Weakonomi¢s » economics

The Megalist of Calling the Housing Bottom

The Weakonomist — Tue, 07 Feb 2012 15:23:50 +0000

As of this writing we are converging on the 6th year of this housing mess, and for almost 6 years we’ve heard people from the head of the Federal Reserve to real estate experts to Jim Cramer say we’ve reached the bottom of the housing market. For too long self-interested parties have made claims the worst may be over. They’ve all been wrong. It’s time to chronicle this journey. Starting with the end of January in 2012 and going back to 2006 I’ve compiled a list. Please note the listed sources aren’t always the ones making the claims, it’s just who published the claim.

Please enjoy the list:

1/31/2012 Homeownership rates fall to 66% as downturn nears a bottom – USA Today
1/10/2012 Has The Housing Market Hit Its Bottom? – Forbes
12/8/2011 Is the Housing Bottom Finally in Sight? – Kiplinger (my favorite!)
9/27/2011 This Has To Be The Housing Bottom – Seeking Alpha
6/21/2011 The Housing Bottom Is Here: Economist Russell Price Explains – Daily Finance
4/24/2011 We Could Be Near a Housing Bottom – Seeking Alpha
2/2/2011 Why the Housing Bottom Might Be Here – US News
1/28/2011 U.S. housing bottom seen in mid-2011: poll - Reuters
11/19/2010 Housing downturn has hit bottom – The Business Journal
10/25/2010 Rising Home Sales Point to a Housing Recovery – Daily Finance
10/8/2010 3 Signs the Mortgage Market Has Hit Bottom – Smart Money
5/12/2010 US Housing Prices Projected To Reach Bottom In Q3 2010 – NuWire Investor
4/27/2010 We Have Met the Housing Bottom, Maybe – The Atlantic
4/22/2010 More Signs of a Housing Bottom – Seeking Alpha
1/29/2010 In hard-hit markets, some see signs of bottom – MSNBC
2/12/2010 Builders: Housing bottom is here – SunSentinal
12/15/2009 Builders Say 2009 Marks Housing’s Bottom, 57% Predict Revenues Increase in 2010 (I checked, and a few did have revenue growth, most didn’t, and 2011 was worse) – World Property Channel
10/30/2009 Moody’s: No Housing Bottom Until Q3 2010 – Wealth Daily
8/21/2009 We Called It: The Housing Bottom – The Street
5/13/2009 Yet Another Greenspan Housing Bottom Call – Barry Ritholtz
2/9/2009 U.S. Housing Market May Bottom in 2009, Zandi Says – Bloomberg
10/27/2008 UCLA sees O.C. housing’s bottom by next summer – OC Register
8/27/2009 Cramer Calls the Housing Bottom (Q3 2009) – CNBC
8/17/2008 Greenspan sees housing bottom, criticizes bailout – Fosters
7/24/2008 The Media Are Missing the Housing Bottom – National Review (Larry Kudlow called this one)
2/21/2008 No housing bottom until ’10: CP Morgan – Reuters
1/15/2008 Mortgage bankers expect housing market to bottom out in third quarter – BizTimes
1/8/2008 Stable Existing-Home Sales Expected in Early 2008, then Gradual Rise – National Association of Realtors
12/19/2007 Is Collapse of Home Prices About To Hit the Bottom? – The Sun New York
12/1/2007 Will Home Prices Hit Bottom in 2008? Yes, but . . . – Kiplinger (again? of course!)
11/26/2007 Deere Sees a Housing Bottom in 2008 – Seeking Alpha
9/14/2007 Hovnanian Chief Says Housing Bottom Is `Very Near – Bloomberg
8/16/2007 Contradictory News Suggests Housing Bottom Could Be In View – Realty Times
5/25/2007 Housing Market Nears Bottom – Forbes
4/20/2007 Housing Bottom Callers – Calculated Risk (Hank Paulson here)
4/17/2007 IMF believes US housing market may bottom out – Reuters
2/17/2007 NAR Says Existing Home Sales Have Hit Bottom – Realty Times
2/8/2007 Housing still on down slope Economists say no recovery until midyear; prices face record fall – Market Watch
12/21/2006 Housing ‘close to bottom,’ realtor-group economist says – Market Watch
12/5/2006 Home builders see bottom of housing slump – CNN Money
11/15/2006 Housing slide may deepen; New forecast sees bottom in 2008 – Boston Globe
10/6/2006 Greenspan Says `Worst’ May Be Past in U.S. Housing – Bloomberg

When will we see the real bottom? It could be soon, one of the few people I trust to have an unbiased opinion (and someone who has attempted to track all the prior claims for a bottom) explains there are actually two housing bottoms to look for and they may be closer than you think. We’ll see if he’s right, or if he gets added to this list.

