This month, you will be getting two newsletters because I want to cover two related, and very important, topics. In this first part I discuss the boom and bust cycle.
Why? Well, I believe it’s essential that professionals and their clients recognise exactly where we are in that cycle and what or who creates such cycles, because having this knowledge in mind at all times makes for better, more timely, decisions and better professional support. In a few weeks time I’ll let you have a follow up on the related topic, written largely for you accountants!
Human nature and the boom and bust cycle
I’ve been asking myself three questions for some time now.
- Where exactly is the bottom of this downturn?
- How will we know for certain when we get there?
- Exactly what will the bottom look like?
Human nature is such that people often have to reach rock bottom before they approach me for advice – their delay in seeking professional support could reflect great tenacity or their sitting on their hands, waiting for things to happen, because their ignorance has given them an unreal sense of comfort! Many of you must see similar things from your clients: they’ll only call you when there’s a major problem. Over the years I have seen that people have an immense capacity to build, or indeed rebuild, if given the chance. First off though they need strong foundations on which to build: they need to know that things are not going to get any worse. You see, people can deal with facts, however unpleasant, much better than they can with uncertainty; people prefer optimism and hope over desperation and not knowing. Sure, recognition of the key facts, knowledge of all the options, and being given the time to take everything in helps: only if they have all these are they able to make the bold steps necessary to move things forward in a big way. For many in business that’s not possible at this moment, people don’t feel as if we or they have reached the bottom, the next crisis could be just around the corner.
Why do I raise these things at this time? It’s because I think the economy has reached a particularly difficult stage and something pretty spectacular needs to happen if we are to break out of what I think has now become a particularly pernicious loop.
This is how I see this, indeed any, boom and bust cycle.
There have always been periods of boom and bust because it is human nature and not the financial systems (however we try to structure them to somehow avoid these things) that bring them about. It’s peoples’ emotions and feelings that really matter: feelings and emotions amplify the economic trends, for good or bad, out of all proportion. At the moment a good many people here and abroad are feeling pretty bruised, they inhabit that space somewhere between uncertainty and panic. The inability to answer my three questions has trapped the world economy in a loop where frankly we trust no one and nothing: we certainly don’t yet feel as if we have reached the bottom. Powerless to move onwards and upwards we are stuck in what the economists would call a ‘feedback loop’ going from panic to uncertainty, and then back again! It’s a loop that, at least for the time being, seems unbreakable. Our politicians are both gutless and powerless, at a time when we need them to be brutally honest with us and regain control over and enforce major changes to all manner of systems. The failure of the USA and Europe to deal with the nub of their problems, the probability of a realignment (or a So wajor spat) between the major debtor and creditor nations, and the culture of ‘pretend, defer and hope’ by politicians and regulators, and the banks’ attitude that their innovative financial instruments are largely instruments of good, not bad, and all they need is support until things get better, does nothing to bring certainty to the situation.
So what does this all mean? Well, we are always somewhere in a boom or bust cycle: it’s just the ‘orbit’ of the cycle and the height of the highs and depth of the lows that are variable. Thinking the world is flat because it’s a big old circle, as Mr Brown did, does not mean it is! An appreciation that the cycle exists and exactly where we are in it at all times is a good starting point for business owners faced with making major decisions. What is also needed is a willingness to act in a different way to the rest of the herd. And that can be difficult for everyone, including senior management in big and small business, the banks and the government, because it can mean not taking the low hanging fruit in front of them or suffering even more pain in the short term. It means communicating a vision about the long term that others may or may not not buy into. It means persuading people to put to one side their short term aspirations in return for more tenuous, long term, plan. It means recognising there is a game of pass the parcel being played here and you having the courage to pass the parcel on at the right time.
I guess that you may be asking why I, as an insolvency practitioner, major in my newsletters on general economic conditions and management decisionmaking rather than technical developments in insolvency. Let me explain. I don’t provide a ‘school medical room sticking plaster solution’. When I am brought in to support someone, I choose to advise them in such a way as to secure their long term success: this means I have to consider more than just the short term pain, or gain. That way people don’t come back to me in a year or two when the sticking plaster solution of other advisors falls off. And I do that because being in business has, in my view, to be a long term game: it is pointless making big gains now if they, and more, are clawed back sometime later on.
A few questions for you. Do you actually know what strategy your clients are following? Do they recognise they are always in a cycle, it just depends whereabouts in the cycle we are and what their response is? Do they follow the herd or have the courage to do their own thing? Do they think and act differently from the rest? Do they wait and see before acting or anticipate and act without fear? If they have a strategy, is it of growth or survival? What is the cornerstone of their strategy – hope, realism or vision?
I don’t know about you but …..
I have really had enough of all this doom and gloom which seems to be permeating everything and is one of few constants in the media. So here are a few links to cheer you up. The credit crunch album! The bankers’ lament! Men of Harlech: the credit crunch bankers’ song! In Lonnie Donnegan style: My old man’s a banker! The Fidelity Fiduciary Bank song from Mary Poppins (just substitute investing in USA sub prime mortgages and dodgy country debt for railways through Africa, dams across the Nile, and self amortising canals! And for you accountants out there: 25 divided by 5 is 14! I have to apologise to all those reliable, trustworthy, reputable, reasonably paid, experienced, long term focussed bankers out there, I know you are not entirely to blame for this crisis, but I couldn’t resist poking fun at you bankers as a ‘profession’. You’re such an easy target, it would be rude not to take a shot, even though my profession, which deals in the fiction of mark to market accounting, are tainted by the same ‘we’re oh so clever myopia’.
And finally, on 11 May next year, Beacon Centre for the Blind is holding a fundraising dinner at the Copthorne, Merry Hill, with an Olympic theme. Guests include several household names, isuch as Roger Black. It promises to be a great night out, providing a good opportunity to support a local cause. In my next newsletter, I will include more details and links, in the meantime, put it in your diary.
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