Today’s pain is a lagging indicator as the economy turns the corner. But fear is still the primary driver of the economy and markets today. The headlines are full of “the sky is falling” reports. And, indeed, we are seeing wrenching layoffs, housing foreclosures, and plummeting retail sales. This first quarter 2009 will surely be ugly, but in all this pain we may be seeing the bottom. Ironically, for all the doomsayers, these signals appear to be on track for the historical average of 16 months for recessions.
I think there are several clues to this bottoming out, and the best signal is the accelerating shift of sentiment from fear back to greed because GREED is what we need to restore confidence in our economy and get people back to work.
Why do I say this?
Bankers Smell Profits. The dressing down of bankers in front of Barney Frank’s committee this week in Congress only reinforces their desire to pay back TARP funds ASAP. I believe most banks that received these funds will do so NOT to avoid these repeated woodshed trips, but because they can now MAKE MONEY as confidence is restored and the market roars back.
Lending is Back. Libor is at very reasonable rates which signal that banks are confident about lending money to each other. Credit default swaps have fallen rapidly signaling the market perception that default risk on corporate debt is returning to normal. Junk bond yields are attractive but falling as investors chase yield.
Putting “Greed” to Work to solve the Problem. Hank Paulson, Ben Bernanke and now Tim Geithner have been alternatively hailed and hammered through this panic. But each was present at creation in crafting strategies to respond to the panic, flood the system with liquidity, and now purge it of poison.
I believe that when this panic passes these guys will justly deserve a Nobel Prize more than a “raspberry” for steering us through this carnage. While Geithner is being panned for this latest—admittedly vague—explanation of the Obama strategy, what seems to be emerging is the market tested concept of a “specialist” who will purge the poison by buying, holding, repackaging and guaranteeing structured transactions over time for these toxic assets.
Like a Resolution Trust Corp on steroids this is a smart, efficient, daring and ruthlessly effective way of engaging the market to solve the problem using the same “greed” that got us into it to create a market frenzy around the millions—make that trillions, to be made from the appreciation in value of all these assets being marked down to market in this recession. That’s why there is such little incentive to change the M2M rules. It protects investors through transparency, punishes the stupid—and occasionally the guilty, and clears the market of weak players and foreclosed assets faster than any other approach—without the risk of “earmarks”, political speeches or campaign contributions.
M2M also enables the survivors to pick up the pieces and the big potential profits from recovery, and restore their market caps—and big paydays.
It just might work!
The stunning increase in job losses announced this week overshadow some cautiously optimistic reports. Are we turning the corner in this recession? It’s too soon to tell, but we are beginning to see actions that suggest consumers are turning from that ‘deer in the headlights’ fear to pursuing some genuinely great opportunities in the midst of the carnage around them.
“Just Do It,” to appropriate the tag line that has served Nike so well so long, is what we are beginning to see in the markets:
- Home Sales Rise. Sales of existing homes rose in December by 6.5% to a seasonally adjusted 4.74M units compared to an expected 4.4M units. While one month does not a trend make, clearing the market of foreclosed properties is the fastest way to stabilize the housing sector and restore confidence.
- Leading Economic Indicators Up. The Conference Board reported that leading indicators rose 0.3% in December beating the 0.2% economists expected. Weak employment and low building permits were offset by growth in real money supply and an improving yield spread.
- The Law of Averages. Economists tell us we are in the 13th month of this recession but that the average length for all recessions since the Great Depression is 16 months. Does that mean this one will be average? It appears we may know soon. History tells us once that bottoming out is reached we can expect to see an often abrupt rally—a kind of “YES! WE MADE IT! Signal that recovery is beginning.
The other lesson from history is that the sudden rally beyond that tipping point when it comes is THE BEST time to be in the market. So having ridden down your 401k values now is not the time to blink—it probably is the time to buy in anticipation of that law of averages.
So what does this wishful thinking mean for our business? It brings me back to a theme I can’t get out of my head—TIME IS NOT YOUR ALLY! If you are trying to position your consulting practice, or product development cycle, or business plan for the recovery ahead these leading indicators should remind you of that incessant TICK, TICK, TICK of the clock in the belly of the alligator that warned Peter Pan and Wendy.
