Playing Global Financial Chicken

Every day the media from magazines, newspapers, radio to TV present two groups of pundits who are playing global financial chicken. One group argues economic recovery is underway and financial markets are responding early and strongly and most importantly will continue to do so. Jim Cramer even goes so far to decry that we are in a “Superboom.” The other group argues there will be a correction most likely  a large one meaning over 10% decline on the major averages.

Financial markets are going up, and yes, only up. Here’s why:  If the economy recovers companies will make money and they have gotten lean over recent years so they will have huge earnings driving equity markets way up. If economies do not recover, governments across the planet have committed themselves to spending and creating liquidity. Thus, regardless of economic conditions financial markets will ONLY GO UP.

The result:   3-4 years from now we will most likely have to pay the price of all today’s profligate spending and liquidity creating. Like a group of drunken sailors we will wake up to huge hangovers and be terribly sick and unfortunately for a much longer period than most sailors take to recover.

Posted in Global Economics | 8 Comments »

Crash portends Doom to Bloom

Watching groups of people standing on the wings of the “Miracle on the Hudson” airplane crashed and floating on the Hudson River surrounded by an armada of air and water craft all collaborating to ensure everyone survives it occurs to me that this could well portend our future.

The pilot, Chelsey “Sully” Sullenberge, achieved the first successful water crash in aviation history. How? Why? What happened? It will be weeks before all this becomes clear yet we can already conclude something quite different has occurred. Most people on a plane with water rushing in would panic and most likely trample or hurt themselves or others scrambling to deplane. Yet these 155 people actually helped each other. One woman even did her high school cheerleader bit to calm those around her.

I was not surprised to learn how extraordinary an individual the pilot is as a person, as a leader. I think he built a team and his team responded to this challenge. The coming weeks will bring more insight and information to either support my views or not. He is a man known to be calm, intelligent and caring. He even donated his time to train dogs for the blind.

The US economy has crashed much like the airplane and is floating on a river of Federal money. Nearly two TRILLION at last count. The first stimulus package early last year of US$168 billion, AIG US $123 billion, Fannie Mae and Freddie Mac US $200 billion, the TARP funds US $700 billion including US $17 billion for the automotive industry and US $45 billion each for CitiGroup and Bank of America and the Obama stimulus plan is currently expected to be US $ 825 billion. Yes, two trillion dollars to shift doom to bloom. Bloom NOT boom because we need to first open up areas of our institutions, companies and economies before we can expect to grow them into a boom.

Today Obama became President. A community organizer who has learned how to get people to collaborate, an extraordinary leader who is also intelligent and a life-long writer, from law review editor to accomplished author three times over, a man like our pilot Sulley of amazing calm and caring. Obama grew up barely knowing his father yet shows no resentment, he faced all the challenges of all people of color yet he appears to harbors no bitterness.

Many today compare Obama to Lincoln and there is much to connect the two:  both coming from Illinois, both eloquent writers and orators, both focused on ensuring opportunities for everyone to work hard and succeed, both using government to build infrastructure, to give everyone an equal chance. Again we will need to wait and see how this comparison develops as Obama must prove himself in action over time to earn the label of being the modern day Lincoln.

My view is that Obama is a leader like our hero pilot, Sulley, a collaborative and innovative leader, again like Sulley who suggested many airline innovations, who will get us to stand on the wings of our fallen economy to stop clamoring over each other to survive but rather to help and support each other through the greatest financial crisis since the 1930s. We are being rescued by a river of money from our children’s future doled out throughout many government institutions many of which were specifically designed to deal with the very crisis we are facing. The analogy can be continued with the armada of countries who we will have to continue to count on to help us navigate through this crisis.

This armada will of course include the usual group of European and Asian friends we have had for many decades and most especially all those countries who continually purchase our debt instuments. Joining this group will be many, many more of the world’s 309 countries if you use the most expansive of definitions of the word, “country.” Why? — because we are all threatened by this global financial crisis.

Interesting that the remake of a 1954 movie, The Day the Earth Stood Still, is in the theatres. It suggests that the world will be taken away from us humans as we have no galactic right to treat it as badly as we have done. If we do not change the alien worlds around us will simply take out our species. Dramatic, yes, poignant AND again portends our future. All the world’s leaders not just those political but also all institutional and business leaders, ALL leaders are challenged today by the same relentless crisis and are leading their charges often floating on rivers of money doled out by others.

