Wednesday, December 31, 2008

A Year Never to Forget

The thing about moving forward is that you're always coming from somewhere. Sometimes, it’s a position of strength, other times it’s not.

But, in any case, we couldn’t be where we are without having come from some place before. And to write that off would be akin to ignoring the face in the mirror.

In the case of the stock market, just having finished its worst year in about three generations, we're moving off of an extraordinarily depressed level.

The chart below shows this in quintiles for the past fifty-five years. By pure coincidence, this period begins and ends with the best and worst performances. Over this time, the market compounded at an annual rate of 6.8%. For every down-year, there were nearly three years of gains.

As to 2009, we should at least take comfort in two points:
  • Statistically, a repeat performance of 2008 would be extremely remote.
  • Of the the ten other years in the same quintile, seven up-years followed for an average gain of 19.4%.
Our greatest hope for the new year is a restoration of market confidence. Without it, there's no efficiency in price discovery, no pricing mechanism allowing funds to flow smoothly across the economy, and no incentive for innovation and entrepreneurship.

However, let's not forget 2008 for its lessons – and their historical importance. Now, we have that unique opportunity that only comes with such a downturn to completely clean house and remove some pretty big impediments.

If we can accomplish this, then good progress will come.

To you and yours, Happy New Year!

Tuesday, December 30, 2008

Adjustment in Crisis

One thing's for sure: We live in an age of suddenness.

No matter how much information we employ, we're constantly surprising ourselves. Take the stock market. Since the 1950s, volatility has averaged 9.8%. It’s now hovering at nearly four times that level. In fact, since 1998, it's averaged close to 14%.

What gives? Despite all our computing power, why can’t we get a better handle on things?

Well, we suspect the answer has a lot to do with the “handle” still having a grip on us.

Over most of the last generation, two game-changers stand out: information technology and global socioeconomic change.

In a relatively short period of time, we transformed the way we communicate with each other. We also upended a multi-decade geopolitical balance. The result: an eagerly competitive and interlinked global economy like no other before.

Viewing the downturn against this makes it seem, well, less ominous.

First, though, we need to accept two truths.
  • Global conditions extended the reach and depth of capital markets.
  • Information technology redistributed the balance of power on Wall Street.
Second, we need to accept these as evolutionary. The world, friends, is changing, and there's no going back!

Ultimately, it's all good, because, at the end of the day, it’s about increased competition for capital – a dynamic that promotes innovation and wealth creation.

The big risk? That would be in folks not seeing the "crisis" as an adjustment (painful as it is)
. And by misjudging the big picture, they could implement policy that hampers or, worse, reverses, this natural and necessary change.

Sunday, December 28, 2008

What's IT Worth?

Health Care + Information Technology = (?)

A. Efficiency & Value
B. Optimized Care
C. Both
D. Total Frustration

If we were to poll different age groups of practitioners, we suspect most folks 45 and younger would answer A, B or C. More seasoned professionals would pick D.

Macroeconomics teaches us that technology advances economic growth, but health care does not follow traditional economic rules: consumers do not pay, payers do not consume and committees (rather than a marketplace of individuals) determine pricing. If anything, say the doubters, Health IT does little more than highlight the system's inefficiencies.

There's also the matter of standards: Until IT systems can actually communicate with each other, very little can actually be accomplished.

A recent Google news search on electronic medical records, for example, reveals a conflicted picture of hope and hopelessness: "More Hospitals Using EMRs", "Fraudulent Use", "More Trouble Than Worth"

"The only truly promising way to save money is to change the way health care is organized and delivered," notes a recent Op-Ed piece in the New York Times. "85 percent of doctors work in small, fee-for-service practices... They are unable and unwilling to be held accountable for the quality and cost of the care they deliver." The author addresses a basic, unfortunate fact about health care: it's the culture that's broken.

The system might just be too entrenched to sort itself out; that is, unless it can be reformed as a more familiar economic framework.

At the very least, we should embrace surging enthusiasm for IT's potential. Let's just make sure it's channeled appropriately.

Saturday, December 27, 2008

Framing the Stimulus

This weekend, Larry Summers states the case for the Obama stimulus package. Lawrence Lindsey proposes criteria to assess the package.

Despite representing opposing aisles, both economists agree some form of stimulus is needed. The Obama plan is expected to encompass massive infrastructure spending, from roads to Broadband Internet.

Mr. Summers writes of a $1 trillion shortfall in GDP and the opportunity for high social returns spanning "energy, education, infrastructure and health care". He argues: "In this crisis, doing too little poses a greater threat than doing too much."

Mr. Lindsey, meanwhile, offers three evaluation criteria: "First, does the program target the weakness in the economy that caused the recession, or is it largely peripheral? Second, are the funds going to be spent in a timely fashion? Third, does the program fundamentally strengthen the economy going forward into the expansion phase?"

