Economic Fears - June 2008

Feeling a little uneasy? How about a lot uneasy? Yeah, me too. Have you tried to get a loan from a bank lately? They’re running scared. Banks will not lend to one another even overnight because they’re afraid they won’t get paid back. This seems crazy to me but that is what’s going on.

So why are we, and the whole economy, affected by big financial institutions making bad mortgage loans? Because the global financial system is based on trust, and these guys did something dishonest, selling bad credit as good, and that makes the world financial system stop. Nobody can trust another. Fear becomes a stronger emotion than greed. According to a survey of banks done by the Federal Reserve, 75% to 85% of bankers expect that in the coming year, the quality of their loan portfolios will deteriorate. That is, borrowers will get weaker and have a hard time paying back their loans. In anticipation of this, banks are making it harder to borrow money and charging higher spreads over their cost of funds.

Sound like a kind of self-enforcing spiral? Additionally, by raising prices for credit, they hope to recoup some of the massive losses incurred from their shady behavior. So if you find the interest rate on your credit card just went up or the bank has told you that at renewal time rates will go up, you can feel better knowing that you’re paying for their mistakes. Construction is in the sewer. Projects are being completed with no plan for additional projects. It’s almost certain that millions of people will lose their jobs, especially those in the building trades. What will landscape people who have depended on new construction do?

There are not many good choices for that segment of the working population. Our only option is to get yet more efficient and productive. We have no choice. Consumers are paying much more for basic necessities than even one year ago. Food and gas prices are way up. People are not earning more, though, so a larger portion of their income goes towards these basics. We, in our industry, produce non-essential luxury goods. In order to compete with all of the other non-essential products being offered, we have to increasingly deliver more value.

If you feel like you’ve already done all you can in this area, I suggest having someone from outside the business take a look around. Fresh eyes always have an easier time finding opportunities for improvement. Every little thing you can do to add value and trim costs will be of great benefit when this market turns around. The good news is that this situation is temporary. Markets always overreact because they are governed by human emotion. How long it will take to correct is anybody’s guess. Right now, fear is stronger than greed … but just wait a while and greed will come roaring back, strong as ever. So what to do? This is not my first time down this path. I think the right thing to do is be brave and thoughtful. Do not fall prey to fear but be mindful that others around you will. This is a time to be fact-based and to try hard to suspend emotion. Your sales are what they are, and your overhead must not exceed sales.

Overheads must be adjusted to match income through whatever means necessary. If you do not currently produce a forward-looking budget that you can compare against the present, it is time to start. More good news is that people who have money still have money and they are the great majority of our market. But their expectations for value go up when they, too, feel the cold grip of financial fear. Luckily, our products make people feel good. We need to remind them what great pleasure they get from this inexpensive indulgence.

A little point of purchase could go a long way—imagination and innovation are your lowcost friends in these choppy markets. Humans are so creative, especially when we need to be. People love our products when produced and marketed well. In the past, we’ve had the luxury of not worrying about our creative marketing. Maybe the market will push us all to improve on this front—and that, there, is the silver lining.