Economics & Research Blog
Reading the Debris Instead of the Tea Leaves
I have no new Monday column scheduled this week,
By Dr. Joe Webb
Published: October 12, 2008
I have no new Monday column scheduled this week, but last week's event's really need some comments. These are somewhat random thoughts. I hope they are useful.
Though the initial jobless claims data were not all that bad, we are now getting into recession territory because enough companies are now severely spooked by what they see. They were cautious before, but budgetary panic seems to be rampant. Unemployment will be worsening.
A few months ago I mentioned that I was worried because imports had decreased and the trade deficit was getting smaller. The fact that the economy has slowed is not a surprise, then. Rising imports means that the ingredients and materials used in the economy are being purchased for processing here. A rising trade deficit is meaningless except as a business indicator. They've both been in trouble for a while. If anyone is surprised by this downturn, or this correction, there's been plenty of signs for more than a year.
The declining price of oil and commodities is expected by many to add to GDP because those products are more affordable. They are actually indicating that demand for those items is shrinking, and that the economy, worldwide, is in significant slowdown since July.
As I mentioned during the past few webinars, when you look at GDP growth, we have had a slow economy for quite a while, usually below +2.5% average growth. For the next year, it is more likely to average 0% growth than +2.5%, and we may get a negative quarter as low as -2.5%. It's hard to believe, but +1% GDP growth might be considered as impressive. In past columns I mentioned that GDP calculations may not be reliable for a while. If you feel like you're flying blind, you probably are. Getting tied up in the GDP and other macroeconomic data means that you may be taking your eye off opportunities and client issues.
Recessions are often dated as lasting six months or nine months before turning to growth, but that is somewhat unimportant. There is no reason to believe that the economy will achieve sustainable growth above the WWII average of +3.4% any time soon. Since the Fed was officially charged with managing employment and inflation back in the Humphrey Hawkins legislation almost 30 years ago, average growth has been below the WWII average, at +3.1%. We now have one of the most hyperactive Feds ever. So what if it's a recession if +1-2% becomes the rule of the day. It will feel like a constant recession except to the academics who can argue when these things start and end months after it really doesn't matter.
The Wall Street Journal, opening an article about the global interest rate adjustment last week said: “With unprecedented coordination, the Fed, ECB and four other central banks cut interest rates sharply in an emergency move designed to offset the economic damage from a deepening financial shock.”
Let me translate this for you: “In a plain sight conspiracy that would be illegal for businesses under antitrust laws on all continents, the Fed, ECB and four other central banks started printing meaningless money to save their jobs so that no one would accuse them of standing by while the markets solved the problems decisively, ruthlessly, and quickly (and better) without them.”
Inflation measures may tame down a bit in a report here and there, but that's just quirks in the system of calculation, and a long term view is needed. So much money has been created that the fix coordinated by the central banks will prolong the duration of economic sluggishness for many years.
Inflation has been up on a global basis for the last year or so, in some cases, significantly. Do not be surprised if some historical analysis shows that China's unpegging of their currency to the US dollar in mid-May 2007 becomes viewed as a seminal event in this unwinding. By staying pegged to the dollar, China's inflation stayed within their borders. As they changed, with great political pressure from U.S. politicians, to diversify into other currencies, that inflation was sent to other shores.
There is also another factor: markets are convinced that there will be higher taxes and higher inflation. If anyone attempts to calculate the net present value of a long-term project using these higher inputs, more and more capital investment projects will not pass muster of even the most conservative returns.
In business, there is often a chicken-and-egg question about what creates a growing economy. What comes first, demand or supply? The old economists had the right answer. Supply. For example, until a farmer can create a surplus beyond what the farmer's family needs, the farmer cannot trade for other goods. The farmer has no clue what to grow until he comes to the marketplace to find out what other surplus production from others has become available. Taking the risk of production is the only way to determine demand. Business owners are becoming so risk averse that everything will slow down. It's not just that credit has supposedly seized up (bankers will realize again they can't make money until they lend it), it's that if business people got credit, they'd be scared to use it anyway. I am convinced that much of this downturn is the perceived certainty of higher capital gains taxes and and higher tax rates on small business Subchapter S corporations. The value of future opportunities is what drives business decisions. The certainty of expected profitability of public companies is what drives their stock prices. What we saw last week was not speculation, but a perceived certainty that profits are drying up.
Again, a word to printers: your clients are scared and cutting back. Compelling ideas that generate business for them is essential. If you are working with retailers, price competition this holiday season will be relentless. Every retailer, large and small will not want to hold any inventory after December 25. They will want it all gone, at almost any price, for fear that 2009 can be worse. They need traffic, and they need to build it at low costs. Last week's column had some ideas.
