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Tag Archives: recession

The Department of Labor statistics shows that the long term (1970-2008) annual unemployment is about 6.1%. Not good. 

USEconomicStatistics

Figure 1: Annual Unemployment & Annual GDP Growth. 

 

When Will Unemployment Return To Normal?
Using 6.1% as a bench mark this data show that the unemployment recovery rate after a peak, averages at 0.06%/month. From a May 2009 of 9.4% unemployment, it will take until November 2013 for unemployment to come down to 6.1%. Today’s (10/02/09) news Jobless Report Is Worse Than Expected; Rate Rises to 9.8% or 15.1 million jobless, suggest that it is more likely to be June 2014. Not good. Definitely not good.

 

What Does This Mean?
The US economy is 70% dependent on consumer spending, so we can expect GDP growth to much lower when this recession is over. The recession is expected to be over possibly this quarter 4Q 2009 or next quarter 1Q 2010. Then the “real” economic growth i.e. the job growth (job growth is what really counts) becomes the main driver and indicator of this economy. Without the job growths, mortgages are hampered, and banks, are constrained  and . . .

 

How Can Your Company Help?
1. Don’t downsize your jobs: Downsize your pay & benefits (temporarily) starting from the top.

2. Pay down your debt: This helps banks with their recovery.

3. Don’t ship jobs overseas: This is probably the single most important lesson from history. Jobs follow markets and markets follow jobs. Of course there are some jobs where the domestic-foreign pay diffference is so great that companies have no choice but to out-source overseas.

4. Invest, invest, invest: Good investments lead to better run companies. A good approach to becoming competitive with overseas costs is to invest in technology or capex that substantially increases productivity.

 

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Our GDP contracted very severely this recession. To understand the severity of this contraction the Federal Reserve of St. Louis data shows that the Annual Percentage Change in GDP has not been negative this last 50 years, until 2009, but the Quarter to Quarter Percentage Change in GDP has 4 times.

 

Economic Outlook
There is some good news though. It is not all bad. Figure 1 shows that the updated moving average of Home Price Growth will likely turn positive 4Q 2009, which is about 1Q earlier than my original forecast 2 months ago. That is Home Prices will bottom in 4Q 2009. Lets hope.

HomePricesNONREVNS

Figure 1: Home Price (Composite-10 CSXR) Growth & Total Non-Revolving Credit Outstanding

However, the Total Non Revolving Credit is still contracting, but the lag to Home Prices appears to be around 2-years, or we can expect Total Non Revolving Credit to bottom in 4Q 2011. This is much better news than my preivous forecast. But we are not out of the woods yet.

 

What to do?
The necessity for caution is reinforced by the lack of near term job recovery & non-revolving credit in my forecast. Here are several suggestions on how to reduce business risk:

1. Manage your cashflow: Cash flow is what pays the bills, not profits, so watch your cash flow.

2. Be careful: Cost cutting is temporary and will unravel the moment you stop wacthing and it can affect what little revenue you are generating.

3. Manage labor wisely: Reduce your man hours but not your manpower. Seek voluntary temporary pay cuts with the biggest cuts at the top and reducing amounts to the lower ranks. This will allow you to bounce back quickly when your sub-segment of the economy turns around because the human asset of your company is still intact. Remember it takes 3 years to bring a fresh graduate engineer up to par. Therefore though it looks cheaper, it will take that much longer to recoup any costs or savings.

4. Reduce dependence on debt: Non Revolving Credit Outstanding shows that banks will continue to have difficulty lending for at least until 4Q 2010 and more likely until 4Q 2011. Pay down your debt as much as you can because it reduces your costs and it gives banks more breathing room to lend to someone else and thereby hastening the turnaround of the Non Revolving Credit Outstanding and the unemployment situation.

5. Watch your A/R: A/R is how your customers borrow while you pay the interest on their credit. A/R is also reflective of your downstream customers, so take care. I have seen companies go under because they did not manage their A/R until it was too late.

