Impact of oil prices

Many a times over the last couple of years, I noticed the crude oil prices being given a lot importance when talking about the economy. What is evident is that the increase in oil prices drives the fuel prices up at the gas pump for consumers. Therefore, reducing the money available to spend. But I wondered whether this was the only impact to the economy. It turns out that there are more.

When consumers see such a sudden increase in the gas prices, a supply shock, then they sense an economic calamity coming and tighten their spending further. For an economy such as US, in which consumer spending is a large portion of the GDP, the effects are compounded.

The prices of lot of goods, produced and ready to purchase, depend on the oil directly and/or indirectly. In some cases directly because oil is used in the manufacturing prices. Indirectly, when the goods or produce need to be transported. The result is inflation -- the prices of the produce and the good increases. The increase in prices cause the consumers to cut back on the discretionary spending. The demand for goods goes down, which results in job losses. Thus, an increase in unemployment. This is called stagflation -- an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.

Do you ask the right questions?

Well, apparently I don't. I recently read an article which emphasizes the importance of asking the right questions. The article suggests that you can increase the workforce productivity by asking the right questions at the right time. 'Right' questions should be open-ended and framed to encourage the audience to ponder. Examples: 

To get a better picture:

"Can you explain more about this situation?"

"How is project coming along?"

Encourage analytical thinking:

"What are the consequences of going this route?"

"Can that be done in a different way?"

"Based on your experience, what do you suggest we do here?"

Challenge:

"What do you think you will lose if you start sharing responsibility for that role?"

By asking your direct reports the right questions, you:

• help the development of your reports
  
• empowered your reports
  
• respect their ideas
  
• build a better rapport
  
• encourage them to ask their direct reports the right questions
  

It's equally important to avoid questions which have negative effect. For example: "Why is your project behind schedule?" or "Who is to blame for this problem?"

There are several success stories where the companies revamped themselves or created new thriving business groups based on the answers. 

These are some valuable insights. Personally, I feel I could benefit from these tips. Only, if I can remember these valuable tips at the 'right' time :-)

The Great Depression

I am taking a Macroeconomics class primarily to understand how the economy works. Here is my understanding of the economic calamity during the Great Depression.

There was a lot of uncertainity during the Great Depression primarily due to:

1. contraction in personal wealth: value of stocks fell more than 90%, causing the personal wealth to fall. Reduction in the personal wealth causes people to cut back or postpone purchases.

2. failure of banking system: Households withdrew their money from the banks, causing banks to increase the their banking reserves. Thus the money available for investment decreased drastically -- because each dollar saved in the banks has multiplier effect on the investment in the economy. Money supply fell by 28%. The lack of investments caused a lot of firms to close down -- fuelling the unemployment further.

Economists attribute the biggest reason for the calamity to decreased aggregate demand for the good and services.  As the demand falls, firms tend to decrease production costs by reducing workforce. Unemployment rose from 3% to 25%, thus resulting in a severe recession also called depression. Many other countries experienced similar declines during this period.

Many economists blame the Fed's failure to act during the Great Depression. The Fed can craft nifty policies which can mitigate the severity and the duration of such recessions. 

There are striking similarities between the current economic conditions and the Great Depression.  The economy is uncertain, personal wealth is decreasing and the unemployment is rising. I am happy that the current policymakers are utilizing multiple economic tools to tackle the current recession. I am still  hopeful that these policies will result in a better economy in the near future.

Play hard or not

is a dilemna I face everytime (or almost) I play table tennis. I have played competitive table tennis over a few years and am quite an advanced player. My game is not as polished and consistent as it used to be, but it is still good. Lot of my friends, colleagues, family claim that they are quite good and want to play a game. Sure, why not! The problem is that I know I can crush them, but by doing so I will also quell their interest in the game. Generally, I adjust my game to make the game more competitive -- by playing with the other hand, or give a handicap, or restraining my game by not smashing. This results in an exciting game fun for both the players. Some players realize that I am just playing with them. 

But, there are a few who don't realize that. I once played easy with a friend of mine, who now claims that he can beat me because he's been practicing. I would like to set the record straight by beating the shit out of him. However, the problem is that'll have to wait because of our different geographic locations.

Because of this experience I face this dilemna everytime I pick up my racquet.

Recession: what can you learn?

Economic times such as the current one bring a lot of pain along. It's no fun to go through such hard times. However, experience makes a person wiser. A first-hand experience, even more so. I am putting together the lessons I learned during these times. I hope these lessons will help me endure future economic recession(s) with less pain.

• Invest, but diversify. You want to invest because you want your money to grow. But diversify to minimize risk. Diversification would spread your gains, but on the other hand it would spread your losses as well. Base your diversification plan on your risk taking situation.
  

1.  Spread the portfolio among multiple investment vehicles, such as stocks, mutual funds, bonds, and cash.
   
2.  Vary your securities by industry, and/or by geography.
   
3.  Even the best companies can crumble in a matter of days. Think Enron, Worldcom, recent Satyam fiasco.
   

• Sell when everyone is buying. Conversly, DON’T BUY when everyone's buying (or when the demand is too high). I understand that it's hard to time the market, but there are certain obvious signs. This is easier said than done. It needs a lot of patience and courage. I made wrong investments exactly at the peak. At that time, I just couldn't wait because I was afraid that I’d miss the boat. 
  
• Markets, be it financial or real estate or services, have a temperament of their own. They don't care or follow the path most analysts predict. The analysts who predict correctly won't be heard in the media, until their predictions have come true.
  
• Prepare for rainy days – keep some funds in easily accessible accounts. Keep funds sufficient for at least 6 months. I just found out that my home equity line of credit was shut down. That account had been my source for emergency funds. Thank god, I still have my job and can build up my reserves. I hate to imagine the what-if scenarios.
  
• Plan for retirement - it's never too early. Keep building your nest egg. Put aside whatever funds you can aside for your retirement; it can only help. It’s hard to put funds aside in these tough economic times, but it's even more important.
  
• Go easy on your retirement funds: Many about-to-retire employees had their entire retirement savings invested in stocks. Their investments lost more than half the value. Now, they have to work a few more years to make up for this loss. Remember, jobs are not easy to find anymore.
  

The returns during the first year post-recession is typically quite high: Historically, it's been more than 30%. I hope you and I will enjoy the fruits and that too very soon. Cheers :-)