“Words mean what I want them to mean, nothing more and nothing less”

With this spectacularly famous misquote, or really paraphrase, of the White Rabbit in Through the Looking Glass by Lewis Carroll, let’s discuss this week’s recession ending announcement.

The National Bureau of Economic Research declared that the recession was over June 20, 2009!  The eighteen month recession, the US’s deepest since the Great Depression, was declared over with a tepid “…the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.  Rather, “a recovery began …”  So, economic conditions aren’t “favorable” or “normal” but the recession is over.    I though over meant finished.  Words have certain meanings unless you’re an economist or politician.

Seems Warren Buffet also thinks the definition of over is finished.  On CNBC, the Oracle of Omaha said that by his own “common sense” definition, the United States is “still in a recession” and will be “…until real per capita GDP gets back to where it was before.”  Each of us needs to  match our 2007 earnings before the recession is over.  That makes sense to me.

So, I’m not ready to declare the recession over.  With unemployment near 10% nationally and 12.5% in my home state how could I?  We still need to treasure our jobs and customers, keep cash reserves high, and borrowings low.

In my last post, about Cognitive Dissonance a few readers questioned me about being angry.  My first reaction was; that’s great, I have readers!  Upon reflection, I agreed I am angry.  How can I not be?

• There are over 14.5 million unemployed Americans.  Half of them out of work for over six months.
• There are over 3.5 million homes in foreclosure default.  And, many million more heading there.
• US Banks are becoming zombies by not recognizing real estate losses.

Based on the news this week, it’s pretty trendy to be angry.  But, we must turn our anger to a call to action, not a lead in to depression.  And, what’s the call to action?  Continue to live in a way that you can survive this no growth period.  Preserve your assets and don’t take on new debt.  Especially with your credit card.  Don’t wait for a dream job to appear.  Find something you can do that adds value.  And, grind it out to make it work.

And, happiness and satisfaction will come from the small successes from your efforts.

Cognitive Dissonance

The human brain is a wonderful tool.  Probably man’s best piece of high tech piece of machinery not invented by Apple.  The human brain is what made us the “rational decision makers” that the modern science of economics is based upon.

Even among the most scatter-brained of us, our brains prefer consistency.  Actually, we crave consistency of thought.  Cognitive dissonance is the uncomfortable feeling caused by holding conflicting ideas simultaneously.  This uncomfortable migraine gives us the motivational drive to reduce dissonance my making conflicting ideas seem like they work together.

How else could a financial expert, with enough juice, to be interviewed say “…we won’t have a double dip recession but it will feel like one.”  I don’t have a job but it will feel like I do.  I can’t pay my mortgage but it feels like I can.  I’m 5’9” and think I can dunk!  And, so on!  Fantasy island (our North American version) has come to life.

The domestic economy has settled into a 1% growth path.  As we’ve previously discussed, we can achieve 1% growth without hiring people to build inventories or sell the goods.  And, while the stock market may seem to like growth from productivity, currency revaluations, etc I don’t.  Nor, do my underemployed friends.  If we’re not adding jobs, please stop talking about how the economy is growing.

The government can’t stimulate the economy!  It’s tried and is out of ammo.  And, our deficit is large enough that even this administration doesn’t want to reload.  Historically low mortgage rates haven’t helped and won’t this year.  We all know asset values haven’t bottomed so why buy a home now?  And, most folks can’t qualify for mortgages anyway.

Housing, fiscal policy and government spending aren’t going to pull us upward.  What will?  We will!  We’ve all got to “grind it out” and find something productive to concentrate on.  Get up earlier each day.  Work harder.  Accept lower margins or fees.  If we can add value, then cash flow will follow.

I’m trained to place debt and advise companies on mergers/acquisitions.  My clients aren’t very active now (i.e. they’re not buying what I’m selling).  Do I allow myself to sit back and pout because they’re not buying?  Hell no.  What I’m good at is getting in front of people, listening to their needs, and structuring solutions.  So, now I’m selling a package of services provided by a clever group of engineers.  As a banker, two sales per annum made a good year.  Now, I need twenty-five sales to make my year.  And, I’m going to grind it out and close them.

