Sunday, May 29, 2016

Lag-time Effect Alive And Well In Our Financial World

Ignoring Lag-time Distorts Our Perception Of Reality
In our fast pace world people have come to expect everything to happen rapidly. The truth is there is often a lag time between cause and effect. This means days, weeks, months, or even years may pass before we see how a certain event or policy has affected us. This lag time generally becomes evident to the masses only after it has hit the economy like a ton of bricks. One of the most glaring examples of this was the 2008 housing meltdown where it became obvious that the prices of homes was not a one way affair where a person could borrow, borrow, borrow, and expect to be bailed out by constantly rising prices.

The element of lag-time should not be discounted. This is particularly true when it comes to economic policy. It is easy to underestimate how complex the interaction playing out across global markets add to and skew even the best intentions of policy makers. This means many variables are often out of their control. A factor that further muddies the water is the fact that hidden agendas lurk everywhere and that those making the decisions are not as honorable, smart, or as well intentioned as we would like. Many times people are given credit for the fruits of seeds they did not plant or the misdeeds of those before them. In short this is akin to the idea of who is left holding the bag when it breaks.

As of late the media has been opining on the legacy of President Obama, the idea of a so called "legacy" I consider much overdone and often misleading. History has a way of being rewritten to suit the views of the person in charge of the narrative which means truth has a way of being discounted.  In our overly simplistic way of trying to understand events the lag-time effect should not be forgotten, today America is reaping the bad fortune of years of poor trade policy concocted years ago. Another example yet to play out is the ACA also known as Obamacare, this is only beginning to play out and it will be sometime before we feel the full negative effects of this program and the impact it has on society as a whole.

Rivers Do Not Peak When The Rain Falls
Even the ramifications from a massive expansion of student loans and sub-prime cars loans that currently drive auto sales will take years to truly experience.   This lag-time also helps explain why bubbles form. The life and economic policy we have in place today will play out in unexpected ways over time. The calamity following the 2008 market meltdown did not generate the true market reforms many of us had hoped for. Today we find the too big to fail banks have grown even bigger and big business is crushing its smaller brethren because its easier for them to gain access to capital. This is very troubling because small businesses play a very special role in our economy and in creating valuable jobs.

I deal with small business on a day to day basis and I will tell you they have little reason to be optimistic. This is why "Small business failures should receive a lot more attention then they do."  If current policies continue we will see a lot more small businesses fail in the near future as people that have ventured down the path of starting a small business hit the wall. Small business is hard, going into business is risky, and many people are not up to the task. As a property owner that leases space to many start-ups I have a keen interest and knowledge of the microeconomics that occur. Just as important is the effect, long and short term on the economy. With most business start-ups having a very short lifespan of just months or around a year, the short term burst of spending is quickly followed by the longer term negatives.

Smokers find Bad Impact Years Later
When a new business opens or is formed generally a fair amount of money is spent or invested, this often comes from the savings or loans from the owner, their family or close friends. This stimulates the general economy. Money spent on fixtures, leasehold improvements, services, and inventory help create jobs, but a dark side exists to this entrepreneurial adventure, when the business fails to achieve economic success a reverse affect radiates outward. Many times suppliers remain unpaid, landlords get stiffed, and inventory is dumped into the economy often below cost. This dumping, while good for those scooping up savings, can have a negative effect on other companies selling the same product. The bottom-line is society will feel the effects of small business failures for years to come.

We are often reminded of the following words of wisdom attributed to the economist, John Maynard Keynes: The market can remain irrational longer than you can remain solvent. In some respect this is a reflection of the fact markets do not always lead a market, this plays out in both up and down markets where it is not uncommon for prices to overextend to an extreme until those who have misjudged a trend finally capitulate. The point of this article is to highlight or shine a spotlight on the issue that what we see and are told today concerning the economy and markets do not reflect the lag-time effect, it is not all about today! Many issues that have been improperly handled over time will haunt us in future years as events unfold.  

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