The Economy: A Viewpoint from Risk and Strategic Management

Here is a quick piece on my take of the current state of the economy from a risk management and strategic viewpoint. This piece includes an article summary as well as my own writings.

Please look at this article on Forbes.

“The beautiful is a phenomenon which is never apparent of itself, but is reflected in a thousand different works of the creator.”

— Johann Wolfgang von Goethe 

     The following three facts are pretty unsettling:

- Mergers and acquisitions are down 14% globally since 2008 and have plummeted 35% in Europe.

     - Massive amounts of cash are piling up on balance sheets. This hoard instinct represents an idle $1.4 trillion in corporate cash and cash equivalents sitting idle in the non-financial S&P 500 companies through late last year, up 69% from 2007, that's pre-recession.

     - Stock buybacks in the US so far this year are on a pace to substantially exceed last year, adding to the $2.2 trillion in buybacks from 2008 through 2012.

   It is understandable for business leaders waiting for things to clear up. The outcome of today’s stagnation is not only clouded, the entire ordeal is unprecedented. We’re in the midst of the longest and most complicated recessionary period ever. No one today has coped with anything like it. At the same time, political uncertainty is mounting due to legislation added by the current administration. Leaders have always lived with uncertainty, but this has always been the case. If money is not invested to spur real growth, expansion and innovation, it’s a good bet that none of these will occur.

     Doing anything is always risky. Doing nothing is a major strategic decision, typically a bad one. Business leaders can anticipate change by understanding that a lot of what seems like uncertainty is actually unfamiliarity. This distinction means that old ways can be adjusted and new methods acquired in pursuit of real opportunities that never have been seen before. In example, executives long understood that capital was scarce and talented people abundant; neither of which is true now.

Quick Advice for Corporations: Businesses must start hoarding talent. There is a current shortage of 10 million highly skilled workers, which could grow to as many as 95 million by the end of the decade. The world is now flooded in capital. A lot of it is currently on the sidelines but more will arise from developing nations. It is estimated that total global capital pool will expand 50% by the end of the decade, which is up $300 trillion from roughly $600 trillion today to nearly a quadrillion dollars by 2020. That’s a lot of money. 

      In order for businesses to continue on their path, good strategy must be considered with risk management in mind. The risk every manager faces is: What do I stand to gain? versus What do I have to lose? The question that is left on the table is: Can businesses afford to continue to sit on their hands/cash? And the answer is yes, yes they can.

Personal Note: I have been asked by several coworkers and friends on my own evaluation of the current state of the economy. Plain and simple I believe that the Fed is floating the economy through their Quantitative Easing Program, buying up $85 billion of assets from various entities and that businesses are waiting for the sleeping bear to wake and for things to crash before they will start unloading their cash hoard. It is my hope that instead of staying in stagnation that the Fed will allow the economy to crash to restart the business cycle so that the country can push forward. For those not familiar with business cycles, take a look at the following graphs: 

Business Cycle with terms

Blue - Stock Market Cycle  Yellow - Economic Cycle

     As I follow Forbes, WSJ, Bloomberg, Reuters  and many businesses as well as their contributors' blogs for my work, I feel comfortable in saying that a majority of business writers and bloggers feel that the current state of the stock market cycle is in Late Bull phase; I too concur. In terms of the business cycle, we have recovered but we have not yet boomed, and until the current administration fosters a pro-business environment, I would expect to see many corporations hold onto their massive cash piles sending the market into a bear one and causing the economy to contract. Fear not though, businesses will spend their cash as with time and inflation most companies choose to spend their money and invest it rather than lose it. Count on these businesses with cash piles to jump-start the real economic recovery into economic expansion, keeping the market in a natural balance.

The alternative side is that businesses will invest their cash before any downturn in the market occurs sending the economy into a boom period. I think this is highly unlikely as businesses stand to lose much more than gain as the market is currently at record highs. My hope is that businesses will invest in human capital and raise up future business men and women for their needs and provide the necessary incentives to retain their employees. Companies that are doing this already such as Chick-Fil-A are seeing vast returns on their customer service and investment in human capital. 

However, Mort Zuckerman is on the same page as myself, check out his article on the jobless recovery. "The country needs a real recovery, not a phony one." 

Side Note: Honestly, only time will tell if I am correct or not. If I stand corrected, I will admit my errors and move forward. My writings are not about whether I am right or wrong but looking at current events or issues and freely sharing ideas. Obviously, I wouldn't write or publish something I know to be wrong or false, so feel free to correct me when, not should, I make a mistake or be in the wrong.