Monthly Archives May 2019

Sub-Prime Economy

On the one hand, there have been only two recessions of any real lasting power over the past twenty years. The first was in the early days of the Reagan Administration, when aggressive budget cutting and revenue loss occasioned by the David Stockman “supply side” economic strategy took an enormous bite out of government spending power, forced massive public borrowing, and triggered a recession. The economy soon grew itself out of recession, either through growth or excessive government deficit spending, depending on one’s point of view.

In 1990, another recession ensued, partly as a belated result of the 1987 Stock Market crash. This downturn lasted about two or three years, and the economy expanded once again. After a lengthy period of prosperity, the Clinton Administration declared the business cycle dead, and boasted that the combination of fiscal and monetary policy had permanently rendered it obsolete.

The bursting of the dot-com bubble allegedly triggered a recession in 2001, but it was short-lived enough to be barely noticeable (except, of course, to those who had their entire net worth tied up in it), and was soon replaced by a real estate bubble. By the time the powers that be admitted that there had been a recession, they declared it over, in the same breath. Not even the horror of 9/11 was able to take the speculators off track. In the meantime, hedge funds (truly a misnomer for what, in essence, are private equity funds) were able to generate unprecedented liquidity by “monetizing” all sorts of collateralized obligations…from so-called “sub-prime” mortgages to more conventional asset based lending obligations. This, in truth, was nothing more or less than a replay of the leveraged buyout craze of the 1980’s, in which speculators and corporate raiders took out the value of companies today in the hope that tomorrow’s earnings would be sufficient to replace the withdrawal. And if not, well, that would be someone else’s problem.

The major difference this time around, of course, is that the vast pools of liquidity generated by this mechanism have (after, of course, making some people incredibly wealthy), been largely plowed back into businesses as extremely low cost loans, mezzanine financing and equity. Too much money chasing too few deals has led some of these funds (and, indeed, more traditional lenders, who have to put their shareholders’ investments to work), to put money into marginal businesses, or to finance questionable collateral. Thus far, it has paid off, with the seemingly endless sources of easy money available, and the economy’s enjoying a very long “sweet spot,” of profitability and resource to capital.

The problem will come in one of two ways: either the economy will heat up noticeably, raising the cost of funds to businesses in the form of higher interest rates or reluctance to fund marginal profits, or perhaps losses, or the economy will weaken noticeably, which, though resulting in lower cost of borrowing, will ironically result in tighter lending standards, and increased business failures. You see, profits are infinitely easier to generate if the cost of money is essentially taken out of the equation. In more traditional business environments, debt service is an important component of the profit and loss analysis.

This phenomenon is already beginning to manifest itself in the highly publicized “sub-prime” mortgage crisis. Secondary and tertiary lenders (and in some cases banks and funds lending under the radar screen through the vehicles of these lenders), have been extending mortgages to homeowners whose creditworthiness is suspect, betting on an endlessly rising real estate market, and continued historically low rates. This system worked just fine for a long time, as the position of these lenders was protected by their enhanced collateralization and the ability of borrowers to carry their overleveraged positions through availability of easy money. Now, with the national decline in home values, and upcoming ratcheting up of adjustable rate mortgages, many of these loans will go into default.

What makes this situation particularly dangerous is that the original lenders, for the most part, no longer hold the paper. These mortgages have been “monetized” and place in pools of securities, managed in bulk by faceless, nameless trustees. When the mortgages default, these trustees will be forced to foreclose and will, for the most part, have no discretion to “work out” the loans. This is a potential disaster waiting to happen, especially for the middle class.

The cheerleaders for the economy and the stock market, who contend that the “sub-prime” and home value problems are likely to be contained and not spill over into the economy at large are, I believe, missing a salient point. A full two thirds of the U.S. economy is driven by the only weapon left in our arsenal: our seemingly endless appetite for consumer goods. After all, we scarcely manufacture anything in this country anymore. Ours is almost entirely a service and consumer driven economy. Large numbers of homeowner foreclosures, caused by overleveraging (in many cases, by homeowners seeking to retire high rate credit card debt) cannot fail to have an effect on consumer spending.