If you have more articles you want listed claiming a housing bottom, put them in the comments. While there are many stories that talk about the bottom, for the sake of this list just look for headlines.

Image: Nick Bastian Tempe, AZ

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When Does a Crisis Reach a Critical Phase or Become Multiple Crises?

The Weakonomist — Fri, 03 Feb 2012 15:45:56 +0000

The following is a guest post provided by Forex Traders. Views and opinions do not necessarily represent those of Weakonomics.com

The year of 2011 may go down in history as the year that never was. Our financial markets, despite a rollercoaster ride throughout much of the period, ended the year amazingly enough at roughly the same levels as where they started. The S&P 500 index concluded 2012 at 1,257, the same as a year ago. The Euro versus the Dollar was still at $1.30, a figure difficult to accept with all of the dour news pouring across the Atlantic, and the Yen remained strong in spite of a horrific earthquake and devastating tsunami.

It may be time to buckle your seatbelts or resort to taking a long-lasting sleeping potion. Most experts believe that we will see a repeat of 2011 right before our very eyes in 2012. Hopefully, we learned a few lessons along the way, but here is a brief recap of a few significant events that transpired over the past twelve months:

We learned to broaden our definition of the word “crisis”. The European debt crisis actually began to surface in November of 2009, and it is now entering its third year on the global stage. The word “crisis”, as a matter of fact, comes to us from the Greeks and is supposed to represent a situation that has reached a critical phase. Perhaps, things move more slowly in Europe or the “critical phase” keeps being delayed by political machinations, but the officials in the know are now telling us that the so-called crisis may last for years. It is hard to believe that a country with an economy no larger that that for Dallas-Ft. Worth could cause such a stir, but credit default swaps may be the “culprit” once again, this time on sovereign bond issues instead of toxic mortgages;
In Japan, we witnessed a true natural and national crisis occur back in March. For some of the hardest working people on the planet, an earthquake and a subsequent tsunami was the last thing anyone expected for a country still trying to recover from two decades of recession. Living on the “Rim of Fire” is far more risky than living in California, as “24/7” news cameras revealed. The national grid came to a screeching halt, export trade froze in its tracks, yet the Yen strengthened, even after several interventions by the Bank of Japan and other central banks. A weaker currency would bolster the rebuilding effort in progress;
On our shores, the Fed was successful in expanding the money supply by its buyback of $600 billion in securities with its quantitative easing program, dubbed “QE2” by the press. Banks were still hesitant to loan the funds to small businesses, stalling the modest recovery that began to take shape before June. What will make commercial banks focus on lending instead of transaction–based bonus compensation? Bring back “Glass-Steagall” was often heard in many corridors, but political gridlock blocked the debate on any new initiatives and resulted in a credit-rating downgrade, to boot;
We learned that uncertainty begets volatility in our financial markets. Equities, commodities, and currencies gyrated wildly during the year, yet the Euro and Yen maintained strong positions despite numerous shorting attempts by forex traders. The lesson was that, in a time of crisis, banks, companies, and individuals repatriate their private “stashes” of assets overseas for survival of the home front. These capital flows thwarted major forex hedge funds and retail traders alike, leaving both groups speechless and recording losses.

Hope you paid attention in 2011 – the “record” is stuck in “repeat” and still playing!

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Bernanke’s Bologna

The Weakonomist — Wed, 01 Feb 2012 15:26:50 +0000

Last week Fed Chairman Ben Bernanke gave a press conference. In the conference he was asked about a number of things, including the Fed’s target inflation rate eroding away the savings of people. You likely know your bank account it paying practically nothing in terms of interest, say 1% (for argument). But inflation is much higher than that, say 3%. This means that every year you have less and less buying power. What did Bernanke say?

