Wednesday, January 7, 2009

Al Walsh on the World - Watch out for that Tiger

Nostradamus Was Right, World-End Is Coming!

Watch out for that tiger!

Nah! Nostradamus made good money selling nonsense to the impressionable, but he makes for good comedy relief leading into my next topic; which is quite serious.
A lot has been written about techniques for business people in the new millennium. I happen to believe that the required skills are largely timeless; being applicable at all times. But perhaps there is one factor that we should pay very close attention to at this particular time.

We’ve been through many economic downturns and survived; including the Great Depression. But I think the one we’re in now deserves special attention. It’s unique because there are financial tidal-forces of monumental size out there that haven’t played out yet. Just consider the multi-trillion, largely-unregulated, highly-speculative derivatives market. A good portion of it is tied to the mortgage mess, and those instruments haven’t been priced down to their true value on balance sheets yet.

Somewhere along the way there’s going to be a day of reckoning, and it’s not going to be pretty.

The actions of the Fed & Treasury to throw “funny-money” (huge quantities of new, unbacked money) at the mess have just frozen it in time. There will come a thaw. What will we have when it comes? The money-throwing might help stem economic deflation, but it will inevitably create huge monetary inflation. We have yet to deal with that monster. And if we can’t stem the economic deflation, we might get the unique “thrill” of having deflation and inflation simultaneously. It’s enough to make one very queasy.

The Wall Street pundits blow sunshine at us because they don’t know what else to do. I can smell their fear. The government just seems to be in a stunned state.

Given the oddity and uniqueness of the situation, it’s difficult for most businesses and individuals to surmise what the impact to them will be. This, of course, leaves everyone in a high state of anxiety.
If you’re not aware enough yet to feel edgy, I highly recommend you start now.

We all want to believe that it will work out okay. Government “talking heads” come out periodically to tell us so. But I don’t think anyone really knows. The banks don’t want to lend to each other for fear of what the “other guy” is holding in his hand. “Will they go under and take me with them”". It’s like a scary game of poker. The banks aren’t loaning out the money they got for their junk mortgage instruments from the Fed because their balance sheets are in jeopardy. The Fed is probably in the best position to know the true nature of the situation, because they bought a lot of the junk. But the Fed isn’t talking. They won’t even say who they gave the money to.

I can’t prove it, but I’ve believed for a long time that the government manipulates the markets during such times through their finance house partners. The “Plunge Protection Team” (The President’s Working Group on Financial Markets) is, after all, quite real and various statements have slipped out of the Fed hinting at such activity. So we are left wondering what is real, and what is smoke & mirrors. Main Street is left holding the bag - with their liquidity cut off and with no good sense of what’s coming.
About six months ago I learned something that made me really frosty. It seems an executive order was put in place to absolve public companies from having to meet full disclosure rules in a national emergency. If the government deems it “necessary” for “national security purposes”, a public company doesn’t have to tell their investors the full truth. Is anybody besides me scared to death at that prospect? I can’t help wondering if it’s being applied now; and to what extent.
In my opinion, we really managed to make a mess of things this time and people have good reason to be concerned.

Which brings me to my subject. Now is a very good time to sharpen your intuitive senses. In the best of times we of the modern world are buried in information. Sorting through it to keep ourselves founded can be daunting. Now we’re faced with challenges that have no precedent, and for which we have no feeling of the potential hazard. Pay attention.
When a farmer in India has a tiger in the neighborhood, he has no trouble keeping his priorities straight. He’s got to feed the family, and there’s endless chores to do, but that tiger is always in the fore-front of his mind. We need to be a lot like that farmer, and use our intuitive senses to help us keep alerted to potential danger.
Since the first humans sat in their caves at night listening to the predators snarling in the moonlight, we’ve been building a strong survival instinct. In our civilized world, that instinct has been dulled. Sometimes it’s difficult to tell the wolves from the sheep. But the instinct is still there if we listen.
There’s a tiger in our neighborhood, and perhaps some wolves too. This is a very good time to heighten our senses and watch for trouble. If it comes, it will probably arrive quickly and in a form we’re not accustomed to. Like that farmer, we have to watch for surprise attacks from the bushes.
Good luck to all of us.

Al Walsh is a regular contributor and has launched his consulting practice. Please enjoy his other posts and comments he is a favorite at The NEW New World of Work.

7 comments:

Ilya Bolotin said...

As one of the "new" generation, I think on the whole people of my age are not yet worrying about the economy to the extent of the tiger in the neighborhood because to follow the analogy we don't have a farm, no crops, and possibly no one we have to take care off as of yet. Therefore, the tiger can be there all he wants as long as he doesn't actually eat me, there is not much to worry about. When it comes to the economy, I have no money invested that I can worry about, nothing saved substantially, and no retirement fund or kid's education trust to worry about therefore there is a good reason for my dulled intuition and lackadaisical attitude towards the economy. I am not proud of that fact, but I am positive that when the time comes to invest, buy a house, and raise children these economic issues will be at the forefront of my mind and something that I will be worrying about constantly. As it stands now, the tiger is in another yard on the other side of town and I have better things to worry about rather than things I can't control and have nothing invested in. For now, I must make smart career decisions, use my skills and education to the fullest in new opportunities and make good acquaintances, not brood about how much money my neighbor is losing on the stocks!

Anonymous said...

