How to Grow Your Business in a Flat Market; Which Lead Indicator?
Mon, 10 December 2012
Over the last five years we have been suggesting various lead market indicators – currency exchange rates for example – at each stage of the economic cycle. During this long-term flat market, clients are once again asking us which lead indicator to watch. We are suggesting that a key indicator of inflation and growth is asset values.
Inflation or deflation?
Every major depression, going back to the 1700s, has been followed by deflation rather than inflation. However, this fact usually gets economists arguing. Some say we will see deflation again because it has always happened in the past. Others say that because deflation happened before doesn't mean it will happen again. Deflation is not written in the stars. Current inflation, as measured by common indices such as RPI and CPI, is occurring through rising prices.
But this is actually an artificial inflation. Why? Because these price rises are not measured against asset values; rather they are measured against consumables. If we look beyond these price rises, we can see an underlying asset deflation. Asset values in housing, several commodities and share prices are currently down. How about the price of money?
The simple answer is to look at interest rates. When you borrow from the bank, interest = the cost of
money – and this has certainly dropped. The longer we stay on the current flat trend line, which started in 1999, the more we will see downward pressure being put on asset values. With several asset classes going down, the result is an asset deflation cycle rather than an asset inflation cycle.
Mortgage your home – lose your job – what next?
Say Person A has an 80% mortgage on their home and depends on their salary to pay off the debt. Suppose they lost their job and finding another in the next couple of years is unlikely. Should they sell the house and down-size? Yes.
Person B is in a similar situation and plans on borrowing more money to renovate their house. What would you advise? ‘Think again!’
Governments around the world are ‘mortgaged’ up to the hilt by borrowing throughout the boom years. They continued to borrow right through the economic cycle and eventually ‘lost their jobs’ – the economy has fallen flat. Now they want to borrow even more money to stimulate the economy. Does this make them sound like Person B?
In trying to stimulate their economy, the Japanese government pushed Japan into a flat cycle, predicted to last another 20 years. The US government has also gone hard on economic stimulation, while the German government wants austerity measures to cut costs. Cost-cutting seems a better long-term strategy than trying to stimulate the economy – Person A rather than Person B.
Economic stimulation versus austerity measures
Although the UK government is also attempting to cut costs, it is still borrowing. In simple terms, rather like Person B. Ministers are taking a huge gamble on ‘getting another job’ and are betting the economy will turn around soon. Some economists say the policy will work, while others argue it will fail.
Different countries have different ratios, but the Western world’s economies are largely one-third government funded and two-thirds private sector. The US and UK governments are trying to stimulate the economy, while the private sector says, ‘We’re holding back and won’t invest yet.’
Clearly, the private sector’s two-thirds outweigh the government’s one-third.
Growing your business in a tough market
At Shirlaws, we keep an constant eye on the marketplace. We aren’t economists, nor are we forecasters. Instead we provide commentary on the marketplace and give our response to market activity. Our focus is on helping managers grow their businesses – whatever the market – rather than giving detailed economic analysis.
Our knowledge of the markets in which businesses operate gives us a unique understanding when we work with clients. It enables us to look both inside and outside a company. That is why we can advise clients on the best model – the business asset-based model – to create growth in the current flat market.