Macro Economic Understanding of What’s Going On

| November 19, 2008 | Reply

I admit, I have an affinity towards macro economics. The study of how actions or inactions are interrelated on a global scale can keep my head buzzed for hours. Everything is connected. Perhaps there should be a "six degrees of separation" model made for finance and trade. That would be cool to see…

One of my favorite macro guys is Nouriel Roubini, a professor of economics at NYU and a well-respected forecaster of global economic conditions. His insight is awesome and I wish I could study under him for a semester. In a recent post, he eloquently explains reasons why we should not be expecting a V-shaped recovery (quick down, quick back up) and why this consumer-led downturn could be much more severe than others.

 In summary, we as a nation made the mistake of confusing income with equity, and thinking debt was free. People bought homes and used equity as an ATM machine. Instead of tapping that equity for investment, they spent it on down payments. Thus raising their debt exposure and driving true saving rates to below zero nationwide. Equity has now evaporated, and income is being threatened with layoffs. We are finding out that debt isn't free, and fixed payments can wreak havoc on a cash-flow statement.

Picture 2

I still consider myself a young dude, so I am trying to learn all I can by observing, listening, and staying in tune with my gut. My gut tells me that most people have not yet faced the full reality of the pending financial downturn that is still to happen. The market is a forward looking instrument and thus, 6-9 months ahead of the economy. We're hitting lows every day now, which means we still have many more months before we feel the full brunt of the blow.

What does all of this mean for the small business?

How can we apply sound business judgment in an unsound world? We have tried to prepare in advance for the downturn by keeping overhead low, correlating most costs directly to selling, and strategically gaining greater market share at a low cost of acquisition. We've questioned all our past assumptions, gotten granular on our statistics, and stayed calm and methodical about our strategic plan. We've used technology to become more efficient (one of our mantras for 2008 has been "automate, automate, automate"). We are finding ways to increase value for our customers at a zero or low cost to the company. And finally, we've focused on developing a best-of-breed experience that keeps satisfied customers coming back for more – thus increasing the equivalent of ARPU (average revenue per user) for our industry.

While we cannot control the wave of forthcoming macro economic pressure that will spill blood into the streets on a micro level, we can work hard to be smarter, leaner, and more focused. Sometimes you have to play defense, and I am a big believer in protecting the downside while seeking a higher-than-average return on capital – especially in a market like this.

The race is not always won by the swift, but to those who stay strong and keep running.

Tags: ,

Category: Entrepreneur Insights