Today, the shift towards microenterprise has been an empowering movement for many of the individuals who like to be educated about what influences their compensation as well as be a driving force in determining their level of income. Conglomerates are now beginning to interface with these smaller, more agile and motivated teams finding that the more accountability one holds in a given circumstance, the better the outcome of the situation. It is easy to see why a business owner of a small business would be much more motivated to address all facets of relationships.
One such company that has lead the way to empowering enterprise is that of Vanguard Cleaning. Utilizing a two level hierarchical franchise, which are labeled as a janitorial franchise and regional master franchise. Janitorial business are independently owned and are fed accounts by the master franchise, which manages the sales and marketing forces for the company and interfaces with the franchise company. Whether one is looking to extend an established company and brand with a business of their own, or is looking to switch to a team of reliable, results orientated cleaning team, Vangaurd is a safe bet, boasting names such as GE, DHL and Hitachi for clients.
If you are price competitive and looking for a free bid on holistic cleaning solutions, or have any other questions that Vanguard may be able to answer for you, call 509-922-1499 and ask for Deidre. She should be able to get all of your questions answer or point you to the person who can.
Tuesday, September 8, 2009
Thursday, August 27, 2009
Why We Need the Federal Reserve
The Federal Reserve has been receiving a good amount of negative intention in the press lately. It is par for the course... when America hits tough times, our citizens point their finger up no matter who is held accountable for regulated industries and if they are good or bad, Democrat or Republican, male or female. But is the answer really to take the Federal Reserve out of the picture and let commerical banking run it's own course?
If you would like a case study of what this looks like, look no further than the great depression in 1929. To dismiss the importance of the Federal Reserve is to ignore the most distinct and basic principles of banking. While I'm not wholly endorsing the Federal Reserve, I'm pleased with the solution until a better practice makes itself apparent. To gain an appreciation for why there is a true need that is filled, to whatever extent, by the Federal Reserve, one must understand the principle of leveraged deposits in a banking system.
Banking is only attractive if it can make enough money to support it's operations. A second hurdle of sustained satisfaction of all involved parties comes in the form of profits for those who invest in the company to finance the very operation of the bank. When deposits start to flow in, a good banker will know how much money to loan/invest and how much to keep in the bank for potential withdrawals (when you take cash out). But even the best banker cannot predict all external factors.
So assuming that every once in a while a banker will fall out of balance with what he has loaned/invested and what he needs to meet withdrawal demands, we then would have to address the potential downside of one bank failing. Could horror stories of one family losing their savings and investments compell other families to run to the banks and demand money that is tied up creating value in the form of interest payments to the public?
As you see, the very process of loaning money creates a kind of economic elasticity, due to the expansion of buying power. If a bank were to loan a portion of everyone's checking account out in the form of loans, they would be duplicating buying power. The bank has promised the availability of funds to several parties when it cannot make good on all those promises at the same time. While this seems dangerous enough, the real potential of this effect becomes apparent when you assume that the loan will be deposited in the same, or perhaps another bank only to be loaned or invested many times over. Until commercial banking changes dramatically, you can be sure that there will be instances when commerical banks would fail without an additional tier of elasticity.
This comes in the form of the Federal Reserve. Employing the same principle, the Federal Reserve can take deposits from the commerical banks and invest the money in the form of securities. For example, the government issues bonds to fund it's activities. If it is seen that there is economic tension on money due to abnormal events, then they can buy the securities back, or the securities of corporations, to create extra buying power. On the books, the money is still available to the commercial banks, but again... the Federal Reserve could not make good on all promises at one time.
The Govenors of the Federal Reserve also determine how much banks will need to hold for reserves, limiting and manipulating the amount of times the purchasing power can be duplicated. Note this introduces a diminishing factor into the picture. If banks must hold 10% of deposits, an initial deposit of $10,000 would be loaned out in the amount of $9,000, which would result in a loan or investment of $8,100, etc. Given this example, it is easy to see why a governing entity is needed to create an extra level of elasticity for the Chrismas season and for economic mishaps.
Going up the chain, the International Monetary Fund manages money in the same way to control money on a global scale. Indeed, the US is all caught up on the required deposits and has no outstanding loans from the IMF. So it seems that we are still in good order. To look at the situation from a horizontal analysis, other countries such as Japan implement the same type of centralized bank for allowing the economy to breath easier. A good number of European countries also deal with a central bank.
