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What's the time on the Economic Clock?

The economic clock suggests it's time to invest in our businesses once again.

In February 2007 business leaders thought business coaching company, Shirlaws, was mad to suggest they rein in company spending and slow recruitment.  'It's time to cash up,' they said.  'But we're in a boom!,' the market replied. 12 months on, the recession started to bite and businesses acknowledged that a good call had been made.

CONSIDER THE TIME FRAME

Once again, the advice appears to be counter-cyclical again, as the key message is 'The bad phase is done.  It's time to start investing again.'  Most business owners will be quick to reflect on the global economic problems - notably the situation in Greece.

Darren Shirlaw, international thought leader and business expert often takes people by surprise with his views on how to respond to the economy.  But his commentaries make sense when you take the long view.  Looking back 100 years or more at previous depressions generate a deeper understanding of today's economic trends.

These observations lead us to make two key points.

Point one: the economy and the markets have been dislocated since 2007
Point two: we won't go straight into a boom.

STILL DISLOCATED

 




Asset classes and the economy normally follow each other around the economic clock (above) and show the same time.  But by 2008 the asset classes had already reached seven o'clock while the economy was still back at four o'clock.  Shirlaw believed this dislocation would cause a double dip recession and that the dislocation would remain for some time before full recovery.

The dislocation is still evident today and the markets are all over the place.  Some commentators predict the markets will fall off again before the year-end whilst futurists predict economic worsening.  Investment banks are also saying we will have a long wait before the economy recovers.

Ignore the markets for a moment.  Statistically we know that once we have had a double dip, the economy has completed its full cycle.  The chance of a triple dip recession is very small and so the next stage of the economic cycle must be a return to recovery.


TIME TO GET POSITIVE

One should be conscious of lead times when saying, 'Now is the time to invest in your business.'  Investments such as recruitment, innovation or acquisition usually take 12 to 18 months to deliver.  This means investing well ahead of recovery for your company to exploit the coming economic upturn.

Back in the 2007 boom Shirlaw's advice was, 'It's time to get negative'.  Now everyone is negative, the message is, 'It's time to get positive.'  This counter-cyclical investment message isn't winning popularity contests because everyone says, 'Just hold your money.'  It seems mad to do anything different.

'Start investing' doesn't mean 'spend madly.'  Instead, invest wisely rather than simply holding cash.

THE RECOVERY HAS WELL AND TRULY BEGUN

The current 'hesitant and uneven recovery' is exactly that.  Even when we enter 'general recovery' the key word is still 'recovery' and not 'boom'.  After the double dip, we are likely to see one to two years of 'hesitant and uneven' and 'general' recovery.  The business media will still be reporting bad news, but it will increasingly add good news stories.

We now have four countries with budgeted surpluses, whereas between 2008 and 2011, everyone was in deficit.  Imagine countries as companies.  Compared with company profit and loss, everyone was in loss model in 2008-11 and no one was in profit.  Now four countries are forecasting profits - a sign of recovery, although still not a sign of boom.

Compare three recession strategies

 

The chart (above) compares three recession strategies.  The purple line represents a company that made massive cuts.  The managers retrenched staff and wound the busines right back, but in doing so they overcut.

As a result, the graph shows almost stagnant growth from 2012 onwards.

This business will survive because it cut back.  But the cuts damaged morale, reduced access to markets and lost clients.  Like a badly pruned tree, a business cut too heavily finds re-growth hard.

The red line represents a company that chose to cut lightly.  By 2012 they were still hanging on, 'any day now the markets will turn around and we'll be fine.'  But this business has been burning cash since 2007 to keep afloat.  As a result of cash burn, the red line keeps plummeting and this business won't recover even when the economy does.

The green line represents a company that took a middle course and cut back to the right level.  With this strategy management maintained morale, farmed business contacts and preserved relationships.  This business still has cash and, as a result of its decisions, will grow once again.

THE RACE IS ON!

Of course, the 2014 investment message is harder to accept than 'slow down' in 2007.  When making money in a boom, it's easy to stop spending for a while.  But when you're not making money in a recession, it's hard to start investing again.

The fit athlete finds it easy to comply when their coach says, 'Take a day off.'  But starting to train after an injury is much harder.  Isn't it time you got off the couch and re-entered the race?

You can download and read Darren Shirlaw's ebook Thrive not Survive: A Guide to a Double Dip Recession by clicking here.