2020: What Goes Up Must Come Down

The United States has had 126 months of economic expansion, which is the longest economic upswing in modern history. Playing nothing but the basic odds, it suggests investors and business strategists alike should be anticipating an economic downturn. With an expansion now running 10 years, it is also highly likely that rising management talent has little experience planning for, and navigating, down markets. 

The geopolitical news does not augur well. To some we are poised for a massive correction that comes around once in a century as we pivot into the digital economy from a manufacturing-centric one. This has been the campaign rhetoric from atypical presidential candidate Andrew Yang who discusses automation as the common threat to our overall societal wellbeing. What we do know is that populist tensions rise throughout the world as political parties splinter, social media rhetoric coarsens, and truth rather inexplicably becomes debatable.

Consider the following:

• United States: The country is as sharply divided as it has ever been in recent memory as evidenced by the ongoing impeachment process. The recent tax shifts have been unevenly distributed, real wages have been stagnant, and the rhetoric wars on social media intensify. The nation appears split in a 47%/49% stalemate tilted in favor of the slight minority due largely as intended by the electoral college construct established centuries ago. That construct was built by men concerned with mitigating the excesses of citizen state democracies and fearing tyranny of the majority or mob rule. Original intent is a sound measuring stick, but it must be balanced against technological discoveries likely not fathomable by those whose intentions we seek to understand as we govern.
• United Kingdom: If misery loves company, then Americans love trying to fathom just what is going on in the United Kingdom with Brexit. Original claims of being confused about what the vote meant that got the Brexit train wobbling towards its calamitous destination become difficult to rationalize after the most recent election. That election bolstered the conservative position seemingly in contradiction to the press articles suggesting British citizens really did not want Brexit. Others argue overreaching on the labor party platform had as much to do with the outcome as the actual call to enact Brexit. Incremental change over rabid revolution. Regardless the exit is to happen on January 31st 2020. What is clear is that there will be disruption to the flow of labor and finished goods and services between the United Kingdom and the rest of world until such time as they disentangle EU laws that have governed commerce in the UK for several decades.
• Germany and France: These countries have likewise seen a rise in political factions while economic indicators show signs of worsening. An inversion curve has surfaced in the past several quarters while Germany teeters near technical recession. Furthermore, German and French banks remain heavily exposed on weaker performing segments of the EU economy. Lacking a centralized monetary policy, the corrective measures to mitigate an economic downturn are far more limited in the EU zone than in other areas. As the EU financiers, France and Germany have exposure at odds with the interests of other nations in the union.
• China: Rising social tensions give investors pause. This monolith is really a tale of two economies, its export economy and its consumer economy. High growth to sustain citizen consumption must come from inflated exports and heavy central planning manipulations. Any downturn in the G7 demand will challenge and pressure the central planning aspects and overall citizen sentiment within the country. Aggressive pricing initiatives to bolster the Homefront could have a cascading ripple effect throughout the region.
• Asia: Many of the paper tigers as well as Japan have been working diligently on digital currencies. Several initiatives are afoot to create an international trading currency. A digital fiat currency could materialize precisely at a time when the US could be seeking investors for the increased debt that must be issued to fund the structural operating deficits in the current budgets coming from a badly divided and chaotic federal government.
• India: My colleague, Patrick Heffernan, has been forwarding me recent articles about India. Long an anchor country to low cost labor based technical services, the general country sentiment begins showing some pressures. Religious based populism begins destabilizing an economy built on a labor model that automation will severely disrupt. India has been shutting down in country internet services as a circuit breaker which seems like anathema to those of us in western democracies. This turns our TBR eyes to …
• Latin America: The various trends playing out in Europe and elsewhere course throughout Latin America. Nations swing wildly from highly progressive policies to staunch conservative policies with allegations of corruption in key nationalized industries thrown in for good measure. But, with India’s society showing stresses, with businesses looking for automation over low cost task workers, and with IT development shifting to agile methods where time zone differences matter more, Latin America could see an investment surge for IT labor hubs in a “North/South” network more optimal for collaboration. Attractive tax treatments could also spur investment in traditional industries as well.
• Russia and her captives: The founders of the US Constitution feared mob rule as the single biggest threat to their effort to build a sustainable democracy. Mob rule in the internet age of unchecked blogs and tweets is an entirely new dynamic that Russia appears to have deployed to great effect in the United States and potentially elsewhere. If China will seek to destabilize regions through low cost goods and services, Russia seems to have mastered propaganda as a way to destabilize societies and trigger nation state infighting. In turn, Russia seeks a more dominant presence in the oil producing regions historically critical to economic expansion. This long held aspiration now faces serious threat of disruption based on the rising consensus, particularly among younger voters, about the climate impacts of burning fossil fuels.

All this cheery news may have readers reaching for the figurative hemlock or to dismiss this as the rantings of an old man tired of watching people run across his front lawn. We are in the middle of a major economic transition impacting global markets. Citizens of all stripes have rising anxiety about the future as some seek to return to the comfort zone that was the Post WW II economic expansion predicated on scale and capital, while others see the future of automated services and the removal of human toil in the economy and seek ways to share the wealth that this new economic construct can deliver. And in the day to day operations of businesses, traditional or emerging, are a host of managers who need to prepare for economic softness for the first time in a decade.

Consider the following when navigating business softness:

• Gaining share in down markets can be had, but it is not for the feint of heart. Can the business absorb reduced margins or even operating losses to gain share and pressure weaker competitors?
• Down markets slow business transaction volumes freeing up labor. Commit to digital transformation investing “idle time” in education and training of the lower cost, digital business rules. A peer from my college days who is  three years into transforming his company states: “Digital transformation can only proceed at the rate and pace of your slowest learners. You have to invest to get everyone up to speed or it will go sideways on you quick.”
• Rationalize portfolio offerings. Shed low margin products with a high cost of sales due to the lack of company familiarity.
• Augment portfolio offerings by listening to customers and keeping an ever-watchful eye on peers or partners with sound cultures and offerings, but perhaps not the stomach for navigating another down turn. Boomer executives who endured the Carter/Reagan downturn and then the 2008/2009 capital markets meltdown might be content to hand the challenge over to someone else.

2020 likely can best be summed up by cultural icon Bette Davis in the 1950 classic All Above Eve: “Fasten your seat belts. It’s going to be a bumpy night.”

 https://youtu.be/yKHUGvde7KU

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