6. The Goldman Sachs mini case study shows that we can change the how and why we do things to be more successful, and that we don’t have to wait for eveyone else before we make internal improvements. If we wait we still incur the cost but have lost the competitive advantage.

 7. Slope of the Pay Cuts: Biggest proportion at the top and smallest proportion at the bottom. Why? First, that is how risk-returns (or risk-reward) works there are no two ways about this. Second, large pay cuts at the top of the company have a bigger impact on saving the company but small impact on consumer spending. Pay cuts at the bottom of the company add up to real slow down in consumer spending, save the compnay in the short term but generally leads to negative future effects. There was a study done some time in the 70’s or 80’s (I forget the name and year) that showed that companies that retrench/layoff labor on a regular basis generally don’t last very long.  

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Your Business Model in 1-Hour! In 1-hr you will definitely learn to quickly fix your strategy problems. Register here for Aug 17, 18 & 19 2009. This is critical  knowledge in a recession. 2 presentation slides are shown below.
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Feedback of previous related seminars:
1. Great, very informative (DM),
2. Very well thought out, effective and practical (RS)

Premium Webinar: Your Business Model in 1-Hour!

Benefit: You will immediately learn,
1. If your business model works.
2. How to recognize useful industry metrics.
3. Determine what strategies work for your company.
4. Take away some strategy maps / frameworks.   .   .   .   .   .   .    Register here.

This is a practical short course on how to recognize the real strategies your business needs and how to recognize the industry metrics for you to stay on track. It demystifies the role of financial statements and gets you back on track with real industry data to manage your strategy. This seminar concludes with a set of quick checks for your business model.

 

Who Should Attend: CxOs, Corporate Managers, Consultants & Investors.

About Benjamin T Solomon: Managing Principal of QuantumRisk LLC, he has 28+ years working in multinational, national and regional companies (Texas Instruments, West Port, Capmark, Coopers & Lybrand …) developing IT systems, streamlining business processes, designing and implementing strategies, and extensive econometric & economic capital modeling in the CMBS/RMBS industry.

Registration: This will be a 1 hour webinar limited to 20 participants per session. Register here.

Dates: August 17, 18 & 19, 2009.

Notes:
1. You will be emailed a meeting key to join, and webinar link.
2. You will be provided a pdf copy of the slides, 7 days after the seminar.
3. Last Refund Date: No refunds after Aug 14 2009.
4. Refund Policy, here.

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2 Presentation Slides:

Slide32

An Example of a Process Framework

 

Slide33

An Example of a Format Framework

Here are responses to some comments.

Bernard commented that there are other factors that need to be taken into account. Correct.

I was looking for a short cut to get a sense of how things will unfold in the next 2 year, because nobody did predict this housing bust or its magnitude, the recession or for that matter that the banks would get into this supersized mess.

Some times when modeling I divide factors into fast and slow variables, (its an art) compared to oil price swings almost everything looks like slow variables, and are in an approximate steady state, then oil becomes the major drive in the short term.

Zachary was curious how much reliance you can put on using average numbers, in particular with respect to arriving at gas costs as a % of discretionary income.

I usually don’t like using average numbers (because I’d rather build fairly detailed models) but in the absence of good publically available data, averages will do. We’ll know by 1Q 2010 how this gas price hypothesis works out.

My bet is that gas cost as a % of discretionary income is a pretty good indicator of consumer spending but needs testing. To get some idea of its potential effectiveness, look at what happened by 2Q 2008. In Denver many people stopped driving cars and switched to Light Rail and buses. The Light Rail, usually not crowded, was packed. Jammed packed.

Another way to look at things is that any policy that increases discretionary income will help restore the consumer spending (and therefore this economy), while that which reduces discretionary income will retard the consumer spending.

To this we can add, an oil price hike just transfers the funds from US government policies to oil producing nations because the effects of the enlargened discretionary income is negated by the increased energy costs.

If you keep enlargening the ‘pie’ you get inflation, if you don’t, you lock down consumer spending. Not easy.