Where is the solution to all this? I believe we need to look at simple economics. People work and make money. They then spend money. If they can’t work or if they are afraid of not being able to work they stop spending money. Businesses spend money in anticipation of people spending money. When people stop spending businesses stop spending. This is the current inward feedback cycle causing economy after economy, institution after institution, individual after individual to crash, to go under and stay afloat again by money doled out from their governments, their investors or others.

Just a few decades ago employers cared deeply about their main resource — people. As we shifted from agriculture to industrial to service societies our companies depended more on information, on capital and their managements began to see people as an interchangeable and malleable resource. Each day headlines everywhere announce terminations many in the thousands of workers PER company. Wall Street has traditionally rewarded companies ridding themselves of their personnel by raising their stock prices.

Most people think of Henry Ford as an industrial genius for having created the assembly line to produce the Model T. Ford’s true genius really was in creating jobs that paid US $5 a day per worker. He enabled his workers to become his customers. Today’s managers have forgotten that their workers ARE their customers and if they are not working and even if they think they might NOT be working then they will no longer be customers. It’s just that simple. Companies create jobs which then creates customers.

The contract between company and worker has been broken. Companies need to rethink their behavior. This is especially true when the worker is not a farm hand or a factory worker but a knowledge worker or a service or experience provider. Companies need to re establish the contract with their workers and capture the collective intelligence and experience of their workers. Companies need to find ingenious ways to survive as some companies are doing like reducing hours across groups of people but everyone keeping their job, changing all kinds of policies and fostering innovation, again collaborating with their workers to innovate.

On his first day in office President Obama adjusted the salaries of all those making over US $100,000 in his administration. GM’s President reduced his salary to one dollar a year. Today 7 S&P companies announced thousands of people in their companies would be laid off — none announced their executives would adjust their salaries or otherwise contribute. Obama is leading by example.
Allan’s Take: Executives should follow his lead.

Innovation is the engine of economic growth. We Americans are known and rightfully so for our ingenuity and innovation. We are on technology curves in almost all industries ready to leap to new curves with completely new technologies. Innovation will spring up all across the US and the globe like Pegasus came down from the heavens and with every hoof innovation sprung. Allan’s Take: Innovation is what will shift doom to bloom.

We have reached the end of technology after technology. Chips for example use electrons for transferring information yet electrons today must be placed in single file in order to fit on the small sidewalks inside today’s chips. Tomorrow’s technology will be using photons for transferring information where there is no size as light is a wave. Photon chips are atready in labs being prototyped.

Is there precedent for my vision? Yes, while many reflect upon the 1930s depression era and compare it to today’s economic situation and argue if we are in or going to be in a depression. I take a completely different view. Allan’s Take: During the 1930’s there was a huge amount of innovation. Companies like IBM began the computer age, companies like RCA began the media age, and companies like GE spurred the industrial age and so on. During the depths of economic decline in the 1970s when prices dropped for two decades both Apple and Microsoft were born and launched us into the information age.

America will lead the world again in innovation and lead the world into the experience age. Companies that stage complete experiences for their customers will capture the most rewards. Companies like Disney, like McDonalds, like Wal-Mart. These companies structure their entire company around producing the best experience they can possibly provide for their customers. They provide much more than products and services. They provide memories, fun, and peace of mind.

Most Americans will be listening to President Obama  today. His inauguration speech will portend a new innovative and caring America in my view. Even 89% of those voting for McCain are expecting Obama will bring change, not small changes like different people, but real change in process, in the way business is conducted not only in Washington, D. C., not only across America, but across the globe – lifting all of us above our rivers of doled money into collaborating and innovating in a new world.

Posted in Global Economics | 14 Comments »

Why invest in the US now?

The world’s leading investors have spent billions on US firms in the last 60 days.

