The Seven Trends of the Current Economic Storm

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While I normally focus on digital and social media, my focus has been completely distracted by the current economic turmoil and political season. The world is facing a very difficult challenge that will likely result in many disruptive changes for everyone. I wanted to get my thinking straight on some of this stuff and I thought I would share. I hope you find it useful. If you have thoughts you would like to add, please leave a comment.

The Seven Trends of the Current Economic Storm

  1. Recognition by everyone that this is a severe economic crisis.
    We are experiencing a massive economic disruption. The mortgage meltdown, the credit default swap market meltdown, and the freezing of the commercial credit markets are causing massive turmoil in the financial markets. It’s driving a self reinforcing cycle of fear and chaos. Jobs are being cut, consumer credit is maxing out, foreclosures are accelerating, pension plans devastated. This is a bad, bad, bad situation and people everywhere are going to know and feel its impact.
  2. Consumers will/have started making cost cutting a priority.
    We will be buying Mac and Cheese from Wal-Mart, instead of eating out. Discretionary cash will be in very short supply. They will spend even more time looking for bargains.
  3. Demand has stalled for high end purchases by the mass market.
    The auto market is down by 30+%. That’s a huge drop. I was speaking with someone from a major car company earlier this week and he described how $10 billion in revenue just disappeared. Factories that were working hard are coming to a screeching halt. This will mean even more job loss and consumer distress.
  4. Businesses are making cost reduction an urgent priority.
    Layoffs are beginning to gain momentum and will continue. Discretionary projects will be put on hold. The cost pressure will be so severe that we will see some radical, but very disruptive innovation.
  5. Businesses will slow/put the brakes on capital spending and payables.
    Hording cash will be a key to survival. Businesses will react by slowing and cutting the spending on capital projects, and like consumers they will stretch out their payables as long as possible.
  6. People and organizations with cash to invest will buy distressed assets at bargain prices
    Just look at Warren Buffet and his actions recently. He knows that when times are bad, it’s time to get greedy. There will be lots of cash strapped asset owners desperate enough to cut really attractive deals for investors. This will shift money from investment in new growth opportunities to investment in cash producing assets. This is really bad for start ups and anyone who needs venture capital. There will be very little money going to new things in the next 12 months.
  7. The government reaction will increase substantially
    The problems we are facing will require even more government action.  There will be increased government deficit spending, cuts to interest rates, stimulus checks to the mass market, big government infrastructure projects and maybe even broad tax cuts. Given the current political trends, friends of Democrats (unions, trial lawyers, Hollywood, etc) are likely see more money coming their way and friends of Republicans (oil, pharma, Halliburton, etc) are likely to be punished as being the bad guys. As the government settles down, they will start putting in incentives to get businesses to invest and spend cash. 

Some preliminary thoughts on what this means

I think that these trends will definitely sway the financial rebound of different companies.

It is clear to me that delays and cut backs in discretionary, high end purchases are bad for the auto, consumer electronics, consumer durables, restaurants and other sectors that depend on these types of purchases. It is time to stay away from this stuff until consumers catch their breath and start feeling some job/financial security.

Companies that can help us cut costs, work out our debt, shop more effectively and help us get credit should be advantaged in this market. Experian looks like a company that should be able to take advantage of this. This is also an attractive potential area for social networking and media to the extent it can help people work out their problems together.

Companies that offer the ability to get results at much lower costs will rebound much more quickly. For example, the extraordinary cost effectiveness of search and online advertising will accelerate the share shift from offline to online. We may not see huge growth online, but offline advertising will get hammered, especially given the importance of the financial and automotive industries to ad spending. Stay away from offline publishers. On the flip side, this makes Google look more interesting and maybe even Yahoo.

This need for much lower costs will also accelerate share shift from costly physical channels to internet based channels.  This may be good for eBay and Amazon, but I’m interested in finding companies that are earlier in the process.  I’m not sure who to look at here.

Given the extraordinary cost cutting we will see in businesses, they will need ways to keep their businesses running with many fewer employees. This is probably good for effective productivity tools and outsource service providers. I think this is particualarly good for collaborative communication tools that really work, like Go To Meeting.  Companies that have cash will spend it very strategically and if you can get in front of  that trend it could be a good thing.

If you have cash to invest, it also makes sense to keep some dry powder waiting for opportunistic investment opportunities in distressed assets.

On the government front, it’s less clear to me which investment opportunities are worth exploring. I need to see the outcome of the election to really know who the winners and losers will be. I think I’m going to take a look at donations to each party to see who looks interesting.

Lastly, for those of you looking for venture capital, it is going to be a serious dry spell. It is time to hunker down hard.

My caveat on all this is that I’m not a stock picker. I think good investments are as much about buying at the right valuation as they are about picking the right areas. I have no perspective on whether or not the companies I’ve talked about have attractive valuations or not. At the time I write this, I don’t own stock in any of the companies I’ve written about, but that may change by the end of the day.

I would love to hear you’re thoughts on other major trends that are in play right now and what it all means. Leave a comment.

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5 thoughts on “The Seven Trends of the Current Economic Storm

  1. Interesting post. It’s rather depressing to hear of the recession but I suppose there is no point trying to hide from it. I think, though, that there has to be some stimulus to invest and start the economic cycle moving on the upward trend again – there has to be a way out. Do you think that online spending will be sufficient to drum up investor interest/enthusiasm to pull the economy out of this situation? I’m pretty undecided at this stage so I’d be interested to hear what you think.

  2. I don’t think consumer spending will get us out of this. The consumer is out of gas.

    I think it will take massive government stimulus and investment tax credits to get businesses to spend their cash on replacement assets.

  3. I think that web 2.0 start-ups will finally start to eat away at the Microsoft’s and Cisco’s (GoToMeeting and WebEx) of the business software world. The much more flexible and affordable Zoho’s, Yugma’s and Skype’s might do to the software giants what cable has done to network television or what the internet has done to video rental.Granted, VC money is hard to come by but I think people, desperate for cost-cutting solutions, will finally realize that they can get their software for thousands of dollars less then what they have been paying. Any thoughts on this or is it just wishful thinking?

  4. Microsoft and Cisco are proven companies for the business world and have business models that work. Smaller companies that combine great products, good sales capabilities and a business model that works will make in roads.

    The problem will be if they are still in the cash burning phase of their business cycle. They are unlikely to get more cash without some serious dilution. Some good companies will get thrown out with the bath water

    The other issue is that while the market is in this crazy mode decision making will get deferred, and that means the sales cycle just got extended by another few months for many deals. That’s always bad for anyone with a product to sell.

    MS and Cisco have scale in their sales force and the money to whether a slow down. Many of the web 2 companies have great product, but no scale in their sales forces. You need scale in your sales efforts to crack the enterprise market effectively. I would look for someone to consolidate some of these product based companies and roll them up into something that has critical mass.

    But we have to find the bottom first.

  5. Insightful… many believe that we are entering into a huge inflationary period. This is due to massive government bailouts and weakening faith in US currency. For this reason hoarding cash can be particularly dangerous. A dollar today will buy much less next year and so on. It may therefore be advisable for those with cash to invest in non-perishable consumable goods, tradable commodities, education, and industrial tools. Invest in your home and seek fixed rate debt.

    Government stimulus only delays inevitable economic corrections. Consumer spending and more importantly borrowing has been way out of control for the last decade. A correction and even and over correction is expected. Govt. bailouts ultimately take money from the taxpayer to bailout irresponsible investors, lenders, and industries. Once again, it only delays market corrections (pain).