INC-centricity

Psychology of Recession

That's a bit of a pretentious heading - as if I'm qualified to comment on either psychology or economics. However, as an amateur observer of the human condition, it does strike me that a significant component to our current economic quagmire is largely in our head. It seems that while we have transitioned over the years from an agricultural economy to a manufacturing economy to a service economy to an information economy - what we really are is an economy of confidence. When we lose that intangible, psychological element of our collective selves, we perceive ourselves to be in huge economic trouble. And, because we are an information-based economy, we have an amazing ability to measure, calculate, survey, report, broadcast and share our lack of confidence with the world. 

But the reality is probably much different from our perceptions. Just as the roaring real estate bubble led us to believe things were better than they actually were, the constant talk about foreclosures, layoffs, and economic "crisis" of all kinds probably has us believing things are now much worse than they actually are. 

I liken this to following my favorite sports team: The Wolf Pack of the University of Nevada. I am a huge college basketball fan, and because I don't live in Reno, I follow my team at a distance, which means - because I am also a geek - I lurk on the main message board devoted to my beloved Pack. 

What I see there from game to game is, I think, a microcosm of our overall reaction to economic news. When the Wolf Pack wins, the fans are elated and ready to take on the champs. When the Pack loses, the fans angry, frustrated, depressed, and evidently prone to drown their tears at the local pub. The confidence swing from week to week can be really amazing. 

A small losing streak of a couple of games has the diehards prepared to fire the coach, complain to the Athletic Director, cancel their season tickets and commit hari kari. A modest winning streak and the fans have the basketball team back in the Sweet 16. Same team. Same coach. Same talent. Same season. Yet, wildly different perceptions of how good or how bad the team really is.

I've learned that you just can't trust the fans to accurately judge the team's performance. And you can't trust the talking heads at CNN, CNBC or the Dow Jones Industrial Average to accurately judge the performance of the economy. In all of these cases, the commentators are biased - one way or another - by the psychology of the moment. 

Bottom Line: It probably isn't as bad as it seems.

10 Keys to business survival in a recession

It seems to be the consensus among business and political leaders that our economy is worse than it has been in generations.  Statistics, for what they are worth, prove it.  In other words, most of us have never seen anything like today’s economic crisis, and there isn’t much in our own experience that gives us guidance in our business decisions.  A recession such as this requires a shift in our thinking, our planning, and our decision-making in order for our business to see the light of day at the other end of this economic cycle.

Economic cycles, by the way, are usually long.  The common chatter heard from talking heads and prognosticators is that we should see the beginnings of a recovery in 6 months - or 9 months - or 12 months - or 18 months, etc.  The truth may be that we are in for a longer ride than we optimistically expect. (For example, economists generally agree that we were in a bear market cycle from 1966 to 1982 - a period lasting 16 years; and that we experienced a bull market from 1983 to 2000 - a period of 17 years.) If history is our guide, the recovery might not come quickly.  Fixing the global mess will probably take years.

So, as small business owners and entrepreneurs, what do we do and how do we survive?  For what it’s worth, here are my Keys to Survival in today’s economy:

Personal Savings at lowest rate since Great Depression

The Commerce Department released a report last Thursday showed the Personal Savings Rate in the U.S. at its lowest rate since 1933.  In 2006, the average consumer spent 1% more than they made during the year.  Obviously, the only way that can happen is if people are spending previous savings or are living off of their debt. 

It's not a good sign for our economy, and it was combined with a report that manufacturing was contracting in the month of December, which is a early sign of recession.  It might be time to start thinking about your asset protection strategy.

The Dow Mirage

I read an article recently by Peter Schiff, a CEO of Europac, who addresses the fact that all the media attention being given to the record breaking heights of the Dow Jones Industrial Average is a lot of hype.  Given the fact that we are a month before a major election, I don't know who would want to hype the stock market to give the impression that the economy has never been stronger - that is another discussion.

52 metro areas housing considered "extremely overvalued"

A study conducted by National City corp, and published in USA Today, has determined that 53 metropolitan areas in the U.S., representing almost one-third of the nation's total housing market, is considered to be "extremely overvalued".  This designation is applied when the study determines that housing prices are 30% above where they should be based on historic pricing, area income, population, and interest rates.  Interestingly, 16 out of 20 of the most overvalued markets are located in California, with Santa Barbara leading the way with a 69% overvaluation.

Link: USATODAY.com.

Stock market models brainless trading

Research conducted by the Santa Fe Institute in New Mexico has arrived at a conclusion that many of us have always suspected:  the stock market acts like it doesn't have a brain in it's head.  Most stock market models begin with the assumption that traders have access to the information they need and then make rational trading decisions.   

However this new research started with an entirely different set of assumptions:  traders have no intelligence.  In this experiment, these brainless traders place random trades to buy or sell stock at a given price.  The demand created by these random trades moves the stock price up or down, just like in the real trading world.  When this model was used to track over 6 million buy/sell orders on the London Stock Exchange over 21 months, the surprising conclusion was that this intelligence-free model sucessfully predicted 96% of the price spread variance of the stock trades.

So, what are we paying those trading commissions for, anyway?   If you are interested in reading the complete study, you can find it here.

Nevada looking at tax rebates

Apparently, Nevada's tax-happy governor is realizing that he pushed through a tax increase in 2003 that was too large.  Had he or the legislature  listened to the business community at the time, he would have avoided this mistake.  But instead, a few special interest groups were appeased, and the largest tax increase in state history was forced down the throats of Nevada residents.  Now, only a year-and-a-half later Governor Guinn is proposing a rebate on motor vehicle registration fees of up to $300 per vehicle. 
In retrospect, it is good to see the point of view of business vindicated, and politicians humbled.  But it doesn't correct the fact that even after the Governor massively increased state spending during the past biennium, the tax increase has resulted in a $300 million surplus.  That is unconscionable.
SURPLUS REVENUE:  $300 million rebate proposed

The Credit Theory of Money

Link: The Credit Theory of Money.  An interesting read, dating back to 1914 when the only "real money" was precious metals.
- Derek Rowley