Over time savings rates do cover inflation.

Now if you actually watched the press conference you’ll know Bernanke fumbled with his words a little bit and some people could interpret his statements as implying savings rates always cover inflation. But he’s not so stupid.

Nevertheless, people pounced on the idea to prove they are capable of basic subtraction. Yes, if you look at the current rates offered on CDs or savings accounts and compared that to the current level of inflation, you will find that as of this moment in time you will not get enough returns to cover the inflation.

But Bernanke said that over time savings rates do cover inflation. We certainly know we are not in normal times, but charts always do a much better job of illustrating the point.

What you’re seeing here is the inflation rate (in red) and the rate on a 6 month CD graphed over time. Not only is it clear these two items are closely correlated, but it’s also obvious that for most of the last 40 years even a 6 month CD pays better than inflation. 12 month CDs are usually higher than 6, but that data was unavailable. The difference would have been even wider.

Now why is this? In finance interest rates are made up of a few components. The most basic are the cost of funds, the expected inflation rate, a premium for time, and a premium for risk. In simple terms, if a bank offers you a 5% mortgage, that rate accounts for all of these things. The blue line in the chart represents a cost of funds, and the red line represent inflation. By combing these rates with others banks are able to calculate how much interest to charge (at a minimum) in order to make it worth their time to lend money.

It stands to reason that the cost of funds (the blue line) would be more than the rate of inflation most of the time. This is because when you deposit money at a bank you are essentially lending it to them much like they will lend it out in a mortgage. You aren’t worried about risk due to FDIC insurance, and your cost of funds is zero since it’s yours. So you are compensated for time and inflation.

Even if that doesn’t make sense to you, the chart should. The Fed Chair understands that the interest rates on deposits are practically nothing these days. But, when the economy recovers the rates will go up again and you will again be compensated for inflation.

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You Have Too Much Crap Because We Won The Cold War

The Weakonomist — Tue, 31 Jan 2012 15:54:57 +0000

Welcome to a world where Storage Wars and Hoarding are well watched TV shows. A world where candles serve as decoration, where there are 4 TVs in a house, and we can’t fit cars in garages anymore for all the crap we have. Where did we go wrong? I’ve got older relatives that have been wearing the same sweater for longer than I’ve been alive because they understand what it’s like to having nothing. But most people these days, we have way too much crap. And I blame the Cold War.

It’s quite simple really. Communist China and the USSR were close allies during the Cold War. Of course the US spent much of the cold war trying to spread democracy around the world. With it came capitalism too. In the 1970s some in China started to realize that the Communist system wasn’t going to survive in its current state.

They proposed reforms that through the last 3 decades have lead us to where China is today. Russia stayed the course and suffered a collapse. China slowly reformed its economy and now you can get stuff for next to nothing.

Think about it this way, many manufacturers in the US actually outsource the production to a Chinese factory. Chinese labor is cheap and American companies can enter into a contract with them because of the reforms in China. As a result goods in the US are very cheap. We get free toys with our Happy Meals, Walmart allows you to get whatever you want at whatever price you want so long as it came from China, and every weekend we go out shopping for more crap to put into our McMansions.

Because stuff has gotten so cheap, we’ve been able to buy more of it. If laptops cost $2000 for a basic machine again, we wouldn’t be able to waste money on new trays for the silverware, or that fifth vase.

As China was liberalizing economically, we were growing, physically. We got fatter and our houses got bigger. Laptops dropped to less than $1000, we could get coffee tables for the price of a family dinner at Subway, and our houses got filled with stuff.

If we hadn’t won the cold war, we would probably still be making most of our stuff in the US. That stuff would be pricier and we wouldn’t be able to afford as much crap. But it is just crap, and we’d be perfectly fine, or arguable better, with out it.

Now someone reading this will question whether we won the Cold War. Allow me to clarify. We didn’t win so much as communism lost. Communism was replaced by capitalism, which was a catalyst for globalization.

We could all choose to buy less stuff, but you can’t expect an entire population to do that. What you can expect is that over time the price of crap will become expensive again. Cheap labor is becoming harder and hard to come by. And the cost of a global supply chain is too pricey to ship goods half-way across the globe.

Consider the last twenty years the prize for the consumer winning over the communist. Of course, this all came at the expense of the American manufacturing worker. Enjoy your crap America.

