If you are trying to tackle a problem by yourself it is pretty straightforward who gets the credit for success and/or failure. It can get trickier if you are part of a team. There have been many studies conducted that demonstrate that team dynamics do lead to better outcomes in most instances. More ideas get brainstormed and fallacies in logic get exposed. Working in a team can cause some individuals to get extremely frustrated and others to effectively shut down and just go along for the ride. So to get the most out of a team you need a leader/facilitator who can keep things moving forward while getting everyone to participate.
No team can be successful if it doesn't have a clear idea of what it is trying to accomplish. This can be harder than many people realize. If you ask a team to improve inventory control, you need to make sure they understand what improve means. If they decide it means inventory is always available when needed, there is a chance that improvement will drive up your costs. If they decide it means manage inventory at the lowest possible cost, you may end up with production delays. There have been many solutions presented by teams that accomplished what they thought they were asked to do but turned out to be disastrous in implementation because of unintended or unconsidered consequences.
In the current litany of problems facing the country and the world, what I think must be remembered is that many of them are linked. If you want the cheapest energy source, you may very easily end up aggravating pollution, global warming, and in the long run drive up cost. If you are a private industry, you generally are interested in maximizing profit now. So if you are asked to add pollution control devices, you will resist because it is going to increase costs that probably can't be passed along, therefore driving down your profits. This is the best decision for that particular company but not the best team solution. This is where Government, which after all is designed to assure the interests of all the people are protected, has a role to play. Government can and does impose standards that must be met.
Next week it is likely that GM is going to declare bankruptcy. It seems that at this point, the results of the bankruptcy are very well understood and the only real reason for the bankruptcy is to invalidate and change many of the current contractual obligations. After the process the Government is going to end up owning about 70% of the new GM. So I guess congratulations are in order to all us taxpayers! Bet you never expected to be a majority shareholder in GM!
Sunday, May 31, 2009
Saturday, May 30, 2009
Solving problems
Everywhere you look there are major problems facing our society. You can consider the Economy, Terrorism, Health Care, Global Warming, etc and etc. Some think the problems are so far along that it is already to late to solve them and that we should be preparing for a collapse of the economy, rising sea levels and widespread pandemics.
In the late 18th and early 19th century Thomas Malthus showed how the growth of population was going to exceed the earth's capacity to support it. The mathematics supporting the theory were correct and we may at some point still face a Malthusian Catastrophe. What the theory did not properly account for was that the conditions of the early 19th century were not the epitome of human progress. Advances that were not and probably could not have been predicted by Malthus not only avoided the catastrophe he predicted (so far) but has greatly increased the earth's capacity to support humanity.
Of course logic does tell us that if population does continue to grow there must be an ultimate limit, but for my purposes, the disaster that seemed so certain and so imminent has been altered by developments that could not be predicted.
I was reading an article today about how LED lighting held great promise to reduce energy requirements. Of course it was talking about a relatively minor reduction overall (somewhere in the neighborhood of 3% of total electric usage). This was calculated against compact fluorescent bulbs so it would obviously be higher since they already are a lot more energy efficient than traditional incandescent bulbs.
What I found most interesting about the article is that it is one thing in one area that is being developed that will potentially help solve one of our problems. I think most of the prognostications base their opinions on what they know. This is only logical, but the one thing they should know but often seem to forget is how much they don't know.
I know that as problems arise and become generally accepted many many bright industrious people start looking for solutions. The vast majority of these attempts will probably not amount to very much but enough of them will result in improvement. Most of these problems are not going to be solved by one gigantic solution. However, is we reduce energy usage via better technology such as LED bulbs, energy efficient appliances, more fuel efficient cars, better use of solar and wind, etc, etc we will turn the corner at some point. Less reliance on carbon based and imported fuel will have significant repercussions.
Simply put, if someone asked me how are we going to solve any of the major problems we are facing, I admit I couldn't tell them, except to say that the innovation and creative capacity of humanity should not be discounted.
In the late 18th and early 19th century Thomas Malthus showed how the growth of population was going to exceed the earth's capacity to support it. The mathematics supporting the theory were correct and we may at some point still face a Malthusian Catastrophe. What the theory did not properly account for was that the conditions of the early 19th century were not the epitome of human progress. Advances that were not and probably could not have been predicted by Malthus not only avoided the catastrophe he predicted (so far) but has greatly increased the earth's capacity to support humanity.
Of course logic does tell us that if population does continue to grow there must be an ultimate limit, but for my purposes, the disaster that seemed so certain and so imminent has been altered by developments that could not be predicted.
I was reading an article today about how LED lighting held great promise to reduce energy requirements. Of course it was talking about a relatively minor reduction overall (somewhere in the neighborhood of 3% of total electric usage). This was calculated against compact fluorescent bulbs so it would obviously be higher since they already are a lot more energy efficient than traditional incandescent bulbs.
What I found most interesting about the article is that it is one thing in one area that is being developed that will potentially help solve one of our problems. I think most of the prognostications base their opinions on what they know. This is only logical, but the one thing they should know but often seem to forget is how much they don't know.
I know that as problems arise and become generally accepted many many bright industrious people start looking for solutions. The vast majority of these attempts will probably not amount to very much but enough of them will result in improvement. Most of these problems are not going to be solved by one gigantic solution. However, is we reduce energy usage via better technology such as LED bulbs, energy efficient appliances, more fuel efficient cars, better use of solar and wind, etc, etc we will turn the corner at some point. Less reliance on carbon based and imported fuel will have significant repercussions.
Simply put, if someone asked me how are we going to solve any of the major problems we are facing, I admit I couldn't tell them, except to say that the innovation and creative capacity of humanity should not be discounted.
Friday, May 29, 2009
Point of View
We all know that some people are optimists and some people are pessimists. I like to think of myself as a realist but I've been told by many people that I'm one of the most optimistic people they know so I should probably accept that. It is likely that all the optimists and pessimists are convinced that they are realists and are unaware of the bias they bring to the table.
In looking at economic data the opportunity for this bias to come out is extraordinary. Take oil prices. When they were down a few months ago, it was viewed by many (pessimists) that it demonstrated the terrible state of the economy and lack of activity and was just about the worst thing in the world. Recently oil prices have gone up (in the spring much like they almost always do) and the same people are saying it is the result of the trillions of dollars we printed and that rampant inflation is going to destroy the recovery, which was never a real improvement anyways, just a pretend one.
Now the price of a barrel of oil is almost exactly what it was three years ago. Of course you have to acknowledge that three years ago the economy was much better than it is now. However, The supply of oil vs the demand for oil is what determines prices. While demand is down there have also been production cuts. Hard to determine the impact of inflation in all this.
A third way to look at the price of oil would be to say it shows that the economy is improving, usage is up, people are driving more and it signifies that the worst is past.
So a single event, such as the change in the price of oil, can be interpreted in many ways depending on your point of view.
In looking at economic data the opportunity for this bias to come out is extraordinary. Take oil prices. When they were down a few months ago, it was viewed by many (pessimists) that it demonstrated the terrible state of the economy and lack of activity and was just about the worst thing in the world. Recently oil prices have gone up (in the spring much like they almost always do) and the same people are saying it is the result of the trillions of dollars we printed and that rampant inflation is going to destroy the recovery, which was never a real improvement anyways, just a pretend one.
Now the price of a barrel of oil is almost exactly what it was three years ago. Of course you have to acknowledge that three years ago the economy was much better than it is now. However, The supply of oil vs the demand for oil is what determines prices. While demand is down there have also been production cuts. Hard to determine the impact of inflation in all this.
A third way to look at the price of oil would be to say it shows that the economy is improving, usage is up, people are driving more and it signifies that the worst is past.
So a single event, such as the change in the price of oil, can be interpreted in many ways depending on your point of view.
Thursday, May 28, 2009
Disposable income
When you think about the United States economy, there is a lot of thought given to all the problems it has. Certain analysts promote the idea that the problems are so great that we are going to collapse, swamped in tremendous levels of debt, high unemployment, rampant inflation and/or deflation, and maybe a collapse of our Government.
What is mostly ignored is that while things are bad for many people, the majority of Americans are impacted hardly at all. Yes, if you have a 401k or own a house you have "paper" loses unless you have to sell right now. I watched the values of my houses and investments drop rather dramatically. I've been recently watching the investments rebound about half way back and I would like to see them recover more, and I have re-calibrated the mix to provide a bit more safety. However, I've been watching these amounts go up and down over almost thirty years and my software still tells me that since I started investing I'm up about 50%. I was up a lot more in 2007/2008 and as I watch the numbers I feel better and/or worse but afterwards I go about the rest of my day.
Similarly I have lived in my primary residence for about 25 years. After I bought it in the mid 80s, there was a decline in real estate in this area and for almost 10 years it was pretty much worth either slightly more or slightly less than I paid for it. Then there was a spurt in prices and the same house suddenly was worth a whole bunch more. This pretty much continued for years until the house was priced so high that I wouldn't have been able to buy it if I didn't already own it. Well, it has now come down some amount, although not as bad as many other areas, but of course my mortgage payment is the same, my monthly bills are pretty much the same and outside of how I feel there is very little real change.