So while the system may not be perfect, the answer isn't to X the Federal Reserve... that would just cripple our system. If you are talking about changing practices on every level of money management up to the international level, then sure, let's hear your suggestions. But realize this is the commericial banks, the people who take loans out of the commericial banks, the pratices of other developed nations, the IMF, etc, etc. To just point to the Federal Reserve and make them out to be the bad guys is ignorant... the very least we can do is articulate our feedback in a constructive manner, even if they are truly going against the grain.
If you would like a case study of what this looks like, look no further than the great depression in 1929. To dismiss the importance of the Federal Reserve is to ignore the most distinct and basic principles of banking. While I'm not wholly endorsing the Federal Reserve, I'm pleased with the solution until a better practice makes itself apparent. To gain an appreciation for why there is a true need that is filled, to whatever extent, by the Federal Reserve, one must understand the principle of leveraged deposits in a banking system.
Banking is only attractive if it can make enough money to support it's operations. A second hurdle of sustained satisfaction of all involved parties comes in the form of profits for those who invest in the company to finance the very operation of the bank. When deposits start to flow in, a good banker will know how much money to loan/invest and how much to keep in the bank for potential withdrawals (when you take cash out). But even the best banker cannot predict all external factors.
So assuming that every once in a while a banker will fall out of balance with what he has loaned/invested and what he needs to meet withdrawal demands, we then would have to address the potential downside of one bank failing. Could horror stories of one family losing their savings and investments compell other families to run to the banks and demand money that is tied up creating value in the form of interest payments to the public?
As you see, the very process of loaning money creates a kind of economic elasticity, due to the expansion of buying power. If a bank were to loan a portion of everyone's checking account out in the form of loans, they would be duplicating buying power. The bank has promised the availability of funds to several parties when it cannot make good on all those promises at the same time. While this seems dangerous enough, the real potential of this effect becomes apparent when you assume that the loan will be deposited in the same, or perhaps another bank only to be loaned or invested many times over. Until commercial banking changes dramatically, you can be sure that there will be instances when commerical banks would fail without an additional tier of elasticity.
This comes in the form of the Federal Reserve. Employing the same principle, the Federal Reserve can take deposits from the commerical banks and invest the money in the form of securities. For example, the government issues bonds to fund it's activities. If it is seen that there is economic tension on money due to abnormal events, then they can buy the securities back, or the securities of corporations, to create extra buying power. On the books, the money is still available to the commercial banks, but again... the Federal Reserve could not make good on all promises at one time.
The Govenors of the Federal Reserve also determine how much banks will need to hold for reserves, limiting and manipulating the amount of times the purchasing power can be duplicated. Note this introduces a diminishing factor into the picture. If banks must hold 10% of deposits, an initial deposit of $10,000 would be loaned out in the amount of $9,000, which would result in a loan or investment of $8,100, etc. Given this example, it is easy to see why a governing entity is needed to create an extra level of elasticity for the Chrismas season and for economic mishaps.
Going up the chain, the International Monetary Fund manages money in the same way to control money on a global scale. Indeed, the US is all caught up on the required deposits and has no outstanding loans from the IMF. So it seems that we are still in good order. To look at the situation from a horizontal analysis, other countries such as Japan implement the same type of centralized bank for allowing the economy to breath easier. A good number of European countries also deal with a central bank.
So while the system may not be perfect, the answer isn't to X the Federal Reserve... that would just cripple our system. If you are talking about changing practices on every level of money management up to the international level, then sure, let's hear your suggestions. But realize this is the commericial banks, the people who take loans out of the commericial banks, the pratices of other developed nations, the IMF, etc, etc. To just point to the Federal Reserve and make them out to be the bad guys is ignorant... the very least we can do is articulate our feedback in a constructive manner, even if they are truly going against the grain.
Economic Opportunity - Grow through Eliminating Expenses
While the media is reporting that indicators are pointing towards recovery, it still means that we have a long march back to level ground. For most, the economy will feel somewhat sluggish. Opportunities of the old kind are less likely to present themselves with the same frequency. Let's face it, now that some of us are getting out of the ruts, the collective confidence will be damaged for some time to come. So what kind of opportunities are likely to be granted approval when a proposal is laid upon the desks of key decision makers?
