Prognostications and Expostulations
We’re going out on a limb with this one or given thats its winter we’ll say we’re walking on thin ice. We’ll gaze into the crystal ball and pontificate on eleven subject areas for 2010. With some we hope we will be wrong. With some we hope we will be right.
1. Stock Market: Buoyed by well managed earnings by the large multinational companies in the DOW, principally as a result of cost reduction initiatives and exposure to global markets the Index will finish up 6% and close at 11, 011 on the last trading day of 2010. Given an inflation rate of 4% investors will realize a 2% gain on equity investments in DOW constituents. S&P 500 and NASDAQ will be flat gaining 2% for the year.
2. Iraq War: The war in Iraq will continue to wind down. America will scale down its military presence in the country. Troop levels in the country will approximate 85,000 by the close of 2010. Though direct American military involvement in conflicts will decline, Iraq will experience civil unrest as Kurd nationalists, Shiite and Sunni Muslims seek to protect their political and economic interests.
3. Afghanistan War: The escalation of America’s military presence in Afghanistan will move the theater of war further into Pakistan. The Taliban will be satisfied to harass US forces by engaging in a guerrilla war. Taliban and Al-Qaeda supporters will use the opportunity to increase the level of urban terrorist attacks in the large cities of Pakistan. Al-Qaeda confederates will seek to reestablish base of support in Somalia, Yemen and ties will begin to emerge in Latin American narco-terror states.
4. Iran: The political situation in Iran will continue to deteriorate. This is a positive development for regional stability because it will force the ruling regime to cede its nuclear program development initiatives. Iran will not be able to capitalize on the US draw down in Iraq. It will become increasingly isolated as Hezbollah and Hamas pursue actions that are less confrontational to Israel in Palestine and Lebanon. The ruling Caliphate position will weaken due to internal political dissent and external economic pressures.
5. China: It will be a year of ultra-nationalism in China. Its stimulus program that is targeted to internal development will sustain a GDP growth rate of 8%. China will use this opportunity to strengthen the ideological support of its citizens to fall in line with the national development initiative. Globally China will continue to expand its interests in Africa and will cull deeper relationships with its Pacific Rim club member Latin America. China will continue to use US preoccupation with its wars in Afghanistan, Iraq and skirmishes in Yemen and Somalia as an opportunity to expand its global presence with a message of peace and cooperation.
5. US Mid Term Elections: Republicans will gain a number of seats in Congress. The continued soft economic conditions, state and local government fiscal crisis, war weariness and cut back in services and rising expenses will make this a bad year for incumbents and the party in power, namely the democrats. Sarah Palin will play a large role in supporting anti-government candidates drooling over the prospect of winning a seat in government.
6. Recession: Though the recession may be officially over, high unemployment, home foreclosures and spiking interest rates will hamper a robust recovery. The end of large government stimulus programs and the continued decrease in real estate values also present strong headwinds to recovery. We predict a GDP growth rate of 2% for the US economy. Outsourcing will abate and a move to reintroduce SME manufacturing will commence.
7. Technology: The new green technology will focus on the development of nuclear power plants. The clash of the titan’s between Google’s Droid and Apple’s I Phone will dominate tech news during the year. Lesser skirmishes between Smart Phones makers or the war of the clones will continue to explode altering the home PC market and continue to change the market paradigm for old line firms like DELL, Microsoft and HP. SaaS or cloud computing will gain on the back of lean business process initiatives and smart phone application development and processing infrastructure will encourage cottage industries fueling the cloud and making for some new millionaires. The tension between the creators of content and search and delivery will begin to tilt back toward the content providers. Litigation involving social networking sites will be filed to create safeguards against its use as a tool to control and manipulate behaviors thus threatening civil liberties and privacy rights.
8. Culture: The Googlization of civilization will allow individuals to embrace more corporatism as a pillar to add efficiency and order to their lives. Multiculturalism will continue to grow in the US. However a growing political backlash against it will become more of a prominent theme as Teabaggers agitate for a return to the true values of America. Electronic arts will make major leaps and bounds as commodification continues to be a driving force in the world of art. Printed words like books and newspapers will continue to dramatically decline. Writing, drawing and playing musical instruments skills will ebb as people prefer to develop digital skill sets. Texting and Tweeting make for poor practice for extended compositions.
