Archive for the 'Economy: National and Global' Category

It Was The Best of Times, It Was The Worst Of Times

Contemplating the current economic and entrepreneurial conditions out here in Main Street America, I keep thinking about this perfectly paradoxical passage from one of the great literary masterpieces:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

Perhaps you recognize the opening paragraph from A Tale of Two Cities by the immortal Charles Dickens. He was providing analysis of the disruptive state of affairs in 18th century England, as well as across the Channel, in France. If you know about the disruptive state of affairs in the 21st-century marketplace, perhaps you’ll appreciate the allegorical reference of these phrases for small businesses almost two and a half centuries later.

It was the best of times: “The more high tech we have, the more high touch we will want.” The reason John Naisbitt’s 1982 words will always be prophesy is because humans will always be analog beings. There’s never been a time when the high touch leverage of a small business has been more powerful against the high tech of big competitors.

It was the worst of times: Tech behemoths like Amazon, Google and Facebook are increasing digital leverage to create new customer experiences and expectations. This trend is deadly for those hidebound small businesses that won’t infuse their sublime high touch with incremental high-tech to produce irresistible, Main Street special sauce.

It was the age of wisdom: Unlike the 20th century, today there are few hidden rules or proprietary tools employed by big businesses that aren’t available in some form to small firms. Digital leverage and data are increasingly available in incremental and affordable forms, but you’ll have to risk what you know for what you might learn.

It was the age of foolishness: In the most transparent era of management fundamentals, the keys to sustained success are lower than low-hanging fruit – they’re on the ground. And yet, innumerable small businesses are following Sears and Macy’s into the realm of irrelevance rather than adapting to new customer expectations with high-touch intangibles, relevant 21st-century practices, and affordable – many free – new tools.

It was the epoch of belief:  In many ways, the path to entrepreneurship has never been easier. A sweet byproduct of democratized digital leverage is a lower capital barrier to entry. Plus, the expansion of the universe of niches (read: niches of niches) is creating unprecedented small business opportunities.

It was the epoch of incredulity:  It’s still easy to start a new business, but it’s never been more challenging to sustain one. New and evolving customer expectations must be served with fresh data and effort – every day. And competitive disruptions are emanating from improbable market sectors.

It was the season of light:  The illumination and availability of customer data for small firms is unprecedented. Extensive information about business prospects is opening doors to the now-illusive, face-to-face appointment. And response behavior of retail prospects is available to help design and deliver a high tech/high touch marketing strategy.

It was the season of darkness:  At the same time, qualifying a suspect into a prospect into a customer has been disrupted by a more informed prospect base. As the selling cycle lengthens for those who fail to recognize this shift, diminishing gross profit erodes equity, burns available credit, and then – well, you know.

It was the spring of hope: One of the most amazing forces in the marketplace is the pathological optimism of American entrepreneurs. Against all odds, they navigate their dreams around the wreckage of peers that were sunk by the reef of disruption.

It was the winter of despair: I never thought I’d see conditions that would so restrict the entrepreneurial energy of America. The past decade saw anti-business political policies, unprecedented demographic shifts and behaviors, distressed economic conditions, and restricted capital and disruptive pressures combine to set back entrepreneurship in America for the first time in generations (Kauffman Index Startup Activity).

The human experience is pregnant with paradoxes, and no sector more so than the marketplace. Digital leverage is at once creating the paradox of exciting opportunities and unprecedented disruptions.

You would be correct to point out that humans have lamented change for millennia, but this really is different. Not change itself, but the velocity – the compression of time between changes.

Past changes have occurred at the velocity of analog – the speed of sound (761 miles per hour). Today’s change is powered by digital – at the speed of light (186,000 miles per second).

Are you adapting to new expectations with your high touch/high tech special sauce? Or are you being disrupted on the way to – well, you know?

Write this on a rock … The best of times or the worst of times? The choice is yours.

Making tax reform fair for small businesses

General Motors Corp and Georgia’s Motors, Inc. are alike in many ways. Both go to market representing themselves to the world as corporations, legally formed entities standing on their own, capable of entering into contracts and being responsible for themselves and their activity. But while both corporations are required to report business activity for the previous year on a tax return to the IRS, only one actually pays taxes.

