A different stimulus idea that might work

Posted by Christopher S. Penn on Feb 11, 2009 in Economy | View Comments

Jobs are what matter most. Here’s a stimulus idea to send to Washington.

Create a $100,000 loan grant run through the federal department of your choice, backed by the Treasury.

Businesses of any size may apply for and receive a $100,000, one year loan at the Federal Funds Rate. If a business then spends that loan funding solely on employment (verified by new payroll taxes and W-2 data from the IRS), at the end of one year, the loan is forgiven, essentially giving the business a free employee or three for a year.

Conditions: payroll taxes and W-2 data should verify that the business spent the equivalent of $100,000 solely on employing new hires. Using data the government collects anyway, controls should be able to easily verify that these are new hires and not existing employees. Don’t spend it correctly? IRS detects a little hanky panky? Interest capitalizes and the loan enters repayment immediately.

Why a stimulus idea like this? Rather than attempt to plow money into specific industries, this lets businesses hire or rehire based on what that specific business needs to grow. The Student Loan Network might need a junior web developer but the Advance Guard might need an admin. By giving businesses the discretion to hire who they need, the market can get the talent actually required, rather than decided by government fiat.

This kind of stimulus will, by design, disproportionately benefit small businesses. Because they’re more agile, this will help them grow faster. Because it’s small business, the ability to bring unemployed citizens in for retraining will work better – after all, you’ll learn the craft of baking bread faster at a small family bakery than you will at Omni Consumer Products Grain Division. (though certainly they can apply and get the same loan)

What’s the cost? The IRS estimates roughly 30 million small businesses exist in the US. Guess what? This is a three trillion dollar stimulus. Considering some of what’s being flung around Wall Street and DC, that’s in the ballpark of other proposals. What makes this one different? If 10% of businesses get the loan and start hiring, the 3 million job deficit goes away immediately, rather than waiting for government funding to flow through states, cities, and banks.

What’s your stimulus idea?

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Yes, you’re in a depression

Posted by Christopher S. Penn on Feb 9, 2009 in Economy, Politics, Rant | View Comments

There’s no formal economic definition of a depression like there is a recession. That said, a depression is basically a really bad recession. The current environment fits that description aptly. Despite wishes to the contrary, more folks are realizing that we are in the midst of a new depression.

Wall Street Journal:

International Monetary Fund chief Dominique Strauss-Kahn said the world’s advanced economies — the U.S., Western Europe and Japan — are “already in depression,” and that the IMF could slash its global growth forecasts further. The “worst cannot be ruled out,” he said.

The IMF managing director’s comments to reporters after a speech in Kuala Lumpur, Malaysia, represent the most dire estimate thus far of the state of the global economy by a major political figure, and were far more pessimistic than forecasts released by the IMF as recently Jan. 28.

UK Prime Minister Gordon Brown in Scotland On Sunday:

‘WE SHOULD agree as a world on a monetary and fiscal stimulus that will take the world out of r… depression.” Thus spake Gordon Brown at Prime Minister’s Questions last Wednesday, creating shock waves as far afield as Washington (“He said the D-word!”).

San Francisco Federal Reserve Bank President Janet Yellen:

The economy is “severely depressed,” and the U.S. faces “horrific” deficits over the long term, Yellen said in response to audience questions.

Yes, it’s a depression. The D-word. It’s okay to say it. It’s okay to admit it, because to use it brings our public discourse in alignment with reality.

Often quoted are the unemployment rates during the last depression – 25% of the workforce. During the last depression, that accounted for 11,385,000 people at the peak.

On Friday, we hit 7.6% unemployment – 11,616,000 people.

Percentage-wise, the percent of the labor force unemployed during the depression of the 1930s was much higher than today. That’s what you hear politicians say over and over again as they try to soothe anxieties of the public that are looking at a very different reality than the marbled chambers of Congress.

In terms of real families, real kids’ mouths to feed, real parents awake late into the night, we’ve just surpassed the last depression.

If we’re willing to drop false pretenses and admit in our public conversation that yes, this is a real depression, perhaps that’s the wakeup call that our political leaders need to hear. Drop your stupid partisan agendas, BOTH parties, listen to the economists who have been proven right over and over again in this climate (Nouriel Roubini, James K. Galbraith, many others), and get America moving again.

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What’s all the stuff in the early morning tweet about?

Posted by Christopher S. Penn on Feb 5, 2009 in Economy, Money | View Comments

More than a few people who follow me on Twitter have been asking about what all the stuff is in one particular Tweet that I do daily, more for my own benefit to see where market indicators are. Here’s your morning tweet cheat sheet.

Sample:
DJIA +146 VIX 42.28 TED 95bps 3mo LIBOR 1.17 1mo OIS 20bps MSCI +1.53% BDI -2.54% 30yr 4.85% BCF 51.39 GLD 919.90 RR 12.30

DJIA: Dow Jones Industrial Averages futures for the day, based on Bloomberg after-hours market data. Gives an idea of what the market sentiment will be at the start of trading, typically due to Asian and European market movements.

