Yawn. It's Monday. I can't seem to get inspired to tackle one largish cohesive thought today. So instead, a bunch of pithy ones.
Chinese Century?
There's a tendency to want to name centuries after countries, so status-quo namers seem to want to name this one after China. This is fueling a bunch of adolescent boyish urgency to go build plants and businesses in China, no matter how inadvisable that activity is, rationalizing that if the GDP growth is upwards of 11%, how could you not be there (reminiscent of "I was drunk, I didn't know what I was doing . . . ). But an article in the New York Times today suggests that the growth rate for China is more likely between 4% and 6% per year, and they give some interesting arguments to support it. Who is right? Who knows. But I can't get out of my mind an article in the NYT last year in which the author asserted that companies only have to be in China if they are at the level of General Electric. Or even better - something Tom Peters said last year in a speech at the World High Performance Forum at the Art Institute in Chicago. He said, "Forget China, India and the Internet. Economic growth is driven by women."
Tom Peters
What a wonderful curmudgeon. In looking for the quote I just gave you I stumbled on something else he said in the same speech. "I've learned four things in 40 years. Decentralization. Execution. Accountability. 6:15 AM." My notes from that speech are six densely-packed pages of type, but I can't get that one sentence out of my head.
Two Fed Rates
A lot of people are wondering about the meaning of the cut in the discount rate by the Fed on Friday and the potential impact on mortgage rates in general.
The fed has two rates it controls - the discount rate and the fed funds rate. The discount rate is the rate at which banks and thrifts borrow directly from the Fed - usually for very short windows (i.e., 1 day) and with a lot of restrictions. There is a lot of stigma attached to borrowing in the discount window, so banks avoid it unless they are truly distressed. Now the Fed is trying to make it easier with longer terms, fewer conditions and reducing the penalty rate (currently 1 percentage point above the fund rate), but banks and thrifts aren't biting yet. Discount rate changes are generally viewed as a temporary, or "tiding-over" measure. Bernanke's history and behavior suggest a man who would prefer to let the markets correct themselves to the full extent possible without serious negative consequences, so this conservative "re-liquefying" move is in character. It is unlikely to have any effect other than pumping some cash into the system and smoothing out the very rippled water of the markets.
The other, more powerful, rate the Fed controls is the Fed Funds rate. This is the rate most likely to have an impact on interest rates, though history suggests it takes three Fed Funds moves in succession to have a measurable impact on financial markets. As long as there are worries about inflation the Fed will resist cutting the Fed Funds rate, though the odds are getting better that by the next meeting on September 18 there will be a cut.
The idea of an imminent crash seems unlikely to me, though the doomsday screamers are out there suggesting we all buy gold again. More likely is continued psychological reaction to markets based on serious misunderstanding of money supply and multiplier effects. I do believe we are on the way to a significant recession, but the graph lines - going up or down - are never straight. There will be more rebounds, corrections and cash injections before it's really a recession.
It's All Related
Thinking about how few people understand the economic markets in which we operate reminds me of how few people understand the business economics within which they operate. Ram Charan likes to compare Harvard MBAs to Nicaraguan street vendors, and he finds the MBAs lacking. He teaches that a Nicaraguan street vendor (or any 3rd world street vendor) understands that making money requires an innate understanding of revenue, cash, margins and inventory velocity. He refers to this as the business nucleus of making money. Businesses that focus on any other element in front of any one of those four elements are acting out of ignorance. Business people that focus on one but not all of those elements are acting blindly.
Considering how much the financial markets affect each of us individually, it is form of negligence to fail to understand them (most people feel it will be too difficult - it's not). The same thing is true in business. Failure to understand the complex interaction of revenue, cash, margins and inventory velocity is negligence on the part of any business person. Here's a quick quiz: For each dollar of investment you make how much revenue do you generate? What kind of customer are you going to serve next? What kind of products do they want you to carry? How much of it should you buy? How should you price it? How are you going to reduce the price and clear it? This is a six point question. The ability to answer all of them correctly gets you an A. The ability to answer only five of them correctly gets you a D. Why? Because they are so tightly interwoven.
The markets are answering the same six questions, only the product is money and the customer is all of us. If you'd like to start having a better understanding of economics I highly recommend the Wall Street Journal blog Real Time Economics.
(c) Andrea M. Hill, 2007
