Welcome to new normalization… not necessarily ropy recession

I don’t think I’ve ever lived through a period in my life where there’s been so much doom and gloom around the economy… and while I tend to be a naturally negative human being, I am also an obsessive analyst, and I must declare that I am not convinced we’re entering a 70’s style recession.  If anything, we might be finally on a weird and rocky road to a much more normal future, compared to our highly abnormal recent past.

In 2008, when we thought the whole capitalist system would fail (and it was close) – and in 2020 when the world locked down practically overnight, we thought seismic business failure would engulf us. But we’ve recovered from both calamities and now face a new set of unknowns… that cancer of capitalism itself, inflation, a shortage of commodities that keep the economic wheels on, and a rebellious workforce that was locked down for the best part of two years.

Why this resembles more of a cooling-off than a recession

We’ve had 14 years of negligible interest rates which have driven businesses and consumers to pump up house prices and stock markets… as there really haven’t been many other places to deposit our excess cash.  On top of the amount of practically free money on offer, we’ve printed trillions of dollars of money to prime economies during the two crises, US corporate tax has been slashed, unemployment has reached record lows while major stock markets have just kept going up and up.  There’s too much of a good thing, and then there are 14 years of continuous good things…

So, let’s examine the current economic situation for businesses:

Those businesses that were based on hot air and analog business models are failing fast  

Where we’re seeing recent business failure is in areas that are almost purely speculative and have very little basis for their value, such as cryptocurrencies and various flavors of AI and automation that just don’t make a lot of sense.  I won’t even get into biotech and other markets where reality misalignments disappointed many naive investors.  Simply put, there have been many spectacular startup failures where both business and consumer investors gambled on business propositions that were based largely on pure fantasy, where they listened to analysts posing as experts – and believed them.  In addition to businesses run on vapor, we’ve seen businesses unable to adapt to digital commerce fall by the wayside – restaurants that couldn’t pivot to home delivery, taxi firms that couldn’t develop apps as easy to use as Uber or Lyft, manufacturers which failed to adapt to making products and equipment that customers still needed.  One can argue that many of these businesses were set to fail in any case, and Covid merely accelerated the failure process.

Businesses addressing real market needs will thrive

Conversely, while stock prices have suffered in recent times, those businesses that address a clear market need and have a path to profitability and growth are surviving and will eventually become safe bets for investors eager to escape the madness of these recent speculative times.  Core tech suppliers and IT services firms have enjoyed record growth over the past 12-18 months as enterprises rely more than ever on technology to run and automate their operations.  Airlines are bouncing back as people are eager to leap out of lockdown purgatory and go on vacation and get their business lives normalizing again.  Many consumer product and manufacturing firms are rebounding as two years of pent-up consumer spending is unleashed, while many banks have digitized their business more than their wildest dreams during the pandemic and are eager to reap the record profits of transitioning their painfully unprofitable analogous businesses.  We can go on and on, but the customer needs to engage have never been as eager as now… and the fundamentals are all there to project a healthy future for many industries rebounding after the pandemic, or growing more than ever because of the pandemic.

I believe we’re entering a “realistic economy” where companies are expected to be profitable, offer substantive value to their markets, and have a sensible fiscal plan to ride out the current inflationary pressures, especially in terms of keeping their core staff onboard.  The cranks and the fakers are slipping away and the real businesses are taking over.  And our investor speculators are desperate to dump their dwindling funds into businesses that actually have a realistic business plan.

Two key issues have contributed to today’s economic peculiarities

1. The Ukraine war

The war has resulted in wheat and fertilizer shortages driving the cost of many food products higher.  Even commodities like neon gas have been hard hit, which is essential for the manufacture of computer chips, as half the world’s supply comes from two Ukrainian companies, Ingas and Cryoin. Suddenly it’s harder to purchase tech hardware and these prices are steadily escalating. And let’s not mention the massive impact on oil prices which has driven up the costs of every product and service needing gasoline. On top of that, the oil companies are exploiting the situation and raising their profits… because they can.

2. Rampant consumer demand post-pandemic

Many families hoarded cash for two years, some bring topped up by government support, others simply earning good money and saving on no work commute, moving to the countryside getting great mileage out of their old pajamas. On top of that many people have enjoyed wage increases or taken more lucrative jobs due to the labor shortage – without leaving the house. Times are good for many, and they are indulging in buying overpriced vacations, cars, BBQs, household furniture, etc. You can’t even find many Rolex watches on the market these days… we’re in a world where demand is just trumping supply in so many areas.

In addition, rents and house prices are climbing as people move back to the cities and there is a shortage of properties, while restaurant bills spiral because of rising food and labor costs. There is now a shortage of taxi drivers emerging in many major cities as it becomes too expensive to make the job worthwhile anymore.  There is a shortage of workers right across the service industries… but as things cool off and the economy corrects, so will these stresses on the cost of living and working.  We are all (just about) adapting… even during unprecedented times where you can’t find good willing workers for love or money. We should take solace in the fact that things are at their inflationary peak, and we are still moving forward as an economy.  The fundamentals underneath it all are strong…

The Bottom-line:  We’re experiencing unprecedented economic and societal challenges, but the fundamentals to get to the other side of this are strong

While we can deplore this shortage of workers who underpin our economies and the impact of this awful war in Europe, which hurts our supply chains and drives the cost of living to unbearable levels for many, we have to look at the bigger picture to realize we’re just in the process of cooling off, and not necessarily plunging into a terrible recession.  Businesses based on real substance are – by and large – doing fine, there is a desperate need for workers of all types to support our industries, and there is a lot of excess money sloshing around the place (Deutsche Bank estimates US households have $2.3 trillion excess cash stashed away to weather inflation and higher interest rates).

We also have a sensible Fed which is looking to fix inflation before making other key economic injections, and we are already seeing early signs that inflation is beginning to cool off with these interest rate hikes. If we can somehow fix these supply chain issues and find a resolution to the Ukraine situation, we will get past this current period without too much damage.  Yes, there are some big IFs here, but we may just be just going through a readjustment of a rather distorted 14-year-old bubble.   And we may be moving into a work of two diverging superpowers

There are surely more normal and rational times ahead, as the past couple of years have been anything but!

Posted in : Cloud Computing, Digital Transformation, Economics and Geopolitics, Supply Chain