What is my point? I may be in a fairly fortunate scenario since my monthly income is secure. However, even if unemployment goes to 10% that means 90% of Americans who are in the workforce are employed. In addition, the percentage of Americans who are receiving pensions, social security or annuities, a rather large percentage, will be no worse off. The heart of the economy is still beating. The turmoil is primarily in the fringes. This doesn't mean that everything is fine, and probably the biggest widespread impact is the loss of housing and investment wealth that makes people feel poorer and led to a significant shift to savings vs spending, but I was looking at a graph of disposable income form 2006 to 2009 and except for a few months in 2008 when there was first a significant increase in April (probably due to the stimulus payments) followed by a return to the more average level immediately thereafter, it has changed very little month to month.
During that period the use of that income has varied and for a while high gasoline and oil prices ate up a lot of it and now a lot of it has shifted from consumption to saving, but, the amount of disposable income has not dropped dramatically (nor has it increased). However, for the majority of Americans their income has continued and with an increase in consumer confidence we may easily see an increase in pent up demand. When that happens we will have turned a significant corner.
What is mostly ignored is that while things are bad for many people, the majority of Americans are impacted hardly at all. Yes, if you have a 401k or own a house you have "paper" loses unless you have to sell right now. I watched the values of my houses and investments drop rather dramatically. I've been recently watching the investments rebound about half way back and I would like to see them recover more, and I have re-calibrated the mix to provide a bit more safety. However, I've been watching these amounts go up and down over almost thirty years and my software still tells me that since I started investing I'm up about 50%. I was up a lot more in 2007/2008 and as I watch the numbers I feel better and/or worse but afterwards I go about the rest of my day.
Similarly I have lived in my primary residence for about 25 years. After I bought it in the mid 80s, there was a decline in real estate in this area and for almost 10 years it was pretty much worth either slightly more or slightly less than I paid for it. Then there was a spurt in prices and the same house suddenly was worth a whole bunch more. This pretty much continued for years until the house was priced so high that I wouldn't have been able to buy it if I didn't already own it. Well, it has now come down some amount, although not as bad as many other areas, but of course my mortgage payment is the same, my monthly bills are pretty much the same and outside of how I feel there is very little real change.
What is my point? I may be in a fairly fortunate scenario since my monthly income is secure. However, even if unemployment goes to 10% that means 90% of Americans who are in the workforce are employed. In addition, the percentage of Americans who are receiving pensions, social security or annuities, a rather large percentage, will be no worse off. The heart of the economy is still beating. The turmoil is primarily in the fringes. This doesn't mean that everything is fine, and probably the biggest widespread impact is the loss of housing and investment wealth that makes people feel poorer and led to a significant shift to savings vs spending, but I was looking at a graph of disposable income form 2006 to 2009 and except for a few months in 2008 when there was first a significant increase in April (probably due to the stimulus payments) followed by a return to the more average level immediately thereafter, it has changed very little month to month.
During that period the use of that income has varied and for a while high gasoline and oil prices ate up a lot of it and now a lot of it has shifted from consumption to saving, but, the amount of disposable income has not dropped dramatically (nor has it increased). However, for the majority of Americans their income has continued and with an increase in consumer confidence we may easily see an increase in pent up demand. When that happens we will have turned a significant corner.
Wednesday, May 27, 2009
Real Estate
Yesterday we learned that home prices in the first quarter of 2009 were about 19% lower than they were in the first quarter of 2008. This shouldn't have come to a surprise to anyone considering the fact that while real estate prices were still collapsing throughout 2008.
To define a housing bottom the more important number will be the month to month data. The data for March showed prices nationally were down about 2% from February. It is not good news, however looking at March, we know that the stock market was in a bit of a free fall between January and March, credit markets were in turmoil and there was very little upbeat economic news.
We know that much of that changed in April so the March-April sales prices may be key to see if we have reached a housing bottom or if prices will continue to fall. There were only a very few metropolitan areas in March that had stable or increasing prices.
There are other factors that have been commented on extensively. One is that while there is evidence of increased sales activity, it is distressed sales. Not sure why that is a problem, those houses are effectively being offered at clearance prices and people are smart enough to buy the lower priced house. We do have to work through the inventory of these distressed properties before we are going to see price increases. Also, some analysts pointed out that people who might want to sell were holding on to properties waiting for prices to stabilize or improve.
It sometimes seems that some of these analysts expect prices to return to levels that existed at the high of the housing bubble. I can't imagine that happening, since the very essence of a bubble is that it creates artificially high prices. I think the best we can hope for is a return to where housing prices should have been had we not had a bubble.
Looking at data showing how prices had behave since 1975 the current level of prices is very close to where they would have been and the trend from 1975 to 2000 continued. You can very clearly see the start of the real estate bubble in 2001. This provides a reasonable basis to say we are in the range where prices may start to stabilize. Of course in the years between 1975 and 2000, housing had it ups and downs. By my calculations we are already lower than what would have been the upper limit of variation but not at the bottom limit. It is entirely possible that the declines will continue to that level (about another 5%).
Finally, one mantra in real estate over the years has been location, location, location. There are some areas that have been much harder hit than others. In many cases the areas of the greatest speculation, California, Florida, Arizona, Nevada have a great oversupply of housing and may take quite a while to reach stability. Other areas are suffering more than the rest of the nation from industrial restructuring and job loss and may have depressed pricing for a long period. However, in most other areas, and I believe I see some signs of this already, housing is at or near the bottom right now. I don't think prices are going to escalate dramatically in the immediate future, but once the market sees that prices are stable, housing is extremely affordable and buying will pick up.
To define a housing bottom the more important number will be the month to month data. The data for March showed prices nationally were down about 2% from February. It is not good news, however looking at March, we know that the stock market was in a bit of a free fall between January and March, credit markets were in turmoil and there was very little upbeat economic news.
We know that much of that changed in April so the March-April sales prices may be key to see if we have reached a housing bottom or if prices will continue to fall. There were only a very few metropolitan areas in March that had stable or increasing prices.
There are other factors that have been commented on extensively. One is that while there is evidence of increased sales activity, it is distressed sales. Not sure why that is a problem, those houses are effectively being offered at clearance prices and people are smart enough to buy the lower priced house. We do have to work through the inventory of these distressed properties before we are going to see price increases. Also, some analysts pointed out that people who might want to sell were holding on to properties waiting for prices to stabilize or improve.
It sometimes seems that some of these analysts expect prices to return to levels that existed at the high of the housing bubble. I can't imagine that happening, since the very essence of a bubble is that it creates artificially high prices. I think the best we can hope for is a return to where housing prices should have been had we not had a bubble.
Looking at data showing how prices had behave since 1975 the current level of prices is very close to where they would have been and the trend from 1975 to 2000 continued. You can very clearly see the start of the real estate bubble in 2001. This provides a reasonable basis to say we are in the range where prices may start to stabilize. Of course in the years between 1975 and 2000, housing had it ups and downs. By my calculations we are already lower than what would have been the upper limit of variation but not at the bottom limit. It is entirely possible that the declines will continue to that level (about another 5%).
Finally, one mantra in real estate over the years has been location, location, location. There are some areas that have been much harder hit than others. In many cases the areas of the greatest speculation, California, Florida, Arizona, Nevada have a great oversupply of housing and may take quite a while to reach stability. Other areas are suffering more than the rest of the nation from industrial restructuring and job loss and may have depressed pricing for a long period. However, in most other areas, and I believe I see some signs of this already, housing is at or near the bottom right now. I don't think prices are going to escalate dramatically in the immediate future, but once the market sees that prices are stable, housing is extremely affordable and buying will pick up.
Tuesday, May 26, 2009
Events
Over the weekend, North Korea decided to perform a nuclear test and also to test some missiles. This serves to remind us all that the world is a dangerous place and there are nations out there that are capable of quite dangerous activity.
The immediate reaction to this event will be a higher degree of uncertainty in the world markets, especially in Asia, as the fear that South Korea or Japan could be targeted. It is extremely unlikely that the North Koreans intend to do anything, since it would result in near instantaneous extinction, but events like this lead to uncertainty.
Perhaps more troubling is that North Korea is perfectly willing to sell technology and weapons to states such as Syria, Iran and pretty much anyone else willing to pay. It is difficult to comprehend how they see this as a long term benefit and sadly the motivation is probably more related to internal politics than to any desire to make life better in the country as a whole.
The only real solution to this in the long run is the spread of a democratic form of Government. People as a group can at times be manipulated, but, when the pursuit of individual power is unrestrained by the society as a whole, you often end up with ruthless leaders incapable of translating the tactics that got them into power to a world view. Saddam Hussein is a perfect example of someone who was able to ruthlessly achieve power but then used the same mindset in his dealings with the rest of the world. He made bad decision after bad decision and eventually it caused his downfall. He was probably incapable of behaving differently considering the way he achieved power, but that is probably best left to the political scientists.
The path to power between in a democratic society may include backroom deals and in some cases ruthlessness, but it always requires the ability to compromise and form coalitions. There will be some people in this country who will want the Government to take aggressive action against North Korea. I don't think that will be what we do, nor do I think it would be the best course of action. There is probably no short term solution for the North Korean problem. The long term solution is the eventual replacement of the current regime with one that is actually responsive to the best interests of the Korean people.
