Economic Outlook 2014

There has been no post on the macro-economy in more than a year for the simple reason that there has been little upon which to comment. As we have long argued, growth in the developed world is going to be slow at best. And so it has proved to be true. The outlook for the next year is similar. The good news is that the threat of recession has abated; but secure and sustained growth at our best historical rates is unlikely. The reasons which account for persistently slow growth remain the same. Rising competition around the globe restrains employment levels. For example in the US, the number of people seeking to work has fallen sharply, explaining a primary cause for decline of the US unemployment rate. While the US has finally passed a budget, it is too soon to declare that America has stepped back from complete political dysfunction. And all of its long term problems await. Europe continues to make small progress, even as some of its states drift along, one millimetre from disaster. Political and military tension in and around the Ukraine merely adds to the uncertainty. India is now in one of its frequent periods of political paralysis, with most of its long term challenges unaddressed. China is holding its own for the moment, as its authoritarian government continues to struggle with the country’s inherent contradictions. We should keep in mind that about half of China’s GDP and employment arise from its state-owned enterprises. Its commitment to the marketplace remains half-hearted at best.

The most fundamental reason that the world’s political institutions are struggling to create coherent policy is because they are all having to adjust to a global economy. This is a radically new circumstance, the entire planet recently stitched into a web of commerce, finance and communication. How to cope challenges us all.

It is important to note that this anemic growth is occurring even though we are fueling the economic engine with extraordinarily low interest rates. It is as if we pouring gasoline on a slowly smoldering fire and the embers just burn a bit more brightly. Where is the fire? Clearly the fuel is water-logged with the problems noted above. With interest rates at near zero, all we get is slow growth!

Overlaying all the factors that account for slow growth is the greatest economic uncertainty of all: what will happen when the world’s central bankers start to remove the monetary stimulus that is giving us such low rates. Such historically low levels cannot be sustained indefinitely, one presumes. Surely inflationary pressure will increase. Or will it? Or have we killed inflation for a generation? Or is inflation about to erupt with a vengeance? But would that at least mean growth is seriously accelerating? Or might we get low growth and high inflation? The plain truth is that the situation is so dynamically complex and so unprecedented, we cannot answer any of the above questions with any reasonable degree of assurance. We can guess or we can hope. But that is not forecast.

But let us guess that as growth starts to accelerate and inflation moves up modestly, the central bankers will respond with measured, that is, small steps. That much might be clear. But we have no way of knowing what will happen next. Will investors panic or stay logically calm? Will real investment come to a halt? What happens to consumption of big-ticket items like cars? What happens to the world’s property markets? What happens if we stay calm when the bankers start withdrawing the stimulus and then freak out when it becomes clear they might spend the next five years raising interest rates? Slow torture? Again, there are no rigorous evidence-based answers to these questions.

Welcome to a world with economic uncertainty higher than it has ever been since the Second World War.

Opportunity Amid the Tumult: Part 2

As this space previously anticipated, 2012 produced disruptions, dislocations and crises in a slow growth world. China slowed as it changed its leadership in a totally opaque manner. India slowed, amid the usual chaos and corruption, but with citizens demanding improvement. The European Union endures its slow-motion public debt crisis, the result of indecision coupled with bad decisions. And then there is the United States.

The only modestly positive event was the re-election of Mr. Obama. This was helpful to America solely because the alternative candidate was so wrong-headed about so many issues, when he was not being totally vacuous. The difficulty is that Mr. Obama remains, what we have long noted, a president devoid of strategic vision or a killer instinct. As a result, he now presides over a fully dysfunctional government. The largest economy on earth dances on the edge of disaster, without any coherent economic policy, never mind actual budget. As with the previous debt ceiling fiasco, the debate over the “fiscal cliff” is incoherently stupid, ignore of the facts unless it is denying them. All the while, Mr. Obama pleads for compromise and good will as if he were teaching a civics class in high school. He is still incapable of saying that compromise is impossible because the other side are fools. So America proves itself incapable even of managing its short term finances; all its long term problems, like the erosion of its educational system and its unfunded health and social system, are unaddressed.

Let us remember that Mr. Obama barely won against an inept opponent and with America’s changing demographics on his side. The Senate and House of Representatives remain as before, with the idiots in charge in the House and the no-ideas-at-all Democrats barely able to run the Senate. Mr. Obama failed to defeat his enemies in the House, and there is no sign that he really tried. His highly accomplished financing and campaign machinery is rolled out only in presidential elections and only for him. Notice that the media barely covers any of Mr. Obama’s initiatives to regain the House and strengthen his hand in the Senate; that was because there was not much to cover.  But he cannot bring himself to do so since he would have to shed his bipartisan identity. Unfortunately, America needs a political street fighter.

So the world’s future is its immediate past, as the pressures of the global economy cause political indecision abetted by a confused and misinformed public.  Canada retains its better than normal situation, the result of a handful of sensible decisions made years ago, but still struggles not to get swamped in the churning waters of planetary pressures.

So what is an individual to do in such an environment?  Bet on the consequences of stupidity.

The economic environment continues to become harsher. The usual consequences of more competitors is the need to work more effectively and innovate faster, even as profits inevitably shrink and worker compensation falls. This result of the global economy would have been challenging enough with rapid growth.  But slow growth removes the lubrication of the rising output, making adaptation even more painful. Bet on this.

Serious advantage awaits those whose products and services offer either edge or escape.

