bizzXceleration: Performance, Value and Profit

Where Away From Here?

So the fundamental question is, when/how/where do things begining to come back? And what are the liklihoods? We've tried to answer that question but looking at key cycle relationships and seeing what leads to what, following around the economic circle of life. The driving engine is Consumption where there's an almost 1-1 link which you can read right off the first sub-chart in two different timeframes. The real question today's news makes critical is when are jobs coming back? There the news is less appealing. We need 2.5% job growth for breakeven, which would be about 4% GDP growth. Given that the outlook from the OMB, et.al. is for 2.5% GDP growth thru 2019 we'd suggest that the chances of reaching that point aren't real good. In fact at 2.5% growth it'll take a darn long time just to get back. There is NO investment, business or personal decision you or anybody you know will make that shouldn't be hedged against that outlook - maybe for the next decade.

Of course whether or not the implications will sink in and be strategically and effectively responded to are other questions entirely.

For Example: the Investment Outlook

What we'd like to get back to is organic, self-sustaining growth where increased jobs lead to increased consumption lead to increased investment which lead to more jobs, higher wages and so on around the "Great Circle". When it works that's called a virtuous cycle - when it runs in reverse it's a vicious one. From the top sub-chart (note how much steeper it is) Investment is responsive to growth beyond a certain point. If we get to 3%+ growth it looks like we'll get a big jump in Capex. On the other hand Tech spending is even more sensitive (the curve is much steeper). As long as the economy stays in the doldrums the outlook for Tech ain't very good. And clearly the days of 9-16% surges have gone the way of the Dodo. Just as a bit of a test - how much of that do you think is reflected in Tech sector earnings outlooks and PE valuations? We'd hazard that the inverse is true - that is people are still locked into a mindset from the '90s and aren't adjusting their thinking at all; and won't until the smoke signals on the horizon are fires at their feet. Which does present some interesting trading opportunities but not very good investing ones, in general.

RE Investment is the other interesting conundrum. Now as our friend CalculatedRisk has taught us all RI leads the business cycle and helps to drive it. As he also taught us it was Housing floating on a see of bad debt and decisions that was the ATM machine the held up consumer spending this last decade. Does anyone think that ATM is coming back? Anytime soon? Anyone, anyone...Ferris? To get a significant lift from RI it'd need to grow at 10% and IOHO we'll be lucky to see years of 3% growth, hopefully followed by some five percenters. In other words, by the charts, expect no help from RI and take what comes as a pleasant surprise.

Comes Round Goes Round: Employment & Wages

The economy is a cycle - like we keep hammering on. Future output and investment growth, such at is and/or might be, will stimulate hiring and wage growth. Now the (temporary?) death of Inflation has driven up real wages short term and helped hold up spending, of course enormously helped by government spending. So in the next chart we've taken a shot at looking at our key future indicators of consumer demand, the YoY change in the sum of real wages and employment, and used Personal Income (PI) as alternative proxy just to calibrate things a little. Zero % growth in the first basically gets us back to that aforementioned 2% consumption growth but it's worse looking at PI, more like 1.5-1.75%. To get future growth of, say, 4% in Consumption we need the sum of wages and employment to grow at 4%. If it's PI plus employment it's more like 7%+! Now what in anybody's outlook makes growing real wages and growing employment a strong likelihood!

Welcome to the New Normal Indeed: Where's My Mommy?

We wish we could send you off this weekend with better news but couldn't figure out how to do that without blowing a lot of sunshine up your skirts, so-to-speak. The key for this new environment is going to be how well businesses and consumers adapt their behavior. It's not a question of the new normal being supported by the new frugalities, but the "New Frugality" being forced by it. At the end of the day this is going to be an economy for a tough-minded Scotsman, a Buffett-economy in other words, that will reward insights, analysis, preparation, discipline, patience and persistence. As well as having the courage to change. Now speaking for ourselves we always prefer cowering in terror but we're hoping very sincerely that the same ain't true of our leaderships.

Back in the day when we used to do a little rock climbing there always came a moment when it dawned on the climber that that tiny little thing bracketed by their boots was the six acre parkging lot they'd left a few hours ago. It wasn't unusual (ahem) for the next step to be clinging tightly to the rock whimpering for Mommy to come make it better. The best response we ever saw was the instructor who shook loose the safety rope and leaned into a loud stage whisper as they rope fell down slack, "you're gonna die"! A little harsh but the student did survive to finish the climb and go on the next one.

Consider this our "stage whisper" and add to your shoppinglist two key readings, one from Mohammed El-Arian:  A CEO’s guide to reenergizing the senior team and Return of the old ways of thinking threatens recovery.