The immediate reaction to this event will be a higher degree of uncertainty in the world markets, especially in Asia, as the fear that South Korea or Japan could be targeted. It is extremely unlikely that the North Koreans intend to do anything, since it would result in near instantaneous extinction, but events like this lead to uncertainty.
Perhaps more troubling is that North Korea is perfectly willing to sell technology and weapons to states such as Syria, Iran and pretty much anyone else willing to pay. It is difficult to comprehend how they see this as a long term benefit and sadly the motivation is probably more related to internal politics than to any desire to make life better in the country as a whole.
The only real solution to this in the long run is the spread of a democratic form of Government. People as a group can at times be manipulated, but, when the pursuit of individual power is unrestrained by the society as a whole, you often end up with ruthless leaders incapable of translating the tactics that got them into power to a world view. Saddam Hussein is a perfect example of someone who was able to ruthlessly achieve power but then used the same mindset in his dealings with the rest of the world. He made bad decision after bad decision and eventually it caused his downfall. He was probably incapable of behaving differently considering the way he achieved power, but that is probably best left to the political scientists.
The path to power between in a democratic society may include backroom deals and in some cases ruthlessness, but it always requires the ability to compromise and form coalitions. There will be some people in this country who will want the Government to take aggressive action against North Korea. I don't think that will be what we do, nor do I think it would be the best course of action. There is probably no short term solution for the North Korean problem. The long term solution is the eventual replacement of the current regime with one that is actually responsive to the best interests of the Korean people.
Sunday, May 24, 2009
Risk Taking
I was recently reading a magazine article that was discussing the importance of CEOs in The Atlantic . It started by discussing how the price of Apple stock rose and fell based on the health of Steve Jobs. Interesting article and the point it makes is that some CEOs take companies on new paths and some simply manage the company they have.
It discusses what type of company might benefit from the various type of CEO, relatively new innovative companies probably need the innovative CEO while old established ones can get by with the caretaker type.
One aspect of having an active CEO is that they oftentimes can create as much harm as good. I think this is a profound insight. In our culture we often idolize the risk takers. An example would be the famous saying by Adm Farragut about "damn the torpedoes, full speed ahead". The reason this is a famous line is because he managed to avoid the torpedoes and capture Mobile during the Civil War. Now, possible the admiral knew that the torpedoes didn't really represent much of a threat, I am no expert, but I've often wondered if history would even know his name if his ships had been sunk by those very torpedoes.
Successful risk takers represent a certain percentage of those who actually take risks. Often this group has spectacular success and is held up as an example of successful behavior. It should of course be noted that this is 20-20 hindsight. Those who take risk and fail are effectively invisible to us, unless the failure was so catastrophic as to be memorable. The inverse to Adm Farragut was probably the Captain of the Titanic who pretty much said damn the icebergs, full speed ahead. We all know how that turned out.
If you consider successful poker players, the single most important characteristic is the ability to know the odds. If you never fold a hand, unless you are extremely lucky, you are going to go broke rather quickly. It is the player who as the song points out "knows when to hold them and knows when to fold them" who will most likely do well.
It discusses what type of company might benefit from the various type of CEO, relatively new innovative companies probably need the innovative CEO while old established ones can get by with the caretaker type.
One aspect of having an active CEO is that they oftentimes can create as much harm as good. I think this is a profound insight. In our culture we often idolize the risk takers. An example would be the famous saying by Adm Farragut about "damn the torpedoes, full speed ahead". The reason this is a famous line is because he managed to avoid the torpedoes and capture Mobile during the Civil War. Now, possible the admiral knew that the torpedoes didn't really represent much of a threat, I am no expert, but I've often wondered if history would even know his name if his ships had been sunk by those very torpedoes.
Successful risk takers represent a certain percentage of those who actually take risks. Often this group has spectacular success and is held up as an example of successful behavior. It should of course be noted that this is 20-20 hindsight. Those who take risk and fail are effectively invisible to us, unless the failure was so catastrophic as to be memorable. The inverse to Adm Farragut was probably the Captain of the Titanic who pretty much said damn the icebergs, full speed ahead. We all know how that turned out.
If you consider successful poker players, the single most important characteristic is the ability to know the odds. If you never fold a hand, unless you are extremely lucky, you are going to go broke rather quickly. It is the player who as the song points out "knows when to hold them and knows when to fold them" who will most likely do well.
Saturday, May 23, 2009
The Future
One of the things that it is nice to speculate about is the world of tomorrow. Over the years there have been many predictions about the future that ranged from flying cars to a society where roots did all the hard work and people had lots of free time.
Of course there have also been visions where the future is bleak ranging from nuclear Armageddon to fascist/communist dictatorships, to world where the machines have taken over (i.e. the Matrix or the Terminator series).
Based on experience any predictions are most likely to be wrong. They may have some validity but the basic problem is usually the fact that looking at the past does not take into account that humanity can and often does alter its behavior.
Consider global warming. Assume that the increased use of carbon based fuels does create a greenhouse effect. One or two years ago, the use of oil and gasoline was predicted to skyrocket. well in the short term the global recession had an impact on usage and it seems probable that we will continue to utilize more and more alternate sources for energy, whether solar or wind or hydro. Further, increased levels of carbon dioxide will promote additional plant growth that will capture at least some of it. Now, none of this needs to be a 100% solution, if everybody used one less gallon of oil it would have a dramatic impact.
Does this mean global warming is not a problem? No, simply that it will not end up being the "worst case" because behavior will change. The degree of change is going to be driven by many factors but it will change. If you look at the use of solar power in Germany, you can see a decent example of possibilities in a country with a fairly inhospitable climate.
The future will be created by the actions of all of us over time. People make individual decisions based upon what they think is best for them. These individual decisions will change as situations change. Ultimately the future will be created by all of us.
Of course there have also been visions where the future is bleak ranging from nuclear Armageddon to fascist/communist dictatorships, to world where the machines have taken over (i.e. the Matrix or the Terminator series).
Based on experience any predictions are most likely to be wrong. They may have some validity but the basic problem is usually the fact that looking at the past does not take into account that humanity can and often does alter its behavior.
Consider global warming. Assume that the increased use of carbon based fuels does create a greenhouse effect. One or two years ago, the use of oil and gasoline was predicted to skyrocket. well in the short term the global recession had an impact on usage and it seems probable that we will continue to utilize more and more alternate sources for energy, whether solar or wind or hydro. Further, increased levels of carbon dioxide will promote additional plant growth that will capture at least some of it. Now, none of this needs to be a 100% solution, if everybody used one less gallon of oil it would have a dramatic impact.
Does this mean global warming is not a problem? No, simply that it will not end up being the "worst case" because behavior will change. The degree of change is going to be driven by many factors but it will change. If you look at the use of solar power in Germany, you can see a decent example of possibilities in a country with a fairly inhospitable climate.
The future will be created by the actions of all of us over time. People make individual decisions based upon what they think is best for them. These individual decisions will change as situations change. Ultimately the future will be created by all of us.
Friday, May 22, 2009
Memorial Day
Many people consider Memorial day the start of summer, or at least the summer season. However, Memorial Day, originally called Decoration Day, is a day of remembrance for those who have died in our nation's service. Observance of Memorial day has diminished over the years. Many Americans nowadays have forgotten the meaning and traditions of Memorial Day. I would ask that sometime in the midst of the barbecues, beach trip or other plans you may have, you take a brief moment to remember those who gave everything in service.
Economic events are not a series of events that happen despite the actions of people. They are the results of those actions. We are currently suffering and ultimately paying for a situation where we inflated demand for assets such as housing by recklessly extending so much credit to bad risk individuals that prices skyrocketed, creating a false sense of economic wellness because of the jobs created, the apparent wealth created, and the high level of economic activity that ensued. When we hit the limit on this because supply actually exceeded demand, and prices started to fall, everything escalated dramatically since equity wealth disappeared, the bad credit risks couldn't make payments, unemployment skyrocketed as disposable income plummeted, the stock market tumbled, etc. etc.
Can this continue forever? Well the simple and true answer is no. As bad as things seem, the law of supply and demand still rules. As the prices have dropped, demand has started to increase. Valuations are much lower but products are starting to move again. Because there was no demand production of new items is way down and supply has dropped. Essentially, all that was required was for a step down of valuations to bring the supply and demand into balance again.
However, it is at a lower point than it was. Inventories are still being burned off and until they are gone, production is going to stay down. As long as production is down, there will be fewer jobs. However, it is inevitable that at some point new product will be in demand and jobs will be created.
The first question is when? I believe there is no simple answer to this question but I believe in some areas we are already there. The term green shoots has been overused, but whatever you call them, there are signs that some companies have stopped getting worse and are getting better. Profitability has in some cases been achieved by reductions in cost instead of increased sales. This better prepares those companies for the future and makes them more productive. Is it true for the entire economy? Obviously not, but as some industries stabilize, it will increase demand. The rate of increase can be argued, but the increase is inevitable, especially since the credit markets have largely been stabilized.
