Slack In The Wrong Parts of the System




A week on the road dependent on airlines is a roller-coaster of interesting meetings interspersed with Monty Python slapstick.   My theme for the 7,500 miles on United was the malfunctioning flatscreen with the CEO announcing new planes with the latest technology.  The main moment of terror was when he explained in between the blur and screeches that the new planes would have more oxygen in flight – did that mean we were about to not get enough oxygen for four hours on this old flying wreck?

But no one will feel sorry for me in that after a long day of travel that began at 2:30 am I arrived in late afternoon on the wild coast of Bandon Dunes, Oregon.  Three days later I was back in Boulder for twelve hours before another morning flight this time to New York City. A whiplash from coast to coast and timezones where one general mood was universal – uncertainty, hesitancy, and incrementalism.

Any kind of shock creates an instant ripple in the economy.  Is the Euro up or down? Does a fire in a refinery in California or a hurricane in the Gulf cause a spike in a tight oil market?  Are stocks down from terrorism in Libya or up from QE3 regardless of economic opinion?

I have been working on Wall Street deals since 2000.  Some years I have worked on several and some years just one. But, I have never seen such a broad swath of that world refinancing, working on portfolios, and generally avoiding risk regardless of opportunity. The bankruptcy professionals remain busy, if not as busy as in the dark days of 2008-2010.

Economists talk about the elasticity of demand or the responsiveness of demand to price variations.  You can raise the price of some goods and not change customer demand or cause a huge change in demand depending on the goods in question. I have worked in a commodity business where a 10% price increase reduces your business by 30% and other businesses where a 25% increase in price has no effect on demand, in fact it went up.

It was a lot more fun in the later.

We are in a business environment where negative events have large negative effects on the economy and positive events are simply absorbed.  We are in a world of great elasticity for good news and no slack for bad news.

Employers are doing everything they can to avoid hiring.  This is a difficult factor to measure.  But, the phenomenon is recognizable to anyone who has run operations.  You are at 115% capacity on all your employees, paying overtime for that 15%, and you still will not hire because you are expecting business to stay flat or decline in the future. That is a far cry from a business that hires to lower the pressure on employees safe in the knowledge that customer demand will fill the new employee’s day with profitable work.

On Wall Street there is a focus on volatility.  Even companies loaded with cash are boring – not enough big mergers, acquisitions, ipos, or expansions.  This is a place that efficiently refinances anything, but lives for the big deal, and the outside fortunes they make possible.  But why take the risk, when no matter how well you do, you will not get a positive reaction in the market.  And worse, if you are even slightly overly optimistic, the market will overreact in the most punishing of ways.

When the economy is humming Wall Street and the free markets around the world absorb wars and disasters as part of growth.  I heard nothing last week on Wall St. or the wild coasts of Oregon and all the airport conversations in between but the opposite.  It is going to take a lot of innovation to breakout of this cycle.


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