9. Latin America: Instability will grow in Latin America as narcodollars continue to undermine political stability in Columbia, Venezuela, Mexico and Panama. The US will increasingly become involved in the conflicts between petro and narcodollars. Mexico’s stability will be increasingly undermined by the power and corruptible influence of the drug trade. China’s influence on the continent will grow.
10. European Union: The EU will continue to manage itself for stability. It will yearn to return to its aristocratic roots and will become increasingly conservative. It will continue to have a complex relationship with the expanding Muslim community. A call to deeper nationalism will arise out of a growing influence of Islam and the inefficiencies of EC bureaucrats in Belgium. The EU will continue its union of expediency to counterbalance their distrust of Russia and their distaste for America.
11. Environmental Justice: Though awareness continues to grow concerning the need to mount and implement large scale solutions to halt the problem of global climate change; the political will and resources required to drastically alter the planets current trajectory in growth of carbon emissions from the burning of fossil fuels remains unaltered. Social responsible enterprises, small businesses and individuals continue to make a difference. Eco friendly small businesses, urban farming, capital formation initiatives around renewable energy businesses are hopeful signs of a market response to the pressing problem. China is investing heavily in becoming a market leader out of business savvy and environmental necessity. Until the great powers of the world can come to some collective agreement on how to limit , cap or trade carbon credits we’ll have to be content to separate the trash and recycle, reuse and reduce.
You Tube Music Video: Donald Byrd, Stepping Into Tomorrow
Risk: unfulfilled predictions will make me look bad
The Cost of Banking Goes Up
The severity of the banking crisis is evident in the 95 banks the FDIC has closed during 2009. The inordinate amount of bank failures has placed a significant strain on the FDIC insurance fund. The FDIC insurance fund protects bank customers from losing their deposits when the FDIC closes an insolvent bank.
The depletion of the FDIC Insurance fund is accelerating at an alarming rate. At the close of the first quarter, the FDIC bank rescue fund had a balance of $13 billion. Since that time three major bank failures, BankUnited Financial Corp, Colonial BancGroup and Guaranty Financial Group depleted the fund by almost $11 billion. In addition to these three large failures over 50 banks have been closed during the past six months. Total assets in the fund are at its lowest level since the close of the S&L Crisis in 1992. Bank analysts research suggests that FDIC may require $100 billion from the insurance fund to cover the expense of an additional 150 to 200 bank failures they estimate will occur through 2013. This will require massive capital infusions into the FDIC insurance fund. The FDIC’s goal of maintaining confidence in functioning credit markets and a sound banking system may yet face its sternest test.
FDIC Chairwoman Sheila Bair is considering a number of options to recapitalize the fund. The US Treasury has a $100 billion line of credit available to the fund. Ms. Bair is also considering a special assessment on bank capital and may ask banks to prepay FDIC premiums through 2012. The prepay option would raise about $45 billion. The FDIC is also exploring capital infusions from foreign banking institutions, Sovereign Wealth Funds and traditional private equity channels.
Requiring banks to prepay its FDIC insurance premiums will drain economic capital from the industry. The removal of $45 billion dollars may not seem like a large amount but it is a considerable amount of capital that banks will need to withdraw from the credit markets with the prepay option. Think of the impact a targeted lending program of $45 billion to SME’s could achieve to incubate and restore economic growth. Sum2 advocates the establishment of an SME Development Bank to encourage capital formation for SMEs to achieve economic growth.
Adding stress to the industry, banks remain obligated to repay TARP funds they received when the program was enacted last year. To date only a fraction of TARP funds have been repaid. Banks also remain under enormous pressure to curtail overdraft, late payment fees and reduce usurious credit card interest rates. All these factors will place added pressures on banks financial performance. Though historic low interest rates and cost of capital will help to buttress bank profitability, high write offs for bad debt, lower fee income and decreased loan origination will test the patience of bank shareholders. Management will surely respond with a new pallet of transaction and penalty fees to maintain a positive P&L statement. Its like a double taxation for citizens. Consumers saddled with additional tax liabilities to maintain a solvent banking system will also face higher fees charged y their banks so they can repay the loans extended by the US Treasury to assure a well functioning financial system for the benefit of the republic’s citizenry.
You Tube Music Video: The 5th Dimension, Up Up and Away
Risk: bank failures, regulatory, profitability, political, recession, economic recovery, SME
Managing Pandemic Risk
The Swine Flu outbreak carries with it the potential to severely damage the financial health of small and mid-size enterprises (SMEs). Left unmanaged pandemics can impair profits, generate losses, undermine the contribution of key employees, disrupt supply chains, halt operations and undermine an enterprises financial health that can ultimately lead to bankruptcy.
