December 2010 Prediction

As the US seems to be shaking off the recession, most are wondering what will the new order of the day be and how will the business market react.  The first step in understanding this would be to take a position on where you feel the short term outlook for the economic health of the country.  To this end, I have the conclusion of the paper written by my team (Sue Strebol, Scott Campbell and myself) in our Intenational Macroeconomics class on our predictions for December 2010.

Overall we believe the recession is past and the turnaround has begun.  The economy is at a crucial time when over reactions and no reactions could cause a double dip in the recovery.  Bernanke appears to be particularly mindful of this and is acting conservatively by gradually increasing the gap between the discount rate and the federal funds rate.  As the banks continue to increase their interbank lending and decrease their borrowing from the Fed, the gap between the discount rate and the federal funds rate should be increased to the full 100 basis points it was prior to the financial crisis by June 2010.

 There will still be some banks closures from residual fallout of the financial crisis but overall the banking system is stabilizing.  The Fed and Congress need to not over react with new regulations or an overhaul of current system but take a serious look at what works and what doesn’t.  The ability of financial institutions to operate as both an investment bank and a commercial bank may need to be re-separated with another Glass Steagall Act.  The derivatives market should also adhere to standards through enforceable regulations regardless of who issues them or how they are sold.

 The exchange rate is market dependent and while the Euro zone is dealing with their crisis the U.S. dollar will remain strong.  The U.S. needs to pay back some the foreign debt it borrowed to finance the bailout.  Most of the money that was lent to the major banks to maintain liquidity during the crisis has been paid back to the government so rather than spend these funds on additional programs; the U.S. should pay down its debt.  This would not only show that the U.S. is serious about lowering its debt and keeping it comfortably below 60% of GDP but also while the US dollar is strong the payments would go much further.

 It will take time for the economy to completely turn around but if efforts through monetary and fiscal policy are rushed they could cause instability and the economy would slip back down causing an even longer recovery period.  The main driver is consumer confidence.  Once consumers feel the worse is past and return to normal consumption, then the economy with once again grow steadily.  The Dow Jones has show steady growth since its low point in early 2009 indicating the market is rebounding and is expected to be at approximately 11,900 by year end.

Who is to Blame?

The new semester has me studying International Macroeconomics.  Those who know me, understand how the study of Economics has captured me throughout this program. 

We have been assigned to write a paper on the Global Credit Crisis of 2008/2009 or The Great Recession as it as been called.  I will not take full credit for the paper as I worked with a great team, however; I will not mention thier names as I do not have thier permission.  What I did want to share was our conclusions on who is to blame for the recession:

The Global Credit Crisis of 2008-2009 is the worst recession the U.S. has experienced since the Great Depression.  There could be argument could made it was the worst global recession in history.  Even with many of the leading indicators showing the crisis may be over and the economies of the world are beginning to recover, the effects of this recession will continue to be felt for many years.  The important thing is to stay vigilant to ensure that actions do not lead to a double dip in the recession.  

With such a wide spread collapse, the bigger problem would be if no lessons could be learned and applied to prevent a collapse of this magnitude from happening again.  In order to determine the lessons which need to be learned, it is important to understand the causes of the collapse and where, if any, mistakes were made.  The government eased the credit requirements to increase the opportunities for the citizens of the U.S. to achieve home ownership.

While this was politically popular, it proved not to be very fiscally responsible since one of the apparent outcomes would be riskier mortgage securities on the secondary market.  The Fed became complacent and thought it could effectively control the ebb and flow of the business cycle through the prudent use of monetary policy.  It can be argued it was not the failure of the government to regulate, but the “reliance on government regulation itself as a substitute for market-based banking virtues now minimized by regulation has brought us to this financial crisis.  The resulting mentality (if it is not regulated, anything goes) has permeated the private markets”. (Holloway)

So, Wall Street, with its increasing greed, exploited institutions within the shadow banking industry by leveraging financial instruments beyond reasonable levels.  In their zeal to create short term shareholder wealth, Wall Street looked only at the bottom line and was less concerned with sustainability or transparency.  

The primary blame for this Global Credit Crisis may be viewed to rest on Congress, who under political pressure eased the regulations that gave Wall Street the tools to exploit shadow banking and the mortgage securitization. Although, Congress also applied similar pressure on the Fed in allowing shadow banking to operate, thinking the market would balance itself out.  Each had a significant role in the credit crisis and each must share the blame.  Had Congress, the Fed or Wall Street acted purely according to their given roles and resisted outside influence, this crisis might have been averted or at the very least minimized.  It still holds true: what is popular is not always right and what is right is not always popular. 