In addition, our very weak dollar threatens to make us a secondary power even in consumption. For example, China’s consumption is growing exponentially, with a rapidly growing economy and the largest savings rate in the World (not to mention a billion potential consumers). Chinese holders of stock brokerage accounts have more than tripled in the last two years. And what will we have to export to these folks? Cars? We can’t even sell them here. Technology? Well, many of the intellectual property originates here, but the products are much more cheaply manufactured abroad, as is the service component. Have you called Microsoft tech service recently? Did you get connected to the Silicon Valley or Bombay/Mumbai?

The competition around the World for our historical economic pre-eminence is fierce. If our lead in manufacturing goes (and for the most part, it already has) and our position as the great bastion of international consumerism diminishes, we are threatened with becoming a second rate economic power. And all the easy money in the World will not save us from that.

The business cycle may, indeed, be a thing of the past, but not in the way it has been advertised. This time, we may not recover so easily from the downturn. That downturn may yet be a long time coming, what with the almost conspiratorial partnership of business, financial institutions, the markets and the government to inject oceans of liquidity into a system which depends upon all of our acquiring stuff and spending well beyond our means. But underlying all of that cash, we must have a solid profitable business base. Therein (and only therein) lies our only hope for future economic dominance.

Economy Power

The founders of EP took advantage of the final phase of the UK’s electricity industry deregulation in the late 1990s to set up a company specializing in the supply of electric power to small and medium enterprises (SMEs). Aiming at a well identified ($4 billion) niche in a large ($34 billion) total market, they chose their company name with good reason. They saw an opportunity to offer lower prices to a steady market segment, provided that they could run their new operation in a very lean and efficient way. The traditional Public Electricity Supply (PES) companies had a high-overhead infrastructure and still carried a heavy bureaucracy from their pre-deregulation days.

Economy Power had to be fleet of foot in all aspects of the business and most particularly in customer acquisition, billing and cash management. From its entry to market in July 2000, the company aimed at SME commercial customers who have higher energy consumption than domestic consumers, and who would be easier to transfer to a new supplier on the basis of price than larger corporates might be. While the PESs shaved their prices to the big boys, they paid little attention to cutting prices for SME energy buyers. Even so, to break into the market with an unknown brand, EP not only had to manifest its offer through the company name, but they also had to ensure that they could keep their own costs much more economic than the competition.

Lean Start, Lean Burn

For a company that had turnover at the time of its sale about five years later of about $150 million, it was started by its four founders with a tiny capital of a few hundred thousand dollars and a bank line of finance of under $100,000. From the time of the startup’s first business plan, it was intended to seek a realization or cash-out about five years later. This meant the business had to become profitable quickly as well as grow fast. One of the other entrants to the market, by comparison, was bankrolled to the tune of nearly $100 million, in sharp contrast to EP’s initial capital-a tenth of that sum.

Top managers Jeff Morgan (Chairman), Peter Darwell (CEO), Ronald Kirk (Deputy CEO) and Robin Fuller (CFO) sought additional funding, making several presentations of their business plan. One of these led to an offer to back the company with over $1million for a 49% stake (reducing to 30% if targets were met), but well into the due diligence process the backers got cold feet. Another investment offer collapsed, even after a positive due diligence process, on a change of policy at the funding firm.

In 2001, with a year’s delay, EP got private funding of about half a million dollars, but cash was still very tight, obliging the company to have very clear strategies to make the operation a success.

The first of three key pillars of strategy was to obtain a favorable contract with an electricity generator and fortunately, EP was able to negotiate excellent terms with the chosen generator. In addition and as part of the deal, the generator that worked with EP supplied a line of credit for several million dollars on favorable terms.

Buy-In the Best Services

The second pillar of strategy was to outsource the billing and registration process in exchange for a long-term contract. Hyder Business Services, a part of Hyder PLC, already a major player in the utilities business covering the whole of South Wales, supplied special customer registration and billing systems. It was vital for EP to prove to the electricity regulator that it could plug into the industry network to send and receive data-flows between all the companies in the industry-the Data Transfer Network (DTN).

Later, in 2002, the billing services business was purchased and became a key component of the company and one of its special strengths.

