Tag Archives: recession

The New Normal

I was meeting with a commercial tenant representative today over coffee, and during our discussion about what trends he was noticing in business, he said that he had been accumulating leads more rapidly over the past few months.  His view was that people were starting to consume more, or at least entertain thoughts of consumption and expansion efforts in business.  They’re not feeling more confident because the economy is on an upward trajectory, they’re just tired of being depressed.  I think he’s absolutely correct.  When you get hammered by a lot of bad news, eventually you don’t care anymore.  It gets to a point that you become sensitized toward bad news, and you just start moving forward with plans, and loosening the purse strings for no other reason than you become tired of the ways things are. 

This is the new normal.

Thinking about this, I realized that, although my set of circumstances differ, and my perspective is shaped by the view from my seat, my conclusion is the same.  

Things changed in the Fall of ’07, and have not been the same since.  2009 was an improvement, challenging but good.  Business in 2010 is different to the way it was in 2009 — things are changing rapidly.  There’s more activity, but not greater volume; clients are focused on cost cutting, do not have the ability to risk their remaining resources, are being smarter about their spending, and are less likely to ride with a project for as long as they had done in earlier years.  These factors are pressuring the market for services to change from the a la carte delivery of specific services to a more all-encompassing pre fixe.  Clients are demanding the delivery of those services in a way that adds value to their projects.  This is leading to more price stability for buyers of services, more specialization and niche building by sellers of services, and a movement away from the traditional ways in which services were priced and delivered. 

Once again, a new normal.  

Naturally, the question of whether we “are at the bottom” and “when is the economy going to return to normal” will be asked.  Well it isn’t going to — there’s a new normal. 

Our economy has lost millions of jobs during this recession, and even if we could replace them, it would take many years to do so.  Current business conditions, however, discourage small businesses from adding new workers.  Specifically,  health care costs, taxes, data privacy concerns, payroll costs and employee benefits are a major discouragement to hiring new employees.  At the same time, new technology has made it easier to outsource job functions than to hire more employees.  A company that needed 8 employees 10 years ago, can now achieve the same output with only 3 employees.   It’s possible now to bank online and make deposits from the office; bookkeeping  and accounting are easily outsourced as online software programs download banking, billing, revenue and expense data and process the data into registers and reports; billing and accounting information can be accessed from the internet by an outsourced independent contractor; printing, copying, marketing, advertising, internet strategy, as well as informational technology are all outsourced, and administrative and secretarial services are shared between companies that have co-located in larger office space, with any excess services needed being handled by virtual assistants. 

My point being that the old jobs lost are not going to come back, big companies will shrink, and small companies will try to remain small.  Jobs are being created, and will continue to be created but they are being created by new businesses, not existing businesses.  The new jobs are in different fields, and workers will need new skills. 

Once again, this will be the new normal. The new normal is to adapt or die.  Adaptation will need to be done quickly, and will require one to be nimble.  Large entities are by their nature not nimble and cannot adapt quickly enough to create significant opportunities in the new normal.  It’s up to us little guys to do that.  I’m up to the challenge, are you?

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The white knuckle business cycle of the finance market

As the ink dries on the first half of financial 2008, we seem to be huffing and puffing up a steep hill that keeps getting higher and higher. Press speculation about our approaching the summit continues to fade into the recycling bin with increasing regularity. The Fed is concerned about inflation, but the Treasury Department says it’s more disturbed about anemic growth, and the financial markets are spooked by the price of oil. Interest rates are low, but getting financing is a bear as the banks, the economy’s call-girls, who, seduced by profits from products meant only to make capital accessible to lower-income households, opened the spigots too wide, and have now slammed the door shut, other than to dance on each other’s graves a la` Bear Stearns. The Australian and Canadian dollars have almost reached parity with the U.S. dollar, the Euro is at $1.57, and the pound is at $2. That’s good for foreign investors in U.S. based assets and U.S. exporters, but it all adds up to an environment in which it’s becoming increasingly difficult to get a deal done locally. Understandably, this is a trying time period — as hopes surge that the housing correction is bottoming out, massive flooding in the midwest threatens lives and crop production; oil soars to over $140 per barrel; and the Dow Jones Average regurgitates the gains of the bull market. It is clearly difficult to earn a dollar these days.

