Crowded Malls?

In any complex system there are numerous interactions and causal relationships. A specific event oftentimes leads to an outcome quite a bit later. Yesterday we got the first quarter GDP numbers and they were down more than expected. However, first quarter economic activity, ended over a month ago. It is a lagging indicator in most respects. Inside the numbers there was a very encouraging item. Consumer spending was up over 2%. This when GDP was down 6.1% would indicate that a lot of inventory was sold off.

If the inventory levels are way down and current capacity has been reduced via all the layoffs, we are going to see some growth in manufacturing activity at a more productive rate than we had during the bubble. Also any increase in consumer confidence is likely to lead to more buying of homes, cars, etc. This is the predictor that will result in an upturn. My own personal opinion was that I saw a lot more shoppers in New York, Delaware and the DC area in April. Maybe it was Easter but seeing shoppers out is one of my own favorite indicators.

Predictions

Given enough information and time most of us can make reasonable predictions. If you consider housing and look out five years from now, most people would think that prices will be up above current levels (certainly there are some doomsayers who expect us to be living in caves and practicing cannibalism but let’s hope they are wrong). So If you have enough money and enough time, you should be buying real estate. The problem is, that even if that prediction is correct, will it be universally correct? There has been ongoing slumps in certain areas of this country (thanks to Michael Moore Flint, MI jumps to mind) even when the economy elsewhere was booming. So a specific investment carries much more risk than an investment in real estate in general.
I’m not trying to tout Real Estate or anything else, but the point I’m trying to make is that general trends are easy to predict while specifics aren’t. Is the US economy going to recover? I think there isn’t much doubt that the answer is yes. When is it going to recover? Well it may have already started but a prediction that specific carries a lot of uncertainty with it. However with the upturn in Consumer Confidence and the distribution of stimulus checks and tax refunds going on now, I suspect we will see growth in spending. If there is enough consumer spending, inventories will need to be replenished and jobs will be created. Certainly has a promising sound to it.

Achieving Goals

In order to achieve a goal two things are required. First you have to know what the goal is and second you have to know how to achieve it. The first step, knowing the goal, is actually the more difficult of the two. That may seem counterintuitive to many but having a clear goal and keeping it in front of you will prompt the behavior needed to achieve it. Of course in the general scheme of things, the goal has to be within the realms of possibility, although it can be a real stretch goal. It is possible to have multiple goals but, you really are better off pursuing one primary goal.
If you know what the goal is, you have to be steadfast in achieving it. If you want to be President of the United States you pretty much have to devote every minute of every day to that goal. If you want to lose weight, you must always keep that in mind. Goals about which we procrastinate are seldom achieved and worthwhile goals do not just happen. There are those who think we can influence external events with positive thinking. This has gone by a number of names and if you look into it they endorse various techniques. The one thing the ones I am aware of is that they require you to focus on what you want to happen. Do these techniques work? I believe they do, but not via some magical influence but simply because if you focus enough on what you want, it will drive the correct behavior.
Goal driven behavior is the key. If you look at every choice you make with a single goal in mind and pick the action that helps achieve your goal, your chances of achieving your goal increase.

Swine flu panic?

Big news today is the swine flu outbreak and whether we are going to have a serious outbreak or not. While I generally think a serious outbreak is unlikely, it is a bit more unsettling here since they had a mild outbreak in a school in Queens. That is getting pretty close to home. I still don't think it is a reason to panic and when you look at the numbers it seems like a pretty insignificant risk. But there is no upside so we have added swine flu risk to the list of risks we face everyday.

Everyday we all do things that have some risk attached. You can't take a shower without the risk of falling. Most of us have long ago decided that the risks are under control and we have relegated them to some remote part of our psyche. We know that driving has risks but we have to drive and we tend to think that the risks are minimal. I feel pretty safe in predicting that many more people will die this year from traffic mishaps than from swine flu. So why are we seeing so much swine flu concern? Simply because it is an added risk and we have not yet added it to that part of our psyche where we store known risk. As I have seen in a number of places, we have diseases that are much more dangerous right now than swine flu. However, the risk of getting tuberculosis or HIV are known and have been processed into our internal equations. Swing flu hasn't yet.