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READINGS

Jobless Report Is Worse Than Expected; Rate Rises to 9.8%The American economy lost 263,000 jobs in September — far more than expected — and the unemployment rate rose to 9.8 percent, the government reported on Friday, dimming prospects of any meaningful job growth by the end of the year.“It’s a very fragile and tentative recovery,” said Mark Zandi, chief economist at Moody’s Economy.com. “Policy makers need to do more.” Despite help from Washington’s $787 billion stimulus package, state and local governments slashed 47,000 jobs in September. And auto dealerships, which added jobs in August as business picked up because of the “cash for clunkers” rebate program, cut 7,100 positions last month.

• Nothing but bad news in this morning’s unemployment numbers
•  Unemployment Charts (Not Pretty)

Jobs Vanish The recession took a much larger toll on employment than was previously reported, the government said today. The Labor Department said that it planned to revise the job figures by subtracting more than 800,000 jobs that it had wrongly estimated were filled by workers.The planned revision indicates that this has been by far the worst recession since World War II, causing a 5.8 percent reduction in the number of jobs in this country since employment peaked at the end of 2007.The decline in private sector employment was even greater, at 7 percent.It is the largest benchmark revision in at least the past dozen years. In 2006, when the economy was booming, it underestimated the total number of jobs by 752,000 jobs, or 0.6 percent. The private sector accounted for nearly all of that, causing an 0.7 percent upward revision.In each of the three years since then, the benchmark revisions have indicated the government overestimated the number of jobs in the economy. But the 2007 and 2008 revisions were relatively small.

• Recession? What Recession?
• Unemployment: Even Worse than the Headlines
• Hours Worked per Person Tailspin Continues
• Comparing This Recession to Previous Ones: Job Losses
• The Mother of All Jobless Recoveries

GE's Immelt warns US recovery slowest in decades General Electric Co. chief executive Jeffrey Immelt warned Tuesday that high unemployment and slower lending will drag on U.S. economic growth, likely resulting in the weakest recovery in decades. "There are reasons to believe that this recovery could look different from ones in the past," Immelt said in a speech in Singapore. "There's not a lot of confidence that it's going to be great."Immelt suggested the world's largest economy could be facing its slowest recovery from a recession since before the 1970s as increased government regulation and bank consolidation pinch off available credit. Joblessness, which reached a 26-year high of 9.7 percent in August, will also weigh on growth by undermining consumer spending, he said."Easing up money has always been the elixir to keep the economy in recovery mode," Immelt said. "But once you get interest rates to zero percent, you can't go much below that, which is kind of where we are right now.""A lot of the jobs lost in financial services and construction are never coming back."

CEOs see sales growing, but many still not hiring An index measuring the expectations of 107 CEOs from among the nation's largest companies was at its highest level this year, with more than half expecting sales to grow in the next six months — but their outlook for capital spending remained stagnant, and 40 percent predicted more job cuts. The Business Roundtable said Tuesday its CEO outlook index rose to 44.9 in September from 18.5 in June. In March, the index stood at -5, its lowest reading since the survey began in 2002. A level below 50 is consistent with a shrinking economy. "Right now, were beginning to see sales trending up, but not to the level that translates into meaningful gains in capital spending or jobs," said Ivan Seidenberg, chairman of the association and CEO of Verizon Communications.While 46 percent of CEOs in June expected sales to drop in the next six months, in the most recent survey, 51 percent expect sales to rise in the next six months. Meanwhile, 23 percent see no change and 26 percent expect a decline in sales.As for jobs, the survey of CEOs, whose combined companies have 10 million employees, showed that many still expect meaningful drops in unemployment. The country's current jobless rate, at 9.7 percent, is expected to hit double digits this year and isn't expected to return to a more normal level for several years.

Credit `Neverland' Vanishes, Leaving Americans Dreaming About Jobs “Millions of people have been living beyond their incomes for the simple reason that those incomes have been outstripped by the cost of middle-class American life,” he writes.Extravagance certainly helped stoke the crisis, Goodman says. Americans didn’t really need that special trip to Belize or those extra flat-screen TVs in their bedrooms.Yet Goodman makes the case that many Americans dug themselves into a hole through a pernicious confluence of other factors -- notably the failure of real compensation for the rank and file to keep pace with productivity gains. Easy credit plugged the gap, he says.“For many years, the economy has existed in a state of Neverland akin to that depicted in J.M. Barrie’s classic tale ‘Peter Pan’; Americans have operated as if we can fly, borrowing increasingly enormous sums of money while making believe it need never be paid back,” he writes.How can Americans renew the economy? Goodman says we need to get back to honest work and invest in productive enterprises, such as biotechnology and renewable energy. To show what can be done, he takes us to Newton, Iowa, which was hammered by the loss of its main employer, Maytag Corp. The town has since gained back jobs by making windmill components.Though it’s unclear how many jobs can be created this way, it’s hard to argue with Goodman’s conclusion: “Rather than bingeing on finance borrowed against a supposedly fantastic future, we must figure out how to generate enough income to live on -- as individual households and as a society.”