Sales Growth and Customer Retention

The third key pillar of strategy was to build sales through brokers working on commission only, albeit with generous bonuses based on “stock option equivalents.” Not only that, but what Robin Fuller called EP’s “dynamic cash flow” model was a vital component, because the company never had substantial cash reserves.

EP always waited until one of its in-house sales account managers was able to speak to a new customer to confirm essential contract details before shelling out commissions to brokers. Thus the company managed to avoid losses when customers defected. Indeed EP policy was for commissions to be “clawed back” where customers did terminate their contracts. Brokers had every reason to ensure contracts were correctly sold in the first place, and that customer satisfaction was the order of the day.

Sticking to its chosen market segment, EP only signed business with customers who purchased $1,000 or more of energy each year. Thus they avoided the bulk of potential loss from customer defection or business failure. By November 2003, EP had already gained a 4% share of UK SME electricity market share by volume (source: Datamonitor).

Cash Flow the Key

The cash flow horizon was never more than a few months, even by the time the company had thousands of customers. Robin Fuller comments in an understatement, “It was interesting to see how our sales receipts balanced up to our outgoings. Sometimes it was nerve-wracking!” The cash constraint meant that growth was not as fast as desired. However, if EP had gone for growth in a gung-ho fashion, management might have not have considered strategic and tactical decisions quite so carefully.

They had to pay very close attention to the quality of new contracts and recovering cash from debtors. Since they worked with commercial, rather than domestic customers, no supply started before the customer’s status was checked, payment was up-to-date with previous suppliers, and signed electronic (direct debit) payment forms had been received. Too many defaulters in the early life of the company would have stopped EP in its tracks.

It’s interesting to note that several much better-funded rivals went bust or were taken over in fire sales. The company always traded up to its near-term cash flow resources.

By the time of the sale of EP in June 2005, only about four years from active startup, the company had added some 40,000 contracts, which demonstrates how the focus on sales and cash flow management can produce spectacular results.

Highly Motivated, but No Excess Staff

At the time of the company’s sale to a major generating company, when it had sales of about $150 million, there was still a staff of only 250 people (even though some direct competitors had relatively fewer people, but with even more contracting out). However, the company did not include a payroll of large numbers of middle managers, unlike their bigger rivals. On the other hand, everyone in the company either had stock options or received a share of the eventual sale proceeds.

This was an unusual practice for a supply company, but it built loyalty and interest in the company’s success. Outside of the Board, there were no highly paid ex-industry managers, and nearly all the middle managers were young and had been employed for their wits and potential, rather than track record. In addition, there were bonuses paid for on-target cash collection performance. This emphasized the company’s determination to manage cash very tightly. One of EP’s direct competitors had payroll costs one-and-a-half times higher.

Realization was the Intention from the Start

The company’s founders had set themselves a goal to achieve EP’s sale or float within three to five years. The directors considered two realization options. The first was an IPO on London Stock Exchange’s AIM (Alternative Investment Market) or a full LSE float. The second was a trade sale to a quoted company or a piecemeal sale.

The IPO route was a costly and time-consuming option. It became clear that a trade sale was the way to go and it could have been either to one of the big existing players in the UK energy market or to a US company looking to gain a foothold in the deregulated UK market. The US companies might have been possible buyers of EP, but the timing was not auspicious.

A rival supply company had been bought by Centrica, a leading quoted energy supplier, in a deal that took only a few months to conclude and this helped EP to opt for such a route themselves. As a supply company with no generating capacity, EP would always be exposed to wholesale energy price movements. The big boys had both generation and supply, and thus were in a better position to manage prices.

Powergen, the country’s largest integrated energy business and part of the German multinational, E.ON Group, purchased Economy Power in June 2005, reportedly for $50 million. Thus the realization objective of EP’s business plan was achieved. The actual price of the deal was not officially disclosed, but the directors have now moved on to start new businesses using the experience and capital gained in the creation and building of Economy Power. Being the business name is clearly a formula that works.

Lessons Learned and Applied Fast

Not only did EP have a fast growth, but during its short independent life the experience gained by the entrepreneurial team enabled the founding a family of firms using the lessons that running EP had taught.

Three new firms were founded as subsidiaries of EP before the company was sold, but did not form part of the sale, since they were outside the interest areas of the buyer. The three EP ‘children’ are ECO2 Limited (renewable energy generation), Economy Calls Limited (telephone services) and Economy HR Limited (human resources consulting).