Safety

One of the things that that is a primary concern of everybody is the desire to be safe. This is a fundamental need but can anyone really know if they are safe? So all anyone can really pursue is the idea of safety. By this I mean if the financial analysts tell you you need $1 mil to have a reasonably secure retirement, that becomes a measure of future safety.
Of course to achieve a significant amount you have to trade current safety for future safety. So, instead of putting any excess money you may have into Government bonds you invest is the stock market. Why? Well everyone knows that over time the stock market goes up by 10% a year. This was based on long term trends and became gospel. Of course the other alternative was to buy real estate. Why? Nobody could lose money in real estate. Further, since the economic future would be better than the present, use credit cards and equity loans to live the good life today. Why shouldn't you enjoy life and you would pay everything off someday. In fact, lease a luxury automobile at a monthly cost much less than you would have to pay if you bought it. Of course at the end of the lease you would own nothing, but just leae a new one.
This behavior all seemed safe to most people fairly recently, and as long as that view of safety persisted, it was somewhat self-fulfilling. The consumer driven economy was being driven by, well consumers in debt. Banks were making loans, wall street was repackaging those loans and providing more capital to the banks. Of course, its called a bubble, but really its more like a bigh ponzi scheme, as long as more money comes from somewhere, it can continue.
We all know it didn't continue and the exact point at which the bubble burst and the causes are probably a matter for the historians to sort out. So equity disappeared, housing collapsed, banks ran out of money and jobs started to vanish. Have we reached the bottom? Funamentally, this is a rich country with significant resources, a reasonably well educated population and a technologically advantage over much of the world. We will buy cars again, we will take out loans and we will buy houses. Prices needed to stabilize and the level of activity in those areas will probably slow for a significant period as people shift to greater safety. One of the problems with our current economy according to many experts is that Americans are starting to save too much.
Well, safety is what we all want after all, keep saving.

Bank Stress Test

The Government released results to the major banks and the guidelines to the rest of us related to the stress test. Predictably, there will be those who feel the test isn't tough enough and that the Government is sugar coating the results to calm the public. Any test like this has a major flaw, what is the right criteria. Keynes was the one, I believe it was Keynes but I may be getting senile, that in the long run we are all dead. Any stress test can be geared to a level that it become impossible to pass. Any test that the banks pass can be considered too easy.

The scenarios of the test were intended to look at the lower end of the current predictions of the economy for the next two years. There are of course those who predict a complete collapse of Western and I guess Eastern civilization and if you consider that the worst case, there is no money and we better stock up on canned goods. The "worst case" scenario the Government used is of course not that one. However since no one really knows where the economy is going t go over the next two years, what is probably more important is the current health of our financial institutions.

I see markets developing for bad loans, valuations starting to be created and potentially small signs of increased economic activity. Considering economic lag, there will be some industries going into recovery while others are still getting worse. However, I'm not going to fill my basement with canned goods and bottled water (unless of course there are some really great sales) just yet.

Role of Government

This is going to be one of those days here on Long Island where the weather is near perfect, new growth is all around, birds are preparing or maintaining their nests and its hard to imagine anything at all could be wrong. This is the end of earth week and we would all like to think that we are making progress towards solving some of the very real problems in the environment. We would also like to think that the economy is strating to improve.
There are of course folks that maintain a gloom and doom outlook as well as people who are naive optimists. However, and maybe I'm one of those naive optimists, when people understand what they should be doing most of them are perfectly willing to do it. Years ago I remember reading stories of how Americans would never take to recycling, now, it is extremely commonplace. People want to do the right thing but of course the most important right thing is normally very individual. Without getting too deep into the hierarchy of needs, I believe individuals need to feel secure before they can be altruistic. There are of course exceptions, but it is the role of Governement to align individual outcomes with societal outcomes. When Government caters to a small group at the expense of society as a whole, it is failing to fulfill its role. We may have just seen a period in which business executives were given greater influence and/or power than they should have been. I don't think the appropriate reaction to this is for the Government to start running banks and auto manufacturers, however, clear and logical regulation to protect society is extremely important. Let's see if they can get it right.

