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Here's a link to one of the most rewarding lectures I've ever heard. It's fairly long, so wait until you have a free hour and a half. I can pretty much guarantee that once you start, you won't leave early. It's by a professor of computer science, but it's about life and its lessons.
Here's the lecture.
The lecture is described in a Wall Street Journal article (subscription required) here.
I'm seeing some responsibility on the part of our much-maligned consumers. This year, they are not growing their spending as fast as their incomes are rising.
Look at the right-hand side of the chart, which shows data for 2007. The blue line (income growth) is well above the red line (spending growth). This is the way we are correcting past overspending. The good news is that consumers are not shutting down entirely--which would trigger a recession--but instead are gradually adjusting their behavior to the reality of the current environment. That reality, for those of you who are really clueless, is that you cannot depend on your home's appreciation to fund your spending.
Business Planning Implications: We should not expect consumers to suddenly return to their high-spending-growth ways, but neither should we worry about them suddenly living like monks.
Today's news was ugly for homebuilders:
Is it going to get any better? Here's a way to look at it. Consider a hypothetical house that would have sold for $100,000 back in 1995. Now every three months let's ask ourselves, if that house were purchased today, what would be the monthly payment? (Assume 30-year fixed rate mortgage on 80% of home price.) The payment depends on both home price and mortgage rate. Here's the picture:
(That's the national picture; not hard to adjust it for your state or metropolitan area.)
The dip in 2001-2004 enabled many first time home-buyers to get their house a couple of years earlier than they otherwise could have moved out of rental housing. We pushed home ownership rate to all-time record highs, in essence borrowing sales from the future.
Now, however, home prices are too high for affordability, even though mortgage rates are still low. The young family who would normally have bought their first home in 2007 already bought a house, probably back in 2005. And investors are out of the market because . . .
Home prices don't seem to going up. But prices are still too high to make owning a rental unit a positive cash flow investment.
And in case anyone is still in a good mood, it looks to me like our overall housing vacancy rate is about 1.25 million units above healthy--and that's taking an optimistic view of what's healthy.
Now repeat after me: the next time there's a boom, I will not buy in at the top.
After Businomics was published, lots of people have been asking me how I got the book published, so I’ll write down my basic procedure. I don’t know that it will work for anybody, but it worked for me. The key here, I think, is to do all the steps. Don’t try to wing it, don’t try to invent a new method, just do your basic blocking and tackling.
Proposal: you need a proposal. To get a proposal, you need a guide to how to write a proposal. I used Elizabeth Lyon’s Nonfiction Book Proposals Anybody Can Write. I took her guide as a bible. In addition to laying out how to write the proposal, she explains a lot about the publishing game.
Agents: you should have an agent. I have a friend who got a major publisher without using an agent, but I don’t think his deal was as good as he would have gotten with an agent. The agent knows the business, knows how much you can ask for, and can play one publisher off against another. Well worth his commission.
I went to Publishers Marketplace, a web site that allows you to search for agents. I searched for agents who did business books. That gave me LOTS of results. It turns out that many agents list virtually all genres. So I started hitting the web sites of agents, looking at the books they had successfully gotten published. I categorized each agent as high priority for me, medium, or low, based on how strong the agent seemed to be in business books. You could do the same with any genre.
I ended up with a list of 113 agents, of which 26 made my highest priority. I picked nine to pitch the book to in my first round. The idea was that if none of the nine went for it, I would alter my pitch and then hit another nine. And if that failed, I’d alter the pitch again and go for the last eight on my top priority list.
For the first nine on my list, I identified how they wanted to be pitched: email or physical letter. I sent them a query letter, as described in Lyon’s book, that was basically a one-page summary of the book proposal.
Three of them asked for the full proposal promptly. I sent it out. Two agents replied fairly promptly that they were interested in representing me. I talked to each one, and identified one as preferable to the other. Then I contacted several authors who were represented by that agent. Got good referrals. Signed contract with the agent.
I sent withdrawal letters to the other agents who had not responded, so that I wouldn’t tie up their time. (Might want to come back to them with another book.) A third agent expressed interest in representing me, our messages crossing in the mail.
