It is time to get to work

Over the past six months, I have been holding back like most people. I started to believe that the commercial real estate market was dead so I didn't try anymore. No longer! Come Monday morning, I am going full bear on finding buyers, builders and tenants. I am not going to wait until everyone is on board with the economy. I will start calling everyone in my prospect list to get a deal going.

Everyone gets into a slump. I think I have been allowing too much of the negative market data to hold me back. I am going to get to work on Monday and make something happen. If there is nothing out there, then at least I will know for sure.

Anyone who is ready to do a deal in the Waynesboro area should get in touch with me asap. The rest of the world can sit by while I make something happen.

visit http://www.projecthayes.com for my contact info.

If Obama Fails, Who Wins?

Lately, Rush Limbaugh has been called to the carpet over his line that he hopes Obama fails. Now, since that statement was made, Mr. Limbaugh has clarified this to mean that he hopes Obama's policies fail.

While this blog is not a place for political discussion, it is a place for explaining economics. It is important to look at the alternatives to the statement, "I hope Obama fails". (I call this "game theory light")

Alternative 1: Obama fails and the economy suddenly improves.
Alternative 2: Obama fails and the economy continues to slide.
Alternative 3: Obama succeeds and the economy improves.
Alternative 4: Obama succeeds and the economy fails.

Based upon these options, we are really only happy with #1 and #3. Obviously, we all want the economy to improve and for people to get back to work. I do have a problem with Alternative #4 because by the administration's metrics, success is gauged by job creation. So it doesn't make sense that Obama and his policies could succeed without the economy improving.

Now, let's look at it from the Republican point of view. Clearly, Limbaugh is interested in getting the GOP back into power. So here are the alternatives for the Republicans:

Alternative 1: Obama fails and the economy suddenly improves.--GOP Wins
Alternative 2: Obama fails and the economy continues to slide.--GOP Loses
Alternative 3: Obama succeeds and the economy improves. --GOP Loses
Alternative 4: Obama succeeds and the economy fails. --GOP Loses

This will take some explanation.

#1. If Obama fails and the economy improves, then the GOP would be the political winner.

#2 If Obama fails and the economy gets worse, then the GOP loses because they could only claim to have caused Obama to fail, but without an improved economy and no real plans other than for the government to stay out of it then the GOP will lose.

#3. Self explanatory

#4. This is similar to #2, but in this case the GOP may win politically and the country would lose economically. You could argue that the GOP would win here simply because Obama lost, but the human costs would be pretty high. This alternative is still flawed because Obama's success is tied to job creation.

It's Economics Silly!

Last night I had some friends over for our regular nickle-ante poker game. As the night went on, comments were made about how bad the stimulus package is and how all of this is going to cause rapid inflation.

Of course, the guys saying this stuff were just parotting what they heard on television or the radio. Honestly, do you really think that Rush Limbaugh understands macroeconomic theory?

So what is the effect of the stim and how will it affect the broad economy? To understand this, we must first look at where we are now. In October, the money market pretty much siezed. This caused a ripple effect that quickly caused the failure of Lehman Brothers. Once that hit, then the Treasury Department got involved and pushed through the Toxic Asset Recovery Program (TARP).

After everyone saw that the economic meltdown was underway, then there was a rush to liquidity. You can tell this by looking at the 3 month treasury bills which went to almost 0%. When there is a rapid movement away from leveraged investments to cash, you will see asset prices drop. In other words, lots of people who had stuff that they owed money on sold that stuff at a reduced price. That is part one.

Part two is the forclosure issue. As homeowners go through foreclosure, they lower the value of their homes and their neighbor's homes. This is because when you have an appraisal done on your home, the appraiser looks at the comparable home sales in the area. If Joe down the street sold his home for 30% off then it will affect your home and subsequently what you can borrow against it. This is part two.

Put parts one and two together then you get deflation. Deflation, the opposite of inflation, means that asset prices are moving lower, consumer prices are moving lower, wages are moving lower. It is very, very bad. If you get into a deflationary spiral, then people will hoard money because it will be worth more later. If people don't spend money, then the demand continues to drop and prices keep droping. If prices continue to drop, then deflation increases and people don't spend. I think you get the idea.

So back to the stimulus plan, anyone who understands these forces knows that you cannot let the market fix this on its own. Will the market correct eventually? Sure, but at what cost? This mess will cause massive unemployment, loss of capital, bank failures, hoarding, and eventually price fixing.

As for what it will cost the taxpayers, the choice is simple: either invest in something now, or face lower revenues which will cost the taxpayer just as much.

Here is how it all works:

1. Prices are falling, demand is off causing the risk of a deflationary spiral.
2. The government prints money then uses that money to buy bonds from the government.
3. The money is then spread across the country and is spent. (it really doesn't matter where)
4. As the new money is introduced into the economy, it causes inflation.
5. The inflation counters the deflation which as discussed above is very very bad.
6. Because the treasury actually printed the money, the real national debt does not really increase.