• Warren Buffet: General Electric & Goldman Sachs
• Prince Al Waleed bin Talal: Citigroup & Apple
• Bill Gates: Republic Services (solid waste management)
• Carl Icahn: Citigroup & Biogen
• Carlos Slim: Citigroup & Saks 5th Avenue
• Edward Lampert: AutoNation & AutoZone
• George Soros: Chesapeake Energy & Wal-Mart
• T. Boone Pickens: Chesapeake Energy & Valero Energy

These investors have each made billions in the past and are confident they will return more billions in the future. They see tremendous opportunities and are confident the US and world economies will turnaround in the coming years. Allan’s Take adds the following:

1. Global companies are investing in the US.

• This week the Belgian/Brazilian brewer INBEV bought Anheuser Busch for US $52 billion in cash at the premium price of US $70 per share.
• BCE Canada’s largest telecom company will likely close a huge US acquisition by year’s end.
• Fortune Magazine reports “Foreigners are Grabbing US Assets.”

2. Attitudes in the US are changing. All across the US teens, black,     white, Hispanic are having their dreadlocks cut. They are pulling up     their baggy pants. They are joining the Army. Seems change has     been discussed so much by so many and with Obama’s win SO REAL     that many are changing on a personal level. Going through drive-ins     manned by youngsters and oldsters you can feel and see the     change. Attitude change leads to productivity improvement.     Research shows that 34% of financial performance directly results     from how people are led and just the reality of our new leader     winning has already created a level of excitement I have not     experienced since the Kennedy Camelot in the 1960’s. This could     evaporate, of course, but I think not, it’s too fundamental, too basal,     too encompassing.

3. But US companies like General Motors are the walking dead you     say?

GM stock is trading at the $3 level – amazing – and sad. The US Congress gave the financial sector over US $ one trillion but seems unwilling to give the industrial sector US $25 billion –amazing – and sad. Reflect on the following:

• The largest car market in Europe is Russia and the biggest car company there is GM with sales growing at 44% per year.
• The world’s second largest car market is China and the biggest car company there is GM.
• The world’s fastest selling car? Yup, you guessed it – GM’s Chevy at 2.5 million cars/yr
• The world’s fastest selling truck? Ford’s F150 at one million trucks/yr

So why are these companies in trouble? Because of embedded costs like health care which is the single largest cost in the manufacturing of a car in the US and other policy issues. It’s not the US autoworker as Toyota has become America’s largest auto manufacturer using only US workers. BMW, Mercedes and other foreign car makers do very well with US workers.

There are many US companies doing extremely well: Abbott Labs, Amgen, Apple, Caterpillar, General Mills, HP, Hudson City Bank, IBM, McDonald’s, Rohm & Haas, Wal-Mart & Wynn Resorts just to name a few in the S&P 500 with an average rise this year of over 20%.

4. The next economic transformation will be from IT to ET – from Information Technology to Energy Technology (pardon the alien alliteration). There is a whole family of at least nine groups of technologies underway many of which will be leap frogged onto logarithmic growth in the coming months including: WT – wind energy technologies, GT natural gas technologies, ST – solar energy technologies, NT – both nuclear fission & fusion energy technologies, BT – many types of biofuels & biomass energy technologies, TT –geothermal energy technologies, OT – all six kinds of ocean energy technologies including tidal, undersea and wave, HT–hydro energy technologies and RT – reducing energy technologies to save energy. Yes, I know the dramatic drop in oil prices could dissipate the enthusiasm for ET, but this time, I think not. ET’s a trifecta: it will be cheaper, it will be cleaner and it will be ours triangulating economic, environmental and political spheres of concern.

   T. Boone Pickens has developed a plan largely focused on WT and GT. He forecasts five million new jobs will be created in wind –WT, 2 million each in gas—GT and solar– ST. Total 9 million jobs which will put ALL out of work Americans to work, not only those 4 million at the moment but all those forecast to be out of work from the deepening of today’s’ recession.

5. The world’s largest investor, now the US government, has invested US $7 trillion in the US. This is double the total inflation adjusted spending on the Louisiana & Alaska Purchases — $267 billion, the New Deal $500 billion, the Korean & Vietnam wars — $ 1.2 trillion and the race to the moon — $217 billion plus all other NASA expenditures over nearly 50 years –$850 billion. Even more startling the money is being borrowed at 2% and guaranteed to return at least 5% on a preferred ownership basis. The earnings on this investment will most likely be over US $10 trillion.

Add up the above: attitudes enhancing productivity, US enterprise success and the coming ET –Energy Technology transformation and you can understand why the world’s leading billionaire investors; the US government and many foreign companies are investing their billions in the US just this month in spite of the global financial crisis.