The commercial real estate market is experiencing a hangover as the players who can obtain financing are embracing a spectator role by holding out on capturing assets that they expect to continue to fall in value. The preferable strategy is to make moves now that can position you well in the upward cycle. We cannot buy at the bottom and sell at the top in any event. We just have to hold on, and stay in the game. Granted, it’s a white knuckle time, but the point of this article is that the current market events represent a necessary fallout; not only will the economy be better off for it, but it needs it. Consider the case of Cambridge Park 125 Realty Corp., et al. v. Board of Assessors of the City of Cambridge (Lawyers Weekly No. 20-034-08) in which the Appeals Court held that “[w]here the owner of commercial real estate in Cambridge seeks a real estate tax abatement, that request should be granted because the subject properties were overvalued for fiscal years 2004, 2005 and 2006.” Realigning real estate that was subject to higher tax rates and increased rents because of overinflated assessments is clearly a needed correction.

Fundamentally, we need to rebuild the foundation that has become necessary to be competitive in today’s globally linked grouping of economies. Yesterday’s building blocks are just that, as inconsequential as yesterday’s news.

We are the world’s largest economy, but we are not as dominant as we once were. That, however, is a challenge not unlike the one we faced in the early 20th century when our economy needed a new level of ingenuity in order to transition to industrialization. We are going to have to adapt our fundamental underpinnings to accommodate the new global marketplace to continue to enable us to lead. Currently, however, we have lost our edge. I see this period as the natural re-ordering of things. Our economy is flushing out the toxic waste that we fed off for years and years. It’s not that it’s a correct strategy, but while India and China were playing to their core strengths and seeking growth without regard to inflation, we were recycling the same old business strategies, but picking up only debris. Collateralized Debt Obligations are just an example of how we survived by churning leveraging strategies that were meant only to expand the inventory of available capital to fuel growth and development. We put the system into overdrive until the engine burned out, and now we need to replace the engine. It’s a cycle, just like the body ridding itself of unnecessary and unusable waste. It’s not pretty when it happens; it can be painful, and very challenging, but it’s necessary. After this cycle is completed, I have no doubt the economy will be able to clear the hurdles, and reach the summit of the hill, regain its strength and be able to add building blocks that are sustainable and necessary.

The issues facing our economy have never been about a subprime loan bust, overly aggressive mortgage brokers, or the failure of mortgage based hedge funds, as has been widely speculated and implied.

Remember, this is a cycle, and it will flesh itself out. In the meantime stay on the playing field.

The dirty "R" word

I’m going to call it. Recession is a dirty word, a word that just doesn’t roll very easily off politicians tongues. It’s not what you want to hear, and it’s a word that you just don’t want to use in an election year. The Boston Globe yesterday quoted Peter Dunay, chief investment strategist for New York based Meridian Equity Partners, as saying that ” . . . [t]his is why we’re probably heading into a recession.” Kudo’s to you, Peter, for heading down the pathway that few have dared to go, even though you put on the brakes with the “probably” qualification. Henry Paulson, the Wall Sreet titan who is currently the Bush Administration’s Treasury Secretary, stopped short of using the bloody “R” word, but has acknowledged that the economy has slowed down. Mr Paulson stated on Good Morning America this morning that the economy has taken a downward turn. When I see a man like Henry Paulson sitting at the helm of the Treasury Department, and taking a front and center position on the morning talk shows to ease our concerns, it makes me comfortable. It really does help. I do know, however, that when I see JP Morgan tap dancing on the grave of Bear Stearns, doing the same jig they have done on many graves in the past, I know that we are in a recession. Chase is the grim reaper of the economy. All banks tend to take away the umbrella they gave you when it starts to rain, but no bank is better at not only taking away the umbrella, but stepping on the face of its troubled clients; clients that it financed in the first place, and then buying their businesses out from under them. You know that the jig is up when you see Chase circling overhead.

It’s not, however, all that troubling to say that we are in a recession. Recessionary times are challenging, and they require a different set of skills. For those of us that are used to workouts, and tough deals we’re okay with the word recession; the more hair on it the better we say. There’s opportunity in tough times, so let’s just deal with the fact that its here, and do our best to bust out of it. There are many strategic business moves that can be made in these times that will position the smart and the street-wise to take advantage of the inevitable boom cycle that will follow.

We like to help clients understand that if you are in a position to invest, build, create, produce, and deliver in times like these, you can position yourself very well for the next cycle. And let’s face it, you’ll be helping move the economy out of its “slump” or whatever they want to call it.