One possibility is the Investing in Eliminating Expenses approach. Now that money is loosening up, organization by organization, dollar by dollar, stability is a major factor in decision making. When you are involved in a speculatively funded venture and expenses run high, this will surely spell your demise once money tightens up. But the inventive consultant or employee can turn this dismal situation into a plethra of opportunity.
Eliminating expenses, whether going green with sustainable energy sources (solar power and water turbines) or automating tedious tasks to enable an organization to really focus on value creation, are going to be large areas of opportunity while this recession is still fresh in our minds. While corporate clients are more likely investors in expense elimination, don't discount the individual's or family's desire to go off the grid or implement sustainability practices like gardens and compost piles in the years to come.
Anyway organizations and individuals can narrow the operating margin is sure to be a great hit in the times ahead. A key takeaway for all business owners and individuals has been not to assume that trends will continue and operating accordingly. It would be best to play into this for the next few years and not work against it.
One possibility is the Investing in Eliminating Expenses approach. Now that money is loosening up, organization by organization, dollar by dollar, stability is a major factor in decision making. When you are involved in a speculatively funded venture and expenses run high, this will surely spell your demise once money tightens up. But the inventive consultant or employee can turn this dismal situation into a plethra of opportunity.
Eliminating expenses, whether going green with sustainable energy sources (solar power and water turbines) or automating tedious tasks to enable an organization to really focus on value creation, are going to be large areas of opportunity while this recession is still fresh in our minds. While corporate clients are more likely investors in expense elimination, don't discount the individual's or family's desire to go off the grid or implement sustainability practices like gardens and compost piles in the years to come.
Anyway organizations and individuals can narrow the operating margin is sure to be a great hit in the times ahead. A key takeaway for all business owners and individuals has been not to assume that trends will continue and operating accordingly. It would be best to play into this for the next few years and not work against it.
Saturday, August 22, 2009
Setting the Record Straight on US Debt
Facts from the Internation Monetary Fund - World Economic Outlook Database, April 2009
For the purpose of this article, we will be focusing on a series of 7 countries each represented by their respective debt versus GDP, a measurement similar to income/debt ratios for businesses. Note that in 1987, United States taking second to only Italy.
Through data that has not been forecasted, we can see that the United States is well within the pack, placing 4th in out of 7 in the seculative operations measure. The pack is distuingished from the extremes of Canada at the low end and Japan/Italy at the high end.
Forecasted data, which should digested with a grain of salt, shows signs of global economic stress, with significant rises in this measure across the board.
Why is this of Significance to the Analyst?
Contrary to the reporting of the financial press, we are operating at quite a healthy debt to GDP level. We maintain good standing with the IMF, which is similar to a commerical bank holding reserves as a requirement of the membership of the Federal Reserve. We aren't at crisis levels in the global economy, while other countries are taking loans out via the IMF.
As a country and even a financed globe matures, the approach to financing that a country pursues will show signs of tension. Currency is now subject to the largest scalability problem that we have faced, dwarfing the global communication challenge. Because there are several tiers that esstentially create extra buying power through the concept of leveraged accounts (e.g. the commerical bank that securitizes peoples loans, the the federal reserve bank that buys government securities), there is a point where global economic issues harmonize and the peaks and lows of each country are intensified by that of each other's peaks and lows. This is the nature of our current financial system.
That the United States could not have mitigated or entirely thwarted the economic crisis is concerning, but our economic issues at hand won't be solved entirely by the global landscape. We must look to the measurements of and paths that Americans hold. Are they looking at the economy with a bias of threat versus opportunity? Is venturing out and failing in business more attractive than failing because of current expenditure weight for personal finacing? The basic motives and actions of citizens is what should be of primary concern to the long-term economic analyst. Similar to cholesterol, there is good and bad credit, even within a tight money situation. Questions of this nature will produce the determinant for the good/bad credit categorization.
What Committee can we Build to Kick Start the Economy?
The job of the ideal committee to get the US ecomony is to build it's usual global economic barriers by stimulating the local economy. Energy is a great initiative, but the availability of currency facilities energy exploration, discovery and development. It is not a viable economic recovery plan. It is a viable sustainability plan. What the country really needs is an enterprise development committee that facilities the high risk/high value intellectual propery environment.
The value of real estate would need to drop considerable to get the US back to the business-consumer-real estate financing model, which I have proposed as being the only feasible economic ratio that will produce a healthy economy that is void of enterprise and therefore innovation strangulation. If an individual were to arrive in a new country focusing on long-term groth, only a fool would allocate 41% for personal financing, 32% for profit generating activities and 27% for housing. Maybe the overspending housewife, but not people of a motivated and financially prudent nature.
