For the past four years we have seen our economy decline. During these years we had many experts from Wall Street, the US Federal Reserve and US Government tell us the problems were contained to certain industries and would not spread. Additionally, these experts continued to comfort us when realities set in that the economic problems were potentially bigger than originally thought by saying comments which lead one to conclude that in a few months everything would be ok. The experts were incorrect and the reality of a more challenging economy has continued to grow over the past several years.During the same period I have shared my opinions with my clients, friends and business associates that the economy was weaker than these experts suggested and to be extremely cautious and to reduce debts. My observations were a primarily a combination of weekly economic and business updates as well as my observations of small businesses as a tax preparer and a business advisor. I was classified as a pessimist instead of a realist.Now the experts are insisting on a light recession which will last about six month. I have stated to clients, friends and business associates we will continue to be in an economic challenging times for years, potentially until 2010 or 2011. Unfortunately, the number of 40 year olds will begin to decline between 2011-2013 which is a key demographic to drive our economy (this group purchases second home and spends monies on their children). Therefore, a more challenging economic environment may continue for quite some time.My current observations to base my conclusion include:o The US Government and Federal Reserve (the Fed) have increase liquidity by more than $2 trillion in the past 12-14 months. The additional liquidity more than likely will increase inflation in the future. The Fed controls inflation by controlling interest rates. Thus inflation will place pressure on the Fed to raise interest rates in the future. Raising interest rates will place pressure on growth.- Inflation may not be an issue if productivity increases, commodity prices decrease andor we can outsource our inflation to the emerging markets (i.e. cheap labor, etc.).- Inflation is actually a positive force is you carry debt. In theory, the higher inflation, the cheaper it is to pay off prior debts (i.e. $1 in current year will be worth $1 less the rate of inflation in future years).
o General Motors (GM) and Chrysler and quickly running out of cash (per the AJC 11/8/08) and are currently asking for additional government assistance. These companies provide thousands of jobs directly and potentially millions of jobs indirectly (through the supply chain and employees spending monies). This is unfortunate, but if we are a capitalist society we would allow poorly managed companies to fail. This should allow for better use of capital in the future.
o Goldman Sachs is now forecasting the deepest US economic contraction since the recession of 1982.
o Unemployment is now 6.5% and expected to climb to over 8%, possibly 10%, over the next 12 months.
o We have felt a lot of pain and we are currently not in a recession according to the government report. If it feels this painful before we entered a recession, how is it going to feel after we enter into a recession?
o Companies and individuals need to save more andor reduce debts. This will allow them to build liquidity, build net worth, and have capital in order to reposition themselves in the future. Either way a dollar save or used to reduce debts does not increase the primary way we judge our economy through Gross Domestic Product (GDP).
o Consumer confidence is extremely low, a score of 38, September 2007 the score was 61.4. This is a historic low and the lowest consumer confidence has been since 1991.
o I notice many individuals wanting the economy to improve, but they are not making the appropriate sacrifices.- They have made poor business andor personal financial decisions and cannot afford anything mis-steps.- They have not felt the consequences of their actions.- Many people are hoping for a better outcome, but not taking any actions. They are hoping for an improved economy because they have placed all of their chips on this hope.
o It took a long time for our economy to become so leveraged and it will take a long time for our economy to become de-leveraged.
o Income taxes are more than likely to increase. No, it’s not because Obama was elected or the Democrats won both houses of Congress. Talk of increase income taxes, especially on higher incomes has been in discussion for several years in both houses of Congress. Increasing the social security limits on wages has also been considered. Now with the national debt almost the same amount of our GDP pressure will be on to begin reducing or at least not adding to our national debt, thus an increase in taxes will be likely.
o Too much information has been released in the past two months for us to understand them all. We are forced to focus on one issue at a time. We will not fully understand what has happened until another 12+ months. For instance, we are no longer a capitalistic society. The US Government now owns equity positions (primarily banks) and is running several financial institutions (conservatorship in Fannie Mae and Freddie Mac). This makes the US a socialistic society. I am not sure that we understand we are now Socialists.- Just a few months ago the US Congress was complaining about China’s and other Sovereign Wealth Funds. The bailout has now allowed the US to own bank equities which means we basically created a US Sovereign Wealth Fund.
o Many small businesses financial position as already eroded. Banks are calling or reducing line of credits and loans. Where will the small businesses find the capital to begin growing?What should you do about it?
o Begin planning for at least two years of challenging economic times.- Planning will allow you to:-Build cash,-Reduce debts,-Make better business and personal finance decisions,-Sale non-core assets to generate cash to reposition,-Concentrate on strengths of your company and building on them,-Identify weaknesses and correct them,-Strengthen your business or personal balance sheet, and-Reposition your company to survive the current economic, environment and to be more flexible to change with economic environments in the future.
– Value cost-cutting-Most companies think of cost cutting as stop spending all monies. When regular cost cutting occurs the value destruction is greater than the monies saved. Companies need to focus on value when making spending decisions and cost cutting decisions.
o Learn to spot opportunities- Spend your time and energy finding solutions, not complaining. The economy continues to provide opportunities. If you are not looking for them you will never see them.
o Show a great attitude, be positive, but be grounded to reality- Set an example, but do not be lured into false hope
o Challenging economic times make any changes even more difficult- Working harder, working smarter and continued sacrifice will be needed
o Stay focused!- Do not chase fades or buy equities just because some popular investor says to do so (i.e. Warren E. Buffett and Jim Cramer), focus on what needs to be done to improve your business andor personal finance positionIf I am correct, you will have the knowledge to weather one of the most challenging economic times. If I am incorrect, you will have build your cash and reduce your debts which means you will have the capital to grow your business or invest. In other words, you can thrive in good times and survive in challenging ones.