Monthly Archive for April, 2017

Wall Street’s sour grapes shouldn’t set Main Street’s teeth on edge

“The fathers have eaten sour grapes and the children’s teeth are set on edge.”

When Jeremiah and Ezekiel so prophesied 2600 years ago, it was to offer hope for a time when the Children of Israel would stop having the sins of their fathers visited on them. As a student of the evolution of American capitalism over the past half century, recent observations have moved me to paraphrase the ancients with a new marketplace maxim that I pray will not become prophetic:

“Wall Street has eaten sour grapes and Main Street’s teeth are set on edge.”

Alas, my passage is not about hope for a sweeter time, but rather, a lament of concern for the opposite.  My perspective is informed by three periods of time: The Reagan Boom, post 2008 financial crisis, and post 2016 election. I’ll split the latter into bookends around the other two.

Post 2016 Election
When we awoke on Wednesday, November 9, 2016 to the shocking Electoral College tally showing Donald Trump had preempted the anointing of Hillary Clinton as president, the Dow Jones was already in record territory at 18,323.  By closing bell that day, the Index was up 265 points. Since then, the “Trump Bounce” has driven the Dow Jones through the once-mythical 20,000 level on the way to 21,000, the fastest 1,000 point run in history.

Meanwhile, out here on Main Street, the 44-year-old NFIB Index of Small Business Optimism reported its own historic spike in that sentiment since the election. But a small business can’t eat optimism, and my recent online polling indicates less than a third of our respondents are seeing customer enthusiasm actually ringing a cash register. After a tough decade, unlike investors, consumers are more measured than manic, so it’s likely to take months of sustained optimism to manifest as Main Street sales growth.

The Reagan Boom
Once upon a time, small businesses benefited from an exuberant stock market.

Beginning in the third quarter 1982, the Dow Jones caught a rocket to a 52% increase over the next four quarters, to 3071. And with the exception of a correction or two along the way, including the 1987 “Black Monday” crash, Wall Street didn’t look back until the turn of the new millennium when it closed at a record high of 11,722 on January 14, 2000.

Main Street businesses had much to be excited about because in those days it was an article of faith that “the stock market was a leading indicator of the national economy.” During that same period, as it had always done, the rising Wall Street tide raised Main Street boats too. Indeed, in that 18-year economic expansion, plus a shorter one from about 2002 to 2007, the old “leading indicator” dynamic between Wall Street and Main Street was made manifest during what has been called the “Reagan Boom.” As Wall Street reached new records, annual GDP growth, the favored indicator for small firms planted in the ground, averaged a beautiful 3.5%.

Post Financial Crisis
American macro-capitalism changed significantly beginning in 2007 with the Great Recession, which overlapped the financial crisis of 2008. In the process of surviving those two gut-punches, Corporate America and Wall Street shifted their business practices by focusing inward more than ever before. Inward, meaning investing less in the Main Street economy, to the extent that the once-dependable maxim, “Wall Street is a leading indicator of the economy,” morphed into my observation that Wall Street is now merely a leading indicator of itself – Main Street is on its own. Here’s my evidence:

  • While the U.S. economy was experiencing essentially a lost decade (2007-2016), with GDP growth averaging 1.4%, including barely 2% annually for the seven years following the end of the recession, the stock market spent the last five years setting new records.
  • For three years running, in the first quarters of 2014, 2015, and 2016, two things happened simultaneously that had only happened before in Bizarro World:
    • GDP went perilously negative in 2014 (-2.9%), 2015 (-2%), and achieved only .5% growth in 2016 (U.S. Dept. of Commerce).
    • The Dow Jones reached new record highs in all three first quarters.

Again I ask, what’s wrong with this picture?

Back to the future
There’s been no corporate earnings performance since November 8 to justify spikes of 15% for the Dow Jones and 11% for the S&P. Where’s the fundamentals evidence one would expect to cause equities to wander into unicorn territory? It’s true: The hope of a more business-friendly government is raising optimism in all sectors of the marketplace. But unlike Wall Street, a small business can only spend what it takes in by serving customers. Our top line manna falls from customers, not mania or manipulation.

Smarter people than I are forecasting a stock market correction if, for example, there’s no tax reform this year. My “sour grapes” concern is that having already “clipped its coupons” on the post-election exuberance, a correction this year for any reason it will set the economy back abruptly, derailing Main Street’s bounce before it ever happens.

No one on Main Street begrudges the success of Wall Street. But right now the disconnect between the two once-symbiotic sectors is at once illogical and unsustainable. When the irrational exuberance of Wall Street ultimately reconciles with reality, that event should not cause Main Street to become collateral damage before the latter ever gets to play in the game.

Write this on a rock … When Wall Street eats sour grapes, it should not set Main Street’s teeth on edge.

Take on the law of numbers with grit and fundamentals

A rabbit was being chased by a hungry fox. Running for his life, he hopped over a turtle as he made haste across a small stream. Tucking himself safely inside his shell — not wanting to become collateral damage in the rabbit’s emergency — the turtle inquired about his anxious neighbor’s prospects, “Hey, Mr. Rabbit. You gonna make it?” To which Mr. Rabbit replied over his shoulder, “I GOTTA make it.”

When small business owners wake up in the morning, they often feel like Mr. Rabbit. But why are so many operating so close to the edge of survival? Why is every challenge or opportunity so momentous? Why are their circumstances so much more dramatic than for their Big Business cousins? The answer is found in the law of numbers. Let’s look at just three key examples:

Customers
Big businesses have lots of customers, so losing one is usually not a big percentage of their customer universe. A small business’s customer universe looks more like a list, on which each name represents a much larger percentage of the total. Losing a sale or customer takes a bigger mathematical bite out of the future viability of any small business.

Employees
When an employee leaves a big business, there are probably three replacements ready to be promoted off the bench to that single assignment. But even if there is a bench on a small business team, it isn’t deep. And since there are more jobs to do in a small business than people to do them, every employee is a key employee who’s difficult to replace.

Capital
Big businesses are blessed with multiple capital options, including the equity and debt (bonds) markets. A small business is the stepchild of the capital markets – sometimes more like an orphan. Other than bank loans and whatever retained earnings that can be held onto after taxes, the best way to describe other capital acquisition options is found in the names of the twin brothers of desperation, Slim and None. And even when outside capital is found, it often comes at a prohibitive premium.

With the law of numbers and perilous percentages against them, translating into limited options, small business owners survive by calling on a special kind of “I GOTTA make it” resolve. But, alas, resolve alone isn’t enough. To overcome the reality of their numbers and operate with less desperation they have to combine their grit with a focus on operating fundamentals that address the exposures. For instance:

  • Customers: Know what each expects from you and deliver that within an inch of their lives. This is part of your special sauce and one of your advantages over a big business.
  • Employees: Hire only those who could one day be promotable off of your bench.
  • Capital: Build and maintain good relationships with at least two banks, and retain earnings like your business’ life depends on it. It does.

During The Second Punic War (218 BC), Hannibal crossed the Alps with 35,000 men and a squadron of elephants. When snow blocked their progress, scouts reported the way forward was impossible. Sensing disaster in the eyes of his men, and realizing that this was a test of his leadership, the great Carthaginian general is said to have uttered those words that small business owners say to themselves, and their people, every day: “We must either find a way – or make one.”

Write this on a rock … Like rabbits and generals, small business owners GOTTA make it with a combination of grit and fundamentals.




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