As bad as the news is, should we be optimistic about the future? Yes. When we read about massive job losses, and individual companies deciding to lay off thousands, should we be confident in the future? Yes. Why would I say such a thing? Four reasons:
1. Cut fast and cut deep. The worse thing any company can do in an economic downturn is ignore and put off what must be done. We should hope that the cuts announced are overly aggressive, and that they will not all be needed. We should want the biggest possible cuts to insure that they are not only realistic, but overly pessimistic. Trust me; the investment markets want realism and clarity. Honesty that sales will decline will be better received than false optimism in forecasts. By over-doing it, favorable comparisons of sales, and operations and profits will come sooner, thereafter leading to more employment, investment and growth.
2. Inventories are not a problem. This thing started in 2007. Even the automotive manufacturers were cutting production back then. The same is true of appliance manufacturers like Whirlpool. The truth is that inventories are not a problem, unlike past recessions. Yes, if demand falls to zero, then theoretically we have too much supply, but that is absurd. All industries are poised to ramp up production to meet increasing demand, and when they do, the profits will be real and significant. Employment, in turn will increase rapidly.
3. The cost of money is historically low. Companies will be able to invest and expand with an increasing margin. I would not be surprised if the US benefits disproportionately on both the domestic and the trade fronts. I believe that “outsourced” jobs in all sectors will come home in the next three years, and that simultaneously, our exports of all goods and services will rise. Yes, this poses significant problems for the rest of the world, but that is a subject for another entry.
4. Demand for goods & services are global and real. As odd as it sounds today, we will need to build more homes by 2012 to keep up with family formation in the United States. It seems unbelievable, but demand for all products in India and China exists; it has just been put off until we find a new equilibrium. Replacement alone for everything we have in our lives accounts for approximately 60% of our consumption today.
So be realistic, but do not panic. Be optimistic, because it will speed our recovery. Work hard and save, because this is the real lesson from the recession of 2007-2010…entitlement is dead.