ECO2 was created initially to provide EP with sufficient renewable energy to meet its obligations under the UK Government’s Renewables Obligation that required licensed electricity suppliers to source a specific and annually increasing percentage of the electricity they supply from renewable sources. It rises from 5.5% in 2005/06 to 15.4% by 2015/16. Apart from the obligation itself, the Government estimated that the initiative would provide support to industry of ¬£1 billion a year by 2010.* This was clearly an opportunity not to be missed.

Jumping at the Opportunity

The Directors of the Economy business decided to go well beyond their legal obligation to produce 20 MWs and go for 100MWs of energy. Now independent of Economy Power, ECO2 Limited is run by the old shareholders of EP (70%) and three industry-experienced managers who hold the remaining 30% of the company. ECO2 now (in 2006) runs four landfill gas sites producing 6.2 MWs and is actively pursuing ten windfarm sites throughout the UK. Four of these are currently the subject of detailed planning applications.

In the style of the EP realization, two projects have already been sold on to new owners for further development. The first is a 10.5 MW windfarm in the Grampian Region of Scotland and the second is a biomass plant in Port Talbot in South Wales that will produce 14 MWs from incinerating wood when completed in 2008.

Younger Economy Family Members Try Out Their ‘Wings’

Economy Calls, the telephone services company that sells calls and line rental contracts to SMEs looks most like its parent. This ‘child’ of EP has similar characteristics, particularly in its way of acquiring and registering customers through commission-only brokers. It also uses the same kind of customer service structure, billing and credit control. Not surprisingly and even though the company is in its infancy, Robin Fuller’s “dynamic cash flow” model is fully operational in this new startup.

Economy HR is even more of a youngster at the time of writing. With just five full-time staff, the human resources consulting business was started as a pilot project in EP and launched operationally in early 2006. The product is the sale of consultancy to British SMEs-the market the company knows well-to help them meet the ever-increasing burden of legislation relating to personnel, health & safety as well as grievance and tribunal procedures. The HR outsourcing marketplace is experiencing rapid growth potential for cost savings to be delivered by investment in external HR transactions and processes. Currently the most popular functions outsourced are training, IT and payroll, but opportunities to apply the ‘Economy’ way of doing business are offering a new challenge to the ‘Economy’ entrepreneurs.

Investing in a Global Economy

In the past many people contributed to a 401K or invested in company stock not knowing what risk was involved. Most people would expect a 6-8% return on their investments and not think twice about where there funds were allocated or how to diversify their portfolio. The stock market crash of 2008 began to change the way most investors handled their finances. Many investors saw a 0% return on their investments from 2000-2010. This fact has many people interested to learn more about finances and how to properly invest in a dynamic, ever-changing, global marketplace.

The first step investors should take is to learn what strategy fits their long term goals. When initial research is begun on how to invest, one will find that many different strategies exist and some often contradict the other. The key is to know what risk levels you are comfortable with and the ultimate goal of your investing strategy. Some novices are very timid to invest now that most economies are interlinked, but one must also realize that there is a lot opportunity to be had as well.

On our MBA International trip to Austria and Germany we had the pleasure to visit Garmisch, Germany and attend a banking seminar with Mr. Leonhard Guntz. Mr. Guntz is Director and Head of Trade Finance Advisory of HypoVereinsBank, based in Nuremberg, and has almost 30 years of progressively responsible experience in international banking. Mr. Guntz helped us to understand how different economies are interlinked and how some have to rely on each other to function. This seminar broadened our exposure to the global economy and allowed us to take in new ideas in how to invest in emerging markets.

Once you begin to formulate what risk you are comfortable with and also your long term goals for investing, the next step is to identify a strategy that fits your needs. Here are some of the basic popular strategies some investors follow today. The majority of this list comes from the Motley Fool financial website. The Motley Fool is a financial investing website dedicated to helping all investors at every level.

