Paper Is Dead

Paper Is Dead

Financial paper is a promise to pay. Consumer or Company Debt is a promise to pay so much at certain intervals. Sometimes this promise is ordered and orderly, as in corporate bonds. Sometimes this promise (consumer credit card debt or commercial paper) is free-floating.

In any event, paper is only a promise.

Corporate common stock is similarly a promise to pay… as in, you get what is left after all of our firm's other promises. Any CPA can tell you that.

Corporate promises have gone out the window. The (increasingly jumbled) government intervention – thanks, Hank, for today's press conference – has made it such that ALL companies's promise to pay is suspect. This is the moral hazard of which we have been warned. If GM is let out of its promises, why not KBH (KB Homes)? Why not Comcast Cable?

Why not any other company that has issued "paper"? Isn't today's wisest choice for any established company's MBA to urge a rush to the bottom? That is, show a terrible "loss" at company XYZ (why not General Mills, Sun Micro, or General Dynamics), and apply to suckle at the government's teat?

There are two answers. The first is that is that the broad market for paper – or the promises of established companies to pay – is dead.

The other answer is that the real money is going to be made by brand new companies that don't have any traded "paper" out. These are the simple start-ups who have to meet their obligations, because their very existence is dependent upon such. They are start-ups who cannot rely on any interventionist government to come through with today's or yesterday's bailout.

You can look around at the supposed paragons of today's economy for the Who's Who list of companies or brands that were started in similarly "bleak" environments. They are Intel. Cisco. Apple. Snapple. Charles Schwab. Bank of America (formerly MBNA).

Welcome to the new economy.

Let the creative destruction begin.

And all praise this creative destruction. Those start-ups who choose to battle on, in today's heavy fogs, will be the brands and companies that drive the world of tomorrow.

 

Patrick Garot – November 12, 2008