Updated: At the recommendation of Mike LaLonde, I’m throwing the S&P 500 Futures (SPX) in right after the DJIA. The S&P 500 is a measure of a broad range of companies, giving a bigger picture of market sentiment.

VIX: Chicago Board of Options Exchange Volatility Index, based on Yahoo Finance data. The VIX is considered by some to be a leading indicator of how crazy the market is, based on S&P futures. A high VIX number (above 20) indicates that something’s going on in the market.

TED Spread: The difference between Treasuries and Eurodollars, typically T-bills and LIBOR (London Inter Bank Offering Rate), as measured by Bloomberg. A big TED spread indicates banks don’t trust each other and would rather borrow from the government.

3mo LIBOR: The interest rate for 3-month LIBOR, as measured by Bloomberg. This is the rate banks charge each other in London for borrowing money and is a good non-government measure of interest rates.

1mo OIS: 1 month overnight index swap, an interest rate that measures risk and liquidity in the money market, as measured by Bloomberg. A higher OIS indicates less cash in the system as banks hoard cash. A lower OIS indicates banks are willing to lend more freely.

MSCI: A stock market index of world stocks (MSCI used to stand for Morgan Stanley Capital Int’l), as measured by Bloomberg. This is an index containing stocks from 23 countries, and tells you how the world market is doing.

BDI: Baltic Dry Index, as measured by Bloomberg. This is a daily average of the price to ship raw dry materials, and is a good current indicator of economic health for goods and services. The reason why is that it costs money to put stuff on a boat and ship it – so if BDI is low, it means producers and retailers aren’t shipping stuff and the economy is unwell. A high BDI means that people are paying real money to ship stuff.

30yr: The average 30 year fixed mortgage interest rate. Since housing is such a vital component of the economy, seeing what mortgage rates are doing is useful for figuring out how housing is likely to be doing.

Updated: At the recommendation of economist Maria Simos, I’m adding BCF and GLD.

BCF: Brent Crude Futures, as measured by Bloomberg. This is the price of barrel of Brent crude oil, which gives a sense of where energy costs will go based on the source product. Neat trick – take the price of a barrel of oil and divide by 25, and you often get very close to the retail price of a gallon of gasoline.

GLD: Gold 100 oz futures, as measured by Bloomberg. Gold is the, well, gold standard, of a third party measurement against inflation. As countries inflate or deflate their currencies, the price of gold goes up or down.

Updated again: I’m adding RR: Rough Rice futures, Chicago Board of Trade. Why? Most of the planet eats the stuff, far more than other grains. When rice prices are high, you’re talking about a global increase in prices on the consumer. i was debating corn or rice, but chose rice because it’s purely a food stock, whereas corn has additional deviations due to things like ethanol.

Any one of these indicators has economic implications, but combined, I think they’re a good quick snapshot of different parts of the economy and how things are going on a day to day basis in a broader perspective than just the stock market.

What public leading economic indicators do you think are important?

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Where’s the bottom? When do things get better?

Posted by Christopher S. Penn on Feb 4, 2009 in Economy | View Comments

These are two questions I receive often on social networks:

Where’s the bottom?
When do things get better?

First, a disclaimer: I am an armchair economist at best. I’ve never taken a course in economics, but I do own Economics for Dummies and have read it cover to cover many times. That’s enough for the barest of basics, but I don’t want you thinking I’m some elite economics expert. I am not.

That said, theoretically, I can’t do worse than the “Experts” who have driven their companies into the ground in search of short term profits, can I?

Where’s the bottom?

The economy as it stands now hinges on two factors, employment and housing prices. Housing prices are important because an inordinate number of loans and investments based on loans rely on housing prices. As long as housing prices continue to fall, the value of those investments will continue to fall, and the credit, lending, and investment parts of the economy cannot recover. The exception to this is if a company that wholly owns its loans can write down the loans and sell them immediately, or devalue them so significantly that the book value of the loans is lower than housing prices will ever get.

Employment is the other piece of the puzzle, which controls the domains of consumer spending, productivity, and retail investing (including real estate). As long as employment continues to decline, more consumers will be benched on the sidelines, more people will not be able to afford homes or even basics. Demand for assistance in every form will deplete government by depriving it of both taxes and additional costs for services.

Of the two, employment is by far the most important. With employment and income, consumers will be able to afford real estate, especially if prices continue to decline. Once enough people are employed gainfully and can begin participating in the economy again, buying everything from commodities to homes.

How will you know the bottom? The same way you knew the top. Probably a quarter or two of waffling, neutral employment with neither gains nor losses, then two quarters of sustained growth in employment across broad sectors, with velocity towards the upside. Once employment ticks upwards significantly, you’ll see all the markets dependent on the consumer begin to recover as well – so figure real estate and housing prices stabilize a quarter or two after employment stabilizes, then ticks upwards a quarter or two behind employment.

When do things get better?

