The Economy - Prescription for Recovery

To understand how to correct the current downturn in the economy one has to have a good sense of what got us here. For the past couple of decades, corporate earnings growth has been strong. Individual disposable income, not so much. Consumers have been living on credit and their earning power has not kept pace with spending. Banks are now having to face the reality that a lot of the money they loaned out isn't coming back.

I'm in the marketing products business. I don't regard my job as selling ads and printed products. I regard my job as helping my customers increase their revenue and earnings. If my customers don't do well, I don't do well. Government needs to come around to this same realization. Individuals need to be empowered to have higher earning potential. They don't need handouts and make-work programs that are the jist of the the "stimulus" packages now being proposed. We are not going to rebuild a thriving private sector by growing government.Government needs to get out of the way. The capital gains tax needs to be eliminated. People need to have incentive to earn, save and invest. It's hard to get excited about the prospect of netting 30% on your investment and then giving a big chunk of it to the government. We need less regulation and paperwork. The income tax needs to be eliminated. How many hours a year are wasted filling out tax forms and complying with employment regulations and filings? When you pay an independent contractor, they do the work, you write them a check. Transaction complete. When you make them an employee you get a helpful guide to federal payroll regulations that proudly proclaims on the cover how simple it is. The instruction guide is 70+ pages long and much of it just refers you to other forms and manuals. As for taxes, a sales tax form takes about ten minutes for a merchant to complete and most taxing authorities offer a small rebate in return for your work. The monstrosity that is the income tax code requires a team of professionals, none of whom really understand the whole thing.

Regulation, taxation and government intervention in general is mostly well intentioned, but it has the the opposite of the desired effect. In the interest of providing security and stability we are stifling the dynamics that have made this country so successful. The Soviet Union provided security and certainty. Everyone had Jack Squat, but it was predictable. Is that where we want to go?

Risk taking is not something that needs to be eliminated. It needs to be encouraged. It has to come with potential reward and we have to accept the consequences of failure. There's no way to win if there's no way to lose. The incremental steps taken by government to reduce or eliminate risk are ruining the game. Get out of the way and let us play.

The Great American Garage Sale - Playing the Crash

The Fed cut rates, in intermeeting move today by 75 basis points for the first time since 1984. Congress and the administration are actually in agreement on the need for a stimulus package. This has lead traders to wonder, "what do they know that we don't?" This has actually caused more panic and selling in the market. How should one repond to these circumstances? Time to go shopping.

This is the most opportune point of the market cycle. When almost everyone agrees that the economy is heading for a train wreck. Goods, services, commodities get cheap and nobody's buying. I would not recommend putting all your money to work in one fell swoop, but if you've got some saved up for a rainy day....it's raining.

In the stock market, start dollar cost averaging into it. That is, purchase the same amount of a broad basket of stocks (exchange traded index funds) each month or every couple of months. In real estate, start looking for bargains and pick one up when you have the opportunity. Spend the next year or so refurbishing and getting ready for the turn in the market. In business, rent a store room and start picking up equipment on the cheap. For consumers, spend your money productively on home repairs, landscaping improvements, etc. Start visiting pawn shops, thrift stores and flea markets on occasion. Good stuff is about to show up there. Use downtime to gain education in something you're interested in. There's free education all over the internet. Go get some.

The train is in the station. Don't wait for it to start to pull out and join the clamor to get on. Find yourself a good seat now and enjoy a good book while anticipating the next leg of the journey.

The Economy - What Happened?

Prelude to Recession

No, this isn't an "I told you so" piece. Nor is it an explanation of how things would be better if I'd been calling the shots. It's just an observation of our current reality, how we got here and what I expect going forward, based on observation, personal experience, data and anectdotal evidence.

In the beginning....there was much liquidity. Home prices were going up every year. This allowed people to tap into extra cash flow by rolling over their mortgage every year or two and cashing out equity. This went on for quite a while, allowing people to safely spend 10k, 20k, 30K or more above and beyond their income. Suddenly, housing prices stopped going up. That extra cash flow went away. Some got behind in their mortgages as they were no longer able to roll them over. Mortgage lenders got more restrictive on lending.

The housing market, already in decline, suddenly saw half the potential buyers disappear as they were no longer able to qualify for mortgages. The mortgage brokers got hit, the realtors got hit, then the home builders, construction workers, suppliers.

Meanwhile, back at the ranch, consumers begin to consume less. First off the shopping list: big ticket items. People held on to their cars longer, their appliances, put off home improvements. With rising home equity no longer available, they turned to credit cards, which soon became overextended as well.

Now we are near the end of the cycle. Credit card deliquencies go up. Bankruptcies skyrocket, retail sales tank. This may sound like a doomsday scenerio, but wait...the good part's coming up.

Some businesses try to compensate for lower revenues by raising prices. This goes over like a lead balloon. Many of them fail. Others recognize that they need to go in the other direction. They find ways to cut costs, increase productivity and offer lower prices. Prices of goods, services and commodities all head downward. This creates new opportunities and sets the stage for a vibrant recovery.

It's the circle of life in a free market. Good times lead to over-indulgence. Over-indulgence leads to recession. Recession leads to recovery and the return of good times. Some remember and learn from the past, but there will always be newbies and declarations of a "new paradigm" in which the old rules don't apply, so many continue to get caught up in the cycle, and it continues. In the process, new ideas are developed, new discoveries are made and generally speaking, life gets better.

The only potential monkey wrench in the system is when government panics and decides to "fix" it. A sure way to prolong and even institutionalize a slow down is to raise taxes, increase regulation and increase government spending. There is plenty of room for improvement in the US business model, but they all involve less regulation, lower taxes and less government "assistance". We need to make it easier for low income individuals to find the way up, not by giving them money, by giving them freedom. People need to be encourage to try and they need to be allowed to fail.

The prescription for the future is more information, less regulation, fewer barriers to entry, more flexibility, less paperwork, more encouragement. Above all, it's important to recognize, going into a rough patch, that this is a normal part of the business cycle. Step one in dealing with it: DON'T PANIC!