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What Created The Rise Of Finance?

The Weakonomist — Fri, 27 Jan 2012 14:43:59 +0000

Does this statement disturb you?

In 1950, finance and insurance in the United States accounted for 2.8% of GDP, according to US Department of Commerce estimates. By 1960, that share had grown to 3.8% of GDP, and reached 6% of GDP in 1990. Today, it is 8.4% of GDP, and it is not shrinking. The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006.

It’s certainly not surprising is it? It makes perfect sense considering the rise of banking and Wall Street over the last generation or so. This blog has said before that this rise also lead to greater levels of compensation, and thus drew talent that may have otherwise focused on other areas (like science or education). This probably further grew the industry’s share of the economy. And when people read these kinds of comments about the rise of Wall Street it is worrisome that they always think this is a bad thing.

Consider the following. Your grandparents likely retired on a pension and collected social security and hardly ever needed to save for retirement. In 1950 the average person lived to be 68 years old. Retirement didn’t last very long, if at all. In 2009, we were living to be 78, and we all know this number is only going to rise with time. That’s an extra decade of living expenses. How is that being paid for? Pensions have had to invest considerably more money in order to deal with the burden of people living longer. Reforms here and there occasionally soften the blow for them, but the burden is still much higher than it used to be. Pensions now invest in riskier securities, and get better returns too. Wall Street’s role was to facilitate the transactions that enabled these pensions to survive just a little bit longer and pay the retirements of all these people. And to say nothing of the rising insurance needs of the aging population. Those premiums are invested too. When a new demand is born, an industry grows.

When you consider that baby boomers are just now retiring the rise of Wall Street makes even more sense. These were the first group of people that may have to sustain their retirement with personal savings and investments. 401(k)s became very popular in the 1980s and of course still are; IRAs too. Now people were taking their retirement into their own hands. This gave rise to the mutual fund industry and now you have a bulging population entering the prime of their careers and saving for their own retirement. Again, an industry grew to service this demand.

Just as everyone was taking responsibility for their own retirements, the internet was about to start growing too. With the internet, people were able to take their own financial management to a new level. Soon, people would be able to buy and sell stocks within a few minutes, and then seconds through online brokerages. Once again, an industry rose to meet this demand.

Further still, consider the globalization that has occurred. More so than ever before, we are engaging in huge levels of trade, moving trillions of dollars to Moscow, Beijing, Tokyo, London, Singapore, Dubai, and Rio. This movement happens at the speed of light and the infrastructure to enable it was built and managed by the finance industry.

The rise of Wall Street shouldn’t be concerning at all. Given the changing demographics and economy, it makes perfect sense. And what of the greed and the financial crisis? Unfortunately, finance is not a stable industry. The financial crisis had a lot of causes, and Wall Street was certainly part of that. Together with a poor incentive structure, they again rose to meet a demand. This is a case of the industry getting ahead of itself.

No one should be surprised nor concerned that the industry continues to be a large part of the economy. Our lives are more financially complicated. The financial crisis is a perfect example of the growing pains. It’s impossible for this industry to grow and meet demand without making mistakes. Everyone made mistakes. I’m no apologist for the criminal, greedy, and immoral acts in any industry. But the rise of finance as a share of GDP is merely a reactionary metric of the way the world has changed.

Image: Jan Tik

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Pricing At The Humane Society

The Weakonomist — Thu, 26 Jan 2012 15:34:16 +0000

Cats were always my thing growing up. But, as evidenced by the branding on my site at some point dogs entered my life. Enter: The Sheconomist too. Dogs are great, and mine is the best, and now I consider both types of furry animals to be valuable members of a stable household.

One of the best ways to get a pet is through a local adoption agency or shelter. And one of the most well known is the Humane Society. If you’ve ever gotten a pet before from a shelter or rescue you’ve no doubt encountered some kind of fee in order to take your furry friend home. Depending on the age and species, this fee likely ranges between $50 and $200. Have you ever wondered where they came up with that number?

Well the fee needs to cover the basic costs for the animal including shots and food. And the shelters have back-office operations too. But many of these places survive on donations and volunteers. Why not just up the price to $500 for a puppy and then you’re good to go? There’s an added benefit of keeping out certain people who might want a dog today, but aren’t willing to make the financial commitment to treat them properly in the future.