  • Large-Cap Investors seek the stability of established companies with proven track records. Stocks like Wal-Mart and Microsoft have some of their boom and fast growth years behind them, but shareholders don’t have to worry about them going out of business anytime soon.
  • Value Investors look for stocks that trade at attractive prices. Like a Christmas shopper waking up at 4 a.m. on the day after Thanksgiving, value investors hope to snag bargains by buying out of favor stocks. While some beaten-down companies never recover, others, such as FairFax Financial, provide standout returns when they come back.
  • Growth Investors focus more on companies with strong prospects for the future. Although they prefer not to pay too much, growth investors are willing to pay up for the most promising businesses. Google is a good example, with more than 75% annual earnings in the past five years.
  • Dividend Investors value stocks that pay them back with generous income streams. Dividend-paying stocks like Duke Energy, with its 4.8% yield, won’t always show big price jumps. However, over time dividend investors hope to outpace their counterparts.
  • Small-cap Investors look beyond the security of blue-chip stocks to find undiscovered companies, such as specialty chemical-maker Innophos, that have the potential to become household names tomorrow. While this strategy is riskier, small-cap investors rely on good speculation and expect profits from their successes to outweigh the losses from failures.
  • International Investors recognize that great companies exist throughout the world. Most everyone in the United States has heard of Google, but a lot of people have not heard about Baidu, which is the Chinese search engine similar to Google which has had enormous growth in China over the last year (MotleyFool.com).

After reading through some of the different investor types one should be able to start to relate to what strategy should fit him or her best. If you are wary of risk and plan to retire soon, than you may find that dividend or large-cap stocks would fit more of your appetite. Generally, most investors feel the younger you are, the more risk you can afford to take. So those in their 20’s or 30’s may feel more inclined to look for growth stocks or small-cap stocks for their long term investing strategy.

As one begins to trade and understand more, then they may be able to see how different markets or stocks function. Once you are at this level than you can start to look at emerging markets and international investing. This is usually a little more challenging because there can be different disclosure rules and cultural differences that one may not be aware of. This was also mentioned by Mr. Guntz in his banking seminar. The more you begin to understand other cultures and economies, the more different happenings in the world will begin to make sense. He encouraged all of us to continue to travel and learn as much as we can about other cultures and economies to become more aware on a global level.

A prime example of how international knowledge can help an investor is in the stock mentioned above, Baidu. Baidu is the Chinese search engine very similar to Google. If one knew some facts about China then they would know that China’s population is around 1.5 billion people. The US consists of only about 300 million people. Another important factor is that the government in China is communist. This means they can control to some extent what their citizens have access to. Therefore, if they chose not to let Google have access to their citizens and keep only Baidu as their internet search engine, one would have to conclude that Baidu should get significant growth and business here. This scenario would be just the tip of the iceberg on how to start researching an international stock.

Investment expert John W. Rogers, Jr, notes that it is of critical importance that investors at all levels get comfortable with the jargon of investing and the stock market. He goes on to say that short-term volatility can scare even the most sophisticated investor out of the markets, but the successful investor is one who can think long-term, because the stock market can go up and down. The main focus right now in terms of the 401K is that you’ve got to have a diversified portfolio; people who got burned were people who had too much of their money either in the company stock, one large growth fund option, or whatever the hottest fund was in that period of time instead of having a diversified portfolio (Rogers). Therefore, we can see that every investor needs to have a little bit of investing knowledge to navigate the waters of their financial future.

Many other complex strategies exist in investing today. For many financial analysts, macroeconomic indicators are used to judge where a stock, exchange or countries economy may go. Macroeconomic indicators are treated as statistical indicators which are used for assessment of the general state of the country’s economy during a certain period of time (Pilinkus). If you listen to CNBC or Bloomberg radio you may often hear some of the macroeconomics indicators mentioned to clue investors on an idea of how a market will turn. Some examples of macroeconomic indicators are gross domestic product, unemployment, interest rates, company inventory, home sales, etc. Depending on what industry your stock is located in you can often use macroeconomic indicators to judge the potential of a stock during a given time period.

As you begin to do research into stock trading and investing you may find information on the internet that relays the concept that a market is predictable and can be consistently beat. After a lot of research I found this to not be true. Nothing is certain and anything is possible is a strategy I have adopted in life as well as investing. If you look into the percentage of hedge fund managers that have consistently beaten the market you will find it is very low. However, most financial experts note that if you have a good sense of the market, learn to read indicators well and choose well run companies poised for growth you can do better than most. In the end you still have to continue doing research because variables in the market can change at anytime.

