Archive for September, 2008

Economics can be simple supply and demand.

Then there are incentives, substitutes, price and competition.
In a world of abundance, scarcity is rare, luxury goods have come to the middle class.
Economics is about Risk/Reward in marketplace.

The markets are the only true scale of our economy, where we put our money is where the truth lies.
People are not rational in their economic behavior, we are more human.  It is the study of how people buy and what people buy.  

The economy is about jobs, productivity, growth and understanding shifting industries.   If productivity grows more than inflation and unemployment is near 5%, our quality of life grows.     What we do know is the world’s populations will have to shift industries and jobs frequently with the speed of the marketplace.

Money Supply attempt to control available credit, money in the float, inflation and spending.  
Professional economist manage investments, portfolio, value options and mitigate risk.  Either in theory or by the words they use and consult.   Most economist just create graphs. 

We have just lived through the best economic environment with value, productivity, jobs, growth, globalization, low commodity prices and low taxation.   To get back there, we must focus our congress on the fundamentals of economics.   We must free up money by FDIC insuring up to $1,000,000 per account and making sure money is in the marketplace with the ability to loan.  The run on the bank can be curtailed by increasing the FDIC insurance and then congress needs to vote on a plan that helps the average homeowner keep their homes, lower their payments and manage this from the people, not the institutions.

Adam Smith nailed it 200 years ago, both communist and capitalist alike have studied Smith and his invisible hand.    

Here are some examples in action:

1. When investors have negative equity renting out their real estate assets.  We saw this 3-4 years ago in many markets.   Specifically, if you own a condo with a mortgage of $1,600 and it rents for $800, the market needs to revalue itself. 
2. When a stock has a P/E ratio over 20, be cautious.  Reality has little to do with stocks, yet when Google went over $700, the only chance for it was to double or triple revenue to meet expectations.  Now it is a little over $300.  Still not quite a bargain. 
3. When a Big Mac cost in excess of $5 in certain countries, their currency is probably over-valued.   Japan in 1995, hit a peak in the value of the Yen, I know I was there with my small American Dollars.   From there the economy and currency has been on a skid.   Big Mac’s are more affordable now.
4. When a country pegs their currency to keep exports flowing, this is artificial and the market will counter this quickly.   China is starting to adjust to a globalized economy, yet it is said they have to have 7.5% growth or they will have social unrest among their 1 billion people.
5. Baseball Cards – are they really worth the money?  If you can find a buyer, yet discounts are the norm.
6. eBay – this is the invisible hand.  From Grilled Cheese with the Virgin Mary to Governor Palin’s Jet (did not sell) to the Pope’s Old Car.   The free market of supply and demand can be seen in action every day.    
7. Education – is a Harvard MBA worth $200,000?   Of course, if your ROI is regained in less than 5 years.   Your earnings potential skyrockets and your ego.   I chose the Thunderbird MBA as it allows me to further my economics, cultural and language studies while earning my MBA.   I also get to travel to Dubai, Moscow, Beijing, Santiago and Geneva for my coursework.   So if you have an international role that needs an excellent General Manager, hire me.
8. When money is involved, the truth comes out.   Money calls all BS to the table.  I was in a meeting the other day and some guy was going on and on about how great a company was, so the other guy asked.   Would you invest more in this company if I do?   [Silence]  The truth is now out.   