I don’t know. I wish I knew. I do know that many of the crap mortgages won’t flush out of the system completely until late 2011. There’s no telling whether broader economic declines will hasten the expiration of those mortgages or whether a recovery package inadvertently spawns new stupidity in lending. Both scenarios are possible. I’d say conservatively that 2009 is a write-off in terms of broad economic growth. 2010 may or may not show a turn.

Why don’t we know when things will get better?

Back to economics 101. GDP – gross domestic product – is a formula. C + I + G + (X – M).

C: Consumer spending
I: Investing
G: Government spending
X: Exports
M: Imports

Right now, consumer spending is in the toilet.
Right now, investing is in the toilet.
Exports are down.
Imports are down too, but our few exports – autos and airplanes – are in more dire straits than imports.

That leaves government. There is no way that the government can singlehandedly carry the entire economy by itself, no matter how great you think Barack Obama or Timothy Geithner is.

Government spending will increase, to be sure. What government is counting on is multiplier effects – throw enough matches and even a wet forest will eventually catch. The question is, how many matches is that?

So what do you do?

Look objectively at the situation. Cut costs. Conserve cash. Save like crazy, because there’s no telling if your job is next on the chopping block, as grim as that sounds. If you’re a business, spend wisely and invest in your people if you can.

In this environment, time is the only thing that will heal the economy. Time will flush out the poison.

In this environment, we are rich in time and poor in money. Thus, spend time rather than spend money. If you have the ability to pursue alternative forms of marketing that are lower cost – direct email marketing, social media, new media, PR, etc. – but time intensive, that might be a fair trade right now.

Give your company or business an objective and then give your team the freedom to get to that objective by any legal means necessary. Take the time to prune out processes that don’t work. Take the time to do inventory and jettison things that you’ve outlived, outgrown, outlasted.

If you’re unemployed or underemployed, time is an enemy because capital is limited. Spend it wisely, focus on job search and income generation. Be unrelentingly aggressive in your job search. If you have a choice between offending a few people with unsolicited email and putting food on your table, as Emperor Palpatine instructed Darth Vader, do what must be done. Do not hesitate. Show no mercy. Network as you can, but if you have to pull out the red saber, no one will fault you for wanting to take care of your family and home.

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Understanding value

Posted by Christopher S. Penn on Dec 1, 2008 in Economy | View Comments

What’s the fastest way to go out of business? I’d venture to say that it’s having a product or service at the wrong price. (that or having no revenue model) Nowhere is this highlighted more obviously than in fantasy markets such as the one in World of Warcraft. There are literally thousands of products you can sell on the open market, and yet an astonishing number of people who play the game are not in-game wealthy. Why? They’re not selling stuff that others want to buy, or at the price they’re willing to buy. There are an astonishing number of auctions in the game Auction House that are mispriced well beyond what others are willing to pay.

The lesson is simple: your product or service is only worth what someone else is willing to pay.

Sometimes, that can be mispriced in your favor – people will pay a lot of money for something that to you is of comparatively little value. Where businesses get into trouble is when it’s going the other way, when you’re demanding to be paid more than what the market is willing to bear.

Take a look at the real estate markets right now. Is real estate moving? Sure is – at the right price, which is currently foreclosure or short sale pricing, pricing far below “market value”. The reality is that the market value is whatever a house will sell for today, not what the seller wants it to be for a profit, not what the agent wants it to be for their commission.

If you’re not earning the profits you want to be as a business, either you have something no one wants or more likely you have something that someone wants but at the wrong price. You can either lower prices or sell something else with a higher profit. The laws of economics are immutable and no amount of wishing or wanting the price of what you have to be higher will make it so.

How do you know what the market is willing to bear? You’ve got to research, gather data, shop competitors, and test pricing repeatedly until you discover the true price of the product or service you have, and then continue to monitor and research changes in the economy and adapt to them. Do this well, and you’ll not only discover the pricing of your offerings, but you’ll eventually gain a sense of when something is trending, when you’re about to see a wave of potential profit roll in. As long as you’ve been paddling and are in the water at the right time with the right board and the right skill, you’ll catch the wave.

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We are in a lot of trouble

Posted by Christopher S. Penn on Nov 21, 2008 in Economy | View Comments

Our economy is in a great deal of trouble. Far more than a problem in financial services, far more than just hype on the evening news, we’re in a LOT of trouble.

Consider a few things:

1. The jobless reports crested today at 542,000 jobs lost/initial unemployment claims filed. This is huge, and indicates that there is severe weakness in all sectors of the economy. This close to the holidays, jobless claims should be declining as the service sector staffs up for the holiday retail season, yet we see the opposite happening.

2. Major companies are getting pummeled, such as GM, Citigroup, and others. A failure of a major Dow component or Fortune 10 has a significant impact on the economy.

3. Mayors Bloomberg and Daley of NYC and Chicago were warned to prepare for thousands of layoffs by the end of the year.

4. We still haven’t unraveled Bear Stearns and Lehman Brothers’ exotic financial instruments. A GMAC failure would be very, very bad.

5. We still haven’t unraveled the massive derivatives market.

There’s a lot of doom and gloom in the media, but not all of it is unwarranted. There really is no bottom in sight.

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