So the ‘answer’ to this recession severity question seems to be not to stimulate consumer spending, but to stimulate industrial growth and job creation.

Any ideas?

Benjamin T Solomon
Managing Principal
QuantumRisk LLC

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. These musing are not to be taken as an endorsement or disapproval of any persons, entity, goods or services.
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Most forecasters try to be middle of the road, but try to cushion the downside, and ‘enhance’ the upside. The scenario below could become a reality and could lead to an extended recession well into 2011.

1. The raw data suggests that pump prices triggered the house price collapse. The logical cause and effect would be spiking gas prices eliminated many peoples’ discretionary incomes.

2. This reduction in discretionary income rippled throughout the economy as a reduction in consumer spending, a finite budget showing up as reduced demand for goods and services.

3. Therefore, the housing collapse, the mortgage mess, and the banking crisis. But would not have been as severe as it is now if the sub-prime mess was not waiting in the wings.

4. If the Fed/FDIC has underestimated the severity of the banking crisis as Nouriel Roubini  has suggested, we are going to see more bank failures, and further tightening of credit. This may be the case if their methodology addressed mean loss rather than percentile loss (eg CVaR). I’ll research the methodology and will let you know what I think. But don’t get me wrong, I have great respect of Bernake, Bair and Geithner.

5. My crude estimate is that $2.00/gallon is the threshold price for point of inflexion between +ve and –ve economic growth. Gas prices at the pump have exceeded $2.00/gallon. If I am correct we are going to see further slowdown and more job losses.

Therefore, this crude analysis suggests that the Fed/FDIC/forecasters have underestimated this recession severity in the presence of oil price increases, and just may be our recession will last well into 2011.

Benjamin T Solomon
Managing Principal
QuantumRisk LLC

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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Paul Krugman’s blog post Bailout for Bunglers was instructive. I particularly liked the end:

“There’s more at stake here than fairness, although that matters too. Saving the economy is going to be very expensive: that $800 billion stimulus plan is probably just a down payment, and rescuing the financial system, even if it’s done right, is going to cost hundreds of billions more. We can’t afford to squander money giving huge windfalls to banks and their executives, merely to preserve the illusion of private ownership.”

Though I agree with Paul Krugman, I think somethink is missing. We need to identify the cause of the recession before we can put forward a recovery package.

From the perspective of business and economic processes, two processes collided in 2005-2008 time frame that resulted in our current recession. The first was the bursting of the house price bubble, and the second was the oil price spike.

The figure below depicts US Home prices up to 2005. House prices peaked in 2006 and started to decline.

shiller_ie2_fig_2-1

Source: Robert Schiller’s United States Housing Bubble (Wikipedia)

The two figures below show average monthly oil prices (Dec 07 to Jan 09) and average yearly oil prices (1967 to 2009).

yearlyavgoilprice

monthlyavgoilprice

Source: OPEC


Conference Board tells us that the average per capita discretionary income in 2006 was $9,148 or gasoline cost was went up from 11.5% (2005) of discretionary income to 26.9% ( 2008 ) (using 2006 discretionary data for all years). A sizeable increase. But this does not tell the whole story.

For households with incomes of $50,000 or less, i.e. small business employees, the 2006 discretionary income was $1,900 for the whole family of 2.7 people. That is, gasoline costs went from 55% (early 2005) to 90% (mid 2006) to 130% (mid 2008). Definitely not sustainable.

Given that the initial toxic mortgages were Alt-A/Subprime loans, and my guess, is that most of these borrowers were small business employees, the gasoline price spike would have killed off these borrowers’ ability to service the loans. No payments resulted in deliquencies, defaults, suffocated demand and finally home price depreciation, and further time-lagged domino effects that scuttled the banks and the rest of the economy.

House prices only started to fall in 2006 when gasoline prices had become unsustainable.

Looking at the graphical data, we can now infer that gas prices at the pump must remain below $2.00/gallon, if the US economy is to come out of this recession any time soon. This is a very important lesson, gasoline prices wiped out a substantial portion of the discretionary income of about half of the US working population.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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