The Edmond Sun

July 19, 2013

THE ASTUTE INVESTOR: Street-level economics show winter might turn to spring

By Nick Massey
Special to The Sun

EDMOND — I know a number of people who earn their living as economists and many who are economics professors in various universities. I always enjoy talking with them and having a little intellectual debate about theoretical versus real-life economics. I’ve often joked that I am a “street economist” and how I have to deal with all the information in real-life situations. The other joke is that in referencing my past appearances on CNBC, I might say I’m not a real economist but I played one on TV.

Over the years I’ve given a lot of speeches across the country and talked with many business owners. As much reading and research that I do, it’s also fascinating to learn what’s going on at the individual business level. The questions I ask of them help me further my own research and shed even more light on where we stand in our economy today. In doing so I get a sense of what people really want to know, which is “when will things turn around” or “when will things get back to how they used to be?”

Some businesses are seeing increased traffic and rising sales, but it’s not anywhere near what it used to be. As one business owner recently told me, “Business is good, there’s just not as much of it.” People want to know about interest rates, possible inflation and what is most likely to happen to their customer base. This is where I start asking questions of my own.

What terms are your banks offering for financing? Is your average sale still around 75 percent of what it used to be? Are terms from your suppliers still tight? Are your customers more interested in servicing old items rather than buying new ones? Are your clients fearful? The answers I get lead me to the same conclusions. But first a little background.

If you look at long-term economic cycles you will see that economies go through seasons similar to spring, summer, fall and winter and it happens during an almost 80-year cycle. And just as spring follows winter, winter follows fall. Actually, while some may not like winter, including me, winter is necessary because that is when nature rests, recovers, purges out the weak and gets ready to start new in the spring. This is where economist Joseph Schumpeter’s famous comment about creative destruction comes into play.  It is the time where weak or no longer relevant companies die or get acquired.  As much as central banks and governments would like to avoid it, you can’t have spring without a winter first.

From an economic cycle standpoint, I believe we are in the winter season and it’s not over yet. As I’ve said many times before, we are simply getting used to the new, lower level of activity. More importantly, many of the business people I talk to are, by virtue of the fact that they are still around, the shakeout winter season winners. They just don’t know it yet. They don’t feel like it, and they would never describe themselves that way, but the people I speak to are the ones who have been through the fire of the downturn and lived to fight another day. This is what surviving a shakeout, or winter season, looks like.

I recently spoke to a group I’ve seen several times over the years. As we talked, the questions revolved around how their businesses might grow in the years to come. At one point I said to a gentleman in the room, “Let me guess …  your business has rotated to more service than sales, as clients keep existing equipment longer, and you’ve rearranged your business to do more work with less people … is that accurate?” When he agreed, I said, “Welcome to the future.”

Shakeout winners are those businesses that have adapted to their new level of sales by adjusting what they make or provide so it is profitable today.  These companies are not holding out hope that the business model of yesterday will suddenly work again. They recognized the need to change or die.

As I talk with business owners, I’m always struck by the same theme.  They’ve been through the tough period where you have to fire good people; they’ve adjusted their sales by adjusting their head count; after firing the dead weight, then firing the marginally productive, they’ve fired good people who are competent and hard workers. There is nothing fun about it.

The good news is that this economic season, this cold economic winter, doesn’t last forever. I think we are six years into a 10- to 12-year stretch.  The companies that are winners, those that have remained flexible and adjusted their offerings to match their sales, are poised to grow dramatically in the next economic phase — the spring season. That’s where the survivors and the strong really take off and prosper. If you’re still standing today, you are likely one of them.

I look forward to giving more speeches in the years to come, and hearing from audiences about how their cautious ways in the downturn set them up for decades of prosperity as the economy turns back toward growth. Even better, I know I’ll have more examples to share with them about how people like you were able to survive and prosper during the tough years and came out wiser and richer at the end of it. Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at Securities offered through Securities Service Network Inc., member FINRA/SIPC.