Sounds like doom and gloom or stick you head in the sand mentality. We need to keep our eyes wide open but remain positive in order to get through a tough economic challenge.

Al Walsh said...

Hi Ilya,

I worry that you won't be able to use that education, or get that good job, or buy that house.

As Anonymous's comment about to "sticking one's head in the sand". I'm counseling just the opposite. Stick your head up and see which way the wind's blowing. We got into the mess we're in partly because a whole lot of people have had their heads "stuck in the sand". When it comes to big economic events, people tend to take the attitude that it's somebody else's problem. But these things have a way of coming home to roost. Just look at what's going on around you. Just to name one item that was on the news today, there are record foreclosures going on because people are losing their homes AND businesses are failing. That's just one little piece. I'm no doom & gloomer, but when I smell big trouble coming I sound the alarm If you choose to ignore it, that's your business. We're Americans - we get to do what we please. Me, I've been buying gold for five years because I saw this coming. Sure glad I don't have MY 401k in the stock market.

Larry Melby, Boulder Creek, California said...

The first thing that I feel has often been left out of the discussion is that the people in charge of dealing with this mountain of debt were piloting the plane when it hit the mountain. Yet we put them in charge of raising bigger mountains. It does not make sense to me.

Back in the spring of 2008, I heard about the derivatives problem and it was then pegged at $62 tri. (Is that the abbreviation of ‘trillion’?) I cannot comprehend that amount of money as it is over 4 times our Gross Domestic Product. I also never understood derivatives. It seemed to me like a huge gambling program played by the rich. Now we find that while everybody was watching their chips, the bank vanished.
Back in 1998, there was the unraveling of Long Term Capital Management. I would have thought that regulators would have put some controls in place at that time, but obviously, they didn’t. This is an even further concern since we have had both the republicans and democrats in charge of the regulators since then.
Who is watching the regulators? Does anybody know what will happen when these derivatives do unravel? Who is going to be left holding the bag and how will it be decided?

For some time it has seemed that we have too many insiders in charge of their own industries. The financial melt down just confirms that. Standard and Poor’s, Moody’s and Fitch’s all have their fingerprints on the mortgage crash. I have to believe that if I could see this crash coming before 2005, when I sold my house, then these people who were paid to know should have known. I smell a rat, but like LTCM in 1998, there is little movement toward an investigation and indictments. The most plausible reason is that without these rating agencies, fund managers would have to do real research and they don’t want that responsibility. You still have to believe, however, that if I knew that the rating agencies were complicit with the mortgage bundlers in creating AAA ratings, then these “Masters of the Universe” knew. It is obvious that they were also fairly certain that they would not get into any trouble. I read late last spring, although I can’t remember where, that a manager at one of the rating agencies told his workers that they would all “be rich and retired” before the bubble burst. I also read, but did not bookmark, that when asked about a mortgage rating from Fitch’s, “What will happen if real estate prices go down?” The answer was, “Our models don’t allow for that.”

Finally, what about sharpening our intuition, or as you put it, watching for the tiger? With this, my being a living troglodyte really shows. The most important thing that business people can do now is to limit their debt. Our firm was the only one in our industry that did not factor our receivables. I always thought that running your company on borrowed money made the banker your partner. A partner who did not share your goals and didn’t care about you or your people—truly the tiger. It shows now, when perfectly good companies are having their loans called. Our company’s cash management plan called for using a line of credit in the summer, when sales were expanding and paying it off when sales slowed and receivables caught up at the start of the new year. Another aspect of our company’s cash flow was that all of the bonuses were paid on collections, not sales. The bonuses shrank by half for every 30 days that a debt went unpaid and were zero after 90 days. (Bonuses also made up half of the compensation for all of our salaried people.) This put the people in charge of sales also in charge of collections.

Here is my advice for those who survive this downturn:
o Pay down your debts so that any time you borrow it is for an increase in activities that will generate the additional funds needed to repay the debt and you know exactly when you will repay.
o Discipline your customers to a 30 day or less pay cycle. You are not their banker and you can not afford them as a customer if they think you are. If you have the best service, they will be back.
o Orient your entire work force, especially salespeople, to the idea that the money has to get into the bank before you can use it.

Mary Schnack said...

I thought this was interesting. I always believe in intuition--in good times or bad. Women have a keen sense of intution--but don't always follow it, and should.
I think the economy is scary, but, and this is a big but. This also is a time of opportunity and we need to not just be watching out for the tiger--but for opportunity. It's there now more than ever.

another point of view said...

I hope there are people working with/for those who are managing the money that will have the strength of character to tell the true story and hold everyone more accountable.I agree with Larry on derivatives - - the people in power decided it was a way to gamble with other people's money and not answer to anyone.
Business owners, like Larry, will survive. For those people looking for a job - - Find Larry in your town. :):):):)

Al Walsh said...

So now the Fed Beige Book warns that we started the new year on a weaker footing:

"The U.S. economy started the new year on weaker footing as recession-shocked Americans retrenched further, forcing retailers to ring up fewer sales and factories to cut back production.

The Federal Reserve's new snapshot of business conditions nationwide, released Wednesday, suggested the country's economic picture has darkened over the last two months. The outlook appears equally dim.

"Overall economic activity continued to weaken across almost all of the Federal Reserve's districts," the report concluded."

Hang on folks - it's going to be a bumpy ride. More surprises are coming.

Al Walsh