict present and future markets is impossible (history is different from the present). Also, the prevalence of thirty-somethings running huge funds using mathematical models is also not good. (Quantitative finance, or quants, are responsible here). Taleb’s latest work states that the more scientific a person’s reasoning is, the more unreliable it is. And he affirms that in the trading industry, where the eggheads, or quants, of the younger generation come up with brilliant theories on trading, and more established ‘fat Tony’ characters use their intuition and life experience in traditional banking. Traditionally, banks trust their money to Fat Tony types, who rely on their veteran instincts; the eggheads, instead, rely on theoretical means to understand the economy, using academic theory.

The failure of recent quants to survive their own bets with other people’s money is a sorry proof for Taleb. And you would think that quantitative finance would be taking a major backseat, having lost its driving privileges. But I doubt that quant-fi will be making its way out the doors of any wall street trading house. Not with the advances made during this period.

A buddy of mine at a large investment firm asked me if our firm, Next Acropolis, would be helping banks to recruit students in math, finance, econ, and their jewel recruits in computer science and financial engineering.

I told him that this was our purpose, and that so long as banks needed skilled graduates, that we were there to help.

A few thoughts I wanted to impart to graduates in finance, who are unnerved by this crisis, as well as students preparing to graduate in the next 24 months, is that the economy still depends on them. This bears true with financial engineers, whose metier suffers from blame in the media, as well as students in all other disciplines.

Truth be told, many banks have lost the deposits of their customers. This underlies the frozen nature of global finance. Credit depends on banks’ lending to each other, and so long as they fail to do so, the rest of the economy is unable to fund its own expansion. Most businesses depend on taking loans to finance their inventories, and help their consumers fund purchasing that inventory. But so long as banks are tied up in paper losses stemming from loans they cannot refund, then the global system is tied up in knots, consumer credit does not flow, and buying does not take place.

Germany, China and the US are the world’s biggest exporters. The US, the world’s preeminent consumer. Get used to this fact: if banks can’t untie these knots, and make their own money move around the globe, they will fold. Simply put.

The sale of Merrill Lynch to Bank of America, or the sale of major pieces of major investment banks to the US treasury means that old management answers to new owners. Let’s put it this way: say you bought a car, and learned that it was broken, what would you do? You’d fix it. And that’s what’s going to happen this quarter, as mortgages get worked out, so that banks don’t have to become real estate investment trusts, with thousands of sagging residential assets on its books. These are public companies — and the leadership is paid to make things profitable.

Phase two comes when CEOs open up the trading book, and learn how to unravel the financial engineering that got them into trouble. It will require working between banks to forgive and delay many debt repayments (since many banks borrowed from eachother to fund trading). This will create new types of confidential third party courts where banks can submit an appeal akin to bankruptcy, but only in the case of a single loan gone bad.

What you will see is banks doing for each other, what they had to do for consumers duped with alt-A, subprime, and other toxic mortgages. Instead of having consumers pay for obscene, and illegally packaged loans that cause foreclosure (and bank closure!), they will allow for consumers to get a workout, and receive terms they can afford. This keeps the home in the hands of paying debtors, who’ll stay in their homes. The banks will get into the habit of doing a similar workouts between eachother, so that they can gradually repay eachother for funds related to trading losses.

Our president will preside over a large cleanup period, that will likely proceed much faster than the entire term of his presidency. This much I believe: for the US, and other nations to avoid mass chaos and near-term depression, they will have to declare their troubles, then work them out in some confidential way, with some government enforcement.

We are in an era of Bretton Woods II. And out of it, we’ll craft ad-hoc financial institutions that will mend the global financial system. And in the process, we will not throw out the emergent disciplines of mathematical finance with the bath water. Instead, we will simply create more flexible, and fault-redundant ways to support ‘risk management’ — formal, institutionalized risk taking.

And for all those quants out there worried about the future. Truth is, we can’t do it without you. We need the dark pool algorithms, the proprietary, automated, intelligent tools to render trading more reliable, and help us transition more safety into stock markets. Stocks aren’t as reliable as other investment vehicles, but for us to create better retirement systems, we need them to work for us in a civilized way.

So moral to the story: just because a discipline isn’t performing well in the real world, it doesn’t mean that the discipline will disappear. This certainly didn’t happen to my discipline after the dot-com crash (computer science & software engineering). Society needs its educated members, and will place them wherever they are needed the most. It is endemic of our populace to think that an apolcalyptic future awaits us; truth be told, the more we collaborate, come together, agree to help out then create transparency into each other’s problems, we succeed. Be prepared for a roller coaster 2009, with a strong recovery, as we reengineer a stronger, more resilient new economy.

interesting links:

• on quants, financial engineering
• Nassim Taleb
• on the new economy of fear

UPDATE

Recent quant grads buck trends, despite aspersions cast on their discipline

Our major thrust in 2009 will be ‘regional economic development.’ We intend to build our business model upon the assumtion that economics is always regional, just like politics are always local. We have made relationships with students and recruiters across the world, and we enjoy this feeling of reach, but we must admit that employers have the greatest ability to influence academics on a regional level, and reach students at their nearby universities. After communicating with career development services offices up and down the state university backbone of California, our home state, we have concluded that college campuses are highly efficient places to promote our brand. We will parallelize communications with campus newspapers with regional business journals, to collectively wake up industries, and students to their potential.

