A black swan event, the pending Financial Reset and your window of opportunity to take back control... now!
We are living in interesting times, some would say surreal, almost like 'actors on a stage' in a fictional story. The tragedy is, we not in a fictional story and we all personally affected by recent world events.
Most small, medium Business Owners have had 12 progressively good years and until very recently, seem desensitised or possibly over confident, about the significance of what is going on around them, whether it be at a macro or micro economic level.
The Covid-19 pandemic has shocked most out of their previous 'business as usual' mentality. Our hearts go out to those that have suffered a devastating and tragic loss of friends and family because of this disease.
We often hear commentators warning audiences to be careful of 'so-called experts' peddling fear as a means to get your attention. Yes, this type of risk does exist, but could I gently suggest that when you receive controversial information, you use your own experience, intuition and research to filter the relevance and truth. That way you don't give up the responsibility of your decisions to someone else and the consequences for you and your family.
A Black Swan Event
At the risk of stating the obvious our new reality is that Covid-19 is a black swan event in an already fragile global economy that could have ongoing impact that undermines our way of living for generations to come. A possible scenario been advocated includes revisiting us every year like the common flu virus, where we have to take a 'jab' similar to our flu inoculation to avoid contagion for that year.
The present global disruption to travel and trade has been shocking for some, with some markets sold off up to 30% (as of today's date). Imagine if this disruption, is our new reality every year?
This would be a game-changer for most economies. What will this impact have on certain industries, both negatively and positively? How will your organisation, where COVID-19 is an annual event, respond and adapt to working in this 'new world'?
We always remain optimistic that a cure will be found and we will return to a 'new normal'.
See graph below, interesting that the time frame from the peak of new reported infection cases and the improvement in equities in China, are correlated. If we suspicious of the accuracy of the Chinese data, the US and EU are tracking a similar pattern of cases as China, which means there will be a peak at some stage in the future for us to assess for future reference.
Fed Failure
Unfortunately, there is an undermining of the Social Contract because of the systemic failure and under-performance of the Federal Reserve Banks (Banker to the Banks) and Treasuries, around the world. They have not proactively and prudently steered economies on behalf of the people through the last 12 to 20 years.
As mentioned in previous articles, globally we should have had a financial correction in 2015, but the 'powers that be' mentioned above, just 'kicked the can down the road' and printed more money. Now we, Joe Public including small, medium sized Business Owners are suffering the consequences of poor Federal and Treasury stewardship.
The McKinsey Global Institute has a new report, The social contract in the 21st century: Outcomes so far for workers, consumers, and savers in advanced economies. It is bleak reading. McKinsey’s findings in summary:
"… [W]hile opportunities for work have expanded and employment rates have risen to record levels in many countries, work polarization and income stagnation are real and widespread. The cost of many discretionary goods and services has fallen sharply, but basic necessities such as housing, healthcare, and education are absorbing an ever-larger proportion of incomes. Coupled with wage stagnation effects, this is eroding the welfare of the bottom three quintiles of the population by income level (roughly 500 million people in 22 countries). Public pensions are being scaled back—and roughly the same three quintiles of the population do not or cannot save enough to make up the difference.
These shifts point to an evolution in the “social contract”: the arrangements and expectations, often implicit, that govern the exchanges between individuals and institutions. Broadly, individuals have had to assume greater responsibility for their economic outcomes. While many have benefited from this evolution, for a significant number of individuals the changes are spurring uncertainty, pessimism, and a general loss of trust in institutions."
Interest Rate deception
Monetary policy is ineffectual now because of a liquidity trap even though the OCR continues to drop, in the first instance, unfortunately Banks continue to keep the margin with no relief for Home Owners. But even if they did share the margin by passing on lower interest rates, this would still not be enough relief for Home Owners. The writing is on the wall.
Historically, lowering of banks' interest rates would have 'steered' the economies and achieved its purposes. But now Home Owners looking at interest rates for confidence will be deceived, because the real issue is not interest rates but the lowering of their standard of living. Due to greedy Corporates freezing Employee wage increases consequently making it less affordable for Employee's to debt service their home loans. Statistics would say that the standard of living has been keeping up, but this is not true for the bottom 60% of the population.
GDP 'red herring'
The welfare of a nation can scarcely be inferred from a measure of [GDP].”—Simon Kuznets (who developed GDP), 1934
Gross Domestic Product (GDP) is another example of a 'red herring' The Fed, dare we say it, uses to control the media and the masses. If that sounds a bit harsh, let's just say that it has served them previously, but not anymore.
Some might also say, there's not much for them to choose from, but it is inadequate, undependable, inaccurate as a performance indicator of a country's standard of living per capita. It's fundamentally flawed for more than one reason but one of the main reasons is, when calculated, it includes government spending, in addition to the nation's goods and services produced.
If government spending comes from taxes on goods and services, using the common sense test, we calculating the tax portion twice, once when the revenue was generated for the goods and services and a second time when the government re-invested the revenue fiscally. GDP is now distorted. What happens if some of the government spending is not sourced from taxes but debt? The GDP is even higher and even more inaccurate...
Another reason for a case for GDP inaccuracy, is the lack of the Hedonic pricing method of new technologies and applications, for example Facebook - the added entertainment value that is not measured and included in the GDP calculation. How much of a country's other Hedonic value is not included in the nations' GDP?
