The Decision Strategist

By now most of you probably know that the fed cut 50 basis points off the interest rate on Tuesday (roughly 0.5%). Fed Chair Bernanke did it because he’s concerned about the economy, which really means he’s concerned about bank profits.

Let’s not forget that the Fed is a privately held and unelected conglomerate of banks.

The value of the Dollar has been declining rapidly against the Euro, and in fact is now EQUAL to the Canadian Dollar.

Central banks across the world are divesting of U.S. Dollars and Iran prefers that countries buy it’s oil with Japanese Yen.

There are two parts to this that I’d like to discuss. The first is why cutting the interest rate devalues the dollar, and the second is why Bernanke decided to do it.

Cutting interest rates leads to a declining dollar

Why does reducing interest rates reduce the value of the dollar? The short answer is that U.S. Treasury bonds have a lower yield. Lenders (largely foreign) are less willing to buy treasury bonds at lower rates, and the $2.5 Trillion in federal debt makes them even more skittish.

By the way, that’s $8,300 in debt for each of you. It’s simply insane that Bush can claim to be fiscally conservative, but that’s a story for another time.

Point being that the dollar is earning a smaller return, our trade deficit is huge, federal debt is as high as it’s ever been, and our economy is not doing well. The result is that the dollar is no longer a profitable or safe investment.

As the dollar continues to devalue it gets worse. Foreign investors with dollar-based holdings saw a decline of more than 15% after the rate cut. You might say that the dollar is on the declining side of a decades long bubble, and people are afraid to hold dollars.

Why would the fed cut the rates?

Let’s be clear here. The only concern of the fed is to bail out their banking buddies (Mish). Banks stand to loose incredible amounts of money in the current credit crunch because they lent too much money on assets that were way overvalued. The fed is now trying to fight asset (housing and the CDO mortgage-backed securities) devaluation, and sacrificing the value of the dollar to do it.

By cutting rates, the fed hopes to stimulate buying and investment, and hence stop the deflating assets long enough for the banks to divest themselves.

Since this rate cut is unlikely to do much to stimulate growth, we can expect further rate cuts in the future, and further dollar devaluation.

Some economists argue that a long term decline of the dollar is necessary to right the enormous trade imbalance. It’s nasty medicine. However, no one thinks that a ‘run’ on the dollar would be beneficial to the US or the world.

But a run on the dollar may be just what we see.

The declining dollar and the world

No one wants to hold on to a declining asset. The world has generally regarded the dollar as a very stable and high-yielding currency, but that is not proving to be true anymore.

There are other factors at work to though that might stem worldwide divestment of the dollar. A strong dollar is good for countries that export to the US because they get a favorable exchange rate. But the US isn’t the only major purchaser anymore. The EU is now a larger buyer of Chinese goods that the US, and many other countries have shifted toward being net importers. The result is that China, though still heavily dependent on US consumption, is not as dependent as it once was.

The declining dollar and you

What does a declining dollar mean for you? For most of us it means higher prices. Corn in Chicago went up 3% since Tuesday. Rampant inflation means any wage raises you get are demolished by higher costs.

Those of us on fixed income or in low-paying no-raise jobs, basically the poor, are hurt badly.

Got Investments? The value of your investments are eaten away by the same inflation rates. Lower interest rates mean lower bond yields but generally higher stock prices, though if the economy takes a dive stocks won’t hold up to well either.

So is inflation good for anyone? Not really. It’s least bad for people in debt. I have student loans at 3.25%, and inflation of 3% means I’m only paying 0.25% in interest. The majority of America with large credit card debt and big mortgages will benefit from lower rates and inflation eating out the bottom of their (read: the bank’s) house.

People won’t connect the lower interest rate on their mortgage with the higher prices at the grocery store, and so a credit-addicted public will welcome the cut.

I have a very minor investment portfolio. Earlier I was musing about how to invest in a recession. I’m thinking very strongly of moving to a commodity-based portfolio. My one reserve is that I don’t like to buy when the dollar has already declined so much. I may just stay in my global tech fund and weather the storm.

Brace yourselves…

-zot

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It’s about time that I acknowledge some of the other blogs out there that I read. There aren’t a lot of decision making blogs, but here are a few good ones. Without further ado:

• Analyzing Decisions. Thoughts on decision making and how we think about decisions from a student at George Washington University.
• The Thinker. A young blog started roughly when The Decision Strategist started. Tends to post interesting content relevant to world events and research. I’ll be paying close attention to this one in the future.
• The Situationist. Run (I think) by the person who conducted the 1970’s prison experiments. Main idea is behavior shouldn’t be thought of as personal but rather situational, because situations have a large effect on what we do.
• Overcoming Bias. A recent find with some good content related to overcoming our psychological biases to make better choices.
• Neuromarketing. Not quite from the same perspective, more based on using brain behavior to market to consumers.