We need to realign our motives to produce value for our country. Construction and real estate will be hit the hardest, but this is the nature of the necessary correction. The Committee should be focused on facilitating and acting as a steward to a fail-fast, carry-value economic stimulus package. This would encourage businesses to fail intelligently, aligned to certain standards and national platforms for maintaining IP resulting from the initiative. Any course of intellectual property that has been previously pursued by a private party is up for grabs, so long as they have some matching funds. If they fail, the IP should be put up for auction via a weighting system that considers the bid and qualification of each bidder (e.g. a bidder with a track record of great success doesn't have to bid as much as a new comer or a track record of failures).
This is just one wild thought, but I thought it may be a step in the right direction for the economic recovery. A most intriguing idea for private parties, if this is not picked up by the government: the committee could very well be that of a private nature or a network thereof. But first, we must free up our resources from real estate in order for anyone to champion this effort, which would require government action if we wanted to accelerate this process. Perhaps even more threatening is the idea that the US will continue to willing finance real estate and strangle business in an attempt to let people keep the American dream rather than finance our true growth as a nation.
For the purpose of this article, we will be focusing on a series of 7 countries each represented by their respective debt versus GDP, a measurement similar to income/debt ratios for businesses. Note that in 1987, United States taking second to only Italy.
Through data that has not been forecasted, we can see that the United States is well within the pack, placing 4th in out of 7 in the seculative operations measure. The pack is distuingished from the extremes of Canada at the low end and Japan/Italy at the high end.
Forecasted data, which should digested with a grain of salt, shows signs of global economic stress, with significant rises in this measure across the board.
Why is this of Significance to the Analyst?
Contrary to the reporting of the financial press, we are operating at quite a healthy debt to GDP level. We maintain good standing with the IMF, which is similar to a commerical bank holding reserves as a requirement of the membership of the Federal Reserve. We aren't at crisis levels in the global economy, while other countries are taking loans out via the IMF.
As a country and even a financed globe matures, the approach to financing that a country pursues will show signs of tension. Currency is now subject to the largest scalability problem that we have faced, dwarfing the global communication challenge. Because there are several tiers that esstentially create extra buying power through the concept of leveraged accounts (e.g. the commerical bank that securitizes peoples loans, the the federal reserve bank that buys government securities), there is a point where global economic issues harmonize and the peaks and lows of each country are intensified by that of each other's peaks and lows. This is the nature of our current financial system.
That the United States could not have mitigated or entirely thwarted the economic crisis is concerning, but our economic issues at hand won't be solved entirely by the global landscape. We must look to the measurements of and paths that Americans hold. Are they looking at the economy with a bias of threat versus opportunity? Is venturing out and failing in business more attractive than failing because of current expenditure weight for personal finacing? The basic motives and actions of citizens is what should be of primary concern to the long-term economic analyst. Similar to cholesterol, there is good and bad credit, even within a tight money situation. Questions of this nature will produce the determinant for the good/bad credit categorization.
What Committee can we Build to Kick Start the Economy?
The job of the ideal committee to get the US ecomony is to build it's usual global economic barriers by stimulating the local economy. Energy is a great initiative, but the availability of currency facilities energy exploration, discovery and development. It is not a viable economic recovery plan. It is a viable sustainability plan. What the country really needs is an enterprise development committee that facilities the high risk/high value intellectual propery environment.
The value of real estate would need to drop considerable to get the US back to the business-consumer-real estate financing model, which I have proposed as being the only feasible economic ratio that will produce a healthy economy that is void of enterprise and therefore innovation strangulation. If an individual were to arrive in a new country focusing on long-term groth, only a fool would allocate 41% for personal financing, 32% for profit generating activities and 27% for housing. Maybe the overspending housewife, but not people of a motivated and financially prudent nature.
We need to realign our motives to produce value for our country. Construction and real estate will be hit the hardest, but this is the nature of the necessary correction. The Committee should be focused on facilitating and acting as a steward to a fail-fast, carry-value economic stimulus package. This would encourage businesses to fail intelligently, aligned to certain standards and national platforms for maintaining IP resulting from the initiative. Any course of intellectual property that has been previously pursued by a private party is up for grabs, so long as they have some matching funds. If they fail, the IP should be put up for auction via a weighting system that considers the bid and qualification of each bidder (e.g. a bidder with a track record of great success doesn't have to bid as much as a new comer or a track record of failures).