Though many consider pandemics as a force majeure risk event that lies beyond control, businesses can take steps to mitigate and manage the drastic challenges a pandemic can pose to a business. This is particularly important for businesses that find themselves in a weakened position due to the recession. Businesses that have become highly stressed due to the current business cycle are at acute risk of becoming insolvent due to the shock of this potentially catastrophic risk event. Business managers, bankers, shareholders and businesses with extended supply chains need to take steps to manage and mitigate the severe effects of pandemic risk.
The first step is to create or update a business continuity plan. Business continuity plans need to address a range of issues that includes planning for disasters in general and planning for the unique challenges an influenza pandemic presents and integrate mitigation initiatives into critical business processes.
All businesses are unique. Addressing a pandemic risk event in your business plan will require you to conduct a risk-management assessment on all aspects of your operations, business processes and market impact to ensure continued operation and financial health of the enterprise.
Some things management must consider in its review are:
- Assess how you work with employees, customers, contractors to minimize contagion threats
- Determine mission critical business functions your business requires to maintain operations
- Stress test your business operations to determine how to function with high absentee rates
- Review inventories in case foreign or domestic suppliers and transport services are interrupted
- Review supply chain links, determine at risk suppliers and identify backups
- Reorganize work spaces to minimize the spread of the disease
- Equip employees to support telecommuting
- Develop communication strategies to update employees, customers and the media
- Use this opportunity to expand e-commerce capabilities
- Promote awareness of the problems associated with pandemic flu
- Alert employees about what steps you’re taking and what they can do to limit the pandemic’s impact
- Review sick-leave and pay policies to ensure they don’t discourage workers from staying home when they’re ill
- Make backup plans if you need to pull people out of countries where the epidemic strikes
- Develop a travel policy that restricts travel to areas where the virus is active
- Stock up on masks and sanitizers, and consider staggering work hours to limit the size of gatherings
Sum2 publishes the Profit|Optimizer product series. The Profit|Optimizer is the leading SME risk management platform that helps business managers and business stakeholders quickly assess enterprise risk factors and take considered action to mitigate and manage those risk factors. Sum2 will be releasing a pandemic risk assessment module by the close of this week. The product will retail for $95.00 and will assist SME’s to assess, mitigate and manage the threats posed to their business by pandemics and other social disasters.
More information can be found on our website www.sum2.com.
Sum2 helps businesses assess risk and realize opportunities.
The Upside To A Recession
Like everything in life there are two sides to every coin. If the recession is hampering your ability to put some new coin into your piggy bank or if it drives you to break it open to help make ends meet, there may be some unintended positive consequences of this period of economic duress. Yesterday during a hike in the hills of beautiful Harriman State Park, a member of our troop spoke of a recent article she read in the New Your Times. The article was about how some people are responding to the loss of their jobs by taking up a physical fitness regimen. People who are now blessed with the gift of unoccupied time, excess energy and the need to quell anxiety are burning off the exigencies of fear with a vigorous workout. Some people are using the opportunity of being unemployed as a way to get back into shape. A good thing and an unexpected and unintended consequence of the recession. We began to think about some of the other positive unintended consequences born from the recession and we came up with the following items. Its good to accentuate the positive.
Lower Gas Prices: We see it and celebrate it at the pump every time we pull in to fill up. The economic downturn has quelled the worldwide demand for energy and oil. It is reflected in the lower prices we pay. The price of gas in Jersey has dropped by over 50% since the summer.
Healthy Environment: The demand for oil is falling because factories are operating at diminished capacities. Unoccupied office space needs less light and heat. People are turning down their thermostats to save money. Businesses are delivering less goods while people are commuting less to work and business travel is way down. The diminished use of fossil fuels is lessening the amount of carbon based emissions being released into the atmosphere. This gives Mother Earth a brief respite from our all out assault on her delicate ecological sensibilities. There is also a lot less noise pollution in my surburban neighborhood. The constant drone of speeding cars and the decelerating roar of jet engines initiating a landing has lessened greatly. Silence is golden.
More Time with Family: Spending less time at work provides more time to be with family. The kids need help with homework. Your spouse needs to know they are loved. Kids love to see you at their JV basketball game or watching them practice Tae Kwon Do at the local dojo. Little ones will forever remember the bed time stories you read to them. Goodnight Moon and the Run Away Bunny are bed time classics that will make you smile for the rest of your life. More time at home also allows you to turn off the Nanny Cam and stop being a virtual parent. You can now become one in the flesh. A virtual presence is good. Being physically, emotionally and mentally available for your family is better.
