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January 5, 2009

This Shakeout Year

Steven R. Berryman

There is really nothing overtly negative about encountering an economic shakeout period such as the one we have entered. In fact, what we will discover this New Year is that long-term national prosperity for America herself depends on a boom and bust cycle.


I hereby resist the temptation to use the old standby from the coaches, “no pain, no gain.” That said, for those not prepared both mentally and physically, it will be a very painful year.


For those people and companies able to honestly take stock in evaluating their own unique circumstances, this is all a “net positive,” and a temporary downturn in fortune.


The consequence of having learned to live in the “bubble-world” of the years since the demise of the gold standard and the introduction of a “fiat currency” is that we have gotten soft, weak, uncompetitive, and used to living on the margin.


We rely on accounting methods that allow us to defer and carry pain off to some future administration – sometimes off the books entirely!


Lobbyists for those likely to profit from these processes make sure the systems stay highly permissive.


We have become addicted to cheap, easy credit, facilitated by foreign currency seeking a safe haven in our bonds. We have been paying off credit lines with other credit lines in a doomsday-leveraging scenario.


Again, lobbyists for those likely to profit from these processes make sure the systems stay highly permissive!


The above is true for individuals, corporations, and nations.


Our congressional oversight and checks and balances failed us as a result of a collective greed. When boom times allow, don’t ask, don’t tell.


We now live in a hugely overbuilt time.


One cause: There is no pain or consequence for defaulting. They had debtors’ prisons in the old days. Today, we have attorneys. There’s no shame in shame.


However, inevitably, there will be losers in the defaults.


Companies not making payroll will cease to exist, some after protracted bankruptcy protection periods. Some will lock up overnight.


But was it the lack of a good business plan, or just the bad luck of the business cycle that put some over the edge?


We have business plans predicated on “just-in-time” inventory stocking and turnaround practices. These are to enable businesses to skip the finance expenses of carrying inventory on the books before sale. This functions perfectly only in “the best of times.”


We have business plans predicated on cheap fuel either for industrial use in production, or the one that gets everyone, the transportation fuel expense. Try escaping that one.


The strong will survive via the Darwinian method. The strongest will be defined as:


*The business with a flexible work force, able to quickly ramp up or scale back payroll. If you are a contractor, are you currently positioned to be able to sub-out a contract that would otherwise cause you to grow your permanent payroll unwisely?


*The businesses able to economize by downsizing into the direction of their primary – or core-business. For instance, if you are a real estate company or a builder, is it really in your best interest to also be conducting a property management business simultaneously? Or is that a distraction?


*The business – or government – able to downsize by cutting non-productive and non-core elements. The trap here is to attempt to save some elements due to either a collective “ego” factor, or Political Correctness.


The overall situation we find ourselves in today is that there is just too much of everything!


We have too many banks, too many choices of automobile, too many levels of government, too many material suppliers, too much unused existing office inventory, too many general contractors, too many subcontractors, and too many drywall hangers, etc.


This is a vertically consolidated problem that only a shakeout period can solve.


Federal government practice to “throw money” at these problems – your money – simply postpones what is a necessary and vital part of our business cycle, the failures of the weak.


In my example above, the consequence of “too many” means that material suppliers have to lower profit margin to win a job. It means that general contractors get fewer jobs each, and also have to lower margins to win one. It means that the subcontractors who bid against one another in a competitive process cut each other’s throats at low margin to put guys to work and win jobs.


Those subcontractors frantically bidding against each other to stay alive also force the margin of material suppliers down as a consequence of bidding hard; thus the cycle is negatively self-reinforcing.


The only answer is to allow the strong to thrive and the weak to go away in a natural process. In our example, those constructing with shoddy practices, or inferior speed or quality, will eventually go away. The construction market will eventually find its bottom.


The opportunity to retain a reasonable profit margin will return with the eventual stability.


Those not actively seeking better methods and availing themselves of creativity will be the losers. Is technology working for you, or are you working for it?


All of us must seek ways to do more with less, economize, and emphasize and develop “best practices” to a new level of competence.


Whether you are in government, the private sector, an individual or a corporation, this economic model applies to you.


It’s here now. Make the hard evaluations and adjustments fast, or risk “being the shakeout.”


Those making the cut will emerge from 2009 better than ever!


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