This is just one wild thought, but I thought it may be a step in the right direction for the economic recovery. A most intriguing idea for private parties, if this is not picked up by the government: the committee could very well be that of a private nature or a network thereof. But first, we must free up our resources from real estate in order for anyone to champion this effort, which would require government action if we wanted to accelerate this process. Perhaps even more threatening is the idea that the US will continue to willing finance real estate and strangle business in an attempt to let people keep the American dream rather than finance our true growth as a nation.
Confidence in the US Economy Stalls for 10+ years
Facts from the S & P 500 Index
Looking from a period of January 3rd, 1950 to August 3rd, 2009, it appears that we have had both the highest degree of exponential growth in the confidence of the companies listed in the index, and also the most pronounced stall, spanning a period of over 12 years. This is outlined by a low of 666.79 on 3/2/2009 compared with a level of 669.12 on 5/1/1996. Top levels of confidence reached in both distinct periods of cyclic confidence only differed by a nominal figure of about 23 points, or about 1.46% (1576.09 on 3/1/2000 and 1552.87 on 10/1/2007).
The last development of our immediate interest will take us to the dramatic increase in the volume of trading that distinguished itself first in August of 2007, and epidimized in March of 2009, for a grand total of 7,633,306,300 shares traded, valued at about 5.1 trillion dollars. For a comparison with a volume closer to the average, October of 2007 registered 3,477,202,100 trades valued at about 5.4 trillion dollars.
Conclusions Drawn from a Limited Perspected
If I were to wonder into thought and attempt to ponder any significance of this data, I would begin by rudely suggesting that it looks as though the US economy is sputtering as of the late. Indeed, if the growth rate of the confidence perhaps did not skyrocket, it wouldn't have overemphasized the dramatic downturn, but that would be discounting the scalability of technology and business. The advent of the Internet and the "flattening of the world" to a more level playing field for global affairs and markets indeed should have boosted the velocity of growth. So why is our valuation in business and assets so low?
Continuing down a delusional path of thought, I would venture to guess that there is some sort of economic strain on the growth of business and the assets thereof. Considering the most direct and concise data points, I would look to input and output and see if it is indeed business that is eating the financial value in our country, or if perhaps investors are going through collective mood swings only to temporarily overvalue only to ultimately undervalue our primary source of innovation and engine for growth.
An Uneducated Guess at the Reason Behind the Lack of Confidence
While I've already traveled too far down a path of assumptions, making this purely a guess based off of thought experiments, I would attribute this again to the lack of financing for business due to the rise in real estate financing. We've basically liquidated the American dream. While overinflation as a whole didn't register in any signicant way, we are now feeling the constraints of hyper inflation experienced in one area of the country while pulling financing power from our source of global value.
Before moving onto other areas of analysis, it needs to be heard that this is a very real threat, that is putting consumers at the center of the interest generating system. Placing this at the center of financial troubleshooting models fits every scenario that has been attempted on my account. Any other experience in the matter, whether the process is documented or not, would be much appreciated.
Looking from a period of January 3rd, 1950 to August 3rd, 2009, it appears that we have had both the highest degree of exponential growth in the confidence of the companies listed in the index, and also the most pronounced stall, spanning a period of over 12 years. This is outlined by a low of 666.79 on 3/2/2009 compared with a level of 669.12 on 5/1/1996. Top levels of confidence reached in both distinct periods of cyclic confidence only differed by a nominal figure of about 23 points, or about 1.46% (1576.09 on 3/1/2000 and 1552.87 on 10/1/2007).
The last development of our immediate interest will take us to the dramatic increase in the volume of trading that distinguished itself first in August of 2007, and epidimized in March of 2009, for a grand total of 7,633,306,300 shares traded, valued at about 5.1 trillion dollars. For a comparison with a volume closer to the average, October of 2007 registered 3,477,202,100 trades valued at about 5.4 trillion dollars.
Conclusions Drawn from a Limited Perspected
If I were to wonder into thought and attempt to ponder any significance of this data, I would begin by rudely suggesting that it looks as though the US economy is sputtering as of the late. Indeed, if the growth rate of the confidence perhaps did not skyrocket, it wouldn't have overemphasized the dramatic downturn, but that would be discounting the scalability of technology and business. The advent of the Internet and the "flattening of the world" to a more level playing field for global affairs and markets indeed should have boosted the velocity of growth. So why is our valuation in business and assets so low?