The second question has to be, what will the recovery look like? If you are expecting a rapid surge back to the levels of 2007, I can't really agree with that. In effect assets in the country have been revalued at a lower level than they were. I don't think they can return to those levels for quite a while. However, if a house has lost 30% of its value, but then stabilizes and perhaps starts increasing modestly in value (say 1-2%), we will have recovered from the lows. It is not going to recreate the wealth that was lost for quite a while. However, if the prices are based on a more solid base we may in fact be better off.
Can this continue forever? Well the simple and true answer is no. As bad as things seem, the law of supply and demand still rules. As the prices have dropped, demand has started to increase. Valuations are much lower but products are starting to move again. Because there was no demand production of new items is way down and supply has dropped. Essentially, all that was required was for a step down of valuations to bring the supply and demand into balance again.
However, it is at a lower point than it was. Inventories are still being burned off and until they are gone, production is going to stay down. As long as production is down, there will be fewer jobs. However, it is inevitable that at some point new product will be in demand and jobs will be created.
The first question is when? I believe there is no simple answer to this question but I believe in some areas we are already there. The term green shoots has been overused, but whatever you call them, there are signs that some companies have stopped getting worse and are getting better. Profitability has in some cases been achieved by reductions in cost instead of increased sales. This better prepares those companies for the future and makes them more productive. Is it true for the entire economy? Obviously not, but as some industries stabilize, it will increase demand. The rate of increase can be argued, but the increase is inevitable, especially since the credit markets have largely been stabilized.
The second question has to be, what will the recovery look like? If you are expecting a rapid surge back to the levels of 2007, I can't really agree with that. In effect assets in the country have been revalued at a lower level than they were. I don't think they can return to those levels for quite a while. However, if a house has lost 30% of its value, but then stabilizes and perhaps starts increasing modestly in value (say 1-2%), we will have recovered from the lows. It is not going to recreate the wealth that was lost for quite a while. However, if the prices are based on a more solid base we may in fact be better off.
Thursday, May 21, 2009
California Budget
Yesterday the California voters went to the polls and defeated all proposed tax increases but did impose a salary reduction on the state politicians. I don't pretend to be an expert on what is going on in California, but it does seem that the state is effectively broke. Of course it is no great surprise that in a time when many of the state residents have lost a ton of home equity, jobs, income and any sense of security, they would reject any increase in taxes.
Of course those same residents are using the state services more and more because they as a group are poorer and more in need of those services. California is going to have to make massive cuts to discretionary spending and what this can be quite dramatic. In most Government budget there is a large percentage devoted to mandated items that can't be cut. Suppose those represent half the budget. Often, in times like these, those mandated expenses actually rise due to greater demand, i.e. unemployment benefits. So in a 50-50 situation the mandated could be up 10% going in effect to 55%. So the non-mandated would fall to 45%. Now if the budget is 10% short because of a lack of revenues, so you have to reduce total spending by 10%, effectively the entire cut has to come out of the discretionary funds, dropping them to 35%. This is only 70% of what they were previously and that can be a dramatic reduction indeed.
This has led to complaints that the California system in antiquated and that the voters can't make the "right" decisions in cases like this. Maybe, but I'm not convinced. Voters do vote in their own best interest. In this case it is very clear that the average householder in California and the rest of the country for that matter feels that there is no additional money available to pay higher taxes. It is going to be painful in California, but Government needs to find a better way to finance its needs. Every service delivered needs to be self funded if at all possible.
I have noticed in my career that budget reductions can be done in two different ways. In the first you try to determine what you can do without. This is usually not very effective since almost everyone feels they only have the things they need already. The other method is simply to say "your budget is now 10% less manage it" That is what has happened in California, and you know what, it works.
Of course those same residents are using the state services more and more because they as a group are poorer and more in need of those services. California is going to have to make massive cuts to discretionary spending and what this can be quite dramatic. In most Government budget there is a large percentage devoted to mandated items that can't be cut. Suppose those represent half the budget. Often, in times like these, those mandated expenses actually rise due to greater demand, i.e. unemployment benefits. So in a 50-50 situation the mandated could be up 10% going in effect to 55%. So the non-mandated would fall to 45%. Now if the budget is 10% short because of a lack of revenues, so you have to reduce total spending by 10%, effectively the entire cut has to come out of the discretionary funds, dropping them to 35%. This is only 70% of what they were previously and that can be a dramatic reduction indeed.
This has led to complaints that the California system in antiquated and that the voters can't make the "right" decisions in cases like this. Maybe, but I'm not convinced. Voters do vote in their own best interest. In this case it is very clear that the average householder in California and the rest of the country for that matter feels that there is no additional money available to pay higher taxes. It is going to be painful in California, but Government needs to find a better way to finance its needs. Every service delivered needs to be self funded if at all possible.
I have noticed in my career that budget reductions can be done in two different ways. In the first you try to determine what you can do without. This is usually not very effective since almost everyone feels they only have the things they need already. The other method is simply to say "your budget is now 10% less manage it" That is what has happened in California, and you know what, it works.
Wednesday, May 20, 2009
CAFE Standards
Yesterday President OBama issued requirement for improved fuel efficiency on cars sold in this country. The question you have to ask yourself is why did he have to do this, why didn't the marketplace take care of it?
For the last 20 years or so, American car makers have focused on selling or leasing high profit models. To get fuel efficiency there are really only two possibilities. You either have to reduce weight (less power needed) or improve the engine efficiency. The second one is clearly more appealing, since it allows the cars to have the creature comforts we desire. I assume their is some progress in this area, however, it clearly hasn't resulted in any significant improvements except perhaps in hybrids.
So the other choice would be to have simpler, lighter cars that got great gas mileage. In the mid 70s, after the gas crisis, I bought one of the earliest Honda Civics. It could best be described as a tin box on wheels back then, but it got up to 45 miles per gallon. It had very few creature comforts and a manual transmission. It was actually fun to drive and easy to park but of course I was a lot younger then. The only real problem I ever had with it was that the clip on the clutch line broke once when I was on the Northern State Parkway. I was actually able to fix this myself at the time and get home.
After a few years I was making more money and the paint on the Honda had started to fade, so I sold it for about $100 to a college student I knew who was driving back and forth from New York City to Buffalo. I believe he kept it for at least another 3 years and I don't know what happened to it after that.
I've had a series of cars since then, all of which had significantly more power and creature comforts but none of which got anywhere near the mileage that original Honda Civic got. I don't even think later Honda Civics are near those numbers and of course Honda, Toyota, and the others added higher end, less fuel efficient vehicles to appeal to American buyers.
So why don't we already have vehicles that get much better gas mileage? In my case, the vehicle I now drive gets less than half of what the old Civic I had got, but it is a lot bigger and much more comfortable. Fuel efficiency was always listed on the sticker but when I went to buy this car it was by no means my primary consideration. Also, since cars come in "classes" it sounded fairly persuasive that this car was above average in it "class".
I don't think I'm that atypical, although I would like to think I am, but I wanted a car that had some power, had the creature comforts I expected, decent reliability and enough space. I have to say that the car I bought met all these criteria. I would have liked to get all that with good fuel economy. I also don't think the car companies had any interest in providing bad fuel economy to me, marketplace forces, meaning me and all of you, wouldn't buy it if it meant either less creature comforts or a higher price.
So the Government has leveled the playing field by dictating a level of fuel efficiency that the marketplace didn't provide. It wouldn't have been required had we all demanded it in the first place.
For the last 20 years or so, American car makers have focused on selling or leasing high profit models. To get fuel efficiency there are really only two possibilities. You either have to reduce weight (less power needed) or improve the engine efficiency. The second one is clearly more appealing, since it allows the cars to have the creature comforts we desire. I assume their is some progress in this area, however, it clearly hasn't resulted in any significant improvements except perhaps in hybrids.
So the other choice would be to have simpler, lighter cars that got great gas mileage. In the mid 70s, after the gas crisis, I bought one of the earliest Honda Civics. It could best be described as a tin box on wheels back then, but it got up to 45 miles per gallon. It had very few creature comforts and a manual transmission. It was actually fun to drive and easy to park but of course I was a lot younger then. The only real problem I ever had with it was that the clip on the clutch line broke once when I was on the Northern State Parkway. I was actually able to fix this myself at the time and get home.
After a few years I was making more money and the paint on the Honda had started to fade, so I sold it for about $100 to a college student I knew who was driving back and forth from New York City to Buffalo. I believe he kept it for at least another 3 years and I don't know what happened to it after that.
I've had a series of cars since then, all of which had significantly more power and creature comforts but none of which got anywhere near the mileage that original Honda Civic got. I don't even think later Honda Civics are near those numbers and of course Honda, Toyota, and the others added higher end, less fuel efficient vehicles to appeal to American buyers.
So why don't we already have vehicles that get much better gas mileage? In my case, the vehicle I now drive gets less than half of what the old Civic I had got, but it is a lot bigger and much more comfortable. Fuel efficiency was always listed on the sticker but when I went to buy this car it was by no means my primary consideration. Also, since cars come in "classes" it sounded fairly persuasive that this car was above average in it "class".
