Update: June 4, 2010
Sometimes things make sense and sometimes thye just don't. Today's employment numebrs for May were very disappointing, from the perspective of private job creation, but I know 8 people who got new jobs in May, 3 people who reported calls from Executive Search firms wanting to set up perosnal interviews for real jobs that their clients' need to fill now and all my clients hired new people in May are looking to hire more people over the summer.
Something just doesn't compute if the Feds say that the U.S. economy genertaed only 31,000 new jobs in May. My smaple just isn't that large as compared to the U.S.
May 17, 2010
After working with 3 of the 4 large banks for a new working capital line of credit for a client, the company is profitable, cash flow positive and actually grew 40%+ in 2009 vs.. 2008, and being turned down by all 3 for no particular reasons other than they aren't lending to small businesses, we successfully raised $200,000. The funds came in the form of a term loan for the purchase of fixed assets from a U.S. SBA micro-lender and a working capital line of credit from a smaller specialty bank. The new funds give the company the liquidity it needs to continue its sales growth in 2010 and the company will hire perhaps 20 new employees this year.
Don't get too discouraged too early in the process! This took longer than it should have but in the end you can't properly operate without capital and the company will fail if pushed too far too often.
Raise the money first!
May 8, 2010
This week I know 6 people who have found new jobs after many months of looking. New job creation in May should be the best in 7+ years.
March 21, 2010
The Zen Masters say that to know 1 thing is to know 10,000. Friday morning the Bay Area's median home price jumped by 25% due to little more than a mix change as very low priced foreclosed homes fell away and normal sales rose from very depressed levels. Friday afternoon I had lunch with a mortgage broker who hadn't closed a deal in a year but had dozen of clients approved for loans but they couldn't find cheap homes to buy. Friday evening two houses were sold on our street of new homes leaving only 1 left on the market.
I'd say real estate had turned the corner in a major way. Now if someone with "juice" and a modicum of brains would get the banks to lend to businesses again the economy might get going as well and create a few jobs.
February 28, 2010
Flies in the ointment: The basic economy continues to grow this year and the recession is clearly over with positive and above trend line GDP growth for Q1 2010 a better than 90% bet. However, the three big flies in the ointment this year, and they are very big indeed, are beginning to worry me.
First, there is almost no working capital financing available from banks. I've been doing this for 35 years and this is the worst time ever for basic, simple and core business lending by banks. The only common thread for banks is finding new ways to say no after asking for more information than ever before. Without the funds to finance working capital, accounts receivables, inventory and payroll growth, it will be impossible for businesses to grow revenues and add employees. Right now it is an unmitigated disaster as banks continue to borrow cheap money from the Federal Reserve, long after they are profitable again, and buy U.S. debt for a risk free return of 2.5%. Why should they lend with that level of risk free return.
Second, the Federal government seems fixated on everything but creating new jobs. Small companies are 90%+ of early hiring in a recovery and, if they can't get working capital financing from banks and they get limited help from the government for taking a hiring risk, why should they step forward and hire new people? They shouldn't and generally won't. Without a job or the prospect for a job who cares about health care? The answer is in the polls and it is no one. Why the Feds are so wooden headed about this is anyone's guess but they are and seem unlikely to change.
Third, small business owners and entrepreneurs are tired and have had their fair share of bad news and tough decisions. They have had to manage cash much tighter than they'd like, fire long-term employees, downsize fixed costs and have heard "No" from banks about financial help. The mood is conservative and business owners are looking to rebuild liquidity and net worth in the face of 2 to 3 bad years. If 1 and 2 don't change then thee real engine of job growth, smaller businesses, will be slow to get rolling.
We'll see!
January 29, 2010
Today's headline says it all; GDP rises 5.7% in the last quarter of 2009 for the best rate of growth in 6 years. Therefore, with 2 consecutive quarters of GDP growth the recession is officially over and the worst of the events of the last few years are behind the economy. I continue to believe that 2010 will be a much better year than any of the pundits or forecasters are willing to predict. The smart entrepreneurs will get ready to take advantage of the economy's real growth at the beginning of the cycle.
Unlike most recoveries where there has been one quarter of tepid growth, followed by one of sharp contraction, then one of modest contraction - for two consecutive down quarters and a recession - then by one big up quarter this recovery will be different. The major difference is that we experienced 4, not 2, consecutive down quarters. Nothing like that has happened since 1929. The primary reason for the prolonged downturn was a lack of liquidity which caused companies of all sizes to shrink, shrink in the form of people, inventory, equipment and ability to carry normal accounts receivable, such that they could live within their ability to raise cash.