But $500 is steep, and you can get a pure-bred animal for that price. So there’s an upper limit on pricing. Which means to keep the operation running, these organizations rely on subsidies (in the form of money and labor). So what about the other end of the spectrum? Why not just give all the animals away? This would allow these organizations to save millions more animals than they do now. Aside from not having the resources, they run into the issue of less than ideal individuals picking up animals that might not get treated in the best way.

So the pricing then serves two functions. The first is a revenue source, it ties a cost to an item that is essentially inventory. The second is a barrier to entry. If a puppy is worth $150 to you today, it’s more likely worth the hundreds of dollars a year to keep him happy and healthy. If a puppy is only worth $5 to you, you’ll treat him like the impulse purchase he could be.

Being economically minded, I couldn’t help but explore other pricing options. You’ll find at most shelters and rescues, the price of a cat or dog is fixed (as is the animal). But every animal is unique. And some are more desirable than others. These facilities are always trying to move as many animals as they can in order to rescue more. So why not discount some of the animals that have been around for a while and have been tough to move. Like a clearance sale. Likewise highly desirable dogs could be priced higher.

For one thing you risk running into the barrier to entry again on the low-end and on the high-end you might be able to move the pup for twice the price but it will take twice as long. It also doesn’t seem right either. Animals aren’t inventory and the people that care for them treat them like people. We don’t put children up for adoption at varying prices (yes there is a price to adoption) so these animals are priced at flat rates too. What you have then is a product treated and priced like a commodity, but is not.

This is terribly inefficient. But organizations that run on subsidies will always be inefficient because there’s no economic incentive to look for solutions. A lack of efficiency isn’t inherently bad. In fact, in the case of rescues, they are forced to rely on passion and caring of part of the community to keep the organization running. And that’s actually how you want these organizations to be run. These subsidies allow the organization to focus on doing a public good too, which can’t be quantified at all.

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Healthcare Spending Finally Getting Under Control?

The Weakonomist — Thu, 19 Jan 2012 15:01:51 +0000

Obamacare hasn’t gotten much attention recently. And with Mitt Romney the likely frontrunner as GOP opposition, I doubt his strategists will be attacking the president on the controversial legislation too much.

But it’s certainly going to be a point of conversation and will once again grab some headlines leading up to the election which is now a short (some would say) 10 months away.

Almost everyone has an opinion on healthcare in the US. Some believe it’s a human right, others think costs are out of control due to liability, and still others note a big problem being poor record keeping. Almost everyone has a problem with the current system, and almost everyone agrees that the costs are out of control.

As the chart above points out, healthcare spending has been a runaway problem. Keep in mind, this isn’t a chart of increased healthcare spending over time. It’s a chart of how much of GDP is taken up by healthcare spending. It’s almost insane that close to $1 in $5 spent in the US is on healthcare.

But there is good news. Spending is leveling off. From 2009 and 2010, healthcare spending increased only 4%, the slowest pace in 50 years. As a result, the amount of GDP taken up by healthcare spending stayed flat just under 18%. Said another way, healthcare spending might be getting under control. Are digitized records and hospital mergers finally paying off? Are medical schools coming up with cheaper procedures? Sadly, no.

What is happening is people are cutting back on healthcare just like they have everything else since the recession struck. That wart on your finger isn’t hurting anyone, why pay someone to freeze it off? Coughing up blood is a part of my morning ritual, no reason to go to the hospital right? So maybe the second example is an exaggeration, but the first isn’t. People are cutting back on tests and procedures. And doctors are prescribing cheaper medications. It wouldn’t be surprising if hospitals are smarting up as well. If customers may not be able to pay for some needless tests, they might pass on them. Much like changing your oil every 3000 miles, there’s probably some urban legend type procedures that doctors order despite not necessarily being appropriate.

Though digitizing records, new pharmaceutical laws, and other innovations may help streamline the system, the real way to reduce costs is to reduce demand. Hospitals have demand generation procedures to drive business, and patients have demand for services. Both seem to be cutting back a bit. Hopefully this is a trend that can improve the lives of everyone.