Continuing down a delusional path of thought, I would venture to guess that there is some sort of economic strain on the growth of business and the assets thereof. Considering the most direct and concise data points, I would look to input and output and see if it is indeed business that is eating the financial value in our country, or if perhaps investors are going through collective mood swings only to temporarily overvalue only to ultimately undervalue our primary source of innovation and engine for growth.
An Uneducated Guess at the Reason Behind the Lack of Confidence
While I've already traveled too far down a path of assumptions, making this purely a guess based off of thought experiments, I would attribute this again to the lack of financing for business due to the rise in real estate financing. We've basically liquidated the American dream. While overinflation as a whole didn't register in any signicant way, we are now feeling the constraints of hyper inflation experienced in one area of the country while pulling financing power from our source of global value.
Before moving onto other areas of analysis, it needs to be heard that this is a very real threat, that is putting consumers at the center of the interest generating system. Placing this at the center of financial troubleshooting models fits every scenario that has been attempted on my account. Any other experience in the matter, whether the process is documented or not, would be much appreciated.
Friday, August 21, 2009
Consumer Credit Crunch Causes Colossal Capital Constriction in US
Facts from Federal Reserve Change-Off and Delinquency Rates
All indicators of the economy that can be observed from the charge-off rates indicate that the economy as a whole is under financial stress, with consumers creating the greatest disparity when compared to ideal fulfillment. The most notable data points run throughout consumer credit, with credit cards approaching the 10% charge-off mark.
Following credit cards comes consumer loans (not including credit cards) and Other consumer loans. The mark for the overall average All loan level comes in next, followed by Single family residential mortages. Note that consumer credit defaults account for the entire top portion of the defaults nationaly and boast contains the overall average of loans within this range.
Although not so concerning, one last area of interest is in that of Commerical real estate loans. From the end of 2008 to the beginning of 2009, commerical real estate loan charge-offs dropped from 2.4% to 1.33%.
(Click the graph below to enlarge... there is perhaps too much data, but it is valuable nonetheless.)
Building Upon Prior Dogma
The prior discussion in the topic of credit allocation in this country, as measured through accounts receivables for US Financing Companies, shows that we were relying on consumers to create the most value as measured by the fulfillment of loan repayments. Through the nature of numbers, one might assume that the overhead eating away from the consumer activity would then filter into real estate activities, which in turn would consume additional operating expenses and carry the remainder to business operations.
It would seem as though we overfunded consumers, but this is indeed not the true issue at hand. Consumers have done well at keeping their yields stable over time. Unfortunetly, the allocation that real estate has received in the past years has strangled financing business, our historical growth engine. Our fore fathers would have considered it odd that we wouldn't adjust operations to assume that business was indeed the most viable asset for generating interest payments and it's net profit may trickle into the hands of consumers, who's everyday needs would be fulfilled only to ultimately pay their mortage, on of many bills.
A Boldly Ignorant Solution to this Issue
Concern for the future of our country sometimes requires brash action which temporarily puts us through uncomfortable times. It is the classic energy consumption conundrum of committing resources only to go backwards not knowing if cost of the action will ultimately result in a positive return. An incorrect gamble can and will contribute to the momentum of the crisis only to risk permanent impression on the global finance footprint, and not necessarily favorably for the states.
Working this multi-variable finance issue backwards, I would say that our immediate action would need to strangle real estate even more than we have seen of the late. Facilitating and overseeing the bankruptcies real estate will ensure that the capital can be reallocated to business and put our resources back to work riding along the most powerful financial growth vehicle our country has to offer. It will feel awkward to tell people to give up their houses (and sense of security) and pursue the seemingly risky bet of business. But if all of America continues to sit in their homes and find new ways to finance debt, we will indeed starve while waiting for food when the grocery center was only a five mile hike filled with valleys, rivers, wild animals and poisoness insects. Let's take that hike and come out a country with more character.