I don't think I'm that atypical, although I would like to think I am, but I wanted a car that had some power, had the creature comforts I expected, decent reliability and enough space. I have to say that the car I bought met all these criteria. I would have liked to get all that with good fuel economy. I also don't think the car companies had any interest in providing bad fuel economy to me, marketplace forces, meaning me and all of you, wouldn't buy it if it meant either less creature comforts or a higher price.
So the Government has leveled the playing field by dictating a level of fuel efficiency that the marketplace didn't provide. It wouldn't have been required had we all demanded it in the first place.
Tuesday, May 19, 2009
Change
One of the things that is unclear to me is what will the impact of the current economic crisis be? Obviously we have a current impact that is ongoing where people have lost their jobs and homes, retirement savings have been gutted and plenty of other negative consequences, but ultimately will this adversity make any fundamental changes in the nature of our society. It is always easy for TV pundits to discuss how people are saving more now, and that is true, but is it a lasting change?
In most prior resessions and/or crises, we returned to pretty much the same behavior as before when it was over, and usually fairly quickly. If you had looked at the oild crisis of the 70s where prices shot up, supply was so bad that we had gas lines you may have predicted a future of smaller more gas efficient cars. Instead, we went a few years later to SUVs, Hummers and other gas guzzlers.
I have to say, I don't know, but based on past experience, I tend to think we will consider better economic times an opportunity to recontinue most of the behavior that got us here in the first place.
In most prior resessions and/or crises, we returned to pretty much the same behavior as before when it was over, and usually fairly quickly. If you had looked at the oild crisis of the 70s where prices shot up, supply was so bad that we had gas lines you may have predicted a future of smaller more gas efficient cars. Instead, we went a few years later to SUVs, Hummers and other gas guzzlers.
I have to say, I don't know, but based on past experience, I tend to think we will consider better economic times an opportunity to recontinue most of the behavior that got us here in the first place.
Monday, May 18, 2009
Spending
If you consider the US economy, it is 70% driven by consumer spending. The cars, appliances, apparel, computers and everything else people buy, is the primary component of our economy. Now this is impacted by all sorts of things, but two main components would be:
a. Willingness to spend - consumer confidence
b. Amount available to spend - total money and credit
Now these are not totally independent, everyone feels less confident about spending money when they either really have or think they have less to spend, but certainly, when you haven't had any change in your actual ability to spend, you will spend less if you think you may be adversely impacted in the future.
However, the amount available to spend has an upper absolute. If you actually have no money and no credit, you can't spend even if you want to. Many people looked at their homes as a sort of savings account where they could finance major purchases using the equity they had stored there. We had a drastic reduction in that equity with the reduction in home valuations. Further because the banks and financial institutions had to write down the valuation of these assets, they had less money to lend.
Everyone talks about the people who lost their homes via foreclosure. However, in many cases, while the foreclosed houses place a drain on financial institutions, once you have lost you home, assuming you have an income source, you actually have more available money to spend, since you are no longer paying off the mortgage. Now unemployment may have also impacted some of these folks so nothing is ever a clear one to one correlation, but it would be interesting to see a study of disposable income of this group before and after being foreclosed on. I think spending may actually go up (except of course the mortgage payment part).
However, those who didn't lose their homes were faced with a reduction in what was effectively their emergency fund. If you had been saying to yourself, well I can tap the equity to pay for college, or I can tap the equity for retirement, or whatever, when the equity disappeared you realized you had a problem. So they had to stop spending because, well, the money was gone. Also, they started to realize that the house as a source of ready money might be a problem.
So savings is up and spending is down. This is bad for the immediate economy, however, it might be very good for the future economy.
a. Willingness to spend - consumer confidence
b. Amount available to spend - total money and credit
Now these are not totally independent, everyone feels less confident about spending money when they either really have or think they have less to spend, but certainly, when you haven't had any change in your actual ability to spend, you will spend less if you think you may be adversely impacted in the future.
However, the amount available to spend has an upper absolute. If you actually have no money and no credit, you can't spend even if you want to. Many people looked at their homes as a sort of savings account where they could finance major purchases using the equity they had stored there. We had a drastic reduction in that equity with the reduction in home valuations. Further because the banks and financial institutions had to write down the valuation of these assets, they had less money to lend.
Everyone talks about the people who lost their homes via foreclosure. However, in many cases, while the foreclosed houses place a drain on financial institutions, once you have lost you home, assuming you have an income source, you actually have more available money to spend, since you are no longer paying off the mortgage. Now unemployment may have also impacted some of these folks so nothing is ever a clear one to one correlation, but it would be interesting to see a study of disposable income of this group before and after being foreclosed on. I think spending may actually go up (except of course the mortgage payment part).
However, those who didn't lose their homes were faced with a reduction in what was effectively their emergency fund. If you had been saying to yourself, well I can tap the equity to pay for college, or I can tap the equity for retirement, or whatever, when the equity disappeared you realized you had a problem. So they had to stop spending because, well, the money was gone. Also, they started to realize that the house as a source of ready money might be a problem.
So savings is up and spending is down. This is bad for the immediate economy, however, it might be very good for the future economy.
Sunday, May 17, 2009
Criticism
Criticism is one of the easiest thing in the world nowadays. I was watching a financial news channel that over a really short period of time criticized the current administration for:
a. Rushing legislation through congress without proper reflection;
b. Not acting fast enough in distributing the stimulus money;
c. Recklessly sending out stimulus money to dead people;
d. Interfering in industries where they had no expertise.
I think they criticized a few other things in the hour or so I watched and I guess they want:
a. Legislation sitting in Congress forever
b. Money sent out recklessly
c. No error rate in the databases used by the Government.
d. Letting our well run banks and auto companies continue to do the great job that brought us to the brink of collapse.
Of course these "news" shows don't have to actually propose a solution, they can take positions that cater to a certain audience.
I don't know if the current administration is doing all the right things, but it is pretty clear that it took over in the midst of one of the greatest financial crisis's ever (in the top 5 for sure), with an inefficient and expensive health care delivery system, millions of people losing their homes and jobs disappearing at a tremendous rate. Every great leader that has expressed opinions on leadership has basically said it is better to start and adjust than to do nothing. That course of action can lead to errors but you proceed, adjust along the way and ultimately you find the right path to success.
Trying is the key.
a. Rushing legislation through congress without proper reflection;
b. Not acting fast enough in distributing the stimulus money;
c. Recklessly sending out stimulus money to dead people;
d. Interfering in industries where they had no expertise.
I think they criticized a few other things in the hour or so I watched and I guess they want:
a. Legislation sitting in Congress forever
b. Money sent out recklessly
c. No error rate in the databases used by the Government.
d. Letting our well run banks and auto companies continue to do the great job that brought us to the brink of collapse.
Of course these "news" shows don't have to actually propose a solution, they can take positions that cater to a certain audience.
I don't know if the current administration is doing all the right things, but it is pretty clear that it took over in the midst of one of the greatest financial crisis's ever (in the top 5 for sure), with an inefficient and expensive health care delivery system, millions of people losing their homes and jobs disappearing at a tremendous rate. Every great leader that has expressed opinions on leadership has basically said it is better to start and adjust than to do nothing. That course of action can lead to errors but you proceed, adjust along the way and ultimately you find the right path to success.
Trying is the key.
Saturday, May 16, 2009
Living
Anais Nin said "I postpone death by living, by suffering, by error, by risking, by giving, by losing."
Life is meant to be lived and enjoyed. It is a precious gift that has been given to all of us. Unfortunately, there are many of us who don't ever really open the gift.
Bruce Springstein's song, "Glory Days" talks about people who feel their best days are past them. If you fall into that category are you really living?
In order to live life fully, you have to know what you want. In the movie "Bucket List" the two main characters found out they had a short time to live and decided to do things they had always wanted to before they died. They were inspired to do this because they knew they were close to dying. Well, all of us only have so much time to live our lives.
The answer is not to ignore the future, but you need to know what your future should be. You have to know what you want before you can get it.
We all need to think about what we want/need to fully live. If you don't know where you want to be, how can you know how to get there?
Once you know what you want, every decision you make, every action you take should be made with your goals in mind.
The ultimate goal is to do the things you want to do, take risks, make errors, give, love and strive. It will make every day an opportunity to be seized. It may require hard work and dedication.
Remember, if you love what you are doing, it no longer is work.
Life is meant to be lived and enjoyed. It is a precious gift that has been given to all of us. Unfortunately, there are many of us who don't ever really open the gift.
Bruce Springstein's song, "Glory Days" talks about people who feel their best days are past them. If you fall into that category are you really living?
In order to live life fully, you have to know what you want. In the movie "Bucket List" the two main characters found out they had a short time to live and decided to do things they had always wanted to before they died. They were inspired to do this because they knew they were close to dying. Well, all of us only have so much time to live our lives.
The answer is not to ignore the future, but you need to know what your future should be. You have to know what you want before you can get it.
We all need to think about what we want/need to fully live. If you don't know where you want to be, how can you know how to get there?
Once you know what you want, every decision you make, every action you take should be made with your goals in mind.
The ultimate goal is to do the things you want to do, take risks, make errors, give, love and strive. It will make every day an opportunity to be seized. It may require hard work and dedication.