In addition to filing a return, General Motors Corp, structured as a “C Corp,” the apex legal business entity, is the one that pays federal taxes at the business rate, currently one of the highest in the world. Georgia’s Motors, Inc. was formed as a Subchapter S corporation, aka “S Corp,” one of the pass-through entities established by law to make being incorporated easier for small firms. Any taxable income reported on its return passes through pro rata to the shareholders, to be added to their personal return and taxed at each one’s individual rate. In our story, Georgia Smith is the founder and sole shareholder of Georgia’s Motors, Inc., one of millions of American small businesses.

Lately, the term “pass through entity” has been used more frequently in news reports about the tax reform proposed by the Trump administration. The increased frequency is because a significant reduction in the business tax rate is being proposed which could put GM’s corporate rate below Georgia’s personal rate, unfairly causing her to pay more per dollar of business income than GM.

The good news is the Trump tax reform drafters recognized this inequity to pass-through entities like Georgia’s. As currently proposed, shareholders of Sub S Corps and other pass-throughs, like a Limited Liability Company (LLC), would still accrue the income of their businesses. But what’s new is that business income would be taxed separately, at the newly reduced, single rate paid on all business income, rather than at the personal rate of the shareholders.

These proposed tax reforms are very important for small businesses because of how their taxable income manifests. Let’s say Georgia’s Motors, Inc., produces $100,000 in business income, which passes through and is applied to Georgia’s personal return. Because of how that income is accounted for, it can create a taxable event typically associated with investments, called “phantom income.” This is when the loss of an investment results in taxable income, but produces no cash to pay the associated tax.

When you hear a small business owner tell you they had a very profitable year, but had to borrow money to pay their taxes, they just described what is tantamount to phantom income. But unlike true phantom income, that $100,000 hasn’t been lost. It actually exists, but in the form of inventory, accounts receivable, equity, etc., but maybe not in enough cash to pay the tax bill when due. And it could get worse: That business income added to Georgia’s personal income could push her into the next higher rate bracket.

By allowing small business owners of pass-through entities to pay a lower business tax rate, in a separate calculation from their personal income, they will have more working capital to invest, and be less likely to experience phantom income.

The small business sector is very excited about the prospects of tax reform, both at the personal and business level, as long as pass-through entities are treated the same as big corporations.

Write this on a rock … Unleash the animal spirits of America’s small businesses with tax reform that includes lower rates applied to all business income.

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.

After a Lost Decade, the REAL Economy Is Ready for Expansion

There’s an old joke about a person paying last respects to an atheist friend. Looking into the casket, the friend lamented, “All dressed up, nowhere to go.”

Thinking about the U.S. economy makes that joke come to mind. Almost a decade since getting really sick, but not dying, America’s businesses – especially the small ones – spent the last nine years all dressed up, nowhere to go.

Since the 2008 financial crisis and associated Great Recession, which actually began Q4 2007 (a year before Barack Obama was elected), the economy has recovered at less than 2% GDP growth – never reaching expansion altitude. Because of the aggregate contribution of America’s small businesses, we know that at least half the missing growth, and millions of new jobs, didn’t come from Main Street. Here why:

One of the historic markers of the small business sector is an optimistic pathology that makes Pollyanna look like Negative Nellie. I never thought I’d see a political/economic environment so demoralizing as to effectively dim the American entrepreneurial floodlight into a glimmer. If you think this characterization is hyperbole, study the NFIB Index of Small Business Optimism – as I have. Alas, that proof in the Main Street pudd’n has been almost a decade of consistent and unprecedented pessimism.

Why so much dourness? Since 2009 the rhetoric and policies of the Obama administration made small businesses feel inconsequential at best, and the enemy at worst. Rhetoric like “You didn’t build that!” doesn’t make business owners feel froggy about capital investments or new hires. Nor do policies like tax increases, Obamacare, piercing the franchise industry’s employer/employee status, the Overtime Exemption rule, and an unprecedented regulatory assault, just to name a few. But wait! There’s more.

Whether through ignorance or ideology, too many talking heads perpetuated the fake news that the economy languished because banks wouldn’t make loans to America’s small firms. But anyone who cared to check heard small businesses calling out these false prophets by reporting, month after month, that they could borrow if they wanted – but didn’t (NFIB). In fact, they’ve spent a decade deleveraging. Which brings me to the single silver lining in all of this: By deleveraging and belt-tightening, small business balance sheets and cash accounts became stronger than ever. I’ll come back to this in a minute.