Buy American?

I recently received an email which was titled Buy American.  All of us have read this email and know the theory.  It goes something like this – if consumers band together and pay attention to labels, and only purchase those item manufactured in the US, this cumulative effort can save American jobs and positively affect the domestic economy.  Unfortunately, our emotional psyche has us all jumping on this bandwagon as it seems to make sense.  The problem is, when looking at the actual facts – this theory turns out to be a complete fallacy.

When looking at the facts we find the average salary in the US has steadily increased while our trade around the globe has increased.  We also find an inverse relationship between unemployment and trade.  As our trade increases, unemployment decreases with the opposite proving true as well.  Those who feel the United States should “keep jobs at home” and put restraints on companies who move jobs overseas are really saying they are against the concept of globalization.  Globalization is defined as the integration of national economies into the international economy through trade, foriegn direct investment, capital flows, migration, and the spread of technology.

Indur Golkany, the noted economic development expert, studied Globalization and its overall effect human well being by looking at 5 different factors (Food Supply, Child Mortality, the prevalence of Child Labor, life expectancy, and the Human Development Index (HDI)).  In his article “The Globalization of Human Well Begin” he shows how the improvement of each factor over the last fifty or so years is a direct result of the developed countries actively getting involved in the economy of the lesser developed countries or globalization. 

The simple truth is the Buy American rhetoric not only hurts the citizens of the United States, but ultimately hurts the citizens of the world.

 This is something we find all too familiar in the US – someone makes a broad sweeping emotional statement and people get up in arms about it.  This country is considered tend to show our country as protectionalist and self centered.  Two factors which we train our children not to be. 

I think it is time we stop listening to the people who would like for us to act on our emotion and use our intellect to determine the best course of action.  I do believe we are among the most intelligent people on the planet, we just need to start acting like it.

Customer Value

My marketing class this semester has been focused on Customer Value.  While this should not be a surprising concept, it never ceases to amaze me how many companies pay this concept lip service.  However, I think our recent recession and the continued explosion of Social Media Marketing is putting a new spin on the concept. 

Marketing defines customer value as the amount over the cost of product the consumer is willing to pay.  In Economics – the additional amount the customer would be willing to pay is called the customer surplus.   The difference between what the consumer actually pays and the amount they are willing to pay is where companies are trying to squeeze their profits.

This answer seems almost too simple.  Find out what your customers really want.  If a company will talk to their customer and find out why they are buying from them and in turn, understand what else or additional the customers want, they can not only shorten the gap in customer surplus, but build loyal customers. 

Companies often find this key when they are struggling – ie:  Harley-Davidson in the early 80’s, IBM in the early 90’s and many more.  Despite the overwhelming success stories, companies overwhelming still seem to think they have the answers internally.  I have been involved with companies both on the Fortune 24 list and on the Inc 500 list.  The biggest similarities I have seen with these companies are they both determine their “go-forward” strategies by sitting around the conference table and deciding amongst themselves.  Unfortunately, one very important person was not invited to the table – the customer. 

American Airlines is the latest company I have seen who is asking the customer what they can do better.  They have started and online method for customers to register their complaints and give suggestions on how to make the Airline better.  My hope is American Airlines not only responds to the complaints/suggestions of their customers, but finds much success, both financial and through customer loyalty, for this program.   

Perhaps this latest recession we are both struggling and surviving through, will cause a change in how businesses attack the marketplace – currently they are fighting a one sided battle.  Once businesses realize their profits are not only depended on what they supply, but what customers are truly willing to and want to purchase.  The marketplace is a partnership, when both parties come to the table together, all can realize the benefits.

Honesty

I have recently been involved in a work situation where it was brought to my attention one of our competitors in Tampa has been telling outright fallacies concerning one very important aspect of their service.  While I will not blast them (directly) in cyberspace nor divulge the mistruth, it was unsettling enough to evoke quite the range of emotions within me.  When I first heard what was said, I laughed at the lunacy of the statement.  This was until I realized the person telling me actually believed what was being said – at face value; simply because they said it and “why would they lie?”

I pride myself on being honest in both my professional and personal dealings.  In the closing of every email I have the phrase “Honesty, Integrity, Ethics, Responsibility”.  These are not just words to me, but the very basis of who I am and what I try to represent in my life.  Please do not get me wrong, I am not perfect – far from it – I fall into the same traps as everyone else.  There are times where my moral compass may wind up a bit off its center.  However, I am not oblivious to these times and when I find myself slipping I work very hard to bring things back to what is, my center. 