Break up the Banks

Just finished reading an article in the Atlantic by Simon Johnson who is now a professor at MIT and was the chief economist at the International Monetary Fund during 2007 and 2008. His basic conclusion is that the US is in most, if not all, way acting like the troubled third world nations the IMF used to deal with and he recommends that we nationalize the banks for a while, break them down into smaller units and then reprivatize them. Another alternative would be to reprivatise them as they are but require them to be broken up by the new owners. He doesn't think that the economy can fully recover until we take that step.

He makes a lot of good points and based and here is a link to the article. http://www.theatlantic.com/doc/200905/imf-advice

I don't disagree with his point that the financial oligarchs have achieved way to much influence but diagree with some other points. I believe the market will be able to place a value on the "toxic assets" and that this can be done without privatization. believe it is already happening, although I do think it may be painful. Also, think a more bottoms up solution is more likely to work than any of these top down solutions.

Earth Day

Seems like today would be a good day to focus on what can we do to reduce wasting resources. A lot of time people think this requires some sort of big solution, but sitting back and waiting for the Government to come up with something, after all the lobbying and compromising that is going to go on, is probably not the best approach. To a large extent the economic slowdown and subsequent reduction in traffic and gasoline usage has probably done more for the environment in the last few months than any Government program. Use of earth friendly light bulbs, adjusting thermostats, adding insulation and increased usage of solar panels where feasable are all things that are going on right now that are having an impact.
Germany is way ahead of us right now in solar and I see that as an area of significant opportunity over the next few years (we are better suited for this than Germany).
Think there are going to be some significant tax incentives coming for installation of solar.

Economic problem

One of the things that I have tried to practice is to determine root causes. If a system is exhibiting multiple problems you have two things you must do, one make sure the symptoms are under control and second determine what is causing the symptoms.
The current economic situation has led to a lot of symptom treatment behavior. However, are they addressing the root cause?
A simplistic analysis would trace the cause to the loss in equity experienced by many Americans. We reached a point where the supply of houses exceeded demand. When this happened, the price point had to adjust and in falling created a significant economic problem for many individuals. Those who had mortgages that exceeded the cost of their homes (and in many cases this was true of people who had been constantly refinancing) had no incentive to continue in that situation. Further, many people who had borrowed money using loans that required constantly increasing equity, found themselves facing high payments and negative equity.
Of course the money flowing from cheap equity loans led to significant consumer spending and that led to many jobs and a high level of economic activity. Another way to put that would be that many Americans were living above their means.
It is fairly easy to argue that the issue was not restricted to housing, but clearly if we could achieve some balance between supply and demand in that market, prices would stabilize and hopefully people would start to rebuild equity. How can this be achieved? Of course right now it is trying to fix itself since builders aren't building, lenders aren't lending and consumer's aren't buying. This has a consequential reduction in economic activity. The Government is providing billions to the lenders and others but it would seem more logical to provide the consumers with that money so they would spend it. Basically, without increased demand, we are not going to increase supply and economic activity will stagnate.

Clever ideas?