Even those ugly job loss reports may be a good sign since rising unemployment tends to be a lagging indicator and when combined with the relatively good news means, perhaps, just perhaps, the law of averages is with us.
“ Just Do It!”
The lessons in church today were about light as a symbol of the Holy Spirit descending upon us to show us the way forward. They were fitting and appropriate for this week of celebration as Barack Obama becomes our President. I don’t know—or think, at least—that God has intervened to send Barack Obama to save us from our fiscal ruin. Although I know some who want desperately to believe that he has received “the call” for just such a purpose.
While Obama can not be expected to snap his fingers and fix our problems overnight, he does have the “big mo” and if he spends it wisely he can raise our spirits and re-energize our optimism about the future and thus re-enlist us all in the great American dream once again. Since financial panics and recessions are as much about psychology and confidence as about economics, Barack Obama can make a material difference in the depth and duration of this recession and our competitive advantage in the recovery ahead.
So my advice is cheer him on, wish him well—and pray for him next Sunday and each one after that—while we all roll up our sleeves and get focused on what we each can do to help him help us achieve the goal of a sound, successful, robust economic future.
Obama also has the “big mo” to do something few of his predecessors have been willing to do—ask us to sacrifice for the sake of a greater good, stronger American future, and better world. We’re already hurting, but will the endgame be memories of hurt or renewal and transformation. There is chatter about a “grand bargain” that integrates the economy, energy, and environmental issues in ways that improve our alignment and enhance the prospects for renewal. It feels to me as if America is ready for a “grand bargain” that is truly based upon a shared vision of the American future.
Obama has a chance to be a transformational leader if he rises above the current carnage in the markets and uses the money we are going to spend anyway to re-align our policies, strategies and psyche to drive that “grand bargain” into reality. He can also do this in a way that is bi-partisan and changes the tone in Washington from “gim’me” and “gotcha” to “attaboy” and “ah-ha!” A transformational leader who changes the tone and inspires us to renew the spirit of America would truly be a gift from God!
In the current economic environment almost every business and individual is hunkered down focused on a day to day strategy of survival. This is a natural reaction to uncertainty, but some of the best opportunities for competitive advantage result from these ‘near death experiences’. How does the old line go? ” What does not kill you will make you stronger!” I suggest a more productive use of time and motivated resources today is to focus NOT on today but on how you position your products and company for the coming recovery.
There are several reasons this makes sense. First, your competitors are in the same boat you are–uncertain and hunkered down—but are you smarter than they are? Do you know the strengths and weaknesses of their products? Their customer relationships? There’s market position? So how can you use this time of retooling to position your products to overtake the competition as the markets recover. Time is never an ally in these things. While the economists tells us recovery will likely start in the 2H of 2009 it probably won’t feel like it until 1H of 2010. So maybe you have six to twelve months to get your competitive act together. How will you spend it?
Here are my suggested New Year’s Resolutions for you:
- Talk to your customers honestly. Understand their business situation and look for ways to partner with them to reinforce your working relationship. Ask your customers how they use your products. What do they like and not like? If you use this time to retool it may as well be devoted to improvements your customers want.
- Give your product some WOW! Are there quick fixes you can make that improve satisfaction? Get feedback about how your products stack up to competitors and enlist your customers in the retooling process by helping you prioritize what improvements you make. It is easier to keep a customer than get a new one–so enlist yours in a community of users that looks out for each other during the rough times.
- Create New Products. I know this sounds counter intuitive in this ugly economy, but the downtime is your best opportunity to take those ideas for new products and productize all that intellectual property you are sitting on. By blending your capabilities with the business needs your customers are describing, can you create new products that will blow the competition away as the market improves?
- Right size the business, don’t neuter it. Cutbacks in staffing and investment are necessary in these times. But be careful that you don’t undermine your core competencies and thus prevent the retooling and refocus on the recovery ahead. Push your best people in front of clients. Leverage your good relationships for wallet share of services. Offer to partner if a customer can help you speed your time to market for new product ideas by being a beta tester and product collaborator.
- Champion your company’s future not its problems. Your people want to know where your company is going and whether they have a future in it. Now is the time to be a true evangelist. Sharpen your message about the product or company vision and preach the gospel often. You want these folks remaining to quickly move beyond grieving to be motivated about taking names and kicking butt in the recovery ahead.
