The buzzword yesterday was uncertainty. US debt has never dropped below a AAA rating. And yet, with the move to AA+, the bond market was positive, while stocks, in companies with good earnings and huge amounts of cash, took a pounding. It is hard to make sense of what is going on unless you look beyond the headlines to some underlying realities.
Here is some advice for these uncertain times.
Don’t bet in binary. The future of global economics isn’t good or bad, it is a constant flux of volatility. It is not going to get more stable, and any short-term stability is a momentary illusion. Rather than looking to the upside or downside of any issue, map out the uncertainties surrounding it, and look at the range of possible ways the situation may play out. Those who saw the downgrade of US debt as a positive yesterday did OK in the bond market. US bonds are the safe haven, and they remain so. One uncertainty reasserted yesterday, an uncertainty that was around at the beginning of the recession: the relevancy of ratings agencies. The question remains if the debt downgrade really means anything if people have little trust in the agency making the downgrade (the same people who held on to high ratings for AIG and Lehman Brothers until the very end). Remember stories like this: Credit Rating Agency Heads Grilled by Lawmakers? The question is what happens if credit rating agencies loose their influence? What takes their place? What volatility does the lack of a standard benchmark create?
Don’t act local. If you think investing in the US or any other country is the key to bringing that nation back from the brink, you are wrong. The global economy is now tightly integrated. No economy exists independently, not even those who try to isolate themselves like North Korea. That is why even economic sanctions work on the most isolated of countries. If you look at your native country’s economy in isolation you will get burned. When you invest, look beyond the investment to understand the relationships at play.
Companies aren’t Countries. Many companies are sitting on cash. The Wall Street Journal reported in July that Apple’s cash stash was bigger than that of 126 countries (see For Apple, a $76 Billion Dilemma). Don’t bet against companies because the countries where their headquarters exist are having issues. For large multi-nationals you have to decouple the company from the country.
All of the numbers count, not just some of them. In a turbulent economy, many people gravitate toward the numbers that have meaning for them. GDP, productivity, debt, VIX, earnings per share—you name it. Here’s an example: Many economists believe that high productivity is inherently good. High productivity inherently means that fewer labor hours (read people) are needed to produce goods and services. If productivity increases during an economic downturn fewer people need to be hired. And then the nation complains that people aren’t being hired. So over the last couple of quarters, people were hired. And what happened: Productivity Slows Less Than Expected as Labor Costs Rise – CNBC. Labor costs increased as productivity slowed (less, but it did slow). The numbers are related. You can’t have one without the other. The only way to hire people is to increase labor costs. Which then gets to consumer spending. If you focus on productivity and don’t hire people, then the people not working for you don’t have the ability to buy the goods or services. Pundits and economists, political leaders and investors tend to look at numbers they believe in, rather than looking at the complex, messiness of the real world. People try to avoid messiness by over-simplification. If you are going to thrive in this economy, you have to embrace the chaos.
"Where people work longest and with least leisure, they buy the fewest goods. No towns were so poor as those of England where the people, from children up, worked fifteen and sixteen hours a day. They were poor because these overworked people soon wore out — they became less and less valuable as workers. Therefore, they earned less and less and could buy less and less."
— Henry Ford
Growth will likely come from some unexpected quarter. Green jobs is a concept where many are placing bets for future grown. Green jobs aren’t really green, they are industrial age jobs (building stuff and installing it) that drives down some aspects of oil dependence, but they are still net consumers of resources. As long as we live in a consumer-driven economy, it will be the consumption of things that ends up driving demand. We are, however, perhaps, in the very early stages of a new economic model built around knowledge and sustainability, where not consuming things may be as economically important as consuming them. Let that sink in for a minute. That means that companies who can find ways to create economic growth by not making things may prosper. Remember derivatives. Unsustainable on one level but they generated cash without environmental impact. People and firms are experimenting. I’m not saying this is the only possible economic future (see the first item above) but I am saying that if we spend all of our time looking only at the perceived risk-free past, as some analyst say, a "flight to quality," then we will miss the weak signals in the background noise that will be the true harbinger of the next period of growth.
Extra For Public Sector Organizations: This is a tough time. But when you plan, don’t plan only for the negative. At some point the economy will pick up, revenues will increase and you will have an opportunity to invest again. Do you keep doing what you have been doing, or do you plan for reinvention during the next upswing? I think the biggest public sector innovation risk is taking "depression" or in this case "recession" era thinking and institutionalizing it. In my talk at Educomm I said I was optimistic about the future of public schools because I thought they still had time to redefine and reinvent themselves, but they had to make the choice to avoid the trap of seeing the future as more of the same. In order for the public sector to move forward rather than tread water, they need to embrace the ability to imagine new models for the future that they can practice while in retreat. They need to be prepared to execute when they have money to spend again. A key indicator of new public sector thinking will be shorter planning horizons and faster acceptance of change. Watch for this at local levels first. And keep voting for the people who decide to keep up with the pace of change.