By Brian McKay
Currently I am pegging the chances of a recession in the next 9 months at 65%. Probably the most important aspect to understand in my prediction is the cause that I feel is bringing it about.
Short-Termism. In the 50’ through the 80’s companies focused on long term goals and stakeholder theory that considered the needs of employees, shareholders and community in a more equal fashion. Starting in the 80’s we saw the erosion of labor movements and a move to focus more on the needs of shareholders and quarterly results. Now corporations judge themselves mostly on valuation and shareholder return. The goal is creating short term gains as executive compensation has been tied to such gains.
Here is the problem such thinking and its actions have created. Worker productivity has grown exponentially but wages have not, as companies seek to minimize the largest cost on their income statements; labor. Investment and spending has moved towards the creation of short term stock growth rather than the investments in people, equipment and facilities that create long term responsible growth. CEO’s are no longer unafraid to market such philosophies and have essentially become weak and over-paid for such weakness.
I like to often say that the system is slowly killing itself. Companies are creating the very downward spiral that will destroy them and their consumer base.
During the past 7 years of stock market growth disturbing trends have emerged that truly put this market out of touch with its own systematic destruction. I once thought that the $1.8 trillion held by companies would manifest itself as increased investment in people and capital expenditures. I was wrong.
The problem is that much of it has gone back to shareholders in the form of dividends and stock buy backs in order to increase the value of their shares. Wages have not seen anywhere near the growth that would be associated with a decrease in the unemployment numbers. Consumer spending that accounts for 70 percent of the economy has seen little growth as a result buying power has decreased and moved the consumer towards discount shopping.
A lack of spending on upgrades to facilities and equipment have failed to create the additional high paying jobs that would normally be associated with such spending. This facilitated the movement of the working class into lower paying service industry jobs.
Companies have stashed money overseas in massive amounts and have often actually borrowed funds to buy back their own stock as borrowing is less expensive than paying the income taxes of repatriating that money. The result is very high debt levels while profitability is up against the wall; a horrible mixture.
One of the most ironic things of short-termism thinking is that over time it actually reduces shareholder value. Companies that focus long term have been shown time and time again to produce better results for their shareholders along with greater loyalty and productivity from their employees.
With the Federal Reserve out of options and once again easy credit and short term thinking, a recession is probably coming. This time will there be an answer? I can’t say. The cycle of boom and bust keeps getting shorter and shorter and disparately hurting those that follow this website, something has to change.
We at Zenruption.com are committed to helping those of us that get victimized the most by modern finance navigate the system. As things materialize, we will provide information to move you forward through the coming economic cycle.
Brian McKay is co-founder and CEO of zenruption. His sole goal in life is to educate and empower the little guy. He learned the most in life by losing everything he had built during a financial melt-down caused by greedy bankers. Thank you bankers! Last year he watched every episode of My Little Pony with his daughter. Oddly, he is still single.