Moral of the story:  We’re in uncharted economic waters.  It’s going to be a long, dreary journey.  You can’t wait it out.  Find your own new idea and go after it.  It may be uncomfortable, but you hold your fate in your own hands.

Planes, Trains and Automobiles

What are the leading indicators of transportation telling us?  Well, it’s a mixed bag.  And, that shouldn’t be a surprise.

Boeing claims commercial aircraft will be booming.    Today, Boeing released its 2010 Current Market Outlook forecasting 30,900 aircraft will be required over the next twenty years.  That’s 1,545 planes per year (Boeing, Airbus and regional jets combined).  Wow² (that’s wow squared for the non quants)!  Assuming a 50% market share for Boeing, it means over 750 aircraft annual aircraft deliveries. This dwarfs Boeing’s peak shipments of 620 planes in 1999.  Over the past five years Boeing deliveries have grown from 290 to 481.  Boeing would need to achieve over a 50% production increase from 2009’s levels.  Boeing’s ramped up like this before but it was painful.  But, don’t worry, be happy!  Even with all the foreign outsourcing, it’s a boon for domestic manufacturing base.  The aircraft supply communities in Washington, California, Kansas (Wichita plant) and eastern seaboard (new Carolina’s plant) will be overflowing with orders and hiring lots of engineers, machinists, and unskilled labor.  We’ve heard one major subcontractor with a $2 billion backlog.  Remember this is a positive sign for the FUTURE’s (not 2010) employment and economic growth.  Deliveries, and corresponding hiring, will be the mid to latter part of the decade.   Subject to unforeseen global events and Boeing’s hiccups.

I’m not much of an expert in choo-choos.  But, Warren Buffet is.  And, he bought Burlington Northern Santa Fe with a prediction that shipments will improve.  For June right he was!  Over the past two months, combined weekly traffic for new carloads and intermodal shipments is about 14% higher than a year ago, according to the Association for American Railroads.  Port of Los Angeles cargo container shipments are up 32%, June over June, for the best June in history and one of the ten best months ever.   Next door’s Port of Long Beach is also up.  Shipping is a sign of a strengthening economy and a leading indicator of hiring.  But, beware!  Some port shipments are imports, bad for employment and symptom of our burgeoning trade deficit.  And, shipping execs are watching sales and confidence measures carefully and making cautions statements.

Lastly, cars.  While my wife comments about all the new cars she’s seeing in our affluent beach community, the industry is struggling to keep pace at a 11.5 million unit run rate.  So, while GM is strengthening, the auto related employment gains have leveled off.  So, I’m grading this neutral for employment.

Transportation-land yields two positive employment indicators and one neutral.     Unfortunately, transportation job growth looks like its coming but its years out.

It’s That Man, and He’s Writing Again!

It’s now time for me to return from my “blog-cation” (i.e. hiatus from commentary).  Who an earth would need a vacation from writing about what interests them?  Apparently me!  And, I don’t even have fact checkers or editors tormenting me.

I was starting to feel like a broken record.  The epitomy of a one-hit wonder.   Sifting through the economic news, looking for the recovery that the front benchers in Congress assure me is underway.  And, not finding it.  Because it isn’t there.

But the recovery is damn hard to find.  Chairman Bernanke is talking about a double dip recession, using fed-speak of course.  Past Chairman Greenspan a “pause” while not ruling out a double dip.  And, the keynote speaker at last week’s  Morningstar Conference also predicting a double dip.  So, I’m going to feel less guilty about commenting on discouraging omens and headwinds, and offer my thoughts what to consider as you steer your business through these turbulent economic waters.

Available cash flow continues to flow into corporate coffers and individual’s pockets to deleverage.  Cash isn’t being used for hiring, investment or inventories.  The ISM purchasing indices on manufacturing and services certainly showed us that.