It is very unsettling to me when I realize how blatant of a lie someone will tell simply because they think it will cause them to get ahead!  We all know even the “little” lies have a way of catching up with us.  With the lines of our professional lives and our personal lives constantly being blurred, these “untruths” have a way of catching up with us quicker than before. 

The information super highway has made it almost too easy to catch us in our embellishments.  Companies and people more than ever have to be careful what is being said as any slip up is quickly researched and the truth can then be uploaded for all to see in the matter of seconds.  Something as simple as a word said in a meeting which seems to not exist can be googled from a smartphone and create havoc on one’s credibility.

I am not saying anything new here at all!  Everyone reading this post knows this!!  My question is simply this – Why are there so many out there who seem to insist on not simply telling the truth?  Why do companies hide the bad financial reports from employees?  They are smart enough to know when things are going poorly.  Why do Sales people lie on the capabilities of their product?  Buyers are diligent enough to do their homework!  Why do people in relationships feel it is ok misrepresent themselves?  It is always found out! 

The simple truth of life – both professional and personal is this:  The Truth will set you Free!  If we could all learn to follow this – many of our problems would cease to exist!

What’s Important

The past week has been incredibly tough on my family.  What started as a surgery to enable my dad to be cancer free; has turned into a concern of what our next steps will be for his treatment.  The purpose of the surgery was to extract two tumors, and to determine how much additional cancer existed.  Unfortunately they found much more cancer than anticipated.  The seriousness of this has gripped us all and caused me to become quite introspective.

I started this blog to put out some ideas which would be thoughtful and cause intellectual thought and conversation.  The subjects have ran the gamut from teamwork to healthcare to some of my political opinions (arguably a bit watered down).  The question which has begun to permeate through my consciousness is:  How do all of these subjects really affect our lives?  At the macro level, we can all understand the big picture; however, when things get personally really bad, does any of it really matter?

My job is very important to me and I take it very seriously.  So seriously, I have forgone personal fulfillment to be sure everything I do represents my company at the highest level.  Even in my work at the University of Tampa, I do my best to represent my company in the best possible light.  Even in writing this blog, I have purposely not listed my company, and until recently, not listed my name as I do not to have any ill effects on the company. 

However; as I was getting the news about my dad, and sending updates out through Twitter and Facebook; I realized, what my company thought of my updates did not matter.  Thinking through all this I began to think everything we do to improve ourselves and our position in life means nothing if we do not transfer this skills with our family.  While this is not at all a new concept, nor an awe inspiring revelation, it is something which has recently come into perspective.

Here is the one critical lesson thus far: friends come and go; business relationships are developed and maintained often for a season; family is always family.

Value of Life

One of the biggest discussions going on in Washington these days is Healthcare Reform.  It has become so pervasive even shock jock “Bubba the Love Sponge” has had guests on his show discussing the subject.  I do not profess to understand its nuances, nor have I formally made up my mind on the direction I think the country should take.

However, there is a piece of the reform policy which I find unsettling.  It is the concept of the Quality Adjusted Life Year (QALY).  This is the concept of where a person would only be granted any medical procedure if it would allow for greater the 1.0 QALY’s.  The exact parameters of the plan, while important, are really not what I find concerning.

The problem as I see it is the quantifying the value of life.  The further concern is the slippery slope this will ultimately lead too.  I can foresee the question quickly becoming one of the social position of the person for whom QALY is measured.

This has come to the forefront of my mind as this week I will be anxiously anticipating my father’s major surgery to remove several cancer tumors. In my family’s opinion, this surgery is absolutely necessary.  However, under a new policy, I do not know which way the ruling would go.  Early this week Senator Edward Kennedy lost his personal battle with cancer.  Due to Senator Kennedy’s political influence, if surgery could have given him additional time, would he be given the same measure of QALY as my father?

I wholehearted believe this country needs Healthcare Reform.  However, putting a monetary value on life is a dangerous and I believe socially irresponsible path.

Micro, Macro or Both?

After finishing the first year of the MBA program at the University of Tampa, I found the subject of economics to be quite interesting. I have found myself following the blogs of Keith Hennessey, Greg Mankiw, Paul Krugman, and Robert Reich pretty religiously. Understanding the bigger effects of decisions our elected officials and the Federal Reserve make have not only made this interesting to me, but also helped me to have an intelligent opinion of why certain decisions were made.

