February 25, 2014

The Silver Lining

Behind the dark clouds of volatile markets there appears to be a silver lining. That may be hard to believe when so many are focused on whether economic weakness is due to bad weather or, well, economic weakness, but here are a few of the signs that things may take a turn for the better:

• Business climate:On February 20, The Economist/FT Global Business Barometer, which surveys 1,500 business leaders around the world, found more than one-half of them expect the global business climate to improve during the next six months and more than one-third plan to increase capital investment in the coming year. A slight majority believe America will have a greater influence on their regional growth than China.
• Consumer confidence:Consumer confidence climbed for the second month in January 2014. The Director of The Conference Board Consumer Confidence Index® said, "Consumers' assessment of the present situation continues to improve, with both business conditions and the job market rated more favorably. Looking ahead six months, consumers expect the economy and their earnings to improve, but were somewhat mixed regarding the outlook for jobs. All in all, confidence appears to be back on track and rising expectations suggest the economy may pick up some momentum in the months ahead."
• Cash-rich companies:Corporate America is sitting on a lot of cash - about 91 weeks' worth of net income, according to Barron's. It has been using that cash primarily for stock buybacks, but could use it for other things. An economist quoted in Barron's said, "The purpose of the capital markets is to fund growth... it's difficult to call this de-equitization an economic equilibrium: Public companies should not make money just to buy back stock."

Of course, positive prospects don't mean everything is coming up roses (especially not in this weather). Consider one of the effects of stock buybacks which is there is a lot less stock in our stock markets than there used to be. As Barron's pointed out, "The Wilshire 5000 may have seen its list of components shrink by half since 1998, but its total market cap has doubled from $11.7 trillion to $22.5 trillion in that span.Unless you're a government statistician, you just might call that inflation." Oh! Inflation. That's something we may need to think more about soon.

Define An Entrepreneur

What is an entrepreneur?Merriam Webster defines an entrepreneur as "one who organizes, manages, and assumes the risks of a business or enterprise."The Library of Economics and Liberty said successful entrepreneurs find ways to derive greater profit from materials or skills while unsuccessful ones don't. The website shared this insight to entrepreneurship:

"An entrepreneur who takes the resources necessary to produce a pair of jeans that can be sold for thirty dollars and instead turns them into a denim backpack that sells for fifty dollars will earn a profit by increasing the value those resources create... Losses mean that an entrepreneur has essentially turned a fifty-dollar denim backpack into a thirty-dollar pair of jeans. This error in judgment is part of the entrepreneurial learning, or discovery, process vital to the efficient operation of markets."

Knowing this, it's not all that surprising that traditional gauges of entrepreneurship measure things like the number of small businesses or self-employed people or business startups in a country. According to The Economist, these measures tend to provide misleading results with Egypt often appearing to be more entrepreneurial than America.

A new paper from the Research Institute of Industrial Economics offers a different way to measure entrepreneurial success. It focuses on Schumpeterian entrepreneurship. Austrian-American economist Joseph Schumpeter believed entrepreneurs were innovators, people whose ideas and execution produced high-growth companies that often upset and disorganized existing models for doing business - think Thomas Edison and electricity, or Steve Jobs and Bill Gates and computing.

The paper looked at Forbes Magazine's billionaires list from 1996 through 2010 and focused on self-made billionaires who earned their dough founding new businesses. There were almost 1,000 of them in 50 different countries. (By the way, four of every 10 global billionaires are found in the United States, predominantly in California, New York, and Texas.) The researchers' conclusion was the Forbes' list offered, "an alternative - albeit imperfect - cross-country measure of Schumpeterian entrepreneurship with more intuitive results than small business activity."

Weekly Focus - Think About It

"Think left and think right and think low and think high. Oh, the thinks you can think up if only you try!"

—Dr. Seuss (a.k.a. Theodor Seuss Geisel), American writer, poet, and cartoonist

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management