The economy has the flu January 10, 2009
Posted by wonderingin in Financial Markets, Politics, The Economy.add a comment
The Democrats proposed spending and tax cut stimulus plans remind me of the old sales recruiting tactic – “let’s throw them [new sales people] up against the wall and see if enough stick to make our numbers.”
Many others seem to agree:
“We have very few good examples to guide us,” said William G. Gale, a senior fellow at the Brookings Institution, the liberal-leaning research organization. “I don’t know of any convincing evidence that what has been proposed is going to be enough.”
The stimulus plans are being driven by a fear (mainly by politicians) that doing nothing or doing too little will cause the recession to be worse or last longer than otherwise might be possible.
All of this economic stimulus is a bit like taking antibiotics for the flu – you hope it will help and you feel better by doing something. But in reality, most of the time the flu must simply run its course.
Economic activity is cyclical – the business cycle has not been banished and it likely never will be. Cycles are also driven by momentum. A growth cycle gains momentum as it feeds on itself until it becomes unsustainable or suffers from some external shock.
By the same token, down cycles gain downward momentum as businesses and individuals pull in their financial horns in acts of self-protection. No government program is likely to prevent that from continuing for a while.
We should treat the current economic contagion like we would treat the flu - with plenty of rest, fluids, and pills for the fever while keeping the patient quiet and warm.
What does that mean in economic policy terms?
- Continue to stabilize the financial system through capital injections, loss sharing and regulatory reform
- Comfort the worst afflicted with direct assistance including extended unemployment insurance, healthcare assistance, and mortgage foreclosure mitigation
- Do not pervert normal economic incentives with more government subsidies, tax law law changes or regulation which do little to support long-term economic growth or job creation
- Be patient and wait it out.
Banking utilities on the horizon? January 9, 2009
Posted by wonderingin in Banking.1 comment so far
In an earlier post, Getting to “Yes” in the Wild West, we suggested that the proper role of the banking system was as a financial utility to grease the wheels of industry and commerce.
Now, even Treasury Secretary Paulson is suggesting that the regulated utility model with an an independent commission to set target rates of return might be a proper direction in which to take at least some parts of the financial system.
Investing to sleep well – Part II January 8, 2009
Posted by wonderingin in Financial Markets, Personal Finance.add a comment
In an earlier post, we wrote about asset allocations to sleep by. Yesterday, John Bogle added his Six Lessons for Investors. With a few comments from us, they are:
1. Beware of market forecasts, even by experts – no one really ever gets this right. Even the prognosticators who hit on a big one, do not necessarily have good overall forecasting track records. We merely remember (they tout) the one time they got it right.
2. Never underrate the importance of asset allocation – To my way of thinking, asset allocation must go beyond stocks, bonds, emerging markets, etc. Proper asset allocations should include significant amounts of cash (for safety) and directly owned real estate (the value never goes to zero) without significant leverage.
3. Mutual funds with superior performance records often falter – I personally prefer to own stocks directly for transparency.
4. Owning the market remains the strategy of choice – This is a classic indexing strategy, Mr. Bogle’s favorite hobby horse and claim to fame, but it may not be sufficient, especially in times like now when the markets are swooning.
5. Look before you leap into alternative asset classes – This should be true for any investment decision. What are the risk and return profiles? How much can you lose? How much can you afford to lose?
6. Beware of financial innovation – Welcome to Wall Street where the pros get rich and investors may or may not make a nickel depending on the timing. On the flip side, the Wall Streeters would not have a chance to make money from new products unless at least some investors were clamoring for higher returns or a better deal.
Regardless of the asset class, no one should expect above market returns unless they know something that others don’t. Saving money with steady interest compounding often beats all the other options.