Whether it’s a trend or not though, there’s still a long way to go. 5% of the population account for half of all healthcare costs and baby boomers have yet to start becoming a burden on the system. Getting healthcare costs under control will benefit everyone. Even if you don’t have insurance and don’t go to the doctor, you still pay taxes that pays for other people to go to the doctor. Hopefully this is a trend and maybe we’ll see a reversal of rising costs while still increasing quality of life.

Data: Centers for Medicare & Medicaid Services

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Tell Me What To Predict In 2012

The Weakonomist — Fri, 06 Jan 2012 15:04:57 +0000

Yesterday we humbly reviewed how awesome I am at predicting things. Normally, in today’s post I’d make a number of predictions for 2012, mostly for fun. But instead of me picking what to predict, I’d like to know what you want me to predict.

It’s not so much a call for suggestions as it is a survey of what you think will be important in 2012. I made predictions about Sarah Palin last year, but she really wasn’t important last year. She could have been, but it’s pretty clear Ms. Palin is more interested in making money than anything else. We know now why she left her office in Alaska, the same reason a start NCAA basketball player leaves for the pros after his sophomore year.

So what is important to the Weakonomics reader this year? Do you want a prediction on who gets the most gold medals in London? How about who will run with Mitt Romney? I’m willing to place wagers on how well Facebook’s IPO will do.

I’ll add some of my own predictions, but this is really about the reader. Let’s archive what we thought was important or what we thought was going to happen in 2012. Help me make a list. Here’s a few things I’m thinking about just to get the mind churning:

Olympics
Politics
Deficits
Employment
Super Bowl
Consumer Financial Protection Bureau
Banks
Finding alien life
Housing prices
Student loan bailouts
Will the 1% meme continue?
Apple (products, success without Jobs, etc)
Energy prices
Conflict with Iran, N Korea
Interest rates
Europe
Blackberry (RIMM) stock price
Kim Kardashian
Consumer Confidence
World ending
Stock prices
What will the Colts do with their QB problem?

Nothing is off the table. You readers are a loyal bunch but we’re all pretty quiet. Speak up! Tell me what I should be predicting and make a prediction yourself.

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You know I rocked my 2011 predictions

The Weakonomist — Thu, 05 Jan 2012 14:57:24 +0000

If your humble blogger had the time, he would create a database the documents all the outrageous calls people make. Pundits predicting stock market results, economists calling for some kind of statistic, or any idiot that the traditional media calls up can actually shape opinion. But that doesn’t mean they are qualified, or accurate. I’d track every one of them and call them out for their irresponsible actions.

That being said, I’d still make my predictions. Because it’s fun. If for some reason people started thinking I was qualified to make predictions, I’d have to stop. This time last year I made some predictions for 2011. Let’s see how I did. Note: the table looks big but there’s a lot of white space.

2011 Prediction	Details	What I got wrong	What I got right
Gold	In 2010 I called for a gold bubble, WRONG. In 2011 I said we’d figure out if there was a bubble or not. I will concede there is not a gold bubble. The normal price of gold is what it is right now. That said, I still wouldn’t invest in gold.	N/A	N/A
Oil	“I don’t think we’ll see oil go above $130, but I can definitely see oil over $100 again settling around that price point the way 2010 played with $85 oil. Likewise, $3.50 gas will be back.”	Nothing	We saw oil over $100 a barrel last year, but nowhere close to $130. Gas prices aren’t at $3.50 right now, but close enough.
Savings	A year ago the savings rate was 5.3%. My call was that economic recovery would have consumers dipping into savings and the rate would fall to the 3-4% range.	Nothing	November of 2011 was the most recent report as of this writing. The savings rate: 3.5%
Employment	An ugly number for years and difficult to predict. Especially now with so many people permanently leaving the workforce.	I was too optimistic and said 8% would be reasonable, we only just now got to 8.6%	Did make the call the rate wouldn’t fall much, saying 7.5% was impossible
Stock Market	Predictions are no fun without making a call on stocks	Small cap stocks would outperform large ones. Quite the opposite.	I did estimate a PE for the S&P 500 to fall from 23 to below 20. It fell to that mark and below in late summer and settled around 21 in December. PE for S&P 500 source.
Sarah Palin	No comment	I said she’d run.	But clarified she’d only do it to stay relevant. She was able to do this anyway with the SuperPAC. Had I known such a thing existed I might have phrased my prediction differently.
Municipal Bonds	This is what local governments use to raise money. At the beginning of last year people were worried there might be a crisis here.	Called stocks to outperform bonds. Called it wrong.	There would be no crisis, partially wishful thinking on my part.
Interest Rates	We all know they wouldn’t go up, a bit surprising they actually went down. Unless you consider increased demand for American debt which once again seems to be the most stable in the world.	Nothing	Fed would keep rates low, and the rates everyone pays would stay low. I didn’t predict an actual range but also didn’t predict them to fall. Rates won’t move until inflation does.
Inflation	People were still worrying about this. I said there was nothing to worry about.	Nothing	Inflation remained within reasonable parameters.
Europe	2010 was a rough year for Europe, I expected the worse to be over but that the Euro as a currency would be called into question.	Definitely still had a crisis. Still ongoing.	Worry remains for Europe. I said stress and strains would create doubt over the Euro as a currency and that was spot on. Also said that would result in the Dollar strengthening against the Euro. At the beginning of the year a dollar bought about 0.75 Euro. Now it buys 0.77. Not quite a rally but study a chart and you’ll see it.
Surprises	There will be some kind of surprise that no one expected	Nothing	Too hard to make a specific call. Arab Spring counts though.