Non-retail clients are also in a situation of looking at budgets and squeezing the most out of them. Print businesses can be excellent outsourcers, handling all kinds of fulfillment and management tasks that may fall by the wayside if companies cut or reallocate their staffing. Talk to your clients about what you might be able to do on this basis to manage and handle things for them.
One of my fellow consultants, Peter Muir, tells sales people in his seminars to make their contacts in client companies "heroes." Now's a good time since many of those contacts may be fearful of their jobs.
This is a critical time for printers to look hard at balance sheets and income statements. Guess what: print prices will not be improving. Remember that your costs are not just the acts you take today, but are the culmination of the investment and employee (including training) decisions you made, or didn't make, years ago. Step back and look at your business hard, and make sure it fits the print markets of 2009 and 2010. As I said last week, it's time for business unusual.
If you have a strong balance sheet and no debt, and a provable positive outlook, now may be the time to borrow money. Rates are great, and inflation will grow, meaning the dollars that will pay the loan back will be cheaper than the dollars are now. Do something with them that makes sense and changes your costs in the long run for provable growing opportunities. Borrowing just to keep the doors open is the wrong thing to do.
Now is probably a great time to buy a competitor's book of business. That book is probably less reliable now than it was even six months ago. Be very careful when valuing it and paying for it. Recessions mean that business that seemed repeatable is no longer so. Look for growing companies (yes, even in a recession) and grab some coattails.
It's easy to blame rising paper costs, incongruous postal fees, and other costs (benefits, inks, whatever) for the lack of profits of a print business. None of those items can be controlled, only managed and navigated. The largest controllable cost in a printing business is labor. That is determined by the tools and training of those workers, and the capital investments that the business has made. Another controllable cost is the drain that old equipment makes on a business. It freezes the job skills of employees to the year that equipment was productive, and makes finding new employees difficult.
Vendors are especially concerned. Publicly traded companies have seen their stock prices plummet (not that they were really strong to begin with) and they know they sell to mainly small businesses whose owners have most likely seen declines in their own wealth that is used to finance their businesses. Many of the “heavy iron” suppliers too easily remember 2002-2003 when “young” equipment sold in the late 1990s came back to market because of bad leases. Such used equipment meant that the new equipment market had to absorb that young, used equipment. Will it play out that way again? The printing market is smaller than it was then, and the digital printing market is bigger. Credit was easier in the printing market in the late 1990s. It has not been easy in the most recent years, which may actually mean that 2002-2003 may not repeat itself to the same extent. There is less equipment in the field with questionable financing, and the idea of a declining printing market is better understood.
Any company that has had a stock buyback program sure has wasted their money. It was a relief to see a report from Staples a few weeks ago that they were suspending theirs to pay off debt. Low stock prices make buybacks more tempting, but investing in the value engine of a business now is all the more important. You can really reposition your business under the cloak of recession's darkness. Better to plan and invest your next attack while competitors are licking their wounds. Better to buy a company or competitor now than your own stock. Turmoil is a great thing to use to your advantage.
I'm not an investment commentator, but I can't resist. Those concerned should look at 1973-1974, 1987, 1990-1992, and 2001-2002 for some precedent. I have seen some managers who had historical proof that their sophisticated investing methods could beat various markets get mercilessly slaughtered the past few weeks. The old, tired, saws about the importance of dollar-cost-averaging and switching your portfolio so that your stock holdings as a percentage of your portfolio are equal to 100 less your age make more sense than any of the quantitative modelers would care to admit. But if that's all that people needed, the quantitative folks would all be out of jobs, so they're always concocting investment methods that only seem to outsmart themselves and create return-killing costs and fees in the process.
In the end, the biggest thieves of value for investments are taxes and inflation. I find it funny that the stock market could go down 35%, and that's horrible, but when taxes take 40% or more out of a dollar earned at its first moment of freedom, that's not even on anyone's radar screen. Depending on what state you live it, total taxes could be more than half; add inflation to the mix, and it's the enemy of compound growth. Keep it in perspective. A dollar earned is not a dollar saved, it's 60 cents after taxes. An annual inflation rate of 3% compounds to 34% in ten years. Investments and savings are always under attack in subtle and slower ways beyond investment risk. Always take these issues into account, and invest accordingly in the variety of vehicles that are there to avoid immediate or even later taxation.
Until then, another old saw about buying when there's blood in the streets will probably prove to be good advice... again.