And what is the inevitable potential adverse reaction to this effort? We fund people's ideas which ultimately fail to gain momentum as a whole and people learn what does not work in a depressed economy. People are thrown out of their homes only to live in their offices where everything is expensed and attributed the cost of business. More aggressive credit recovery methods due to increased business activity will feed on themselves and ultimately cost a large amount of money to spin wheels only to devalue homes and inflate the cost of operations in an attempt to force innovation. Basically, a place close to where our current indicators point we are going.
Ideally, not the best outcome, but relatively speaking, it is no worse than our current condition. The only change is devaluing the rewards of our economic growth in place of the operatings thereof, something seems counter-intuitive, but when the rabbit utilizes leverage to bend the stick and grab the carrot it only makes sense to grab the carrot back and restring it to get the rabbit running again.
All indicators of the economy that can be observed from the charge-off rates indicate that the economy as a whole is under financial stress, with consumers creating the greatest disparity when compared to ideal fulfillment. The most notable data points run throughout consumer credit, with credit cards approaching the 10% charge-off mark.
Following credit cards comes consumer loans (not including credit cards) and Other consumer loans. The mark for the overall average All loan level comes in next, followed by Single family residential mortages. Note that consumer credit defaults account for the entire top portion of the defaults nationaly and boast contains the overall average of loans within this range.
Although not so concerning, one last area of interest is in that of Commerical real estate loans. From the end of 2008 to the beginning of 2009, commerical real estate loan charge-offs dropped from 2.4% to 1.33%.
(Click the graph below to enlarge... there is perhaps too much data, but it is valuable nonetheless.)
Building Upon Prior Dogma
The prior discussion in the topic of credit allocation in this country, as measured through accounts receivables for US Financing Companies, shows that we were relying on consumers to create the most value as measured by the fulfillment of loan repayments. Through the nature of numbers, one might assume that the overhead eating away from the consumer activity would then filter into real estate activities, which in turn would consume additional operating expenses and carry the remainder to business operations.
It would seem as though we overfunded consumers, but this is indeed not the true issue at hand. Consumers have done well at keeping their yields stable over time. Unfortunetly, the allocation that real estate has received in the past years has strangled financing business, our historical growth engine. Our fore fathers would have considered it odd that we wouldn't adjust operations to assume that business was indeed the most viable asset for generating interest payments and it's net profit may trickle into the hands of consumers, who's everyday needs would be fulfilled only to ultimately pay their mortage, on of many bills.
A Boldly Ignorant Solution to this Issue
Concern for the future of our country sometimes requires brash action which temporarily puts us through uncomfortable times. It is the classic energy consumption conundrum of committing resources only to go backwards not knowing if cost of the action will ultimately result in a positive return. An incorrect gamble can and will contribute to the momentum of the crisis only to risk permanent impression on the global finance footprint, and not necessarily favorably for the states.
Working this multi-variable finance issue backwards, I would say that our immediate action would need to strangle real estate even more than we have seen of the late. Facilitating and overseeing the bankruptcies real estate will ensure that the capital can be reallocated to business and put our resources back to work riding along the most powerful financial growth vehicle our country has to offer. It will feel awkward to tell people to give up their houses (and sense of security) and pursue the seemingly risky bet of business. But if all of America continues to sit in their homes and find new ways to finance debt, we will indeed starve while waiting for food when the grocery center was only a five mile hike filled with valleys, rivers, wild animals and poisoness insects. Let's take that hike and come out a country with more character.
And what is the inevitable potential adverse reaction to this effort? We fund people's ideas which ultimately fail to gain momentum as a whole and people learn what does not work in a depressed economy. People are thrown out of their homes only to live in their offices where everything is expensed and attributed the cost of business. More aggressive credit recovery methods due to increased business activity will feed on themselves and ultimately cost a large amount of money to spin wheels only to devalue homes and inflate the cost of operations in an attempt to force innovation. Basically, a place close to where our current indicators point we are going.
Ideally, not the best outcome, but relatively speaking, it is no worse than our current condition. The only change is devaluing the rewards of our economic growth in place of the operatings thereof, something seems counter-intuitive, but when the rabbit utilizes leverage to bend the stick and grab the carrot it only makes sense to grab the carrot back and restring it to get the rabbit running again.
Thursday, August 20, 2009
Economic Trend Report - Real Estate Receivables Outgrow Business Financing Receivables
Facts from Federal Reserve G20 Data
Observing the accounts receivable for financing companies during the 20 year period 1988-2008, there was a development that was quite unique. From a percentage of between 10 and 11 in 1988 up to and beyond the infliction point, financing for real estate met and exceeded that of business in Q3 of 2004 at between 31 and 32 percent. Real estate financing continued to balloon until it reach between 34 and 35 percent in Q3 of 2006 while business financing sank to a low of between 31 and 32 percent.