Investing today also has many more advantages than it had in the past. With the advance of technology and the internet, individual investors can research company statistics as well as macroeconomic indicators on their own. In the past, most of those who had access to company/financial figures were in financial occupations. Most analysts predict that with globalization the stock market will continue to be volatile. If you are cognizant of the events happening all around you and the globe than this can be used as a strategy in investing.

Janice Revell goes into great detail on different investment strategies in her article, “Navigating a High-Wire Market.” Janice feels that is always good to mix some of your stock bets globally. She urges that one has to be very educated on the stock and country similar to the lesson we received from Mr. Guntz in Germany. Janice goes on to note with most of Europe apparently falling apart at the seams and even economic powerhouses like China slowing down, there is still a lot of opportunity internationally for emerging markets.

Many emerging markets offer opportunities that you cannot get in the US anymore. China’s economy despite the slowdown, is still expected to expand 10% this year (Revell). When investors mention the term BRIC they are referring to investing in international emerging markets. This is an acronym for some of the top countries that are continuing to develop quickly. It stands for Brazil, Russia, India and China. Investors still have different opinions on which countries have more opportunity than others, but BRIC is still widely used to refer to international investing.

Mr. Guntz also made note of how China is working with Africa to continue to develop parts of this nation. Africa is also rich with a lot of the earth’s minerals. However, researching this further I found that an experienced investor such as Mr. Guntz who travels to a lot of these locations frequently may be better aligned to take advantage of some of those investing opportunities than an average investor who has not visited these locations. In hearing Mr. Guntz speak about some of these emerging markets it did begin to get my mind spinning about opportunities for investment.

The Motley Fool notes in an article that if you believe emerging markets will remain commodity-based oligarchies, then that may limit the amount of international investing you may want to do. However, if you believe emerging markets are entering a new era of rising consumer spending power, infrastructure development, and more diverse, sustainable development, then there are many profitable ways to invest (MotleyFool.com). After traveling abroad in college and graduate school I tend to believe in the second notion. I just look at what America has accomplished in the last 200 years.

I believe it is wise to start investing globally because many people have a fear of the unknown. As we learned on our international trip, the more you travel and become aware of different cultures and trends the more you are able to process the effects it has on different societies. Having knowledge of an emerging or international economy can become much less of a risky stock investment. You can hypothetically be deductively reasoning some of the risk out from your knowledge base of the culture or country.

Megan McArdle talks about different strategies in investing in her article “The Great Stock Myth.” What she concludes after researching many different theories is that once everyone believes that the stock market or a stock offers high returns for relatively little risk, that notion stops being true. She goes on to say that financial markets have an interesting feature that has undone many a trading strategy. That is once everyone starts believing something, it often stops being true. If you discover an arbitrage opportunity-otherwise known as a “price anomaly” or “free money” it will be profitable only as long as few people knew about it. Once it is widely known, bidders will rush into the market until the discrepancy is traded away. After that happens, future returns will be lower (McArdle).

After learning how to navigate markets and discovering what investment strategy is right for you, then it is on to the last step before jumping in, which is timing. If you find a great stock, but jump in at the peak of the market you could find yourself starting off with a loss to come back from in the first couple months. The more time you have, the less you have to worry about the price you purchase the stock. If you feel the company is going to grow a lot over the next 10 to 20 years then your timing may not be as important. If you plan to swing trade a stock every several weeks, months or even years then you definitely have to take note of a good time to purchase the stock.

The last topic to review is when to sell your stocks. Many mutual fund investors are quick to withdraw their cash when returns turn south. However, several academic studies have proven that investors who jump from one fund to the next, chasing performance, tend to do vastly worse than those who stay put. If you have done your homework and look for a quality company in the appropriate emerging markets than you should be prepared to stick with a fund through good times and bad as a whole. Two major signs to sell a stock and not hold for the long term would be that the business’s fundamentals have changed or the stock has become highly overvalued (MotleyFool.com).

