I travel quite a bit, for business and for pleasure, and as I travel across the country and globally, I am continuously amazed, but not surprised, at the amount of discussion (more like complaining) around the economic condition today. Whether the markets are up or down, someone will always be happy and another will be complaining; that’s just how it is.
There is so much uncertainty lingering in the air, so it seems, and people filled with more frustration and anxiety than ever before, again so it seems. It’s interesting to observe, but none of it really bothers me. This can be because I’m an extreme optimist, but the facts I see around me every day also tell me that things are really not that bad.
Someone’s loss is always another’s gain. Wealth doesn’t just disappear. Even if you make the argument that it does, it may do in absolute or gross terms, but not relatively speaking. Relative to A, B was X% wealthier then and chances are B is wealthier now by X plus or minus Y percent. Big deal. A may overtake B, and B may come right back to overtake A, but all that depends on individual initiative and decision making, not the economy in my opinion. If A and B did nothing different tomorrow compared to today, their financial situation relative to each other wouldn’t really change would it? The economy to me is merely measure of absolute or gross collective progress. That is my personal scientific or mechanical justification, but again maybe it’s just my absurd optimism that’s showing.
By no means I am underestimating the extent at which we collectively jacked up. We have dug ourselves in the hole that we are in. I am not blaming any one particular group either. Individuals and governments were equally involved at all levels. It became the culture, especially here in the United States. I am not denying that we messed up, but I am more interested in what we are doing about it now and what we are going to do about it on a go forward basis.
From a consumer perspective, we have and are continuing to reduce debt levels across the board, from mortgage balances to credit cards and auto loans. I trust that we will continue marching on that path. It’s hard to believe that we won’t given what many had to go through in the last few years.
From a corporate perspective, I see a steady stream of M&A activity at all levels. For example, Google recently bought Motorola for $12B! Similarly, there are numerous deals taking place at the tier 2 and 3 levels as well (Side note: I used to work in M&A and am still subscribed to several M&A publications that provide notice of deals)
But that said, there are tons of companies with historically high levels of cash on their balance sheets. While one group is cautious, another is opportunistic. This was and always will continue to be the case in a capitalistic world. The good news is that forward progress is always being made. Maybe it doesn’t seem like it from an absolute or gross perspective because market values are on the decline, but activity is taking place, value is being created and wealth is being built. Again, blame my ignorance to my optimism.
It is for that reason that I don’t worry too much about who is going to spend, or where the growth will come from. The world is too big and someone is always contributing to progress. Right now, corporate balance sheets are at historical highs. Companies in the US alone are carrying more than $1T on their balance sheets, and globally this number is close to $5T. That is where the spending will come from. The fear of uncertainty and political instability may be preventing it today, but the money is there. It hasn’t disappeared. Companies are profitable. It’s a matter of when they will start spending again, not if.
I believe that sometime sooner or later the cash will come. It may not necessarily all pour in at the same time, but trickles of it are fine as well. Again, Google just spent $12B buying Motorola. The other comforting fact for me is that businesses typically make large financial decisions a good 12-18 or more months ahead of time, at least in a normal environment. The hindrance is caused by the ever changing landscape, tax situations and laws, but this is the new way of life. Sooner or later companies will come to terms with this and start modifying their behavior accordingly; again my personal opinion which you may blame to my optimism.
Global economies will eventually start recovering. I am seeing a conscious and effective rightsizing initiative currently, from the consumer to Corporates. Consumer debt is at an all time low. Even global Governments are trying (but obviously failing according to some). These efforts will eventually pay off. The private sector, who is the ultimate job creator, will eventually come through at some point. How long can they keep the cash on hand after all? It won’t do them much good.
As soon as Corporates start spending, unemployment will benefit, a key variable monitored by many as a gauge of overall economic condition. Growth feeds on itself just like shrinkage does. Economic cycles aren’t a new concept, and they are inevitable, just the timeline isn’t. Today it seems like it’s taking longer between cycles, but that’s not purely because of the typical underlying variables that are merely the doings of business and economy. Underlying this cycle is decades of consumer abuse that reached all time record levels of debt.
Everyone is trying all sorts of things, and I like to believe that genuine effort eventually pays off. We will eventually find the right solution personally, politically, and as a result economically, no?
Readers: What are your thoughts? Am I crazy?
Sunil owns over a dozen profitable niche websites