By Brian Mitchell, Managing Partner & CEO.
I just returned from a few days in the sun attending IAB ALM. A few takeaways: Marco Island Florida is a lot of fun, will definitely be back recreationally! It was awesome seeing lots of industry friends and meeting new ones as well. It was incredibly interesting hearing about innovative technologies and models disrupting for the better. And in general, it provided an overwhelmingly positive outlook on the mid/long term economy in both the digital tech sector as well as macro industrial complex. Nobody has their head in the sand that we aren’t now experiencing some financial stress in some companies (or soon will be) and/or in some individual households for that matter. Uncertainty drives stress, it’s just part of the deal. Those stresses can heighten focus on what can be influenced or, for some, it can heighten worry on what cannot be influenced whatsoever and is inherently unhelpful. The reality is nobody can individually drive macro concerns to a remedy so we need to focus on what we can actually control. I wrote a little about this in October and I think it remains important to strip out what is merely worrisome and instead ensure our individual focus centers upon only what is actionable.
It is what it is. When quarterly metrics come up short, boards and shareholders aren’t pleased, but payrolls remain due (as do grocery needs, monthly mortgages, and kids’ private school tuitions, and more). Belts tighten. Sacrifices sometimes need to be made. Casualties do happen. And although I hate to say it, I believe many companies eliminate positions to reduce salaries/benefits/opex opportunistically. I know it sounds awful, but it’s almost trendy to trim the fat. Jack Welch had some polarizing philosophies around this topic, but there is little argument some of his strategies were brilliant for company profits even if painful for some individuals. His rule of “cut the bottom 10%” had little regard for external factors, it was just his method for topgrading in perpetuity. Similarly, many private equity firms run their playbook without deviation once they take controlling interest in a new investment. PEs institute their systems and metrics to measure their definition of success, and they implement these across their entire portfolio. With little nuance and variance, these “standards of performance” are instituted across dozens to hundreds of companies in several different sectors. Even with the diversity of the portfolio entities, their systems, methods, and metrics are consistent with their overall investment thesis which produced this formula for success, and they don’t really care if the existing team does or doesn’t like the changes. Part of their playbook is eliminating redundancies in every department, implementing automation and innovations which sometimes eliminate the necessity for certain human functions, and identifying people or teams that are simply bloated, unproductive, or unnecessary altogether. I know I know, it sounds kinda mercenary, but it happens. And in macro over time, it typically works and the data supports it, which is why they don’t deviate from those proven “standards of performance”, AKA their playbook. Now lots of companies in general are mindful to preserve cash and be more conservative with investments that may not yield near/mid-term returns to the business. This impacts hiring in both tactical and strategic roles, up and down the organization.
So, are there silver linings to this downturn or recession that seems to be pending if not imminent?
First of all, market fundamentals are still pretty solid. No global pandemic or at least not one where everyone halts where they’re doing and business screeches along with it. We have had some soaring home prices in the last few years and whereas it seems in most markets the housing market has flattened, it hasn’t receded. The stock market has been on a long bull run and corrections are part of the cycle – we are simply due. We’ve also ingested 4 trillion bucks in the U.S. economy with stimulus/PPP over the past 3 years straight into the consumer’s hands (that was nice, wasn’t it!?!?!?) and that bloat is being paid for somewhat now. Supply chain issues have largely been resolved in many sectors so production challenges and timelines have been significantly reduced. The war in the Ukraine remains unresolved and there are constant threats of war or terrorist disasters, however it’s not so catastrophic as to undermine most of the global economies (knock on wood). This isn’t 2020 or 2009. I don’t work for the World Bank, I am not an economist or financial advisor, however I’m a businessperson who reads and has been around these cycles for nearly 3 decades (yes, I’m old….rats).
Other potential positives? The market just flat out needs a reset back to balance that will stabilize forward growth opportunities. Higher interest rates actually benefit savers with a greater yield in CD’s or money markets. Investors can sometimes find bargains in undervalued assets as certain company valuations decrease and/or in identifying low-cost dividends in the stock market. The Fed tends to lower interest rates again at later stages of a recession to stimulate a recovery which could be a good opportunity for home buyers. Bottomline is that recessions are natural, unavoidable, and cause challenging circumstances for companies, investors, and individual consumers and it’s difficult if not impossible to time the low point of a down economy, but the long view remains bullish.
This, of course, is all simply one man’s perspective, but I have confidence around the next corner or two. My next blog will be resolving peace in the Middle East!