Investment banking business if far more profitable than managing accounts for investors. Accounting firms make more from consulting than from auditing. Advisors make more from moving money from here to there than just holding it. No one is making more money for getting it right and often they make far more for getting it wrong.
Agency theory says that there is a cost to a principal for having an agent work for them because the goals of the principal and the agent are not totally aligned. In other words, the agent acts in their own best interest and that isn’t 100% in the best interest of the principal.
Is there anyway to align the goals of investors and those agents that they use during the investing process?
After nine years of robust growth, America’s economic bubble burst in 2000. Technology shares plunged in the spring, foretelling a sharp economic slowdown later that year. The Fed, led by Alan Greenspan, slashed interest rates. But the economy failed to pick up and was in recession before the devastating terrorist attacks of September 11th. Its health took another knock in December when Enron”s collapse shook investor confidence.
Yet once again America”s economy defied the pessimists. On the back of strong productivity growth, resilient consumer spending and an upswing in corporate profits, it surged in the first three months of 2002. George Bush”s $42 billion economic-stimulus bill seemingly came too late.
But by the summer of 2002 the recovery seemed to be sputtering. A rash of corporate scandals undermined already weak investor confidence and sent equity markets into turmoil in July. George Bush””s projected $5.6 trillion budget surplus over ten years had almost disappeared. America seemed set for a “double-dip” recession or the onset of deflation, but by December commentators were seeing signs of resilience, though not a strong recovery. To reinvigorate the creaking economy, George Bush reshuffled his economic-policy team and is lobbying for tax cuts worth $670 billion.
The Dow Jones Industrial Average rose by 3.0%, as investors hoped that President Bush”s proposed tax cuts would spur both equity-buying and the American economy. Markets also cheered a jump in the ISM”S manufacturing index, from 49.2 in November to 54.7 in December. (ISM readings above 50 signal expansion, those below contraction.)
The price of gold hit a six-year high of $356 an ounce, as worries about a looming war in Iraq encouraged investors to seek a safe haven. Oil prices eased on expectations that OPEC will increase production by as much as 1.5m barrels a day to cover the shortfall caused by the strike in Venezuela. The price of West Texas Intermediate slipped to $30.35, from a recent high of $33.65.
This is a big week in economic news. Tuesday we get the retail sales numbers and the import and export prices. Wednesday we get the producers price index (PPI) and Thursday the all important inflation measure of the consumer price index (CPI). We also get the initial jobless claims and the fed’s beige book on Thursday. Friday is the trade balance and industrial production. Lots of great stuff next week. As you hear of these releases try to gage the market opinion of the information and if it makes a difference. Some numbers will and some won’t. The beige book will certainly be interesting reading.
As Tiger Woods said at the begining of his first press conference as a professional, “Well, I guess…Hello World!” This is my first post in my new blogging world. Much like Tiger at his first press conference, I am a bit unsure of my footing, yet full of enthusiasm. I will surely not rise to his level of accomplishment. But I don’t think it’s unreasonable to hope to pull off a great shot on occasion. It’s those great shots that keep even the worst players coming back and wanting more in golf. And hopefully there will be enough great shots here to keep you coming back and wanting more as well. Time will tell.