Wising Up and Hunkering Down

The volatility in the stock market is telling us something—we’re not quite sure yet what it is, but volatility is always a signal that something unsettling is about to happen.

Our worst fear is that rising debt will lead to rising inflation, slower growth and currency fluxuations caused by trade imbalances that give rise to just the kind of seesaw markets we’ve been experiencing.

Welcome to the future.

The audacity of hope for a new ‘Pax Obama’ or whatever the Obama years were to bring in our 2008 electoral dreams are waning.  They are replaced by uncertainty driven by a fear that we got ‘baited and switched’ in the change we can believe in campaign promise.  Some of this is just projecting our anxiety over the bad economy onto the guy who is President at the moment.  Some of this is a ‘wising up’ that things really are dangerous for our country right now and we may not have the “A” team on the job.


My usual morning routine is to fix my coffee and begin my ritual of surveying the headlines and commentary from overnight.  I have a list of about a dozen news sites, blogs, and other sources I consistently track.  I’ve developed and honed this portfolio over time.  A dozen is about all the patience I have to absorb in one sitting.  I scan most items, look for patterns of consistency or conflicting views.  I save a few interesting things to read later and discard the rest.

I’m not looking so much for daily details as I am trends, context and implications.  From all of this I have a working hypothesis about what I expect to happen on several fronts that I continually stress test by events.  Volatility both screws up my system and wises me up to the tendency to cling to conventional wisdom.  I used to tell my colleagues at Global Energy Decisions that volatility was a wonderful thing for consultants because it forces our clients into action—and when they needed to take action they generally needed our market and risk analytics services.

We may be anxious and uncertain about today’s markets, but the more business and individuals work to ‘get their groove back’ the faster it will happen.  Pessimism is tough to maintain once you are up to your eyeballs in repositioning for the growth prospects you see on the horizon.


This is a quick attempt to summarize my short list of working hypotheses so I can come back six month, one year or five years from now and assess how well my system of reading the trends turned out to be:

  1. THE BEST PERFORMANCE OF 2010 HAS ALREADY HAPPENED.  This hypothesis drives my short term anxiety.  It is the sum of my worries that what we are seeing is NOT really material growth but a tactical move by business decision makers to suck earnings and profits into 2010 before the Obama flood of tax increases begins to hit in 2011.  Accelerating economic gains into 2010 masks the weakness of the current market and denies 2011 a more solid foundation for real growth.  That sucking sound we hear is the air coming out of our 2011 growth prospects.
  2. JOBS GROWTH IS AN ILLUSION.  Business is hunkering down out of fear of rising costs from health care, taxes, and new regulation on the horizon.  They are keeping employment levels sufficient to maintain critical cash flows, skills, and to fulfill current orders—but no more.  Volatility really hurts here because global businesses are subject to wide swings in profitability by currency fluxuations and the ripple effect of the EU meltdown and China’s labor unrest, rising prices and growing risks of bubbles bursting in property values and other areas.  For now I sense business is hunkered down to ride out the storm hoping 2011 will be better.  Next year could be better but there seems an equal plausible scenario  that the combined weight of higher taxes, rising costs, inflation, and prospect of more of the above will send 2011 growth plummeting.
  3. INVENTORY REBUILDING IS NEARLY COMPLETE.  The cutbacks from the recession drained inventories across the board and we have seen some growth in manufacturing and trade to replenish inventories, but it feels like merchants learned their lesson about over stocking and thus getting caught with excess inventory they have to write down or sell off at fire sale prices.  Just in time inventory strategies seem to be working to stabilize earnings quarter over quarter, but this is a strategy of survival not growth.
  4. HOUSING IS STILL A BUBBLE. The housing sector is struggling to clean its plate of foreclosed properties and restore a sense of balance.  Here in the San Francisco Bay area we have actually seen rising housing values for the last several months ironically at the higher end of the market.  It is still ugly out there with plenty of inventory and plenty of foreclosures to go.  The question is whether that to go inventory will be dumped on the market in large numbers and drive down prices again.  The end of the home buyers tax credit does seem to be motivating some buyers, but rising interest rates will actually help more to get those who can get a loan off the fence.
  5. HOARDING CASH FOR A PENT UP DEMAND FUTURE. The earnings reports are full of cash as if business is stockpiling it both for defensive purposes if things go south as well as getting ready for a binge of spending when the ‘all clear’ is sounded.  This is the first good news trend.  There is still hope for a better future—it’s just not here yet.  As the cash accumulates, some of it will be spent on M&A deals where the value is good and the prey is weak in consolidating sectors. For businesses looking beyond near term survival this is a great opportunity to position their strategy, products and prospects for the future.  A lot of work should be done in-house to get ready to launch, get ready to sell, get ready to grow.  This should be a good time for consultants, investors and product developers to position for competitive advantage—and help the rest put lipstick on their pigs.

So what?

So America has seemingly decided to ride out the storm.  Yes, we are anxious.  Yes, we feel let down by Team Obama.  Yes, the November 2010 elections will bring ‘change we think we believe in’ in our civic consensus building.  We’re learning all over again that political stalemate more often works for us not against us.  Giving either party too much power and they waste it at our expense.

The problem this time is we really need the Federal Government to ‘get its groove on’ to move the economy forward.  The problem is the only strategy the current team seems to want is more spending and more government control when what we need is less spending, more global trade, and a perception that America is open for business again.

The other problem is that it is a LONG TIME between the November 2010 election and the November 2012 election and every politician will be running scared or running hard during this period.  Little of substance is likely to be enacted in a stalemated Congress.  The blood in the water around Team Obama will discourage cooperation across the aisle—not that he ever wanted any.  All of this political stalemate will take place in a very volatile and dangerous world where America is increasingly neither feared nor respected at a time when American leadership may be needed most.


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