See the Moment, Seize the Day (2/3)

The US economy is spiraling downward, and at its center is shriveled consumer demand, formerly driving 70% of America’s economy, now the starting point of the vicious cycle ravaging Corporate and Retail USA, and in turn, her economy.

Massive unemployment has set historical levels; December 2008’s 7.6% is a 16-year high and 2008 Economics Nobel Laureate Paul Krugman projects 10% by end-2009. 600,000 jobs were cut in January 2009 alone, totaling 3.7 million cuts since December 2007. At 7.6%, that’s about 8 in 100 workers, jobless; at 10%, one in ten.

After the Troubled Asset Relief Fund (TARP)’s $350 billion initial tranche failed to tangibly restore consumer lending and spending, more than ever, US banks refuse to lend, and people refuse to borrow, out of a primal fear of the unknown. Truly, now no one knows what will happen next.
This brought unprecedented belt–tightening (disposable income levels dropped 0.4% in November; 0.2% in December), sparking a unique deflationary spiral: despite retailers’ rock-bottom prices, consumers still won’t spend, but not in anticipation of lower prices (a classic deflationary environment): they simply cannot afford it, no matter how cheap. Consumer spending dropped 1% in December 2008, the latest in a six-month negative trend, despite retailers’ deep discounts to stimulate purchases.

This directly contributes to US company failures (experts predict 14,000 store closures in 2009 – unprecedented in US history), bringing even more layoffs. The spiral will continue and US GDP, already shrinking 3.8% in Q4 2008, is projected to shrink 5% in 2009.

TARP Too Tiny?
Obama’s $789 billion stimulus plan – aside from the $700 billion TARP - is again attempting to rehabilitate the wheezing Financial System, and reinstate consumer spending and lending. Inevitably that money will be used to dispose troubled banks’ toxic assets, a necessary, painful evil.
It seems TARP is being misused, spent by Citigroup, and Bank of America to attend conferences at Las Vegas’ $300-per-night Venetian hotel, and fund the bonuses of Goldman Sachs’ and Capital One Financial Corp. executives. Furthermore, continued layoffs and belt-tightening will fulfill predictions that credit card debt rising from the current $1 trillion, to above $2 trillion. Already Obama’s $789 billion seems inadequate.
Indeed. USA Today reported that total US debt is approximately $59.1 trillion, including “hidden” obligations (like Social Security and Medicare promises). To pay for that would mean the raising of taxes by $31,000 annually, for the next 75 years, in addition to every US household’s $112,043 average debt. It is prompting a call for a revision in federal accounting procedures approximating corporate standards, to eliminate “hidden debt.”

Applied Optimism
Our businessmen are more optimistic. Under PGMA’s watch, we saw 31 consecutive quarters of positive GDP growth and 2007’s 7.3% is a 31-year high. From 2001-2007 our economy grew 116% and per capita GDP grew 144%. Even the predicted sub-4% growth for 2009, amidst Global Economic Turmoil, is still higher than the GDP growth average before 2001. The result? 93% of Makati Business Club members expect the Financial Crisis to affect their businesses, but only 19% are planning layoffs.

Our Economist President exhibits the prudent budgetary foresight and planning of a mother and housewife, with the nation as her household. Her policies reflect the following entrepreneurial crisis fundamentals. Following them arms us to brave the Economic Storm, and capitalize on its opportunities.

Know your Cash Position Intimately

Cash is King. Liquidity will allow you to, internally, weather the bad times; externally, to exploit opportunities presented by those who suffered in the Crisis.
Precisely plot expected cash inflows and outflows, factoring-in reasonable, defensible adjustments according to economic indicators like exchange rates, oil prices, even interest rates, presented in weekly cash reports. This will indicate changes needed – like postponed spending, pooling of cash across business units, or cash optimization - to ensure liquidity in the short- and medium-term.

Optimize Cash

Entrepreneurial success requires positive cash flow. Shed debt and other liabilities. Consider converting debt to equity. All dress up the balance sheet that entices potential investors.

Liquidity is security. Consider options like loan restructuring, whose longer terms stretch and reduce net monthly payables (improving short and medium-term cash flows). Liquidate idle, non-performing assets and invest the money.
Consider low-cost Small and Medium Enterprise funding like USAID, and SBGFC (Small Business Guarantee and Finance Corporation), whose lending program offers 6.3-6.5% interest per annum for 360 days and below, and 7-7.2% for terms beyond 360 days. Last November 24, I mentioned how the Gulf Coordinating Council (GCC) countries are seeking viable investments into emerging markets for their Sovereign Wealth Funds (SWF). Finally, consider peer-to-peer lending: borrowers post loan requests on the Internet for review by potential lenders.

The next article will feature more fundamentals that will help us weather the Crisis’ short and medium-term effects.

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