It wasn't too long ago that the world feared deflation. Deflation can spawn a vicious cycle: people delay purchases because tomorrow they will be cheaper, which decreases demand, which fuels more deflation. Enter the Fed and Washington's "shock and awe" stimulus. Since then, the economy has stabilized and securities asset values have been supported. Despite recent tumult, the stock market remains up for now and debt prices have risen, putting the professional investor class back in the chips.
But has Main Street benefited as much as Wall Street? Some jobs have been saved and some retirement accounts have recovered what they lost. But unemployment is stubbornly high and home values are still sinking.
Now the fear is inflation, particularly worrisome when too much unemployment means static wages. Global "shock and awe" flooded the world with so much money that it drove up commodities demand. But all $4 gasoline does is send more money to our oil suppliers. The Fed is suggesting that the slack in our economy - unemployment too high to drive up wages, and production capacity too excessive to drive up prices - will keep inflation in check. The issue is: the Fed does not control policy in other countries. If China or other emerging markets experience inflation, those price hikes might be passed onto us at places like Wal-Mart.
As we wait to see if inflation in other countries gets passed to us, we are watching deflation over here in our home values. Is there any question why things seem so confusing these days?
Jobs follow the money. Today's IPO market is hot, and hot markets create jobs. But with LinkedIn going public at 600x earnings, we must be cautious about another bubble, as this would mean any new job creation would be lost if this bubble bursts.
Here in Houston, we've been quite lucky. The energy industry has proved resilient for now. Everything requires energy: manufacturing plants, computers, transportation and communication systems. Energy seems to be the most universal global need. No matter what's happening in the domestic economy, as long as the global economy is growing, so too will the demand for energy.
Therefore, more and more capital providers are wanting in on the energy game, while existing energy capital providers want to grow their energy exposure. Since jobs follow money, the energy finance market remains pretty darn robust. Demand for energy finance experience remains strong in all sectors, including corporate and investment banking, institutional and alternative investing, and the operating company market.
For those of us who keep a close eye on economic news, we couldn't help but catch the recent headlines about Arnold Schwarzenegger and former IMF head, Dominique Strauss-Kahn. It got us here at Leyendecker & Associates thinking about power.
As it's been said for some time, power corrupts and absolute power corrupts absolutely. Over history many people have done great things with their power, but it seems a good many have also greatly abused it. The caveats of power seem constant in human history and worthy of acknowledgement.
For some, the pursuit of wealth and power is the most important priority. But we have seen time and time again to be careful what you wish for, as you just might get it.
Ultimately, what recent headlines have got us thinking about is that knowing the risks of power is wise, but shouldn't deter anyone from trying to reach up and out with their career. The trappings of power are obvious, but wealth and fame are challenging to manage.
There is little to lose when one is merely aspiring, but there is everything to lose once we have arrived at success. It's an interesting notion to extrapolate not only on a personal level, but also on a micro and macro economic level. It has served as a nice reminder about something we at Leyendecker always try to keep in mind...
Life is a 162 game season. The goal is to be in first place at the end of the season. Strive to improve every day. Be patient and persistent. Do good things.
Chart of the Month: Total U.S. State Tax Revenue & GDP
The following two charts look at the movement of total U.S. state tax revenue and GDP since 1975. Both numbers have been rising consistently for decades. Interestingly, neither indicator dipped significantly during the recession in the early 1980s or the recession in the early 1990s, but both were volatile in the 2 economic downturns since 2000. [Source: Bureau of Economic Analysis (GDP) & the U.S. Census Bureau (tax revenue).]
At an Atlanta Fed Public Affairs Forum, Roger Ferguson, president and CEO of TIAA-CREF, discussed how the "three legs" of the retirement system - employer-sponsored retirement plans, personal savings and Social Security - are each under stress. The number of people with a private sector employer-sponsored retirement plan has fallen significantly. Today, nearly half of Americans are not even in any kind of retirement savings system. Ferguson stresses a need to incentivize smarter retirement savings by making sure people have the right range of retirement planning choices, and he outlines suggestions to improve the system.
The Federal Reserve Bank of Philadelphia partnered with PolicyMap to create a data-generating tool based on zip codes. It allows users to view a range of data, like unemployment, rental and home sales, family income, demographics, lending activity, educational attainment, to name some, for different areas of the country. Data can be used to conduct tailored and specific analyses.
Towards the end of this speech, Dallas Fed president and CEO Richard Fischer explains the trimmed mean analysis, a metric created by Dallas Fed economists. It measures core inflation by removing the highest and lowest monthly prices to ascertain underlying inflationary trends. This metric has shown that inflation has been moving at a "sedate" rate of 1.3% for 6 months. This proves, according to Fischer, that higher gas and commodities prices have not yet caused more general price inflation. Echoing recent statements from Chairman Ben Bernanke, Fischer declares his commitment to doing what is necessary to preclude gas and commodities inflation from bleeding into other price categories.
This article from the Freakonomics blog looks at studies that suggest failure is far more random than we might expect, and actually an indication of a healthy economy. Research shows a correlation between churn and faster economic growth. The author does look at the difference between healthy failures (the common Silicon Valley start-up failure) and unhealthy failures (the subprime mortgage crisis), and outlines three key components to mitigating the risk of catastrophic failures while creating the necessary conditions for healthy failures.
John Rowe, CEO of utilities giant Exelon, discusses the challenges of leadership in situations where many different political, social and environmental considerations have to be negotiated to find the solution with the most positive long-term implications.
Based on their research about decision-making, two social psychologists argue that taking the time to "sleep on it" can be the soundest approach to making complex decisions, as it allows time for the brain to get distracted. The two co-authors found that the unconscious is incredibly skilled at separating the vital from the less relevant. But this requires time for those activities - like sleeping, running, or focusing on an unrelated task - to allow temporary distraction and detachment from a given problem.
Based on the belief that creativity is a developed skill available to all, not a natural talent for a lucky few, McKinsey researches suggest four ways to inspire creativity in the work place. It's an exercise that can mean finding new ways to increase productivity, achieve growth, or finally tackle persistent issues.
Three researches followed 170 Silicon Valley start-ups for 8 years in an effort to determine the impact that company founders and management teams have on the likelihood of success. Some of the results: Turnover, particularly additions to the management team and founder exits, and diversity in all senses improves a company's odds of reaching an IPO; A founder's exit can boost a team's ability to grow and evolve; Founding management teams with a wide range of company affiliations and extensive functional capabilities tend to be more successful more quickly.
Thanks for reading The Leyendecker View. We hope you find these perspectives unique, insightful and valuable.
We at Leyendecker & Associates are committed to the highest standards of value creation.