Any questions?

4Q GDP expected to be horrible

This coming Friday, we will see the US GDP number come out for the fourth quarter of 2008. The expected number is -5.1% annualized. That is pretty horrible.

Based upon a GDP of $14.4 Trillion that means we are looking at a loss of about $185 Billion in lost GDP for the fourth quarter alone. Since countries can only increase their GDP in two ways: increasing the number of workers or increasing the productivity of the workers, we are facing a serious productivity and employement situation.

Theoretically, if you increase the number of people on the job while keeping productivity the same, then you should have an increase in GDP. Likewise, increasing the productivity of workers while keeping the number of workers the same also increases GDP. In all cases, it is always a little of both. More workers and increasing productivity means more GDP.

Right now, it is pretty obvious what is happening. People are being laid off (less workers) and those that are still employed are producing less (lower productivity).

Normally, we could blame all this on consumer demand. But this time it is different. Over the past year or so, credit has tightened. As a result, projects and investments have been put off. Since people could not borrow the money to say, build a new office building, then that translates into lower GDP.

Way back in October, we saw then Treasury Secretary Henry Paulson make the case for the TARP (Toxic Asset Recovery Program). The idea made sense, buy up the bad assets held by banks and get the banks back in the business of lending. The original plan did not happen because of a problem with pricing the assets. So instead, the banks were given money in exchange for stock warrants. Thus partially nationalizing the banks.

Today, we have a new administration. I call on them to get back to the original TARP idea which is to take the bad assets off the books of the banks. If this is done, then the good loans can be pulled out and the bad loans can be renegotiated.

I don't expect anyone to listen to me, but it feels good to say so.

Recession Rules

Okay, so we are in a recession. That feeling that we had in the Fall of 2007 when people began to talk about the failings of the economy, the upcoming burst of the housing bubble and the eventual slowdown that would soon follow has now turned into the worst downturn since the Great Depression.

So what is a small business owner to do? Well, first you want to remember that a drop in overall GDP will affect your business, but it likely won't eliminate your business. A drop in revenue of 20% while bad, should not destroy a healthy business.

The main goal is to come out of the recession with what you went in with. In other words, you want to keep your net worth the same. That means your assetts should remain stable as should your debt. Just keep it together and weather the storm. This is easier said than done.

Rule 1: cut out all dead wood early and quickly. If you have an employee who is not productive and will likely never be productive, stop carrying them along. The livelyhood of your good employees are at stake when you keep around a lousy one. Just cut your losses and drop them. They will have to adapt and become productive on their own dime, not yours.

Rule 2: Review every expenditure. Look for monthly recurring bills that can be eliminated. Ship things ground instead of over night. Turn down the heat. Cut off lights. Put off purchases until you really need them. (Never cut corners when it comes to serving your clients.)

Rule 3: Invest your time in revenue growth. Now is the time to reach out and get more business. Any idiot can make money in an up economy, but your prove your worth in a down one.

Rule 4: Stay up on the economic news. You want to know when the Fed meets and what they are likely to do. Pay attention to your interest rates and where they are heading. Pay off the high interest rates first.

Rule 5: Talk with your banker at least twice a month. Let them know good and bad news. Be sure they know what you know. Your banker likes knowing who you are and what you are doing. Right now, you need them and they need you.

Rule 6: Be honest with yourself. Don't fudge your income statement. Take and honest assessment of the business and how it is truly doing. Look at cash flow and pay attention to the little things.

You can and will survive this downturn. Like most small businesses, you are a dreamer and a doer. Lot's of people are counting on your success, not the least of which are your family, employees and clients. Just remember you need tough times to make it great.

In Uncertain Times, Opportunity is Everywhere

Last night, I had a long talk with my 14-year old son about the current unheaval in our economy. For both of my sons, I talk freely with them about any and all issues. From economics to politics to religion, anything is fair game in my house. All I ask is that they have an understanding of the issues and back your position with facts not just opinion.

Anyway, John and I were talking about how the financial crisis will affect our family. He is understandably concerned about the future. My (hopefully) reassuring message to him was that we are in a major turning point in our country. This turning point is very similar to others in history: October, 1929; Pearl Harbor; the atomic bombing of Hiroshima and Nagasaki; the assasination of JFK, Watergate, Falling of the Berlin Wall, etc.

With historical understanding of present conditions, you will see that ultimately our country will prevail. I told him that with every change comes an opportunity to grow and fix the problems that face us. If life were boring, there would be no challenges. Without challenges, there would be no greatness.

Of course, these words come from a person who has be pretty conservative in his financial dealings in the past few years. As a result, we are reasonably prepared to deal with the economic changes. There are many in our economy who are not. For them, the changes are terrifying and they may need help from their friends and neighbors.

My final message to my son is that we are all in this together. Hopefully, we as a nation can come together to deal with the crisis and resulting economic downturn. We have done this before, and we can do it again.