The Next Culture War Over the past few years, however, there clearly has been an erosion in the country’s financial values. This erosion has happened at a time when the country’s cultural monitors were busy with other things. They were off fighting a culture war about prayer in schools, “Piss Christ” and the theory of evolution. They were arguing about sex and the separation of church and state, oblivious to the large erosion of economic values happening under their feet.Evidence of this shift in values is all around. Some of the signs are seemingly innocuous. States around the country began sponsoring lotteries: government-approved gambling that extracts its largest toll from the poor. Executives and hedge fund managers began bragging about compensation packages that would have been considered shameful a few decades before. Chain restaurants went into supersize mode, offering gigantic portions that would have been considered socially unacceptable to an earlier generation.Other signs are bigger. As William Galston of the Brookings Institution has noted, in the three decades between 1950 and 1980, personal consumption was remarkably stable, amounting to about 62 percent of G.D.P. In the next three decades, it shot upward, reaching 70 percent of G.D.P. in 2008.During this period, debt exploded. In 1960, Americans’ personal debt amounted to about 55 percent of national income. By 2007, Americans’ personal debt had surged to 133 percent of national income.

• Moral decay? Or deregulation?

A CEO’s guide to reenergizing the senior team Helping senior managers swim through this thick stew of challenges is a perennial problem that has become more acute for many organizations over the last year. The credit crunch and global economic slowdown didn’t just cause the unraveling of many business models. They also unsettled the assumptions and confidence of many senior managers. Mopping up the collateral damage in the executive suite is now a mission-critical task for many CEOs and is likely to remain one even when business conditions begin to recover. Among the many emotions that can influence how executives interpret and respond to events, there’s one worth addressing on its own: plain old white-knuckled fear. In times of rapid change, when the actions that used to lead to success don’t any more, even strong leaders can experience intense, unproductive levels of fear caused by threats to their identity, their reputations, their social standing, and even their basic survival needs of a job and a paycheck. Ironically, leaders with the strongest track records are often more susceptible to fear during tumultuous periods because they have less experience facing adversity than their colleagues with more checkered pasts do. Provoking members of the top team to confront their fears and embrace the need for change is an important starting point, but it still leaves an enormous task before the CEO: helping the team learn new ways of doing business in response to changing conditions. When Harrah’s Entertainment CEO Gary Loveman talks about the difficulty successful executives face in learning, he likes to quote a line from a 1991 Harvard Business Review article by Chris Argyris: “Because many professionals are almost always successful at what they do, they rarely experience failure. And because they have rarely failed, they have never learned how to learn from failure.”Yet failure, or at least the dramatic upending of what yields success, is exactly what many executives face during times of tumultuous change. The basis of their success—clear mandates and time horizons, experience-based judgment, the ability to convert data into useful information for decision making, and a clear understanding of cultural norms—can go out the window overnight. Serious upheaval means mandates can become muddled, ambiguous, and highly dynamic.

Chinese Economic Juggernaut Is Gaining on Japan Though recent wild currency swings could delay the reckoning, many economists expect Japan to cede its rank as the world’s second-largest economy sometime next year, as much as five years earlier than previously forecast.At stake are more than regional bragging rights: the reversal of fortune will bring an end to a global economic order that has prevailed for 40 years, with ramifications across arenas from trade and diplomacy to, potentially, military power.China’s rise could accelerate Japan’s economic decline as it captures Japanese export markets, and as Japan’s crushing national debt increases and its aging population grows less and less productive — producing a downward spiral.“It’s beyond my imagination how far Japan will fall in the world economy in 10, 20 years,” said Hideo Kumano, economist at the Dai-Ichi Life Research Institute in Tokyo.Catching Up to Japan

• How Do Japanese React to China’s Rise? Depends on Their Age

Return of the old ways of thinking threatens recovery We are at the point of maximum confusion in the multi-year transition of the global economy, markets and policymaking. We have left the global growth regime that was driven primarily by debt-financed consumption in the US, but we have not as yet reached a position of more balanced, albeit anaemic, growth. Those who lack a robust anchoring framework, be they investors or policymakers, risk being misled and backtracking to outdated ways of thinking.The signs of inappropriate reversion are multiplying. Confusing temporary factors for sustainable ones, a growing number of analysts have extended the ongoing stimulus/inventory bounce to a V-like recovery next year and beyond. The momentum for meaningful financial reform is stalling in spite of clear evidence that financial activities have far outpaced the regulatory infrastructure. And some banks are returning to the bad habits that almost destroyed them.This reversion is intimately linked to the inadequacy of the anchoring analytical frameworks. Appropriate frameworks provide important protection against the short-termism that can contaminate markets and policymaking. By contrast, ill-designed frameworks can encourage short-term thinking, leading to market and policy overshoot on the way up and down.Today’s lack of appropriate anchoring frameworks appears to be exacerbating short-termism. The issue goes well beyond the still-limited appreciation of the multi-year realignment of the global economy, which is gaining momentum. It also relates to tendencies well-documented by behavioural economists – such as framing the problem wrongly and refusing to question past approaches.