Our point is further exacerbated when GDP is recorded to two decimal points. This is farcical, and worse still, for governments and nations to empirically, emotionally and psychologically place strategical value on labels like 'technical recession' when making decisions.
If the GDP indicator is inaccurate, we basing our decisions on poor economic data. There is high probability that we making poor decisions. As Business Owners we highly recommend you make your decisions based on your industry and businesses' bottom-lines and Key Performance Indicators.
Superficially, the New Zealand's Labour government rhetoric to ditch GDP for the nobel Happiness Index is at best conceptual in its out workings, because nothing has changed at the 'coal face', 'on the ground' for families in New Zealand. New Zealand continues to lead the OECD and World in many 'social ills' statistically. We have to be cautious of political posturing, particularly in an election year, it usually is just bluster.
Financial Reset
Disclaimer: What we share in this below section is the opinion of some experts we follow, including John Mauldin, Mauldin Economics The global consequences of spiralling government and corporate debt; an inability to support our aging population; a lack of ability for Fiscal and Monetary policy to stimulate economies sufficiently; negative interest rates invested by Corporates to drive up their share price; lack of productivity and value been created by Corporates commensurate with their fundamentals; almost non-existent returns on government Bonds; Bank's Repo Desk unable to reconcile their accounts and technically insolvent desperately relying on the Federal Bank to print money to bailout more and more banks; a Federal Bank that has lost control around the world and forced to perpetuate Quantitative Easing to the tune of trillions of dollars; the list goes on and on for Joe Public and the small to medium Business Owner... add the COVID-19 pandemic and the result is a financial reset, some time from 2025 onwards.
"A couple of years ago in my Train Wreck series, I described a multi-step process.
- The Beginning of Woes: Something, possibly high-yield bonds, will set off a liquidity scramble. It will spread through the already-unstable financial system and trigger a broader credit crisis.
- Lending Drought: Rising defaults will force banks to reduce lending, depriving previously stable businesses of working capital. This will reduce earnings and economic growth. The lower growth will turn into negative growth and we will enter recession.
- Political Backlash: Concurrent with the above, employers will be automating jobs as they grow desperate to cut costs. Suffering workers—who are also voters—will force higher “safety net” spending and government debt will skyrocket. A populist backlash could lead to tax increases that prolong the recession.
I still expect something like that sequence, though it may be more of a drawn-out, rinse-and-repeat process. I think we could see multiple sequences before a final, market-clearing Great Reset, which I expect in the latter half of the 2020s.
After each recession/crisis, and especially as technology begins to eat into middle-class jobs, expect complete political upheaval every four years at a minimum. The politicians will make promises and they will simply not be able to deliver, and a new group will make different promises that don’t work, either." - John Mauldin, Mauldin Economics. January 10, 2020
Future Focus
As an aside, politically because the Left and Right are getting further apart, with less and less Centre voters, we have 'fringe' voters (predominantly Millennials, Gen Z's) jumping from social, liberal, centre left to capitalist, conservative, centre right and vice versa depending on whatever the parties are prepared to promise in an election year and deliver to their voters' 'back pockets'. Political parties unfortunately don't have the answers, so this 'flip flopping' by voters will continue until a 'significant global event'.
Newly elected political parties are always looking to create new policies that historically have increased business risks, costs and caused uncertainty for Employers and Workers. The existing labour laws and related costs, are forcing Business Owners to consider alternatives to the status quo when employing. Combined with the trending global development of the GiG economy which is growing exponentially, due to Millenials and Gen Z's looking for flexible working arrangements that suits their lifestyles. Consequently proactive Business Owners are exploring organisational restructures of their labour force and how work gets done.
Your Window of Opportunity
As a Business Owner the above does not make for good news, but you can change before you forced to change and take back control. There is a window of opportunity to implement some basic strategies that will offer some short term relief, improving cashflow and 'buying' you some time to restructure. These strategies recommended are consistent with what some multi-nationals and governments are starting to implement within this window of opportunity. The risk of not doing anything is not an option. Here are 3 effective strategies for small, medium Business Owners to consider;
- Renegotiate prices and terms with your suppliers, they may not be open to discounting prices but could be open to adding value. If you don't ask you don't receive. The result if you can persuade your suppliers, is both of you benefit, by improving the value proposition for your customers.
- Refinance and take advantage of the lowering interest rates and consolidate all your existing debt over a longer period with another Lender (other than your existing bank). This will improve your bargaining position when negotiating with your bank and improve your cashflow.
- Restructure your organisation's fixed costs by identifying what is Core and Non-core and lower your breakeven and moving some of your Fixed Costs to Costs of Sale (Variable). This will improve your margins, productivity and profits. Most importantly you will only incur a non-core cost if you generate a sale.
Hopefully you will take our advice seriously and be proactive about making changes during this window of opportunity. If you would like to learn more or comment on any of the items discussed, please don't hesitate to comment or contact us. We welcome robust discussion, because the stakes are high. You need to be a strong leader to navigate the next season for you, your family and your Business
We, at Cornerstone Solutions, are keen to have a conversation with you and your Team. We committed to maximising value and mitigating risks for small to medium Business Owners. If it is restructuring, please contact us at [email protected] or if it is discussing refinancing or consolidating your debt then [email protected]
Be safe, take action, speak soon, Emil Verster