Posted in Global Economics | 4 Comments »

Grapes of Wrath – Again?

The Grapes of Wrath was a John Steinbeck novel made into a movie in 1940 starring Henry Fonda about really hard times. Drought in the State of Oklahoma forces a farming family into foreclosure and they go off to California with other families to find jobs and new lives. Instead they find more and more difficulties including the death of their child. The movie ends with a poignant scene where the mother suckles a starving old man. In another poignant film, The Starman, an alien being who visits our planet, says to a scientist at the end of this movie, “Do you want me to tell you what we find special about your species?” “Of course,” he says. “You are always at your best when times are at their worst.” I believe today’s challenges will bring out our best.

The world’s media is transfixed by tumultuous & shocking financial events. The world is having a daily conversation on how bad things are and wondering how bad can things possibly get. We have gone from worrying about our money & investments to actually worrying about putting food on the table for our families. What to do? Read on…

Allan’s Take: focus on the physical world not the paper world. Every day a rice farmer awakens in China and plants, a construction worker in Canada wires up some rebar and
a pearl farmer seeds his oysters off the Gulf Coast of Abu Dhabi. We are all still producing things and we will all find ways to help each other make it through this series of crises and bring out our best.

Inside the vortex of any change it is almost impossible to see things clearly as so many things are swirling around us. I offer a counter perspective for your reflection and action below:

Most of the recent financial problems precipitated from the collapse of the housing market in the US. The housing market is now improving:

• Mortgage applications are up 17% this week from last week.
• Sales of houses are up 5.5% this month from last month.
• Housing inventory is down 7.1% from last month.
• Capital infusion into banking for mortgages is just getting distributed.
• The national home retention program has stopped foreclosures and loan modifications will be issued by 01 December 2008.

Stop, I know you are thinking what about all the excesses, all the inappropriate risks, all the wrong doing, etc. Yes, you are right there is much that needs to happen from government policy changing to regulatory transformation, from banking policy changing to more diligent oversight, and so on. This will happen during the coming months.

Is the worst over? No one knows! All those who have so far fathomed an answer have been wrong. I believe there will be more discoveries, more bad news, more financial pain. It’s like getting cancer. It’s bad. It’s awful. But you go see the Dr. and you start treatment. It’s difficult. It’s painful. But it works 97% of the time. We are all experiencing a sort of financial cancer. Trades were engineered, then packaged & leveraged and exploded just like cancer cells grow rampantly and if unchecked will also explode.

What to do?

1. Put your customers into groups: (a) those that produce 80% of your profits usually a third, (b) those that contribute significantly to overhead usually half, (c) all the others. Set up a Customer Retention Team with your best relationship people and ask them first for their ideas for retaining every single customer in the first group the first week. Then spend their time on fostering ideas for retaining customers in the other two groups the following week. You personally take the top sales person job and meet face‐to‐face or at least online including audio & video with as many customers as you can taking them in order of how much each contributes to your cash flow.
2. Set up two ‘Find New Business Teams of your most creative people & your most knowledgeable people. Ask one team to develop at least three action plans to capture new business from new customers in current markets. Give the other team the assignment to develop at least three action plans for finding customers in new markets.
3. Set up an Opportunity Team. Give them the challenge to think beyond the usual cost cutting. Ask them to come up with a list of as many ideas as they can; good ones AS WELL AS bad ones that can improve business even if it means spending more money to get much better results. This will surprise them from the usual, ‘let’s get out our knives and start carving’ approach. Challenge them to produce as long a list of ideas as their time allows without consideration of viability or feasibility. You decide which of their ideas are best for implementation.

Give them some food-for-thought:

There are always companies who thrive during downtimes. There are also always companies who are hiring and growing during bad times.

They must be doing something right. Find examples of companies in your industry & your community that are performing well. Ask them to use the following examples as stepping stones to their thinking.

1. Raymond James, a financial services firm is adding 250 brokers to its 4,900 advisors across the globe.
2. Wal-Mart leads in hiring thousands although most of them are clerical jobs many are not.
3. Others hiring in the US include: Accenture, Berkshire Hathaway, Dell, Emerson Electric, IBM, McDonald’s, Microsoft & Oracle
4. Across the globe: Flextronics, Hitachi. Paribas, Saint-Gobain, Tata, Wipro just to name a few.