Edge in the competitive wars means either a powerful productivity tool, or a commanding marketing facility.  Be a innovator who develops them. Or an entrepreneur who introduces them. Or an investor who supports those who do.

But many companies offering productivity or marketing tools seem not to be thriving.  And this just adds to the opportunity since it is being poorly exploited by some of those who claim to see the opportunity.  The problem is that they are fighting yesterday’s economic wars, with tools too modest to achieve much advantage.  They look for quick and obvious answers, ones that do not take too much rigorous thought, that do not require challenging conventional wisdom, that do not require uncertain experimentation and that do not march into spooky realms of creative thought.

So we are swamped with analytics of all kinds. But the world does not need more data; it needs answers, solutions and decisions. So where is the software that tells managers what to do, directly and exactly? Impossible? Too complicated? Are you so sure?

[A few companies know that “decision” software  scares people; so they call it analytics when it is something quite beyond. Know who?]

Escape is also a sure bet. In a fiercely demanding world, escape from its pressures is highly valued today, and will be more highly valued tomorrow.  And as with edge products, much opportunity abounds, left by those who look for the obvious and easy. The world of escape products is wildy uneven, producing handsome profits one minute and punishing losses the next.  The classic problem is that an escape product [game, song, movie etc] quickly loses its appeal since diminishing benefit sets in quickly.  So social media booms since it is the newest escape product.  But what happens when its appeal fades, as it will. Or what strategy might help it evolve into an ever morphing seductive environment? It does not have that attribute yet.

So you think that the users, so many unique people together, will find ways to entertain themselves forever? Really? Then why is YouTube, which used to be sure user-generated content was all it needed, looks to other sources?

Why does the movie and game industry produce such erratic profits? Too many sequels? Too much imitation? Too little creativity? Too little risk taking? What is really wrong with this picture?

Further discussion involving opportunity will be provided in subsequent postings.

May 2013 be a year of success and conquest.

[Why was there such a long interruption between postings? Larry was thinking.]


Opportunities Amid the Tumult Part 1

As we have long noted, the world faces a prolonged period of disruption and dislocation. The best we can expect is slow growth and volatile financial markets. Too many countries have too many problems that will take time to address. That presumes that these problems are being addressed, and largely speaking they are not.

China’s financial system remains vulnerable with limited regulatory oversight and high “private” debt levels, while its secretive government is in transition. India’s public services are chaotic, while it still fails to mount a broadly-based educational system, even as its population surges. Europe struggles to cobble together any semblance of a coherent strategy, while its deficit containment policies guarantee economic distress in much of the E.U. Meanwhile, the U.S. is missing in action, with its president lacking either vision or the desire to fight, leaving the clowns of Congress running amok.

There will inevitably be a number of false “dawns”.

Canada’s only immediate problem is the turmoil of its trading partners.

Moreover, that most insidious enemy of all market economies gathers strength, as the disparity between the rich and the middle class and the middle class and the poor continues to widen almost everywhere. This trend cannot continue. One way or the other, it will stop.

What is the individual to do in these tumultuous times?

First, remember that the world has faced graver situations before, and emerged intact. Remember too that almost all countries have the resources to solve their challenges; the problem is the lack of public leadership and the will to act. Resolving these issues will certainly require a hit to the standard of living of most of us. But that only means most of us would give up some the junk we do not need, nor ever did.

Second, the real threat to our well being is not the mountain of debt that so excites us. Rather, it is the vast waste of human talent that has already occurred, and the added waste which inevitably awaits us. Part of this waste is the result of society failing to offer a secure platform for accomplishment; part of it is the result of ignorant, frighten, confused and thoughtless individuals making truly idiotic decisions.

Third, decide explicitly that you will understand and use the distress to advance the deployment of your talent. The way forward for any individual could hardly be clearer. Concentrate on creating innovations that either increase productivity significantly, or that make a major contribution to solving an urgent social or marketplace necessity. Necessity, it should be noted, is always in the mind of the beholder. Your advantage rises in direct proportion to the fact that this is not what most persons choose to do.

Fourth, you must turn your back on the herd. It will not be easy, but in challenging times, the herd’s reaction is almost always to jump off a cliff. And if the first cliff does not kill them, they just look for another cliff. So let the herd chase get-rich-quick internet fantasies, develop ever more useless phone apps, multiply social networks until no one has time to work, create games of no originality, develop stock trading strategies to bamboozle the unwary and when in doubt sell more advertising.

Fifth, look for productivity or product innovations the old fashioned way – with equal measures of hard work and craftiness. [Notice how reading that sentence makes the herd’s approach so beguiling.] Of course, only a fool would look for innovations in a fields or markets in which the innovator had no or little inherent interest.

Since many good ideas exist but are ignored, look for innovation using all of the search technologies available. Search creatively. Use mathematical analysis intensively. That includes asking experts wherever they are. And when aggressive search fails to yield an answer, or provides only part of an answer, conduct equally aggressive research and development. In other words, create your own intellectual property – the true currency of the 21st century.

Where would you get the resources to conduct your own R&D? Subsidize your research from your “day” job. Create a cash cow to fund your research. Use your craftiness to fund cheap ways to conduct research. Use volunteers/friends/family to help. Be resourceful.

Are these tactics not obvious? Clearly to most they are not and that is why serve you so well.

But might your search and R&D both take considerable timet? Yes, they might. And here is one other “secret” of success. Patience in a world of impatience just might make you a warrior prince, if not king.

The next post will address specific industry opportunities. Right now I have an opportunity to harvest.