Eating More Healthy Foods: The recession may require us to trim down the food budget. One way to do this is by replacing all the processed foods we have become accustomed to buying and consuming because we didn’t have the time to cook meals using wholesome fresh foods. Now that we are blessed with more time and incented to save money we can replace the box of mac and cheese with the protein rich rice and beans. We can replace the frozen fish sticks with a fillet of fresh broiled fish accented with a sprig of rosemary. Yum Yum!
Reading More Books: Last week I needed to visit the main branch of the NY Public Library. I was pleasantly surprised to find a large line queuing at the entrance waiting for it to open. People can take the opportunity to fill their free time to read more books. Libraries are free and provide a rich offering of mind enriching services. Some will go back to school to get a degree, learn a new trade or acquire a new skill. Reading books also provide a wonderfully constructive escape from the harsh realities of a recession.
Quality of Life: It may seem counter intuitive but the recession can help you to upgrade your quality of life. Eliminating the expense of all those extra cable channels will dampen the temptation of watching “All in the Family” reruns or “The Titanic” for the sixth time. The changing economic realities of our lives will certainly create the possibilities for looking at new opportunities and explore the benefits of a simpler more active life. Getting back into nature, sports, learning, family, community service and pursuing the personal projects and dreams we have all sought to do can become real and can enhance the quality of our lives beyond our wildest imaginings.
Spiritual Development: Trying times will create opportunities for people to explore their inward selves. The Apostle James says we should consider difficulties as opportunities for growth. Growth occurs if one is faithful and willing to connect to solutions that are larger then oneself. That connection is made possible through an optimistic application of faith that believes that all things are possible and that the joy is truly in the journey. Living through tough economic times may not be fun but it can be a joyous experience. If we are mindful we can detect the presence of the heavenly born opportunities that are the unintended consequences of our time of trail. If we remain grateful we will be blessed with sight to realize the abundant grace we enjoy in the midst of our trying circumstances. As we live life abundantly we need to remember to share it with others so that our portion of joy may double.
You Tube Video: Bing Crosby & Bette Midler: Accentuate the Positive
Risk: negativism, pessimism, faith
Honda Motors Practices Enlightened Capitalism
Amidst all the layoffs, business closures and shutdowns the hard edge of capitalism is a painful experience far too many people are forced to endure. During times of plenty, the relationship of labor and capital is harmonious and symbiotic. Both parties recognize the value that each bring to the corporate community and each parties enrichment and well being is served by the degree of harmony present in that relationship. During down business cycles management may resort to layoffs to preserve the enterprise. Unfortunately this often causes resentments and hard feelings on the part of workers who have lost the means of earning a living. When workers return to their jobs this can cause problems and hurt an affirmative corporate culture that is critical to maintaining a sustainable business enterprise.
In the face of the meltdown in the automobile manufacturing sector, Honda Motors is one of a very select few that is not resorting to layoffs. Honda Motors known for product quality and leadership in product innovation and business processes is also highly respected for its treatment of employees. Honda Motors places great emphasis on the creation and maintenance of an affirmative corporate culture to sustain profitability and market leadership.
Honda Motors decision to restructure the work force, and give workers a period of paid leave until business conditions improve speaks volumes about how management respects and values the contribution labor makes to the long term sustainability of the enterprise. Any remuneration workers receive during the leave will be paid back to the company with unpaid overtime when the workers return to the production line.
The value of good will on the Honda Motor balance sheet has increased exponentially. The sustainability of an affirmative corporate culture will drive profitability, product innovation and market leadership for the many years to come.
We applaud Honda Motors for this innovative and enlightened response to the current market challenges.
You Tube Video: June Carter Cash & Johnny Cash, One Piece At A Time
Risk: sustainability, labor relations, corporate culture
Healing on the Sabbath
There is a wonderful story in the New Testament from the Book of Matthew. It tells about a man Jesus discovers in a synagogue with a withered hand. The Pharisees who were the fundamentalists of their day asked if it was lawful to heal on the Sabbath? Jesus answers that it is always lawful to do the right thing on the Sabbath. Jesus understood that The Divine Healer requires us always to be mindful as to how to respond to those in need even if that means violating supposedly sacred rules to do so.