Some analysts get very in depth with all the topics I have mentioned above and books have been written for each specific topic. The whole idea with stock timing is to know how long you have until you will really need the money. Furthermore, you want to have an idea of how much time you are willing to spend researching investment opportunities. The market is volatile and will always change. You cannot fill your portfolio with a couple international companies from around the globe and expect to sell them in 20 years for a substantial profit. While that is the idea behind investing, you still need to follow the businesses and understand what is happening in the macroeconomic environment.

Mr. Guntz relayed the idea of researching and exploring many different cultures and places to truly get an understanding of how they function with other economies. The more you experience and travel the easier it will become for you to invest globally. Investing is a long journey similar to life. Both worlds are constantly changing and the more you learn along your journey, the easier it will become down the road. Investing in a global economy can be scary to those that do not have the knowledge to go with it. It is similar to those people that fear others because they do not try to understand them. Saint Augustine provides a quality quote that can encompass our MBA international experience as well as investing in a global economy. He notes that, “the world is a book, and those who do not travel, read only a page.”

Ignore Economic Woes in Personal Finance

Are you planning your financial decisions based on where you think the economy is headed? Maybe even saving more money, reducing your risk exposure, or avoiding investment opportunities in the hopes of weathering financial crisis? Maybe you feel things are improving economically, and financial rebound is just over the horizon, and so are adjusting your financial decisions accordingly. If either of these are the case, your focus is misplaced and I will outline why.

Your personal financial decisions need to be founded upon solid principles that do not need adjustment based on the financial winds of the economy. Your focus should be on sound, financial common sense, that is unaffected by whether the economy is growing or contracting, principles that are as poignant in a stagnant economy as a booming one. If your personal fiancé focus is on anything beyond spending less than you earn, reducing your expenses and pursuing opportunities you are needlessly overreaching and overcomplicating the issue.

If your personal financial makeup needs adjusting like the sails of a ship to catch the fluctuations of economy there your foundation is shaky. Up or down, maintaining a focus on creating value and service for those you interact with, in good times or bad need not vary. A focus on reducing expenses while maintaining and increasing value to those you service in business, and for services you contract, need never fluctuate to the tune of the economy. A focus on maintaining your personal profitability at all times, by spending less than you earn each month remains unchanged in good times or bad.

It may sound oversimplified to some, but these are the financial secrets of success and wealth building. Keeping it simple, and yet effective, keeps your eyes open and available to see opportunities when they present themselves. The savvy personal finance manager is simply prepared to seize opportunities as they present themselves.

Following the moody swings of the overarching economy serves no purpose but to provide excuses for poor performance during tough times. Sure, times can be tough, but these are also times of incredible opportunity to those who are looking to capitalize and create abundance rather than spread blame and wait out the downswing of the economy. Preparedness is all in personal finance and in business, and keeping things simple will free your resources to seize on the opportunities for money creation that abound around us.

Manufacturing vs Service

Perhaps paradoxically it is the recession (and its end) that created the climate for such positive figures – the weak pound and moves to restock as global demand returns – rather than any sort of added robustness of the manufacturing sector itself.

The reality is that service and industrial economies both contracted during the past two years. As global and domestic demand fell, the major manufacturing countries were hit hard (Japan down 8.6% and Taiwan down 14.5%). While closer to home, a comparison between the service-based UK (down 6%) and Germany’s industrial economy (down 6.7%) reveals a broadly similar contraction rate.

What’s differentiated recovery rates to date is not so much whether an economy is manufacturing or service-based, but rather individual country responses to the downturn. In Germany, for example, the creation of a ‘bad bank’ would effectively ring fence bad assets for a long term management approach, enabling credit markets to operate.

In the UK the dominance of the finance sector resulted in a longer, but some people would argue shallower, downturn. However, the continuing dysfunction within the banking sector has restricted the access to credit – resulting in high levels of default and failure across business sectors. As a result, construction has been one of the hardest hit industries in the UK, down 14.1% at the peak of the recession, while manufacturing (down 13.8%) and utilities (down 13.2%) have similarly suffered.

In reality, while service and production-based economies do exhibit a very particular set of characteristics, it is way too simplistic to claim that these have resulted in one country emerging from recession before another has. To do so with any degree of certainty, one must take a broad approach and analyse the host of socio, political, economic and fiscal factors at play to achieve a true picture.