Talk of a short lived crisis is political bravado
I don’t mean to be the agent of doom again but I cannot help but be struck by how many journalists, politicians or even economists seem to think the current crisis is a simple spillover from the financial world that will work itself through over a couple of quarters. In other words, the “V curve” chatter is back. I am all for positive thinking and suspension of disbelief, but where’s the data to support that ?
Real Economy: off a cliff ?
I am no economist, but I believe we are in for a long haul; I am particularly shocked by how fast the “real” economy is deteriorating. One after the other, companies are announcing serious job cuts, spending freezes, hiring freezes, travel freezes, hell-freezes-over freezes. And whilst Q3 may have mostly been business as usual, anything better than armaggedon on Q4 results will be welcome.
Let’s take one example; think simply about what a large corporate cutting costs is in the process of doing. It might look something like this:
- freeze all travel unless sales related and approved by the boss
- freeze all current external engagements where possible
- immediately go back to subcontractors and shave, oh, 35%
- cancel all new orders of laptops, blackberries etc and freeze IT infrastructure projects except by some special approval
- cancel all data cards
- shoot tradeshows, corporate entertainment, catering
- fire short term labour and consultants
- close 3 international offices
- shoot all variable incentives
These “for everything else, there’s Mastercard” moments are about to get scarce. Unless you are in the business of VOIP, teleconferencing or selling crisp white shirts to scared city workers, I don’t see how this does not deeply affect the real economy. If you are a DELL, Intel, Amex, British Airways, Hilton, Vodafone, Atos Origin, Infosys, Manpower, the local golf club, you’re going to be hurting. Yes, sales of food produce and video games and live events may buck the trend, but that won’t save the swanky new restaurant that just opened round the corner from you.
The slow road to recovery
I talked about the de-leveraging problem previously. With a deep dip in consumer and business confidence, no visibility on the re-opening of the credit markets, significant macro and currency risks and declining end user spend, we are not going to get out of this smoothly or quickly, in my humble opinion. It is not just a question of getting visibility back and hence unleashing blocked investment programs, it’s going to be about meeting ambitious ROE targets and debt repayment schedules.
This time technology won’t save the day by offering seemingly endless productivity improvements: that was 2002, most of these gains have been harvested. Sure there is still a lot of value chain optimisation to go, but we leave in a global, technology enabled world already.
Finance is the trigger but weak consumer saving was the fundamental problem
I understand people are angry over fat cat bankers and a crisis who speed is hard to get one’s head around. But that, whilst it may feed the diatribes of populist congressmen who think securitisation is evil, is far from the whole story. I remember economic strategists back as far as 1998 saying that the main risk to US growth was an overstretched and overspending US consumer. Looking back, 1993 was probably the seminal date, when US home ownership started trending away from its long-term average, personal savings rate fell gradually from 6-8% to about 2% over time, all fuelled by a long period of historically low interest rates (and inflation). A mixture of home ownership incentivisation, liberal monetary policy and market liberalisation of consumer finance created the long-term inbalance that is going to be so hard to correct today.
If it is the government’s job to trigger a return to consumer confidence and spending, one can only wonder which levers can now be used to make this happen. Maybe the Chinese, who partly enabled the consumer spending boom in the first place, can save the day by replacing the US as global engine for growth ? US debt being 3X of total GDP, one can hardly expect too much respite from that angle; US Treasury buyers are bound to start feeling jittery some day.
How long ?
I asked Warren. He did not know. Most people’s answer is the limit of their natural forecasting horizon; mine is 24 months. What’s the good news ? Our industry is still growing and much faster than GDP. Online still has a ton of catchup to do — it’s just going to take some time.
So I won’t be buying that new Aston Martin right now. I will be urging my portfolio companies to stay tight and focus on revenue generation. The good news is, that’s how they have been operating anyway. The bad news is, since they were operating “on the skinny” as a matter of course, there isn’t always that much to save.
May the force be with you and may the capital efficient make it through this difficult period. On our side, we will certainly keep investing to support the best business of tomorrow.
<– Polite New Yorkers … who knew ?
Related: read Uber-Bear Roubini here, for 9% US unemployment talk