The Republican Party opposition to the economic stimulus legislation reminds me of this story from the Gospel. The passage of the recovery bill in the congress was accomplished without one affirmative vote from the GOP. Almost every Republican to the last member cited concern about the country sliding into socialism. Taking a cue from lead party shill Rush Limbaugh, the self anointed demagogue and chief has been howling about the government sponsored recovery plan. Speaking for all Republicans, Rush states that government involvement will lead to the corruption of free market enterprise, ballooning administrative bureaucracies and the sure return of the debauchery of erstwhile earmarks splayed about in an orgy of pork barrel spending sprees.
The economy like the man with the shrived hand needs healing. He cannot find work if he is not healed. The doctor is in the house and being faithful to the Hippocratic Oath is compelled to heal despite the incantations of conservative demagogues of damnable results if ideological dogmas are violated.
An interesting historical analogy steeped in realpolitik can be found in a famous statement made by Deng Xiaoping as China’s disastrous Great Leap Forward was concluding. Said Deng: “I don’t care if it’s a white cat or a black cat. It’s a good cat so long as it catches mice.” This was interpreted to mean that being productive is more important then upholding beliefs in communism or capitalism.
The leader of China at the time, Mao Tse-Tung saw this type of thinking as a great threat to his power. To consolidate his power and mitigate the threat Deng’s thinking represented, Mao launched the equally disastrous Cultural Revolution. Deng and his policies were rehabilitated years later only after the damage of the Cultural Revolution became apparent. The adoption of liberalized economic reforms and the eradication of ideological strictures has done wonders for China. Like Mao, the GOP demands ideological purity regardless of the effect. The United States has pursued the policies advocated by the GOP since the Reagan Administration. Those policies and philosophies have brought us to where we sit today. A moribund economy over dependent on a financial services industry, leverage and the availability of cheap credit.
President Obama’s recovery program is classic move taken from the Keynesian economics playbook. It offers a massive capital infusion into the economy that is funded by an increase in Federal debt and a generous tax cuts that should satiate the most rabid Reaganomic raconteur. Obama is not beholden to ideology. The Great Empiricist has proclaimed the death to all ideologies and is not beholden to the stale bread of old dogmas. Obama is willing and most able to craft solutions from tools and systemic loam to effect the cure. He might even resort to a dollop of supply-siderism and sprinkle a bitty bit of voodoo economics on the zombie republicans to get the American economy going again.
You Tube Video: Dr. John, Gris-Gris Gumbo Ya Ya
Risk: economy, politics, recession
In The Hall of the Mountain Kings
The tenor of this years Davos Conference is markedly different from years past. As recently as last years gathering of the worlds power elites, the agenda of the annual World Economic Forum was keen to address the smoothing over the rough edges of globalization in a post scarcity world. Those rich in capital, ideas, power and connections assembled to devise solutions to the worlds dilemmas with the practical medicine of enlightened capitalism. The weltanschauung from the halls of these mountain Kings and Queens has drastically changed with the turn of the year.
Gone are many of the deep pocketed investment bankers who in past years underwrote elaborate banquets and soirees to curry influence and to woo favor with the potentates of power. Gone is the insatiable appetite of the American consumer market that drove much of the conferees suppositions of the sustainability of a healthy global economy. The American consumer now lies prostrate like a Jolly Green Giant coated with an overdose of pesticides by a mad Iowan crop duster. Gone is the confidence of those who believed American pronouncements about the sustainability, soundness and correctness of its economic policies. Gone is a concerted spirit of cooperation among the nations and a belief to work together in a cooperative spirit to solve the problems that acutely ail the global economy. Unfortunately the ghosts of economic deprivation, acute political conflict and social dissonance still freely roam and continue to haunt the exalted halls of the mountain kings.
You Tube Video: Apocalyptica, Edvard Grieg’s, In the Hall of the Mountain Kings
Risk: economic, political, social
US Economy Bleeding Jobs
The ADP National Employment Report was just released. The US economy is bleeding jobs. Over 693,000 jobs were lost during the month of December 2008. The report shows steep declines in all market segments that include, small and mid-size businesses, large businesses, manufacturers, service businesses and construction. The Report shows that job loss is accelerating more rapidly then observed levels during the 2001 recession.
Full ADP report and an explanation of their methodology can be accessed here.
You Tube Video: Johnny Cash, The Ballad of John Henry
Risk: economy, jobs