Remember, if you love what you are doing, it no longer is work.
Friday, May 15, 2009
Hard decisions
I've never encountered any event that met the definition of a miracle. Without getting into a religious discussion, I generally believe that if there are miracles they are few and far between. You do read of people who were told they had an incurable disease and staged a remarkable recovery. Certainly, they may very well believe that that was a miracle, and maybe it was, but I don't think anyone should count on miracles as a way of life.
Why is this important? Well the obvious reason is that ultimately the outcome you should exect is usually the one that is the most probable. Now there are some exceptions, for example while generally the odds of any one person winning a big lottery prize are extremely small, it might be worth a small risk since the rewards so greatly exceed the risk. Of course if you put your total income into lottery tickets, slot machines or anything else, you are most likely headed to disaster.
Why don't people take the course of action that is the most likely to succeed? Well, oftentimes it is a difficult path. If you want to lose weight and don't have a medical issue, if you reduce the number of calories you consume, and increase the number of calories you burn via exercise, you will impact your weight. There is no question about that but many of us have problems doing this. So there are many ads about miracle pills help people lose weight and they do a great business because they promise a path that avoids the hard work involved in surefire success. I don't know if any of them work, but considering the obesity problem in America, it would appear that they can't be as good as they claim.
There are almost never any simple answers to complex problems. Also, most of the time even when you take the correct course of action there will be setbacks along the way. If you are trying to lose weight and despite watching your diet and exercising, you strangely gain weight one day, it doesn't mean you should give up. You need to make sure you are in fact sticking to your plan and give it time to work.
Why is this important? Well the obvious reason is that ultimately the outcome you should exect is usually the one that is the most probable. Now there are some exceptions, for example while generally the odds of any one person winning a big lottery prize are extremely small, it might be worth a small risk since the rewards so greatly exceed the risk. Of course if you put your total income into lottery tickets, slot machines or anything else, you are most likely headed to disaster.
Why don't people take the course of action that is the most likely to succeed? Well, oftentimes it is a difficult path. If you want to lose weight and don't have a medical issue, if you reduce the number of calories you consume, and increase the number of calories you burn via exercise, you will impact your weight. There is no question about that but many of us have problems doing this. So there are many ads about miracle pills help people lose weight and they do a great business because they promise a path that avoids the hard work involved in surefire success. I don't know if any of them work, but considering the obesity problem in America, it would appear that they can't be as good as they claim.
There are almost never any simple answers to complex problems. Also, most of the time even when you take the correct course of action there will be setbacks along the way. If you are trying to lose weight and despite watching your diet and exercising, you strangely gain weight one day, it doesn't mean you should give up. You need to make sure you are in fact sticking to your plan and give it time to work.
Thursday, May 14, 2009
More Government Talk
One of the thing that happens in Government, and probably in all big bureaucracies, is the fear of failure replaces the desire to succeed. These are by no means the same thing. Failure is best defined in Government by not having done anything wrong. Part of the problem is that the criteria for success is often too difficult to measure. In private industry, you normally have one primary consideration, did you make money. Of course, as any business grows, you start to add human resource, accounting, and other support groups where the connection between the necessary services they provide and the bottom line is either non-existent or extremely difficult to quantify. Well, effectively the entire Government consists of support groups with the exception of our Military who are in a different category (still not P&L people).
So what happens? There is an old Chinese proverb that states "the nail that sticks out feels the hammer!". Well generally that best describes most Government. You need to make sure that just about everyone, or certainly your superiors, agree with what you advocate. Now, this isn't totally unique to Government, but in Government it reaches levels not found elsewhere.
So what are the consequences? The primary consequence of this is that you get slow but safe reaction to almost everything. This of course can become catastrophic if what you need is fast and risky reaction (i.e. Katrina) but in most other situations it ends up being the middle course of the prevailing administration theme of the day.
So, we have an economic crisis and swift Government action is required. Not very likely. In those instances where anyone did stick their head out, the nail of congress or an oversight committee soon hammered them back into compliance. So when you review the stress test results, remember, everything in Government has to pass the Goldilocks test, can't be too hard, and it can't be too soft.
So what happens? There is an old Chinese proverb that states "the nail that sticks out feels the hammer!". Well generally that best describes most Government. You need to make sure that just about everyone, or certainly your superiors, agree with what you advocate. Now, this isn't totally unique to Government, but in Government it reaches levels not found elsewhere.
So what are the consequences? The primary consequence of this is that you get slow but safe reaction to almost everything. This of course can become catastrophic if what you need is fast and risky reaction (i.e. Katrina) but in most other situations it ends up being the middle course of the prevailing administration theme of the day.
So, we have an economic crisis and swift Government action is required. Not very likely. In those instances where anyone did stick their head out, the nail of congress or an oversight committee soon hammered them back into compliance. So when you review the stress test results, remember, everything in Government has to pass the Goldilocks test, can't be too hard, and it can't be too soft.
Wednesday, May 13, 2009
Bottom?
If you look at various blogs that discuss financial matters there is a lot of discussion about the current rally in the stock market. The most prevalent view seems to be that this is not a "legitimate" rally, but any of the following: Bear Market Rally; Sucker's Rally; Government Manipulated Rally and I'm sure quite a few others. You don't see too many arguing that it is a legitimate "bull market" rally.
The reason the rally is questioned is because there are still many problems with the economy. Unemployment is still increasing although based on the latest numbers not as quickly. There are still a lot of potential credit issues in the market, including bad mortgages, credit card debt that may default, commercial real estate and significant reduced economic activity. These are all real concerns.
The recent financial crisis was in my opinion caused by the bursting of the real estate bubble. It led to a reduction in equity to almost all property owners. Equity in homes had been considered a source of funds by many people in this country. When the equity went away, not only did we have all the foreclosures (still continuing) but also people in houses that didn't go to foreclosure, didn't have enough equity to refinance or take out a home equity loan. So the economy will bottom when housing stops losing value.
The latest statistics seem to indicate we may have reached that point. Prices are down from a year earlier, but may have stabilized on a month to month basis. If that is so, and the data is inconclusive, we will see increased economic activity. However, with all the wealth that was lost, we can't expect a jump to the levels of last year anytime soon. If you start from a lower overall level of economic activity, the recovery may be very slow with bumps along the way, but a recovery none the less.
The reason the rally is questioned is because there are still many problems with the economy. Unemployment is still increasing although based on the latest numbers not as quickly. There are still a lot of potential credit issues in the market, including bad mortgages, credit card debt that may default, commercial real estate and significant reduced economic activity. These are all real concerns.
The recent financial crisis was in my opinion caused by the bursting of the real estate bubble. It led to a reduction in equity to almost all property owners. Equity in homes had been considered a source of funds by many people in this country. When the equity went away, not only did we have all the foreclosures (still continuing) but also people in houses that didn't go to foreclosure, didn't have enough equity to refinance or take out a home equity loan. So the economy will bottom when housing stops losing value.
The latest statistics seem to indicate we may have reached that point. Prices are down from a year earlier, but may have stabilized on a month to month basis. If that is so, and the data is inconclusive, we will see increased economic activity. However, with all the wealth that was lost, we can't expect a jump to the levels of last year anytime soon. If you start from a lower overall level of economic activity, the recovery may be very slow with bumps along the way, but a recovery none the less.
Tuesday, May 12, 2009
Government and Banks
Yesterday I was discussing how the concept of Government has changed or is changing from an idea of "less Government is good" to one where "Government needs to be involved." Watched an interview on CNBC the analyst said she had never imagined the amount of Government intervention she was witnessing and that the current rally in the banks was be manufactured by the Government.
Of course, if the Government intervention is going to stay at that level, then what is the consequence? Suppose the prior business model for the major banks is no longer viable (not my position particularly but the one that was espoused in the interview) what will the new business model look like? Primarily, the current intervention is designed to reduce the risk of a financial collapse. In order to do that they are requiring the banks to maintain levels of "Tangible Capital Assets" of 4% for the "worst case scenario".
It also seams like they are going to prohibit certain types of boutique financial instruments and focus on more traditional lending practices. This most likely means that the banks will spin off the more exotic operations and they will become smaller entities that may engage in high risk transactions, but which will be small enough that if one or more of them fail, it wouldn't collapse the economy.
So the original bank will become again something that looks like banks used to look like. Conservative, relatively low risk lenders, who make sure loans are provided to those who can repay them. Actually, doesn't sound like that terrible a business model over the long term.
Of course, if the Government intervention is going to stay at that level, then what is the consequence? Suppose the prior business model for the major banks is no longer viable (not my position particularly but the one that was espoused in the interview) what will the new business model look like? Primarily, the current intervention is designed to reduce the risk of a financial collapse. In order to do that they are requiring the banks to maintain levels of "Tangible Capital Assets" of 4% for the "worst case scenario".
It also seams like they are going to prohibit certain types of boutique financial instruments and focus on more traditional lending practices. This most likely means that the banks will spin off the more exotic operations and they will become smaller entities that may engage in high risk transactions, but which will be small enough that if one or more of them fail, it wouldn't collapse the economy.