Iowa’s Business Boom: With almost a 50,000 job surplus, you might need to change Iowa’s nickname from the “Hawkeye State” to the “Hiring State.” Iowa Governor Chet Culver talks about his state’s business boom.
Click here to watch a video: http://www.cnbc.com/id/15840232?video=844089500

Jon worked on an egg farm as a youngster and learned that paper egg cartons had many problems. Later in life he decided to start a company to make plastic egg cartons. He built an extrusion plant in the Midwest and later another on the West coast. Things were going well until the oil crisis hit in October, 1973. He got a call from Dow Chemical telling him that after 60 days they would no longer supply his styrene. Their long-term customers were to get all their supply.

He was out of business and being a responsible businessman called his customers so they could make other arrangements, informing them that he would no longer be able to supply them after 60 days.

Then he looked up from his desk and saw the huge book of all the world’s chemical companies on his shelves. He opened the book on his desk and began calling each and every chemical company looking for polystyrene. His calls revealed no one had polystyrene for sale but then one company offered him urethane. He then put an 8-way trade together to get the polystyrene he needed.

He even made an extra US $70,000 at the end of the day. He continued making large amounts of money trading chemicals.

He asked some purchasing managers why they called him to do deals they could do themselves. The answer, “Jon, by the time we get things worked through our company these product dislocations are gone. You are providing a needed service to the chemical industry.” During the next year Jon made enough money to acquire company after company.

Today Jon is the Chairman of Huntsman Chemical and along with his 14,000 employees produces 22 billion pounds of product like McDonald’s clamshell hamburger containers & L’egg containers for women’s hosiery generating US $12 billion in annual revenue from operations in 24 countries.

I was hired to prepare the first financial proformas for Huntsman as a graduate student back in 1974. Jon is an inspiration not only to me but to the world of what can happen when you persevere.

Posted in Global Economics | 5 Comments »

When will our economy change?

Over several decades of facilitating strategic discussion around the globe, 104 countries at last count, the number one question was how can you know when the economy, yours or global is going to change either upward or downward. Today in the US the question is paramount and again economists and others line up on all sides of the same question pointing in ALL directions.

Allan’s take: Follow the corrugated box industry globally and in your country or region. Almost everything gets packed and shipped in a corrugated box. The companies making corrugated boxes know the earliest when an economic cycle is going to change.

Today I talked to the head of global sales of one of the leading corrugated box making equipment companies in Phillips, Wisconsin. He told me things are going strong everywhere around the planet and especially in the usual suspects — China, India, Brazil.

Things have been going poorly in the US and are likely to GET WORSE. This means regardless of what the economists forecast the US is going to take at least another year and half to pull out of its current nose dive.

Evidence International Paper is GOING to announce later this month that it is closing a large number of corrugated box plants. Also Smurfit another large box manufacturer recently announced the closing of 9 plants. While some of this is due to consolidation, cost savings and increasing in output from new technologies the overall trend is corrugated boxes are going DOWN for at least one and half years. International Paper has stopped all capital expenditures for the next 18 months.

If this is not enough for you to accept my position read below. When illegal immigrants go home to find a better economy you can be certain yours is not doing very well!!

Send me your email and we will send you My Take on the coming Upturn.

Illegal immigrants going home

According to Mexican consulate officials in Dallas, some 400 immigrant families have told them so far this year that they’re going back to Mexico and asked for transfer documents to enroll their children in Mexican schools. Enrique Hubbard Urrea, Mexican consul general in Dallas, said it is impossible to track every Mexican who leaves the area. But he said the number asking for transfer documents at the consulate is on the rise.

In 2005, the consulate issued 162 such documents; in 2006 it was 199; and last year it was 270. At the current rate, more than twice as many people will leave this year as last, he said. “There is no doubt the trend indicates that the number is growing,” Mr. Hubbard said. And it isn’t happening only in Dallas. At the Mexican consulates in Chicago and Phoenix, too, the number of Mexican families applying for transfer documents for their children has increased.

L. Allan Austin

www.allanaustin.com

+1 407 682-3887

Posted in Global Economics | 2 Comments »