Are We Too Fearful of Recessions?

Recessions are painful for bosses, shareholders, employees and their families. Resilience is required and often difficult decisions must be made. All are familiar with the negative aspects of an economic downturn but the benefits are rarely heralded in the media headlines; the bad news is so much better for clicks and viewers.

This has probably resulted in an outsized fear of recessions and an unhelpful recent phenomenon of political pressure on central banks to come to the rescue. In this instance, the wannabe Orange Emperor of Greenland cannot be solely blamed. The political nannying of the business cycle is a global exercise.

We are currently witnessing a monetary experiment without precedent as $17 trillion worth of bonds carry negative yields thanks to central bank intervention; in practical terms, borrowers are being paid to borrow thus making the cost of capital free.

The prompt for this intervention has been increasing evidence of the global economy approaching a stall speed and in the case of global manufacturing probably contraction.

On the face of it, monetary intervention to stave off recession sounds like a good thing but the longer-term effects on economic behaviours and corporate resilience are arguably quite dangerous.

To use a parenting analogy, we are seeing the emergence of “helicopter parenting” which has been correctly criticized as ultimately unhelpful to the healthy development of children. An unnatural desire by parents to interfere and protect children from any stressful experiences, even low-risk danger, can lead to unintended consequences.

Adults helicoptered through childhood are behaviourally unprepared for the normal stresses and pressures of the real adult world and end up with limited coping strategies and resilience to deal with sudden challenges.

It could be an unhappy coincidence that Ben Bernanke, the former Chair of the Federal Reserve, way back in 2002 referred to “helicopter money” as the ultimate weapon to defeat a severe recession.

The phrase ‘helicopter money’ was used to describe the blunt instrument of printing money in huge amounts to defeat deflation. Well, it could be argued that $17 trillion of free loans (bonds) is getting very close to a helicopter moment. And the longer-term implications are not good.

If capital is almost free and yields (interest rates on deposits) are too low, it forces investment capital to chase higher riskier yields elsewhere. At one point in July, Greek bonds traded with lower yields than US Treasuries! Who would have predicted that in 2012 when Greek bonds were yielding 35%?

When money is almost free, painful economic history tells us capital will be poorly invested and permanently destroyed.

A previous article on the WeWork IPO highlights the degree to which investors will ignore red flags and chase the short term opportunity of a “hot IPO”.

We are now into our tenth year of economic growth compared to average expansion periods of circa three and a half years. This extended period of growth and cheap capital covers up a lot of weaknesses in the corporate world. Bluntly, there are too many zombie companies staying afloat and destroying capital year after year.

Europe and China are probably the biggest culprits.

The large loss of jobs in a normal business cycle, of course, is bad news for employees but ultimately those jobs will be lost as the company shrinks to survive and then finally fail. Politicians, as usual, will lobby governments with emotional statements and sudden expertise on business restructuring and global markets.

Sadly, the only thing politicians can be relied upon for expertise is election cycles and polling data.

Think back to 1984 and the huge pressures to keep the Ford plant with 800 jobs open in Cork.

A little company called Apple had opened a plant a few years earlier but one wonders would it have received the government attention it subsequently received if the Ford plant continued to dominate government policy? Maybe ask the 5,500 Apple employees in Cork today who are probably quite happy that Ford did pull out in 1984.

It is a fact that some of the best companies in the world started in recessionary periods.

The robust business models and culture of resilience required in challenging times are hugely important building blocks for super-successful companies. Think Microsoft, Electronic Arts, Burger King and FedEx.

Apart from building robust business models, startups in a downturn can benefit from lower costs of professional services, leases, machinery, plants and technology.

And perhaps the biggest challenge of all right now is talent.

In a cooler economic climate, there are opportunities to hire top quality recruits at sensible remuneration rates.

It also forces talented individuals to reassess their long term career plans and perhaps consider a move away from sectors which are structurally challenged and unlikely to survive the next downturn.

The CEO of the government funding agency (NTMA), Conor O’Kelly recently said he was 100% sure there will be a recession. He cleverly refused to put a timeline on that prediction.

For business owners and employees, it might be worth considering whether you have the resilience for a downturn.

If you are unsure about the answer it is possible you could become a longer-term victim of helicopter monetary parenting.

For those that feel they can meet the challenge of a recession – get ready to take the necessary pain and the opportunities.

Oh, and the average length of a recessionary period is around 18 months or just over 500 days.

As parents in the old days used to say, you can do it.

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