So the original bank will become again something that looks like banks used to look like. Conservative, relatively low risk lenders, who make sure loans are provided to those who can repay them. Actually, doesn't sound like that terrible a business model over the long term.
Monday, May 11, 2009
Government growth
Just about everybody is familiar with the saying "The only thing certain is death and taxes". Simple enough of a message but it is probably one of the earliest complaints about Government intrusiveness. Clearly, as long as there is a Government, it has to be paid for. However, there is a wide variation of opinion about the role of Government.
For a good period of time, the most widely held position was that Government is the least effective way to accomplish almost anything. It seemed that this belief started with Nixon and really picked up steam under Reagan. If you look at things like Charter schools, and privately run prisons, public private competitions for Government services and quite a few other areas, we have seen a great trend towards privatization. At least until recently.
Probably the biggest fallout of the financial crisis may be the reversal of this trend. Of course if you have lost your job, your house, your retirement, you may think they are more significant, and they are for you, but if we now go back into a cycle of bigger and bigger Government, it will indeed have very long reaching impacts.
I think this is an area I may dwell on for a while here, but there is one assumption that I would like folks to consider. Is private industry more efficient that Governement? Almost everyone immediately says it is, but time after time in public private competitions the Government has won. The losers of these competitions have usually complained that the Government had an unfair advantage based on the built in support infrastructure, but in most direct comparisions I have seen (and admittedly this is a small percent), Government was able to demonstrate they could deliver the services either cheaper or at the same cost and provide workers with better benefits.
More to come.
For a good period of time, the most widely held position was that Government is the least effective way to accomplish almost anything. It seemed that this belief started with Nixon and really picked up steam under Reagan. If you look at things like Charter schools, and privately run prisons, public private competitions for Government services and quite a few other areas, we have seen a great trend towards privatization. At least until recently.
Probably the biggest fallout of the financial crisis may be the reversal of this trend. Of course if you have lost your job, your house, your retirement, you may think they are more significant, and they are for you, but if we now go back into a cycle of bigger and bigger Government, it will indeed have very long reaching impacts.
I think this is an area I may dwell on for a while here, but there is one assumption that I would like folks to consider. Is private industry more efficient that Governement? Almost everyone immediately says it is, but time after time in public private competitions the Government has won. The losers of these competitions have usually complained that the Government had an unfair advantage based on the built in support infrastructure, but in most direct comparisions I have seen (and admittedly this is a small percent), Government was able to demonstrate they could deliver the services either cheaper or at the same cost and provide workers with better benefits.
More to come.
Sunday, May 10, 2009
Saturday, May 9, 2009
Good or lucky
One of the questions I've never been able to resolve is how much of success is based on being good vs being lucky. Let's start off by agreeing that a lot of people eliminate themselves from this question by simply not even really trying. If the only way you pursue success is by entering lotteries, or hoping you are the one that has already won whatever, you are counting on pure luck. I'm not talking about that because clearly you are not even really trying.
There is another criteria, and that is talent.It is pretty obvious that some folks have certain specific talents that others just don't have. This is most obvious in some fields such as entertainment and sports but it actually permeates all fields. I've had a good number of people work for me over the years and some of them simply were not good at some aspects of the business. You could counsel them to work on public speaking or send them to certain courses, but ultimately you needed to give them a chance to excel by focusing on the talents they did have, and not set them up for failure.
However, if you take a group of people who all have the requisite talent and all of whom work hard, some will be much more successful than others. What is the factor that determines this? There have been quite a few books over the years trying to determine the qualities for success and mostly they end up talking about working harder than everyone else. believing in yourself, and persistence. But I, at least, think you still need at least a little bit of luck.
There is another criteria, and that is talent.It is pretty obvious that some folks have certain specific talents that others just don't have. This is most obvious in some fields such as entertainment and sports but it actually permeates all fields. I've had a good number of people work for me over the years and some of them simply were not good at some aspects of the business. You could counsel them to work on public speaking or send them to certain courses, but ultimately you needed to give them a chance to excel by focusing on the talents they did have, and not set them up for failure.
However, if you take a group of people who all have the requisite talent and all of whom work hard, some will be much more successful than others. What is the factor that determines this? There have been quite a few books over the years trying to determine the qualities for success and mostly they end up talking about working harder than everyone else. believing in yourself, and persistence. But I, at least, think you still need at least a little bit of luck.
Friday, May 8, 2009
Supply side - Jack Kemp
Recently Jack Kemp passed away and he is remembered for his football career and for his advocacy of supply side economics. Supply side emphasized the reduction of taxes for business and people who were doing well financially to encourage them to increase investment, providing jobs and creating significantly increased economic activity that would lead to increased tax revenues to some extent. Supply siders did not to my knowledge ever argue to eliminate taxes altogether and if you were to research it a bit they advocate using the Laffer curve that effectively correlates tax rates and tax revenues and argues there is a point at which tax revenues are maximized. So, in theory, supply siders should advocate increased taxes if they fall too low on the curve.
The alternate and prior pre-dominant theory was Keynesian economics. Its basic theory was that you should incentivize consumers, release money into the economy to effectively increase demand. Of course higher demand leads to higher prices encouraging more production, increased economic activity and once again increased tax revenues.
Not sure the term supply side is used much anymore, but generally its proponents were primarily Republicans (pro business) and Democrats were more Keynesian (pro consumer). Of course over the years things have gotten a bit muddled. You had the prior administration providing tax rebates to all taxpayers, very Keynesian, and the current administration giving thebanks guarantees, supplyish.
Not that anyone probably cares and it may be a legacy of when I studied economics in school, but I've always been much more Keynesian.
Still, I was sorry that Jack Kemp passed away, not often that an ex-football player gets his name associated with an economic theory.
The alternate and prior pre-dominant theory was Keynesian economics. Its basic theory was that you should incentivize consumers, release money into the economy to effectively increase demand. Of course higher demand leads to higher prices encouraging more production, increased economic activity and once again increased tax revenues.
Not sure the term supply side is used much anymore, but generally its proponents were primarily Republicans (pro business) and Democrats were more Keynesian (pro consumer). Of course over the years things have gotten a bit muddled. You had the prior administration providing tax rebates to all taxpayers, very Keynesian, and the current administration giving thebanks guarantees, supplyish.
Not that anyone probably cares and it may be a legacy of when I studied economics in school, but I've always been much more Keynesian.
Still, I was sorry that Jack Kemp passed away, not often that an ex-football player gets his name associated with an economic theory.
Thursday, May 7, 2009
Is it safe yet?
In the last few days, the talking heads on various shows and a lot of economic experts have changed from talking about how bad the economy might go to when will the recovery start. This is of course not universal and I see a lot of charts around showing that the current run up in stock prices are simply a bear market rally. However, charts on how an index operate are clearly historically based. Ultimately, the stock market has to react to the economy, it doesn't create it.
While most signs, especially the leading indicators, have been more positive recently, hard to say they are definitive. However, if you go against them, you need to base that on something. If home sales are up, even at depressed prices, that means people will need furnishings and new appliances, and renovation materials. The price at which the home is purchased doesn't really impact any of that, unless of course the buyer has no money left.
Also, is these assets get a valuation, any valuation, they are no longer worthless. In the worst parts of the country, home prices have fallen by as much as 40%. Well even in those areas the assets are worth 60% of what they were, which in my view is much better than 0. Most of the country is doing better than those numbers.
Is it safe yet? Starting to look like it more and more.
While most signs, especially the leading indicators, have been more positive recently, hard to say they are definitive. However, if you go against them, you need to base that on something. If home sales are up, even at depressed prices, that means people will need furnishings and new appliances, and renovation materials. The price at which the home is purchased doesn't really impact any of that, unless of course the buyer has no money left.
Also, is these assets get a valuation, any valuation, they are no longer worthless. In the worst parts of the country, home prices have fallen by as much as 40%. Well even in those areas the assets are worth 60% of what they were, which in my view is much better than 0. Most of the country is doing better than those numbers.
Is it safe yet? Starting to look like it more and more.
Wednesday, May 6, 2009
More human nature
When there is news the most common reaction of most people is to overreact. I’m not sure what the final outcome of swine flu is going to be, but for a disease that so far wouldn’t even qualify as a bad flu season, we have had schools closed, presidential press conferences and tons of media coverage. It seems to be quieting down now, and the typical response to the first overreaction is typically reverse overreaction.
Newton postulated a law in physics that states that for every action in nature there is an equal and opposite reaction. This is conservation of energy. I believe this is still an accepted law, although possibly something is going on in physics that I’m not aware of.
It seems to me that in human behavior we have a similar but somewhat different law the law of overreaction. Given a unexpected event or news, there is a predictable overreaction by most. This is probably related to our evolutionary flight or fight impulse that effectively says when confronted by a large unexpected creature; you either kill it and eat it, or run like the dickens.
Newton postulated a law in physics that states that for every action in nature there is an equal and opposite reaction. This is conservation of energy. I believe this is still an accepted law, although possibly something is going on in physics that I’m not aware of.
It seems to me that in human behavior we have a similar but somewhat different law the law of overreaction. Given a unexpected event or news, there is a predictable overreaction by most. This is probably related to our evolutionary flight or fight impulse that effectively says when confronted by a large unexpected creature; you either kill it and eat it, or run like the dickens.