The best news out of today's economic numbers was that the Consumer didn't lead the way but Businesses did! Businesses of all sizes added to their working capital and productive equipment investments reflecting the increased liquidity in the system. This means the recovery has "legs" as business investing in equipment, inventory and trade credit will hire people. Hiring is what we need to generate more consumer spending based on wages and not debt.
2010 couldn't get off to a better start.
January 3, 2010
The most interesting numbers coming from the government in the last month were the rapidly dropping new claims for unemployment, which fell to a point where positive job growth in December is a certainty and the likelihood that November will be revised up from negative 11,000 to a positive number is very high, and the fact that the money supply, as measured by the broader index called M2, was still shrinking.
That means businesses have started responding to increased sales and future orders while banks and other forms of lenders are still reducing the money supply. The net is that businesses have created sufficient net free cash flow to grow without external financing. This is both very typical of the early stages of a recovery and very positive for growth and increased employment in 2010.
The longer the newspaper and web headlines and stories stay negative the better it is for real growth. Right now will be the best time to start a new company or expand a stable one since 2002.
Update: December 4, 2009
Sometimes it is fun to be right and this is one of those times. Today's employment numbers show that the recession ended several months ago and employment kicked back into gear in the second half of November. The drop in the unemployment rate from 10.2% to 10.0% will be the start of a new cycle of hiring by government, remember that the stimulus money is just beginning to filter out into the real world, manufacturers and then services. My personal bet is that employment increases this month as seasonal hiring well exceeds forecasts.
The key is to bear in mind that this recession was caused by a lack of liquidity and not a fundamental drop in demand. With some level of liquidity restored things will get better fast. The last show to drop, it always is the last, will be for banks to start lending again. This normally takes 1 to 2 years for banks to get back to business and almost always starve companies for capital when they really need it and then flood the system with cash at the end of the expansion cycle. This time, however, the political pressure is so great they will return to lending in early 2010. They may do it kicking and screaming but they will do it or face a level of scrutiny and control from Washington they won't like at all.
Get ready for the next up cycle and don't get left behind.
November 9, 2009
Lost in last week's flood of economic and corporate data was one very important piece of information. Worker productivity, the amount of work performed divided by the number of worker hours spent, climbed at an unprecedented rate of almost 10%. Think about it for a moment - 10% more output for the same number of workers or the same output for 10% fewer people working. Totally unsustainable and driven by the fear of running out of cash from last year's credit freeze (see below) and this year's credit crunch.
Major increases in productivity, which used to mean 6%, can only be maintained for a quarter or two and always come right before hiring begins in earnest by companies of all sizes. The next major increase in new job will start over the Holidays and make itself felt in Q1 2010. This is a unique time to pick up cheap space, infrastructure and people before prices for all three reverse themselves in 2010. This will happen much, much faster than the depressing headlines which are always late, wrong and, in this specific case, very wrong.
The last shoe to drop will be credit availability from banks which are 80%+ of the market for small to medium sized business who do 90%+ of the hiring and new job creation. Look for your first credit card solicitation as sign that the credit cycle has begun to reverse itself as well.
November 4, 2009
Get ready for a major breakout to the upside for the economy! This may sound too optimistic for the raft of negative press these days but remember that the press is always 6 to 9 months behind the times much as the stock market is 6 to 9 months ahead of change. The media was screaming about rising home prices long after the market had tanked and they are doing the same thing today.
Cisco's results were so strong last quarter and its backlog for the next quarter so large than it referred to the "tipping point" in its earnings release and indicated that it will begin hiring again. This is very significant as Cisco sells to almost every top 1000 company in the US as well as the Global market and its order backlog reflects the simple fact that companies are buying again.
I believe that we will see better GDP and employment numbers over the next 5 to 6 months than anyone will admit to as a result of pent up demand, low interest rates and excellent corporate profits. The Fed will leave rates low until there is clear improvement in employment which means between another 3 to 6 months of low cost funds.
The major anchor to corporate growth and hiring is the lack of working financing from banks. Despite some $2 Trillion of Federal Reserve stimulus the broadest measure of cash available to the economy, called M2, has actually fallen by about 15% annually for the last several months. Cash is going into banks but not coming out in the form of loans; especially loans to small and medium sized businesses which account for the vast majority of new job creation and have done so for the last 25+ years. I believe a combination of government pressure, bad press and the fundamental need to make loans to maintain profits will cause this situation to change and change soon. Once the money begins to flow then smaller businesses will hire and get the economy moving.