1. With communication being instant, everything in the market has already been considered.  This is positive as our rebound could be much quicker than we would ever think.  
2. Relieve homeowners of interest on their mortgages bringing their payments down by 20-50%, create a stepped plan to bring interest rates back 1% at a time.   Year 1 = 0% to Year 5 = 5%+.  Homeowners get needed relief and enables them to pay down the principle, meanwhile the market should cyclically bounce back.   Hopefully, bringing equity back into the market quicker.     
3. Do not allow any foreclosures or bankruptcies during this period, flexible payments for those over their head.   Garnish wages for the people dodging their responsibility.
4. No bailout – Just nationalize the mortgage industry for the next 3-5 years, stabilize the industry, yet allowing other financial industries to deal with their problems.
5. In the next 3-5 years, auction the CMO’s and other mortgage backed securities to the industry as they risk subsides.  Create a market to trade these securities.
6. Free up the money supply for banks to not tighten down on lending policies.
7. DO NOT create FDIC for everything in despair – money will move to the highest yield, banks will lose BIG if we cover money markets, even if they insure – maybe just guarantee current funds.  FDIC also needs to raise their limits to $1,000,000 to keep funds at banks and stop the movement out of the banks.  Money is moving to T-Bills and other safer places.   Investing in Euro’s may be the next trend, continuing the downslide of the dollar and the US economy.  
8. The FED needs to continue to broker deals for failing banks, taking over the mortgage industry will help many banks clean up their balance sheets and avoid these issues.  Yet, when this is over there are going to be more and more SEC Anti-trust policies…
9. Improve underwriting for home, auto and credit cards, improve transparency and the real risk in portfolios
10. Do not think we can control the markets – let short sells happen, the invisible hand
11. I like Obama as a leader, yet he must not think that we can move away from globalization by creating barriers and tariff’s for imported good and/or protect industries.   This will ultimately lower the cost of living.   On the other side, McCain needs to stop politicking and Palin needs to find her voice.   No reason to post-pone the debate.
12. Eliminate all subsidies and let the market find the bottom, it will rebound quicker without the uncertainty.
13. US government should release some of their Oil Reserves to stabilize prices
14. US government should create incentives to go green, Pickens and Gore are leading this revolution and both need to be studied.  We need to use Wind in the midwest, Solar in the southwest, hydro in the Mississippi and continue to move the standards of automobiles, jets and manufacturing.   Carbon offset incentives would be smart too.  
15. We should realize that we should raise taxes when the economy is overheating and lower in times like this, we need to lower taxes for small business and companies to stimulate their spending.   When a sale is made, it all starts – that is when we get paychecks and then we as consumers spend more…
16. This is a great time to go to a progressive flat tax, everyone gets a 30k write off and then a flat tax over or go to a national sales tax (no black markets, goodbye IRS).   Freeing up money will stimulate the economy for both rich and poor alike. 
17.  Stop worrying about the CEO’s paychecks, the board, stockholders and markets need to make these decisions.  The world is watching and this issue is coming to a head soon.
18. Allow the economy to be guided by the market, every few years we learn how it works again, this will not be our last crisis.   Yet, we need to really buckle down to avoid major fallout.   Swift action is needed.
19. We all need one thing: certainty.  With our politicians, economy and jobs.  Until we find this, rocky roads await us.  Whether it is mortgages, outsourcing or financial engineering.   Unfortunately, we just create more red tape with Sarbanes-Oxley, this has created less certainty.   
20. Going to principle based international accounting practices makes a lot more sense than rules based GAAP.   This will allow us to look at the principles of how companies account and not regulate by hard rules that can find loop holes. 
21. For the democrats in the crowd (including myself according to my latest online survey), have some heavy taxes on luxury items over $100,000, cigarettes, alcohol, drugs, gas and anything else that we can all agree are socially un-responsible.   

1. Healthcare – why do nearly 50 million people not have healthcare?   Is this the most responsible way for society.   We need to privatize insurance yet insure everybody in every class of health.  We need to start to enforce proactive healthcare with our new understanding of Genetics, led by companies like 23 and ME.   Medicare and Medicaid can more than fund this as private companies begin to pick up the slack.   With our current healthcare system driving prices up, competition ultimately drives prices down.   
2. Immigration – aren’t we all immigrants.   With an aging population, who is going to replace our workforce?   Japan’s stagflation may be because of their shrinking population (they did not have a post war baby boom) and China’s future looks uncertain as their workforce shrinks quickly with their one child laws.   The US could have a competitive advantage as an industrialized country if we continue to create the melting pot that we all love.   We also need to extract talent form the world and continue to be a leader in innovation, patents, science and technology as our world moves quickly to atoms and bits.
3. Foreign policy – if you go and visit your friends to help them out.   Does that give you the right to move in?   NO.  The terrorist are gone from Iraq and the religious war is always going to be there, especially with some irritating American’s hanging around.   Move the troops home and to Afghanistan.  We do not have to be the savior of every country.  Did we not learn from Vietnam?  Let trade become our biggest weapon.   
4. Military – Also, invest in technological drones and non-troop oriented solutions.  Human capital is too valuable to continue to put in harms way.  Lower our military spending in this post-war period.   We can raise wages for the military by avoiding $30,000 toilet seats and Gulfstream renditions.
5. Education – performance based teaching is just common sense.  Our teaching profession needs to attract the best of the best.   We need to pay better and attract the best students to teach our children.   We need more flexible curriculum and ability to choose our education provider by choice not district.  Competition will bring the best schools to be sought after, public and private.  
6. College for everyone – on-campus employment, volunteer, community service, peace corp, military service, internships and lots of other ways to benefit society and create enough benefit to satisfy tuition payments.
7. Social Security – our future looks grim on our current isolation of social security funds.  We need to free a percentage of the fund to invest in the economy, this can both stabilize our economy and provide great returns over a 45 year period.  Invest in an Index Fund, John Bogle could teach everyone a few things. There is not a 10 year period that has been negative, not even the Great Depression.   We also need to mandate access to 401k’s, simplify IRA, Roth, Simple, SEP and others to create standard rules for everyone.   Level the playing field, create choice architecture to automatically opt in everyone.   This would increase the world’s 401k’s by 30%, thereby create savings and investments in the economy.