Read today that the Administration has decided or is thinking about converting bond positions into equity positions at the financial institutions it has given money to. This will eliminate the debt from the books and, per the article, generate extra assets to the banks.
This is another of those clever bookkeeping ideas that people come up with every so often that make things look better but don't actualy do anything. This benefits the banks because it converts taxpayer debt into equity that may easily lose value. Further, the equity would have to be sold to investors for taxpayers to see any money and if investors were willing to buy the stock, the Government wouldn't have to.
There have been a lot of clever ideas in business that were designed to make things look better when in fact there was no fundamental change. Basically its the same thing as three card monte, the person with the idea is guaranteed some money and everyone else probably loses. Repackage paper, recategorize assets, extend debt periods, all don't add a dollar of revenue or reduce a dollar of cost in any business. In fact, they most likely generate hefty fees for someone and those fees need to come from somewhere.
I used to evaluate proposals and often I was presented with a proposition that alledgedly reduced costs. Many times this was simply recharacterization to make it look like it was going down. Of course if what I'm doing is a single transaction and the costs were shifted to a different transaction, good for me but the costs are still there. This may be very simplistic, but the only way to reduce costs, is to reduce costs.

Predicting the future

Have been reading a lot about the economy and people's opinions on what is going to happen. All of these prognosticators have their pet theory and of course present arguments in support of that theory. They range from "recovery is right around the corner" to "we are in a death spiral where increasing unemployment reduces spending reducing sales leading to unemployment leading to ...".
I'm not going to predict anything, but it does seem that one thing we should consider is adjusting the work week. If we don't have enough jobs for everyone, having people work less hours would create more of them. Also, having more leisure time (while employed) would most likely result in increased spending, leading to more sales and more jobs.
I guess the real question is would such a policy make us uncompetitive in the world market and I don't honestly know the answer to that. It would seem that core industries should be able to compete.
Just a thought.

Spring thoughts

I think we all have an image of Spring as a pleasant time of year where there is rebirth, flowers and general optimism about the future. Certainly yesterday on Long Island the weather supported that view of Spring, but for a lot of early Spring the weather is unpredictable and often quite nasty. We seem to quickly forget this every year and remember the days that support our idea of Spring. Simply put this is just an example of how we are all (or at least most of us) intrinsically optimistic and ready to move forward. This is possibly the one great characteristic of the human spirit, the ability to see the positive and work towards it. There have been truly terrible events and castastrophe's and listing them here would be boring but after every one of them, humanity has rebounded and gotten stronger. The current economic situation certainly is having a terrible impact on certain individuals, but if anyone thinks this is the end of humanity, or growth, or progress, I think they have failed to pay any attention to our history.

Limits of Government

Quote today from Abe Lincoln is
"No man is good enough to govern another man without that other man's consent."
I Assume this was in relation to his position on slavery and it certainly sounds good, but wasn't the whole point of the Civil War to impose the right of the Union to govern the Southern States without their consent? I believe the argument was that they had consented when they joined the Union and couldn't dissolve that relationship. However, they lost and were clearly governed without their current consent for at least a while.
The limits of Government always seem to be tricky. I lean towards libertarianism, but there is no doubt a need for collective action. Would be hard to maintain a national highway system without some sort of government involvement. Also, certainly is a good idea to provide protective services (police, fire etc.)
Just random thoughts now but worthy of further exploration.

Global Warming

As the polar ice caps melt ocean levels are going to rise. Would think this water could be used to irrigate desert areas resulting in more plants reducing carbon in the athmosphere. Would think that pumping water to the desert and using solar to desalinate it has to benefit everyone. Guess people who want to maintain unique desert environments may object, but what about offsetting the sub sahara drought areas that weren't desert a few years ago?

Is this too simple?

Tax Day

Day always makes you wonder if you are getting good value for your money. Certainly we have the best Military in the world, although not sure if it is in fact the most efficient. A lot of other areas are questionable.

Craziness

Even if you don't agree with giving billions of dollars to big corporations such as GM and Chrysler, after they have your money you need to hope they succeed.

Daily saying

Mistakes are, after all, the foundations of truth, and if a man does not know what a thing is, it is at least and increase in knowledge if he knows what it is not.
-Carl Jung