Businomics Blog

Investment Information: Good Advice in Easy Format

In my free time I am chief-economist and co-founder of abcInvesting.com.  We have just launched version 2.0 of our investment information website. Here are the cool things we're proud of:

1. Our lessons, the "ABCs of Your 401k", are available in text, audio or video, and they use "drill-downs" so you only get the details as you need it; the rest of the time you get a high-level overview of nine key topics.
2. Our personal financial assessment gives you recommended goals. Why take a quiz and get a letter grade or percentage score when what you really need is an action plan?
3. MyPage helps you keep your goal and next action step at the top of mind, as well as links to your account information, investment performance, handy calculators. (You need to sign up, because we'll be keeping track of some of your information.)

Let me know what you think of abcinvesting.com

 

More Economic Cyclicality

Here's an excerpt from a recent speech, captured on TVW, Washington State's Public Affairs Network, regarding a more volatile economy.

 

Thanks to the Washington Forest Protection Association for inviting me. For information on how your company or association can arrange for me to speak, check out my economics speeches page.

Housing: The Current Problem and Its Solution

I recently spoke about the economic outlook, and my comments were captured by TVW, Washington State's Public Affairs Network.

Thanks to the Washington Forest Protection Association for inviting me. For information on how your company or association can arrange for me to speak, check out my economics speeches page.

Forecast for the Dollar: A Little Holiday Music

Calculated Risk, who seems to hear everything first, points us to this holiday music.

 

Economic Forecast 2011-2012

With today's GDP report I have updated my economic outlook and extended the forecast period through 2012. It maybe looks a little better, but still not wonderful.

The key to my cyclical pattern is the Fed's quantitative easing, which I think will help the economy. Note, however, about a 12-month time lag before we see the benefit of QE2 (as the hipsters call this round of quantitative easing).

Sectors with relatively strong growth: consumer discretionary spending, capital spending, housing construction and exports. How can housing construction grow? The secret to high growth rates in this sector is a very low base. A 20% gain from next to nothing is just a tad higher than next to nothing. Seriously, I think some bold developers will put up more apartments in 2012. I expect spending on consumer services, imports, defense and state/local goverment to show relatively slow growth, with non-defense federal spending growing at a moderate pace.

Interest rates are flat in my forecast. The Fed keeps short rates low, and long-term rates gradually edge up in 2012, but stay low by historic standards. Inflation remains tame through 2011, then starts to inch up late in 2012.

I'm anticipating skeptics to tell me I'm way too optimistic. Here's another view of the forecast, comparing the level of GDP to the CBO's estimate of potential output:

After two more years of economic growth, we still will not be up to our potential. Sheesh, that's a gloomy outlook.

Risks to the Economic Forecast: The biggest risk is a European recession, triggered by another credit crisis. The American economy does not have enough margin for error to survive a downturn overseas. So although my forecast is hopeful, I have raised my estimates of the risk of a double dip somewhat, in honor of our Irish cousins. The risk of a near-term double-dip is still no more than 15%, but that bears some contingency planning.

The real turning point occurs late in 2012. What does the Fed do when inflation starts edging up, but we are not yet operating a full potential? Do they reverse the quantitative easing early, or do they persist until they are absolutely sure that we are out of the woods? Do they get the magnitude of the money drain just right? If they do not get the timing exactly right as well as the magnitude of their tightening, then it's back to the cycle-coaster. Too early a tightening and 2013 is a down year; too late and the next recession is 2014 or 2015, but it's a doozy. This is a good time to think about my comments regarding increased volatility of the economy.

Business planning implications: The base case for planning next year should be moderate growth overall, then adjusted upward or downward depending on your particular sector and your market share expectations. Although inflation overall remains tame, it's likely that commodity prices will accelerate. Then add in some contingency planning for a European recession triggering an American recession.

Finally, it's not necessary to send me a link to the cartoon video on quantitative easing. Everyone this side of Katmandu has already sent it to me. It's funny, certainly, but the substance is stupid. Not that I can't enjoy a cheap shot along with the best of them.

 

What Does Quantitative Easing Mean for Banks?

The Federal Reserve today announced a new quantitative easing plan in which they will buy $600 billion of long-term Treasury securities. What does this mean for banks?

Bank deposits and reserves will increase. Even if your bank does not sell securities directly to the Fed, some of your clients may be selling securities. Across the country, total bank deposits and reserves will increase. This will put many banks in the awkward position of earning less on their reserves than they pay. The Fed is paying banks 25 basis points on reserves; the FDIC is charging over 30 basis points to most banks for deposit insurance. (Your cost varies depending on the condition of your bank.) The key challenge for bankers is figuring out what to do with the inflow of deposits. There aren’t a lot of great options out there right now.

Deposit growth will rise before loan demand increases. Real estate is largely moribund, though there are increasing opportunities to finance apartments. Commercial lending typically lags the business cycle by two years or so. It will gradually improve, though we have another six months or so before it really takes off.   That leaves consumer lending, primarily made through the big banks. Here the banking industry has two challenges. First, many of the most credit-worthy borrowers don’t care to borrow more money right now. Second, many of the people who would like to borrow are not credit worthy. I expect consumer lending to surmount these challenges as banks nervously ease up on credit standards, and consumers nervously put their toes back in the water.

This is the process whereby the quantitative easing will help. Milton Friedman famously said that the time lags in monetary policy are long and variable. A good rule of thumb these days is 12 months before the overall economy feels the benefit of quantitative easing—and even then, we’ll feel better growth but not normal times.

For community banks, look for core deposit growth in the next few months, well in advance of loan growth.  Twelve months from now, however, loan volume should pick up in both commercial and real estate lending.

Quantitative easing will be positive for the economy, but challenging for the banking industry during the time lag. My top advice to bankers is to carefully plan how they want to deal with higher deposits. In particular, do careful planning on where you want to expand loan volumes.

Nimble Management in an Uncertain Economy

The Tatum firm held a webinar, "Planning to be Nimble in 2011" with some interesting take-aways. Here are my favs:

• Businesses should use more "check points," examining them frequently. With greater uncertainty about the economy, recognizing deviations from plan early is vital.
• Supply chain risk is increased by the economic uncertainty, a point I've hammered away at for a year, as in my post "Economy in Recovery: Will Vendor Performance Limit Your Rebound?" and "Vendor Performance in the Economic Recovery: 5 Lessons."
• Flexible staffing is important at all levels, not just at lower level positions. However, your top performers need to be well taken care of. Their alternatives will improve, and you can't let them get away from you.

I think the topic of planning to be nimble is vital given the increasing cyclicality of the economy. I think the webinar is worth listening to. Here is more information about Tatum.