Not too bad if I say so myself. Keep in mind this is all in good fun. Whether I’m accurate or not doesn’t matter. You should trust my predictions as much as a presidential candidate’s promises.

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The Principal-Agent Problem Was Really Just A Theory

The Weakonomist — Wed, 28 Dec 2011 15:30:06 +0000

Back in the 1970s some finance professors proposed an idea that has since shaped the very landscape of business. Basically, if the owner of a company also manages the company, they have all the motivation they need to maximize profits. But when a shareholder (principal) hires a manager (agent), that manager may have other things on his mind than maximizing the return for the shareholder. The manager will focus on his own thing. Depending on who you talk to, this became known as either the Principal-Agent Problem or the Principal-Agent Theory.

To fix this “problem” shareholders started tying the performance of the company’s stock to the compensation of the managers they hired. Seemed like the perfect solution, the agent effectively becomes a principal. Since the 1970s, executive compensation has exploded and (at least from the outside) it looks like all the executives really care about is maximizing shareholder value (and thus their own). One could thus argue the Occupy Movement is a byproduct of the principal-agent problem.

Which brings us to the present. Have things really gotten better for corporations, employees, and people as a whole since this idea became standard practice for compensation? Of course not. In modern society corporations are considered evil. And corporations today are struggling with profitability. Many have called this the death of capitalism. Is all this because of a poorly designed compensation system? It’s certainly played a part.

The author of a new book, Fixing the Game, thinks he’s got the solution too. In the book Roger Martin argues that the focus should be on the customer, instead of the shareholder. He gives examples of companies that put the customer first, but those don’t really matter here. This theory has merit, but it worries me as being too simplistic. It’s no more a solution to the problem than Principal-Agent theory and a couple of cherry-picked examples does not a solution make.

That said, it’s worth a try. I buy the idea that the Principal-Agent Theory hasn’t really helped anyone except those in the c-suite. The theory may hold true, which means the compensation system needs to be repaired. But the customer focused strategy, is just that, a strategy. The goal is still maximizing shareholder return. The two can operate together if the agent’s compensation is more focused on executing the strategy and creating sustainable profits for the company.

The problem with compensation today is a short-term focus. Today, a CEO can inflate a company’s stock price for a few years and then leave with $100 million and the company is really no better as the stock price tanks when the price returns to “normal”. If a CEO had to wait a decade for the payday, and the pay was tied to the performance over that time, you might see different managerial actions. Especially if the CEO had to wait a few years after retiring to actually get paid.

Capitalism isn’t necessarily broken, but it could certainly use a makeover. The customer focused strategy makes sense from a theoretical standpoint, but so did the Principal-Agent “Problem”. Does it stand up in the real world? I certainly hope enough companies give it a try so we can find out. But without a change to compensation and executive focus there’s nothing to even talk about. The article below points out that Upton Sinclair said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it”.

Read: The Dumbest Idea In The World: Maximizing Shareholder Value (Forbes)

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