A potential consumer driven recovery is being derailed by continuing huge unemployment, continuing woes with home ownership, flawed monetary domestic policy  and a capital markets fear (US stocks and Euro Zone sovereign debt).  The limited growth we’ve had is temporary; the result of Government stimulus that yielded limited benefits, and created a crushing deficit/national debt.  We need consumers, with paychecks buying stuff.  Through expenditures from their salaries, consumers will use their personal cash flow to create corporate cash flow.  Corporate profits that will be sustainable enough to finally create a meaningful amount of jobs.   The consensus forecast 2nd half 2010 GDP growth of 2%  in the United States and 1% in Europe isn’t enough.

So, over the next few days, let’s talk about the impact these issues are having on our companies:

• Planes, Trains and Automobiles—Is transportation contributing to economic growth?
• Dead Europeans and Live Americans with Funny Names—Why Keynesian stimulus doesn’t work.

and

• It’s About M2 and Incentives Stupid—Money supply growth and tax policy.

Stay Alive Til 2010. Now What?

The recession is over!  Three quarters of economic growth!  Solid corporate and bank earnings!  Are you still in business?  Well then, congratulations are in order.  Darwin was right.  Only the strongest survive.  So, you must have the strongest business in your sector.  Right!

Did Darwin say strongest?  Nope.  He said only the fittest survive.  Well then, what does fit mean?  Fit means the potential for survival.  Look again at your business.  Were you truly the fittest?  Or did certain factors give your business the potential for survival.

The 2007-2008 Other People’s Money recession came on suddenly and violently.  It was the child of a liquidity crisis, and then the recessionary cycle imploded.  So what factors made survivors from the rest?

-        Not Using Other People’s Money—in financial lingo, not being over leveraged, having strong equity capitalization, and vast current assets.  Why?  When demand falls, those pesky other people don’t demand their money back and force your business into bankruptcy.  And, you can use your cash reserves to carry you through the bottom of the cycle.

-         Having a Product or Service People Need and Can Pay For—If your customers care if your business didn’t open up tomorrow, you are positioned properly.  And, were selling a product people truly needed and could pay for.  In the recession people could live without Harleys, boats, Chevys, Nordstroms labels, vacations and $25 bottles of California Cabernet.  But, they needed food, clothes from Target, entertainment from NetFlix, etc.  I think you get the picture.

Now take a hard look inward.  Did you consciously design your business to possess these factors?  Or did it just work out that way?

Notice I didn’t say that the best managed companies survived.  That wasn’t the reality.  A six sigma, lean machine with an optimized supply chain couldn’t survive without customers ready, willing and able to buy.

Survivors:  You may be well positioned and seeing only upside.  But, please don’t lie in the shade and roar like a contented lion.  You’re going to soon need to make investments in the business and hire workers.  Don’t invest in non-optimal business practices.  Make the investment in process improvement, lean manufacturing, and pull scheduling.  Work your supply chain and undertake make v. buy analyses on all components.

Find the smaller operations consultants that will implement the fixes and be self funding.  Consultants worth their salt can fund themselves from the cost reductions.  We do.  On every assignment we take.

Often Wrong But Never In Doubt!

I’ve taken a small hiatus from writing articles as the press of business and family life has consumed all my time. But, honestly it’s more my personal lack of conviction about the economy’s health and direction that has temporarily silenced me.

A past business partner used to challenge me with the ism: “often wrong but never in doubt”. Meaning, am I really so sure of my position. As much as my gut feel tells me that we’re still in a recession, that this jobless recovery doesn’t have traction, the experts tell me that I’m wrong. So, I’m reevaluating the “never in doubt” part of the challenge.

As difficult as it may be, I’m visualizing the cup of Starbucks (recession’s over so no more Costco house brand for me!) in front of me as half full. Why?
• Euphoric stock market pushes DJIA over 11,000 and S & P 500 over 1,200.
• Government reports job growth.
• Retail sales up in March (1.6& over February 2010).
• Industrial production is rising.
• Recapitalized banks record solid earnings
• Leveling off of credit losses.
• Foreclosures abating.

OMG! Economic headwinds just clouded over my vision and knocked over my half full cup of joe. Good thing the metaphoric coffee makes less of a mess than the liquid kind. What dark images entered the picture?
• 10+% Unemployment isn’t going to come down soon.
• Retail sales almost flat and dependent on auto rebates for growth.
• Credit card losses at 7-12% with few new lines.
• Banks earnings from trading not lending.
• Regulators allowing banks not to recognize losses on residential real estate.
• Housing still flat for the medium term with overhang of bank foreclosures.