While business caught up with real estate financing in Q4 of 2007 at between 30 and 31 percent, the percent of consumer account receivables reached above 40 percent for the first time and has held at above that level through 2008.
Observed Assumptions
For the economy to proceed in this direction for almost a 4 year stretch and not set off alarms at the federal reserve, an analyst would need to assume that this country could derive an increasing amount of financial value from real estate with minimal dependence on business. This trend drove both business and real estate financing below consumer financing, business financing giving up majority status in Q3 of 2003. While no one man drove this trend, the overall effect was placing financial confidence first in consumers, then in real estate followed by business.
Put in a different way, the largest asset base for generating interest for the country was consumers followed by real estate. Our smallest asset base was indeed business. This trend held from the Q2 of 2004 through the end of 2007. Collectively, we were putting our confidence in the consumer to generate value ahead of both real estate and business, a bet that we are now attempting to back out of at the first sign of the yield.
Conclusion
While the manfestation of this ice berg has tipped in the sub-prime mortage securities market as economic forces cause the economy to swing back into the natural balance, there will be a good portion of pain ahead in the business sector. Real estate financing as measured through percentage of accounts receivable will need to shrink another 1/3 in order to allocate the majority of funding to business instead of consumers. In otherwords, in order to get the proper amount of gas flowing in our economic engine, we could need to divert 1/3 financing from real estate to business.
Because we are observing business pains through the real estate sector, it will be a long while before policy makers change interest rates to encourage businesses to begin borrowing. The fact that our country's largest domestic investment just took a plunge means that money is tied up, which causes consumers to hold more of the credit. Basically we have strangled business only to kill real estate and place consumers at the center of our economic engine. While real estate did shrink back below business financing, there is still a long ways to go before our true economic engine receives the funding it needs. Hence, betting on the immediate return of business may be a risky play, especially while so much money is still tied up in real estate.
Observing the accounts receivable for financing companies during the 20 year period 1988-2008, there was a development that was quite unique. From a percentage of between 10 and 11 in 1988 up to and beyond the infliction point, financing for real estate met and exceeded that of business in Q3 of 2004 at between 31 and 32 percent. Real estate financing continued to balloon until it reach between 34 and 35 percent in Q3 of 2006 while business financing sank to a low of between 31 and 32 percent.
While business caught up with real estate financing in Q4 of 2007 at between 30 and 31 percent, the percent of consumer account receivables reached above 40 percent for the first time and has held at above that level through 2008.
Observed Assumptions
For the economy to proceed in this direction for almost a 4 year stretch and not set off alarms at the federal reserve, an analyst would need to assume that this country could derive an increasing amount of financial value from real estate with minimal dependence on business. This trend drove both business and real estate financing below consumer financing, business financing giving up majority status in Q3 of 2003. While no one man drove this trend, the overall effect was placing financial confidence first in consumers, then in real estate followed by business.
Put in a different way, the largest asset base for generating interest for the country was consumers followed by real estate. Our smallest asset base was indeed business. This trend held from the Q2 of 2004 through the end of 2007. Collectively, we were putting our confidence in the consumer to generate value ahead of both real estate and business, a bet that we are now attempting to back out of at the first sign of the yield.
Conclusion
While the manfestation of this ice berg has tipped in the sub-prime mortage securities market as economic forces cause the economy to swing back into the natural balance, there will be a good portion of pain ahead in the business sector. Real estate financing as measured through percentage of accounts receivable will need to shrink another 1/3 in order to allocate the majority of funding to business instead of consumers. In otherwords, in order to get the proper amount of gas flowing in our economic engine, we could need to divert 1/3 financing from real estate to business.
Because we are observing business pains through the real estate sector, it will be a long while before policy makers change interest rates to encourage businesses to begin borrowing. The fact that our country's largest domestic investment just took a plunge means that money is tied up, which causes consumers to hold more of the credit. Basically we have strangled business only to kill real estate and place consumers at the center of our economic engine. While real estate did shrink back below business financing, there is still a long ways to go before our true economic engine receives the funding it needs. Hence, betting on the immediate return of business may be a risky play, especially while so much money is still tied up in real estate.
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