Tuesday, May 5, 2009
Human nature
When you are trying to make sense of current events, the best way to do that is to look at how similar situations played out in the past. Considering that basic human nature is effectively the same as it has been, and various laws of nature and economics are the same, it would seem fairly easy to simply predict the future based upon the past.
Well as every prospectus in the world points out, past performance is no guarantee of the future. Why? Well the real problem is the interpretation of the past, and what comparison you make to the current situation.
I have seen a lot of comparisons between the current economic situation and the 1929 – 1940 period. If you are think they are comparable, it is easy to point out that after the initial drop in the stock market there were a number of significant rallies that didn’t take hold and led to greater and greater declines. Therefore, any upturn in the current market is not the start of a recovery, merely a “bear market rally”. Of course there have been many other notable recessions besides that one and they didn’t last as long or fall as far.
How can we know which one is most like this one, if any?
After the fact of course it is very easy for a statistician to find charts that show why the current situation was almost exactly like a prior one or more. Going the other way is clearly much more difficult, because however close your chart looks to a previous situation, it may not be as close a few months from now.
I do like looking at charts, especially since they are now are in color (I may be dating myself there). They also can provide a reasonable and somewhat rational approach to the future. Also, if everybody buys in to a particular indicator, it does become a reasonable predictor, because everyone buys into it.
Of course once that becomes predictable, some smart people figure out how to play it and the indicator becomes less useful for the majority. Like I said human nature hasn’t changed much if at all.
Well as every prospectus in the world points out, past performance is no guarantee of the future. Why? Well the real problem is the interpretation of the past, and what comparison you make to the current situation.
I have seen a lot of comparisons between the current economic situation and the 1929 – 1940 period. If you are think they are comparable, it is easy to point out that after the initial drop in the stock market there were a number of significant rallies that didn’t take hold and led to greater and greater declines. Therefore, any upturn in the current market is not the start of a recovery, merely a “bear market rally”. Of course there have been many other notable recessions besides that one and they didn’t last as long or fall as far.
How can we know which one is most like this one, if any?
After the fact of course it is very easy for a statistician to find charts that show why the current situation was almost exactly like a prior one or more. Going the other way is clearly much more difficult, because however close your chart looks to a previous situation, it may not be as close a few months from now.
I do like looking at charts, especially since they are now are in color (I may be dating myself there). They also can provide a reasonable and somewhat rational approach to the future. Also, if everybody buys in to a particular indicator, it does become a reasonable predictor, because everyone buys into it.
Of course once that becomes predictable, some smart people figure out how to play it and the indicator becomes less useful for the majority. Like I said human nature hasn’t changed much if at all.
Monday, May 4, 2009
Expert Opinions
If you wait for good news you may be too late. What do I mean by that? In many economic swings there are points where things fairly quickly get worse or points where they fairly quickly get better. At some point these changes are obvious to everyone. However, the ability to predict or at least recognize these points early can be critical to how much you can avoid losses and/or maximize gains.
Right now there are a number of leading indicators that indicate that we have reached the bottom. The indicators are a slowdown in falling real estate prices, slowing of unemployment claims, increased consumer confidence and reduction of inventories. Of course a one or two month improvement in any of these indicators can be a temporary aberration.
A more telling indicator may be what the experts are saying. Around the beginning of this year it seemed that every expert I read said we were in for a long and prolonged recession, that at best would last into the last quarter of this year and maybe much longer. That’s when I started to get optimistic and go long on some positions. I’ve never held much confidence in consensus predictions, or alternately, I’ve mostly had a lot of confidence that they were wrong.
Right now there are a number of leading indicators that indicate that we have reached the bottom. The indicators are a slowdown in falling real estate prices, slowing of unemployment claims, increased consumer confidence and reduction of inventories. Of course a one or two month improvement in any of these indicators can be a temporary aberration.
A more telling indicator may be what the experts are saying. Around the beginning of this year it seemed that every expert I read said we were in for a long and prolonged recession, that at best would last into the last quarter of this year and maybe much longer. That’s when I started to get optimistic and go long on some positions. I’ve never held much confidence in consensus predictions, or alternately, I’ve mostly had a lot of confidence that they were wrong.
Sunday, May 3, 2009
Underlying value
What is the underlying value of the assets causing the financial crisis? The argument about this could define whether banks fail, or, return to profitability.
Many of the assets in question are mortgages issued to borrowers with poor credit to buy overvalues properties. The mortgages are backed by the properites, but the value of the properties has collapsed. It is doubtful that the properties will recover to the levels they were at at any time in the near future, but what are they worth now?
No one really knows the answer to that question, but clearly they have some value, if only the value of the land. In some parts of the country, real estate values have dropped tremendously, but, clearly there is some point, and there are some indications already, when the drop in price creates demand.
So, if the prices start to stabilize, and new mortgages are written, the true losses at our financial institutions can be determined. I don't see how the losses can be any greater than the real declines in the underlying assets, plus some carrying costs.
How much have these assets been discounted in the investment world? If they have been discounted too much, we may see some institutions looking much better, fairly soon. If they have been discounted too little things will get worse.
Many of the assets in question are mortgages issued to borrowers with poor credit to buy overvalues properties. The mortgages are backed by the properites, but the value of the properties has collapsed. It is doubtful that the properties will recover to the levels they were at at any time in the near future, but what are they worth now?
No one really knows the answer to that question, but clearly they have some value, if only the value of the land. In some parts of the country, real estate values have dropped tremendously, but, clearly there is some point, and there are some indications already, when the drop in price creates demand.
So, if the prices start to stabilize, and new mortgages are written, the true losses at our financial institutions can be determined. I don't see how the losses can be any greater than the real declines in the underlying assets, plus some carrying costs.
How much have these assets been discounted in the investment world? If they have been discounted too much, we may see some institutions looking much better, fairly soon. If they have been discounted too little things will get worse.
Saturday, May 2, 2009
Agility
Saturday, May 02, 2009
Dwight Eisenhower said “Plans are nothing, planning is everything”. I couldn’t agree with him more. The second you create a plan it is probably overcome by events (OBE). Not being an expert on chaos theory, anything I say about it is probably wrong, but I believe the fundamental principle of it is that the world and most complex systems have too many independent variables to be predictable. Therefore any plan cannot account for all the variables.
This doesn’t mean that planning is not required. In fact, as the quote illustrates, it is everything. Planning can provide us with situational awareness, so that as things happen we react in accordance with pre-established goals or outcomes in mind.
Years ago (probably in the 1970s) I got a free book on investing when I subscribed to someone’s magazine (I actually don’t remember what magazine it was). The book actually had a lot of useful explanations of market terminology and various investment instruments. It also had a section where it provided advice garnered form successful investors. One bit of advice that I have tried to follow since then was quite simple. Accept the fact that you will be wrong a significant amount of the time.
A lot of people, if not all, tend to have a high opinion of their own insights. However, if you do something and expect a certain result, if you don’t get it, you were wrong. Accept it. It is now time to do something else. The plan that you had needs to be adjusted. You need to be agile.
Dwight Eisenhower said “Plans are nothing, planning is everything”. I couldn’t agree with him more. The second you create a plan it is probably overcome by events (OBE). Not being an expert on chaos theory, anything I say about it is probably wrong, but I believe the fundamental principle of it is that the world and most complex systems have too many independent variables to be predictable. Therefore any plan cannot account for all the variables.
This doesn’t mean that planning is not required. In fact, as the quote illustrates, it is everything. Planning can provide us with situational awareness, so that as things happen we react in accordance with pre-established goals or outcomes in mind.
Years ago (probably in the 1970s) I got a free book on investing when I subscribed to someone’s magazine (I actually don’t remember what magazine it was). The book actually had a lot of useful explanations of market terminology and various investment instruments. It also had a section where it provided advice garnered form successful investors. One bit of advice that I have tried to follow since then was quite simple. Accept the fact that you will be wrong a significant amount of the time.
A lot of people, if not all, tend to have a high opinion of their own insights. However, if you do something and expect a certain result, if you don’t get it, you were wrong. Accept it. It is now time to do something else. The plan that you had needs to be adjusted. You need to be agile.
Friday, May 1, 2009
Get started
C. S. Lewis said “The future is something which everyone reaches at the rate of sixty minutes an hour, whatever he does, whoever he is.” The future is inevitable. For each of us it is also limited to some amount of time. Today used to be the future. If everything is put off until the “future” that means what you put off yesterday was due today.
The point is, your current behavior will create your future. If you’re going to start exercising, or eating healthier, or saving for retirement someday, that someday will come and be replaced by another someday. One of my favorite sayings is “if you want to get something done, you have to get started”. Of course this is another way of saying, “a road of a thousand miles begins with a single step”.
It’s time to get started.
The point is, your current behavior will create your future. If you’re going to start exercising, or eating healthier, or saving for retirement someday, that someday will come and be replaced by another someday. One of my favorite sayings is “if you want to get something done, you have to get started”. Of course this is another way of saying, “a road of a thousand miles begins with a single step”.
It’s time to get started.
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