For entrepreneurial stuff, Here are a couple of less well-known sites that I’m a fan of:

• Mary Schmidt. An Albuquerque and Santa Fe based business development blog. Excellent stuff for tiny businesses.
• Occam’s Razor. Mostly web analytics and interesting ideas. Good stuff.

Other notables include:

• Mish’s Global Economic Trend Analysis. Excellent discussion of the current economic situation, with an emphasis on housing, credit and stocks. Definitely not a bull, but intelligent and non-politicized.
• A boat load of personal finance blogs, including The Simple Dollar, Get Rich Slowly, Lazy Man and Money and The Digerati Life to list a few.
• Patrick.net. Big community of housing bears, but they all seem to be right. Good clearing house source of information.
• Doctor Housing Bubble. Witty and informative posts about housing. Pioneered “Real Homes of Genius”. Funny and intelligent stuff.

Just in case any of you need more stuff to read ;).

-zot

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When I was discussing strategies for competing against big business, I mentioned that big companies have trouble innovating. The basic problem is that businesses reward their employees based on success, giving little reason for employees to try anything other than what has worked in the past.

This thing is, truly bright and creative people don’t like doing the same old thing that has worked the past 10 times because they aren’t learning or doing anything new. Motivation tends to be fairly low, and as a consequence you get surveys saying that people waste 2.09 hours a day at work.

So this got me thinking: what if a company organized itself to reward employees for creativity and new ideas more than they are rewarded for success? What would that look like? For small businesses this is easier, because you have to innovate to survive. Even small businesses fail at this though. For large businesses it is even harder to not get stuck using a solution that works instead of a solution that makes them and industry leader. The idea would be to institutionalize innovation as the center of your business culture.

How you ask?

It’s a good question. I don’t know that anyone has solved it yet. I have a general idea that I will present in depth soon, but it’s still pretty rough.

Part of the answer may lie in using good hiring practices. Part may be in seeking employees who are freaks of nature and, like entrepreneurs, have a higher risk tolerance. The environment and situation is probably relevant.

Most importantly and most difficult, the reward structure has to shift to reward quality creativity more than profitability. Unfortunately it’s very hard to tell a quality creative idea. It’s much easier to use profit as a measure of performance because it is an actual number. Most people would probably argue that it is the right measure also, because a business is supposed to make money.

The thing is, focusing on profit leads to a short term strategic focus where companies end up sacrificing long term benefits for short term growth. The same thing happens in the federal government with popularity replacing profitability.

In fact, the proliferation of data is leading to the desire to quantify all performance. If no easy number exists, we prefer to rely on a proxy with a nearly worthless signal to noise ratio than to take the time and effort to evaluate the situation.

The thing is, if what you’re making isn’t easily quantifiable, measuring a proxy shifts efforts to the maximization of the proxy.

Think national testing requirements and the shift of education to teaching the tests. Tests are actually a poor measure of intelligence and education, but we prefer to use them as a bandaid than to consider what is really contributing to the decline of education: lack of money.

-zot

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I’m looking to get an entrepreneur group together in Albuquerque. If you are interested in starting your own business or already have and would like to meet and talk with other people involved in the same process, please contact me. There doesn’t seem to be much of a community for small businesses that are just starting, but it could be really helpful. It would be great to sit down with people once or twice a month and talk about challenges, strategies and ideas. I see five (at least!) big ways in which an entrepreneur group like this could help:

• Exchanging information and ideas encourages new ways of thinking about things and solving problems.
• Free networking and marketing. Meeting other people involved in starting a business introduces new people to products and services and maybe would create a bit of a feedback loop for generating new business.
• If you are looking for a co-founder or a partner, an entrepreneur group is a great way to meet other like-minded people.
• If you are looking for investors, you might meet potential investors at the group, and being part of an entrepreneur group will help when talking to investors.

As I’ve mentioned in a few previous posts, I’m in the middle of starting a web-based company called decyder, but I’d be interested in talking to anyone who is starting a business, regardless of the whether or not it is tech based.

Even if you aren’t in Albuquerque but are in New Mexico, let me know if you’re interested. Maybe we can shift meetings around to different locations.

contact me here.

-zot

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