From there, I trusted my agent. He revised my proposal and query. He sent the query out to his list of acquisition editors handling business books. He sent out the full proposal to those who wanted it. He negotiated the offer we got. That part was the easiest, because I had an experienced hand guiding the project.
The keys to my success: I took a the basic plan from Lyon’s book, and followed it. Nothing miraculous. When I’ve spoken with people having trouble getting published, they were trying short cuts.
We've posted a new interview from the Businomics (tm) Audio Magazine. I spoke with Mark Sanborn, a leadership expert, author and speaker, about his new book, You Don't Need a Title to Be a Leader. You can listen here, and be sure to visit Mark's web site.
The Wall Street Journal's survey of economists (subscription required) shows a sharp rise in the probability of recession.
I'm not quite a pessimistic as the panelists, but I agree that there's a significant chance of a downturn.
What should a business do to prepare for a recession? I see four key steps:
1. Evaluate your vulnerability to recession. Some industries are fairly stable, others very prone to big swings. Know your own business.
2. Set up an early warning system specific to your business, so you are not relying on newspaper headlines, but instead are focusing on the metrics that reflect buyer decisions to purchase your product.
3. Sketch out on one sheet of paper a contingency plan. How might you cut expenses if your sales start to falter? Do you have alternative revenue sources? How can you conserve cash?
4. Manage the business on a day-to-day basis to give yourself the flexibility to implement the contingency plan. Some of the things you considered in preparing your contingency plan may not be immediately available to you, so operate the business in a way that increases your flexibility to handle a downturn.
More details on this topic are in the book, Businomics. Learn more about it here.
(Investors, in a later post I'll address investing in a recessionary environment.)
An interesting interview about the economics of long-term growth is available on the podcast, Econ Talk. (For those of you who don't podcast, you can listen on your computer, or copy to your computer and then a CD to listen to in the car.)
The interview is with Paul Romer, professor at the Stanford Business School, who did path breaking work on growth theory, but is able to tell real-world stories that illustrate his theory. Here are a couple of gems from Romer, loosely transcribed:
The Soviet MIG was a good airplane, but the Soviet washing machine was not good. What's the difference? The MIG was built for a competitive environment, where the product had to be as good as its Western counterpart. Soviet washing machines [and other consumer goods] had no competition, and were generally poorly designed and made.
Everybody wants growth, but nobody wants change.
I guess I was wrong. Hate to admit it, but I do believe I was wrong.
Seeing that housing-related problems were not spilling over into other sectors, I was not expecting the Fed to ease later this month. I was expecting a move early next year, when inflation would be lower.
Today's employment report, though, argues for a Fed ease.
I've highlighted to most recent data point with a circle, because otherwise you wouldn't see it, it's so low. No one should take one data point too seriously, but the trend had been toward slower job growth.
The Fed Funds rate has also been in tightening mode. I measure this by looking at Fed Funds adjusted for inflation relative to its long-term average:
By this gauge, the Fed could cut 65 basis points just to put Fed Funds into neutral. From the perspective of the most likely forecast for the economy, the Fed has reason to ease. I continue to believe that bailing out Wall Street investors is not on their list of concerns. But keeping Main Street businesses operating is important to Ben and the boys.
Our recent blog post about the Jamaicans of Mackinac Island was featured on an interesting new web site, TheIssue.com. The site is intriguing: it's laid out like an on-line newspaper, but all of the items are blog posts. The site starts with an issue of the day, then moves to the typical sections of a newspaper: U.S., World, Business, Science & Health, etc. (But surprisingly no sports.)
I still use blogsearch.google.com when I want to know what the bloggers are saying on a specific topic, but TheIssue is a good way to browse. The function of a newspaper in the Internet era is not to provide specific stories--they are all over the place--but to add a layer of judgment about what's interesting or useful. TheIssue does that. It will be fun to watch it.
"Conerly hits forecast bullseye for Washington" was the bold-font headline in Western Blue Chip Economic Indicators. Seems I was the only forecaster from any of the ten states covered who nailed the numbers perfectly. To tell you truth, the difference between me and folks who were half a percentage point away is mostly luck. But I'll take credit for it anyway.
The Western Blue Chip publication takes the consensus economic approach to state-level forecasts. If you need to understand what's going on in one of the states, take a look at it.
States covered are Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington.