This crisis, he notes, centers on an "extreme household balance sheet problem". "Shovel-ready" spending occurs best in the private sector. And, the best stimulus would be a permanent reduction in employment taxes. He advocates a greenhouse emission tax to cover any lost revenue.

Mr. Summers, in his comments, carefully defines the president-elect's plan as both an "investment" and a private-sector solution; its "key pillar": the creation of three million new jobs within two years.

Regardless, its passage depends on two points:
  1. whether folks view government as an ally or an adversary, and
  2. the extent of economic adjustment already taking place.
Unlike TARP's formation, the Obama plan faces a debate of weeks instead of days.

Sunday, December 21, 2008

What's in Demand

Over the next several weeks and months we'll be hearing a lot more about aggregate demand – the economic measure of how much we're collectively willing to spend on goods and services. Accordingly, the richer we all feel (paycheck and net worth expectations), the more we consume.

Right now, since most of us don't feel that rich, we're consuming a lot less than only a few months ago.

Aggregate supply, or the amount we produce, balances against this. Financing costs, operating costs, taxes and technology affect its shape and steepness (economists represent this graphically as an upward sloping curve).

Almost overnight (September 2008), financing and operating costs reversed direction and anxiety shifted from inflation to deflation. The trigger: a sudden drop in demand (alternatively, a sudden rise in savings).

How policymakers view demand affects legislative choices. Many ascribing to Keynesian economics – such as the incoming administration – see it as a fixed picture defined by employment levels. Their response to expectations of rising unemployment is massive infrastructure spending. Government spending, they argue, complements consumer demand and expands GDP (a multiplier effect).

Others see demand more as a pricing mechanism. Rather than something tightly correlated to employment, it's a self-adjusting, constant-motion process. (Employment, after all, is itself constantly adjusting.) The best remedy in their view is for government to step as far back as possible. They advocate massive tax cuts to advance price discovery.

At the very least, let's hope legislative action reflects the economy’s complexity, and targets a basic goal of increased transparency in consumer decision-making.

Sunday, December 14, 2008

A Simpler Equation

The election might have ended all hopes for supply-siders, except now the electorate doesn't appear quite so warm to a full-on Keynesian approach. The most recent testament: souring opinion on a Detroit bailout.

While economists feverishly debate the appropriate model to fix the economy, political reality holds that Washington will legislate some sort of hybrid approach. Even President Reagan was not a purist: he reduced taxes, but also increased spending.

Whatever legislation emerges we certainly hope does some good, even if it fails to resolve the economic debate. In fact, it's likely to shape new schools of thought based on its success.

Meanwhile, folks are adjusting lifestyles to more basic needs. This process apparently also includes a reassessment of core convictions, which began some months ago and continues today.

And the worse conditions get, the more basic these convictions become. Luxuries aren’t just tangible objects, they can be belief systems too. The idea of something can be quite different than what its reality actually means to someone.

For most, this comes down to preserving some sort of equilibrium – keeping kids in a desired school, staying within a desired community, or simply keeping up appearances; for some, it's a question of survival – there’s a lot less net worth to cover lost income.

Just as political intentions may not match the economic model, the electorate’s views may not support political intentions.

Though constantly in motion, this equation is becoming much less complex than only a few weeks ago.

Saturday, December 13, 2008

Game of Tag

Today's social Internet converts dynamic interaction into highly productive tools. Users view and assess information in ways they never have before.

One vivid example of this is the tag cloud. Using statistical algorithms based on popularity or conviction (not necessarily the same thing), a tag cloud displays a site's word content. An index, on the other hand, sorts information sequentially and one dimensionally.

Here's what Talking Transitions' tag cloud looks like (this, by the way, only covers what's visible on this page, so no previous commentary); size indicates frequency:

Imagine we could create a cloud for all commentary on the economy (possible – we think – but beyond our scope). Which words and phrases might appear in the larger sizes?

We'd guess: risk, bailout, deleverage, volatility, depression, blame, savings, foreclosure, socialism, capitalism, Keynes, corruption, taxes, real assets, hard assets, transition… Others might pick different or similar lists; the final output could itself be different or similar.

(We’re assuming what the cloud might look like. A tag cloud, on the other hand, makes no assumptions.)

While we may each assess events differently, Internet functionality now allows us to aggregate and view the underlying information in fast-evolving and widely accessible ways.

No one quite knows what economic effect this has, other than we're all a whole lot more aware of how powerful information is. We also know we're well-positioned to advantage of this.

The consequence: a very different market dynamic than the early 1980s or 1930s.

Some might say it’s what first upset economic balance, and what could eventually restore it.