As we watch the spectacle of the still proud but now impoverished US auto industry come begging to Congress for a rescue plan “just like the banks got”, two thoughts came to mind. First, great—now everyone is getting in line for a bailout instead of helping themselves turn the corner. And second, if we’re going to throw this much money at stabilizing our economy does anyone in Washington care about getting our money’s worth from this when we look back on it 10 years from now?
The pressure on President Obama to come to the rescue on January 20th is enormous. At this point in the year-long (so far) recession the risks mostly seem on the downside. That is it is likely to get worse and feel worse in the near term before it starts getting better. Economists already tell us this will be a deep and painful recession that will last 24 months or so—or about 6 months longer than those of the mid 70’s and early 80’s.
The Bush Administration and the Fed have gone to unprecedented efforts to pump liquidity into the financial system but the predictable response to such uncertainty has been for lenders to take the money but not increase lending for fear of more liquidity problems ahead. Of course, this just makes things worse as the credit crunch ripples through the economy. The first stimulus package of $600 checks flushed a lot of money into the economy but didn’t do much stimulating as people put the check in savings or paid bills.
Pressure is building for another stimulus package bigger than the first, now from President Obama and the Democrat-controlled Congress eager to show the new team hard at work to “fix the economy.” Expect them to throw money at it. Estimates of the size of this stimulus are $500 to $900 billion—without the earmarks for those waiting in line for bailout. Expect a mix of infrastructure spending, help for state and local governments, unemployment insurance extensions, and earmarks for energy efficiency and a thousand other pet causes.
Infrastructure spending does create jobs and we certainly need it, but it is slow to stimulate the economy and a significant percentage of the money spent flows into the global economy for the products and commodities the US now mostly imports. The good news is that infrastructure actually built will begin to come on line about 2010 when the economy is coming visibly out of this mess and begins to grow again. And grow it must because the near term deficit will be staggering.
If we use the stimulus and bailout efforts to retool, to improve efficiency and reduce further our energy intensity, to reform poor contracts, bad financial structures, replace failed programs and policies and focus on improving the US global competitive position for the long term—it still won’t be worth the pain of such a deep recession—but what does not kill us will certainly make us stronger.
The current economic crisis gives us plenty to worry about. Markets despise uncertainty and yet seem to find ways to profit from exploiting it. We are in the middle of a deep recession with forecast estimates of recovery stretching from early to mid 2010 depending upon our mistakes and luck.
But for many, volatility and uncertainty can be a wonderful thing since every strategy that every client put together is now back on the table as facts on the ground, market conditions, and the opportunities and risks they present have changed. As we look for insight to see through this fog of uncertainty, most know they must refresh their strategies refocused on the future. In so doing, we regain confidence by executing around a focus on the future when we need it most.
What has not changed is the power of scenario analysis as a tool for rehearsing the future and managing uncertainty. Only a few months ago we were debating how high oil prices might go and the implications of such a spike. In doing so, we fell into the most common strategy trap of all—assuming that current conditions will be projected into the future as they are now. Now as we experience falling oil prices and a tanking economy we are talking about the broken fragmented future ahead. But the same lesson holds true on the correction side of any business cycle.
The truth is we have just experienced the amazing power of “what if” in living, frightful shock and awe. Both high oil prices and low oil prices offers an alternative view of the future that is sharp, distinct and fraught with possibilities and risk.
So what should we do now? Think! Think broadly about the opportunities and risks we face. Think about how these changing economic and market conditions are affecting competitors. Think about the shifting balance of power, market share, capacity for change and global positioning and the opportunities and risks offered.
Think about strategies that perform well across several alternative scenarios.
Thankfully, time is not an ally. If the economic forecasters are correct about the length and depth of the recession we have a narrow window of opportunity to get our acts together to assess the opportunity in this carnage. For those on the sidelined or in trouble this seems like an eternity. But for those adapting their business plans to re-position their business for a competitive future in the recovery ahead—immediate action is needed to use this time wisely. Even the process of considering the future is liberating for those who find themselves like deer in the headlights. Strategic thinking that is focused on positioning for the future is like a flashlight peering into the darkness.