In light of the recent economic slowdown, I believe that our system will be seen as a timely innovation in the annals of corporate productivity advancement. Simply put, our technology will enable companies to find the ideal educated individuals to meet the needs of growth and capability. Having the perfect person for each key role will strengthen the company beyond any other productivity saving tool. And being able to extend an offer to students is a major incentive for students to target their academics toward specific areas of their industry, and perform work that directly prepares them for recruitment. This way, Next Acropolis will incentivize and reward individual efforts to serve the needs of industries across the economy, and directly partner students with those employers in an on-demand fashion.

The economy must face a downturn in order to weed out corruption, inefficiency, stale business models and products that do not meet consumer’s needs. It is difficult to satisfy a consumer demographic whose discretionary income has receded; but designing for efficiency and low cost of ownership, across all product disciplines, will be a neccessary activity. Gas, electricity, raw materials, and money will all be precious, no matter if the economy is surging ahead or not.

The arrival of a whole new generation of independent, highly trained workers is something to be inspired about. The millenial generalization is very much an amusement for journalists; I find my students to be highly engaged, entrepreneurial and motivated to achieve for personal reasons well beyond the reward to prestige or money. In technology, this is quite common. But I believe that in the case of young people underserving their employers, hinted-at by writers on the ‘millenial generation,’ I believe that employers  will be pleasantly surprised by the street-savvy, business-minded attitude of our young people. I believe that so long as corporations give big projects to bright people, provide guidance and get out of the way of good ideas, that they will turn on the potentiality of this generation to deliver on our investment in them.

USC business students were kind to invite me to a meeting of GLOBUS, which is their international management society. I was greeted by eager, and super smart undergraduates, all of whom want to know how to get a startup moving.

I doubt that such a group of students would be readily accessible during the mid-nineties in New York, when I was an undergrad… These young people were fully versed in the culture of the Internet, their primary entrepreneurial medium of choice. I believe that they see the Internet as the primary medium for the startup, and unpacking some of the legends of the internet era was a lot of fun.

A pressing concern from business students was the impact of advertising. We discussed the emergence of Google AdSense, and put that innovation into context. I proposed that one of the fundamental failures of the initial internet startup period (1984 - 2000) was the failure to monetize sites based on advertising. Google successfully reinvented online advertising through AdSense, and reignited the drive to build successful internet content businesses. In my perspective, this created the Web 2.0 phenomenon, where social technologies like wikis, blogs, networks and such took hold. Without effective advertising, these important innovations would have little means to operate.

Now, I told them, entrepreneurs are seeking to put social processes online. This opens up a whole new array of innovations that I described as ‘metatechnological’ - making innovations in technologies that produce architectures for new social systems. These new metatechnological business models were fundamental to understanding why newer entities such as google were successfully pushing older, established companies out of the way.

We also talked about the efficacy in creating a startup in a time of minimal credit, and compromised budgets. The era of the ‘cheap revolution‘ is in full swing, with commodity computing, offshore engineering, viral social marketing, and feeless usership based on AdWords.

We also discussed the social analysis needed to model an enterprise. I told them about the basis for Next Acropolis, which is rooted in the social reality of corporations:

What I see happening in society is that

1. education gets wasted
2. Corporations become swinging doors for bum leadership and unmotivated hires
3. People don’t go into what they care about, due to various factors (don’t have confidence in their truest desires, due to ignorance of the larger economy)
4. Students are disconnected from the vital needs of employers (and economies)
5. Students operate in a vacuum, uniformed and cut off from inspiration in the world
6. Governments must cater politics to massive disconnected, underperforming groups of individuals

and this is product of our free market, monster.com labor system, which states:

• because big job boards make jobs available to anyone, anywhere, it’s easy to find work
• It’s easier to find a better job if you don’t like your current position
• Therefore, corporations can’t hold onto experienced individuals, because they never settle
• And therefore, corporations must not invest in employees, but instead leave it up to employees to invest in themselves as vessels
• Firms make all employment ‘at will’
• And promise less and less to the employees, who seem so capable of fulfilling their own objectives if the current situation doens’t suit them
• Jobs become merely tools to allow individuals advancement, and individuals are tools for organizations

Credit Suisse shows no sign of slowing down as the rest of the world enters a slowdown. They are actively recruiting IT students, and trying hard to attract talent to thicken their ranks. One shouldn’t forget the lessons of Google as it began to monetize itself in the downturn of 2000. As numerous startups began to divest some of silicon valley’s best IT talent, Google swooped in to feast. The failure of the late 90’s startups provided Google with ample business models to critique (ie, adsense, the web portal, the search engine in general).

Credit Suisse, along with Goldman Sachs, seeks this kind of advantage. Though GS showed revenue drops around %70 this year, at least they continue to survive. And Credit Suisse has also prevailed in this market, where mere survival is reason to brag. The technology showdown between these two trading giants has shaped the market as it stands: one organization’s trading systems facing off with another’s. We are talking about computers doing optimized trading, and competing for optimal prices on the open market, 24/7.

The ongoing expanse of electronic, real-time automated trading is luring customers to their funds, and now these banking titans must lure the talent to keep up with their efforts to scale these programs. The rest of the economy can take notice, and take heed of the dictum that it’s wise to scale up your R&D and product development during the downturn. Intel and other technology organizations are up to the same…

We hope to help organizations of all sizes to participate in this kind of cherry-picking done by CS and GS. They look to campuses in NYC and Raleigh, NC to send their best students, on invitation, to view what kinds of opportunities lie within these banking giants. Now that the surviving powers on Wall Street are viewing themselves as fully fledged technology companies, they must press their case to students, lest they take a job with microsoft, google, or another tech entity.

Next Acropolis’ goal is to create the environment where small and medium size companies can actively court the same pool of students as any major multinational, and open up more opportunity to students through mentorship, internships and jobs.