Look for your first credit card solicitation in the mail, maybe your first in a year or more, as the sign that the credit freeze has begun to thaw. Times like these are the very best times to start something new or develop new programs to fuel growth in the next up cycle.
September 1, 2009
Anyone and everyone reading this doesn't?t need me to tell them that we?ve all just lived through the worst economic period in either 35 or 70 years. The key question now is what happens next, how should one position their company for the next twelve months and what level of risk to take in terms of growth, people and financial exposure. The second most pressing question is what form the next up-leg in the economy will take. To frame these issues I believe one must view them in the context of what happened, the responses to the problem and how the economy will behave in 2010.
First, this was no ordinary or typical recession. It was a combination of a global margin call on assets that drove a true depression in values for all goods and services including, and perhaps especially, labor. The series of mistakes that culminated in Merrill Lynch going bankrupt essentially froze short-term borrowing globally. Cash fled to short-term U.S. securities and literally abandoned all other forms of investment. At the bottom of the cycle the short end of the yield curve for treasuries was only a few basis points while the return on a ten year treasury note moved above 5%. These securities typically have a spread of 1.25% which really meant that there was no market, another way to say risk, for anything but cash equivalents. The net return of short term government debt has been negative for the last year before one factors in fees, transaction costs and taxes. Corporations couldn't?t sell their commercial paper and had to redeem these short term notes as they came due placing enormous cash flow pressure on companies everywhere.
Second, the systems that were put in place during the New Deal in 1933 to 1934 were designed to prevent another depression. That is a decrease in the value of real assets such as stocks, bonds, homes, equipment and, by extension, the value of people?s labor. The liquidity crisis caused firms to aggressively cut costs and, since some 80% of our economy is service based, labor got hurt badly across virtually all segments of the population. Housing dropped 35%, cars probably 20%after accounting for rebates of all types, hotel rooms rates fell by 30% or more and even major destination locations, such as Las Vegas, saw customer counts fall by similar amounts. Without cash you can?t do much so raising and hoarding cash, some $400 billion is now held by U.S. companies, has been the watch word for the last year.
Third, the Federal government has now pumped in some $11 Trillion, with a big T, in cash to jump start the economy while the Federal Reserve Bank has dropped rates to zero and will most likely keep them there for most of 2010. My bet is that rates will stay at zero until the economy has shown clear and unambiguous improvement and employment growth returns. Given the recent unemployment news it is highly unlikely that interest rates will rise until late in 2010. In truth, there is no reason for rates to rise since inflation is dormant and excess capacity for both labor and productive capacity will keep prices and wages down for some time to come.
Therefore, what happens next. Despite the recent economic slump, September was certainly worse than August and not at all as good as forecast, I believe the coming recovery will be more robust than most expect for the following reasons:
1. The Zarnowtiz Rule, named for Victor Zarnowtiz, a recently deceased leading scholar on business cycles, states that deep recessions have steep recoveries. It is Newtonian physics applied to economic cycles. Equal and opposite reactions. The depth of the recession is equal to any except 1929-1933 and, therefore, the bounce back should be equally sharp. Equities have already recovered some 80% of what they lost since the Merrill Lynch disaster.
2. The financial system is liquid, rates are as cheap as they can be, returns on short term government securities are negative and the money will begin to cycle through the economy driving demand. As the old saying goes; don?t fight the Fed.
3. The global economy is larger and more resilient than previous ones where major segments of the global population, China and India for example, were excluded from global demand due to politics. Since the last major downturns in the 1970s and early 1980s some 2.5 billion people have become part of the world?s economic system. More customers, with greater purchasing power and accommodating governments can only help drive demand for goods and services.
4. The U.S government?s $819 billion economic stimulus program has only begun to gather momentum. From the time the bill was passed until the summer rules were formulated and ?shovel ready? construction projects started. The majority of the government?s economic push will be felt in Q4 2009 and into the first three quarters of 2010. That is a lot of ?push? and it will have an impact on GDP, job creation and consumer sentiment.
5. Lastly, the major nations will do more if they determine the current level of stimulus spending isn?t getting the job done quickly enough. That is the true lesson of the Great Depression and one not lost of today?s world leaders.
The next year is certainly a time to choose ones goals carefully, make certain you are properly financed for the business mission and understand the risks involved but not the time to hide under the stairs and wait for what could be the best high tide to hit the shore in many years.
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