What to do?
• Consider cautiously reentering the stock market, but please cost average into broad based mutual funds.
• Value your job! The next one isn’t there yet. And may not be soon.
• Keep your personal leverage down! Don’t borrow to buy things.
• Have twelve months of cash in reserve.
• Don’t depend on interest rates hovering around zero forever.
• Read the next article on the state of manufacturing.

Are Banks Business Lenders? Trend Line Says No

My teenage son likes reading horror novels, particularly the zombie genre.  The living dead, brainlessly roaming the globe looking for healthy, living beings to consume.  Sounds a heck of a lot like the banking industry!  And, there were many zombie sightings in the FDIC’s Quarterly Banking Profile released February 23^rd, 2010.

The banks, made brain dead by their record level of net charge-offs and non-performing loans¹, stop making loans and terrorize the populace by charging new and higher fees for  just about everything!   Why write about this?  Isn’t this old news?  Well yes.  Secretary Geithner and BAC CEO Moynihan tell us that the banks are healthy and lending again.  But, over the last week I triangulated three data points and drew a trend to timid banks not making loans.  Please remember; no loans no job creation!

The first data point; last Wednesday’s Wall Street Journal article titled, Lending Falls At Epic Pace.¹ Those Journal headline writers are skilled professionals and that just about says it all.  But, there are three striking items in the first page of the article.  “U.S. Banks posted last year their sharpest decline in lending since 1942, suggesting that the industry’s continued slide is making it harder for the economy to recover.”  “FDIC Chairman Sheila Bair said the banks are ‘bumping along the bottom of the credit cycle’…”  “Some small-business owners say they could expand if they could just get a loan.”  I don’t need to comment.  I wish I could have made the point that well.

Sunday morning the Pacific Ocean was too rough and dirty to go surfing, and I saw Robert Shiller, Yale Professor and proprietor of the Case-Shiller real estate indices on NBC.  As usual, the Professor refused to make a residential real estate forecast and ducked any questions about commercial and industrial real estate.  But, he did remind us that entrepreneurs are the real creators of new jobs and they can’t get loans to start or expand businesses.  And, investors aren’t comfortable with the economy’s position in the cycle and are holding back new investments.  Ouch.  Data point Two.

And, Data Point Three?  The FDIC’s Quarterly Banking Profile released February 23^{rd 2}.  As we discussed in a prior commentary that bankers are emotional, not the stoic, objective guys and gals in their grey suits that we envision.  When they fear unknown losses in one or more portfolios (e.g. residential real estate, commercial and industrial real estate, and credit cards) they stop lending in others.  Have I made zombie sightings in the FDIC report?  Yup.  The entire industry only earned only $12.5 billion in 2009.  Better than $4.5 billion in 2008, but a pittance compared to the $100 billion in 2007.  So, they’re scared of low earnings in 2010.  Why.  Because non-performing loans (90 days late or worse) are $391.3 billion, 5.4% of all loans, the highest level in the 26 years banks have reported this data.  Anything else at a 26 year high you ask?  Losses (i.e. net charge-offs) at $53 billion, a 2.89% rate compared to 1.95% a year earlier.  And, only 58% of the non-performing loans are covered by reserves.  In English?  If banks don’t recover 58 cents on the dollar, losses go directly to income.  Worried bankers think new loans may cause new losses so let’s not make any.  Are they lending entrepreneurs working capital to create jobs?  I’ll let you answer that question.

Who’s going to fund small businesses growth that will create jobs?  Customers through making deposits with purchase orders.   Vendors through long and generous accounts payables.  Friends.  Relatives.  And, other nontraditional sources.  But, not the grey pinstripe crowd.  Not now.

¹ Wall Street Journal, Print Edition, Section 1, Page 1, February 24, 2010

² Federal Deposit Insurance, Quarterly Banking Profile, February 23, 2010. http://www.fdic.gov