We did a study of both macro and micro economics and while micro seem more prevalent to everyday life; I really think I liked macro better. What is the difference? The definitions tell us microeconomics relates to how households and firms make decisions to allocate limited resources where macroeconomics involves the “sum total of economic activity, dealing with the issues of growth, inflation and unemployment, and with national economic policies relating to these issues. However, in practice, I have seen microeconomics policies are what can make or break a political career (we have all heard of Joe the Plumber). Once elected, it is the macroeconomic policies which keep an official in office (how will we come out of this recession?). Is it any wonder our elected officials seem to never keep their promises? However, understanding why the decisions are made on a macro level helps to make sense of some of the decisions.

The dirty secret seems to be the government is trying to manage the economy from the macro level; therefore, Joe the plumber, or you and I, are not really the biggest concern. The concern is really for the greater good of the country as a whole. Unfortunately, in times of recession, the more personal concern is our own self preservation and not the community as a whole. Hard decisions have to be made for the “greater good”. I do not agree with all of the decisions being made or how resources are allocated, all I am trying to do is think of things from a different perspective. I would think a study of both Macro and Micro economics would be good for all Americans; it would help us all to better understand how our system works.

Robin Hood is no friend!

We all have celebrated the story of Robin Hood stealing from the rich and giving to the poor.  I too, was regaled by the tales of how he fought for the oppressed.  However, our current administration has caused me to see this character in quite the different light.

I found myself reading a blog update by the venerable Robert Reich (http://robertreich.blogspot.com/2009/07/house-tax-wealthy-to-keep-everyone.html).  While I enjoy reading what Reich has to say and don’t always agree with him, I found this post particularly disheartening.  It seems the House is considering paying a portion of the new health care reformby taxing the top income earners.  Mr. Reich even calls this “Robin Hood economics”. 

Here is part of the problem I see with this thinking.  If we continue to, in my opinion, take the easy way out and tax the “rich” – what incentives will there be left to go after the almost obsolete American Dream?  Greg Mankiw points out, if this is passed, the top 1% income bracket will be taxed at nearly a rate of almost 50% (http://gregmankiw.blogspot.com/2009/07/top-tax-rate-may-soon-exceed-50-percent.html).

Have we forgotten this country was founded by people so tired of taxes they left otherwise comfortable lives to face complete uncertainty and most likely death?  Have we really come to a place where there will be a penalty to achieve financial independence for our families?  This country was not built on taking handouts; unfortunately, our administration seems to feel this is the best way to go forward.

I have to think there is a better way.  I have to think there are more creative ways to pay for those less fortunate among us.  Am I wrong?  Have I completely missed it here and does every think this is the best idea we can come up with?

A Celebrity Pass or The State of Current Society

I think I may be either old fashioned or “old school”.  While I was saddened by the passing of recent celebrities, I find myself at odds with my thoughts and feelings.

In the first case – Michael Jackson.  Much like most of my generation,  grew up on both his music and dance moves.  I “moon walked” across my kitchen many times.  His death caught many of us by surprise.  If we take a hard look through the shock of his passing, most realize for the last decade and a half, he really did nothing to help his legacy.  While we will never know what really happened at Neverland Ranch and I will by no means either condemn or condone his actions.  I will say, for a grown man to have 12 year old children spend the night in his room, is at a minimum odd.  Given the choice, it would not be something my children experience.  Yet, the media, who condemned him, deifies him in death.  Suddenly, because he died and had arguably great music, all the strangeness is put aside and you are looked at as insensitive if his more recent activities were brought up in the last several weeks.

Steve McNair’s homicide caught all of us by suprise.  I was dumbfounded when I heard the news.  Then the reports came out of the details of his death.  My only thoughts were of how this not only could have been, but should have been avoided.   The simple facts are he was killed by his “girlfriend” while he slept.  Now the city of  Nashville, and McNair’s hometown will honor thier star.  This man was killed by the woman with whom he was having an affair.  Yet, again, the media is choosing to diefy him.  The comment which appauls me is – he made a mistake!  Really? A mistake which lasted serveral months?  A mistake which he took on serveral vacations?  I cannot understand how this is a mistake.  How are his wife and four children supposed to feel?  

Where are we as a society when our celebrities can do anything they please.  Whether it is questionable activity with minors, or outright disrespect for thier families as long as they can sing a good tune or through a ball well, is it ok?  I found myself agreeing with Mrs. Rodney Peete with her outrage, but she was lamblasted for expressing it. 

My concern is the messages we are sending.  How bad will it have to get before we realize no matter how a person it, they still need to follow the rules of what we call civilized society?