You’re no doubt wondering how I’ll reconcile my story with the record-setting stock market. First, for generations it was an article of faith that whether stocks were trending up or down, that trajectory was a leading indicator of the economy six months hence. But today, the stock market is merely a leading indicator of itself, and the real economy is on its own. Two prime reasons include:

1) the crossing of the moral hazard Rubicon by the government with bailouts of too-big-to-fail corporations and banks,

2) the Fed’s counterfeiting policies ($3.7 Trillion in QE). Both spawned empty-calorie financial capitalism at the expense of muscle-building market-based capitalism.

Help me reconcile how GDP went negative during Q1 in both 2014/15, and almost did again in 2016, but the Dow reached new record highs in all three quarters. Only in Bizarro World is that a sustainable reality.

And then we had an election. Out here on Main Street, you’d think the phone rang and the warden said it was the governor with good news. Most people don’t need me to catalog the good, bad and troublesome about President Trump. But, warts and all, small business owners are attracted to at least four of his credentials: 1) he knows how to make a payroll; 2) he knows what it’s like when the government gets in your grill; 3) he understands the incongruity of over-taxing and over-regulating a group sorely needed in America today – job creators; and 4) he hates Obamacare.

For the first time in a decade, there is simultaneous, almost giddy optimism on both Main Street and Wall Street. The NFIB Index just reported the highest one-month jump in small business optimism in the survey’s 43-year history. They know those squeaky balance sheets will deliver unprecedented profits in the hoped-for expansion. Meanwhile, incredibly, the Dow-Jones has added 2,000 points since election day, to push through the 20,000-point milestone/firewall.

With all of this pent-up energy, investors and job creators of all shapes and sizes are all dressed up, looking for a place to go. We’re thinking economic expansion, but unfortunately, what happens next is not up to us.

Write this on a rock … Note to President Trump & the Political Class: Don’t screw this up!

Top 10 Things That Keep Small Business Owners Up at Night

If you ask any small business owner “How’s business?” invariably they will respond: “Well, I can always use more customers.” So if someone asked you what’s the greatest concern of small businesses, you could be forgiven for being wrong if you said they need more sales, because that’s what most people think – especially politicians.

When it comes to buying and selling, small business owners are pretty good at that – every company is founded, and has been built to do those things. But operating a small business in the 21st century has become more complicated than ever before, which is why people who know small business know the best way to find out what’s really going on is to ask the owner what keeps them up at night.

One organization that knows how to ask small businesses the right questions is the National Federation of Independent Business. As you may know, the NFIB’s monthly Index of Small Business Optimism has been the gold standard for such research for 43 years. They also have a quadrennial report that speaks directly to the “what keeps you up at night” question. It’s the NFIB Small Business Problems and Priorities Survey, and in the 2016 report, you may be shocked to learn that “more sales” came in at #45 out of 75 options.

With an almost 15% response from 20,000 members they surveyed, 2,831 small business owners told the NFIB that their greatest challenges weren’t the competition (31), or social media (64), or online retailers (61). What about poor profits? Nope, that’s #16. Even the most initiated observers of small businesses would feel safe in presuming that cash flow would be #1, but this primordial Main Street challenge is actually #25.

If you listen to politicians, you’d think needing a loan is what wakes small business owners up at 2am. Surely you know better than to listen to politicians when it comes to small business or the marketplace, because needing a loan is almost last, at #70. That monthly NFIB Index I mentioned earlier has reported that since 2007, established small businesses have been adhering to what I call “The Great Deleveraging.” They don’t want no shtinkin’ loans.

So what is the numero uno greatest small business challenge? Drum roll, please: The cost of health care. Number 2 is oppressive government regulations. Number 3 is federal income tax on businesses. Number 4 is uncertain economic conditions. Number 5 is tax compliance complexity. And six through nine are also all government related. This next point is very instructive: The first operating challenge to break through the top ten is #10 – finding qualified employees. Let’s review: Nine of the top 10 greatest small business challenges are directly associated with government.

Some might say health care costs are not the government’s fault, but that would be Rip Van Duffus who just woke up from a seven-year nap and never heard of Obamacare. To be fair, let me hasten to add the cost of health care was a small business challenge prior to Obamacare. And this law did “bend the price curve,” as promised. Unfortunately, for the small business sector, Obamacare bent the cost curve up, not down.

Thanks to the NFIB Survey, President Trump and the 115th Congress can’t say they don’t know where to start helping small businesses. Indeed, they’re neck deep with the Obamacare “repeal and replace” debate right now. But here’s some “Breaking News”: We polled our online audience about that issue and 94% said “Yes” to repeal and replace, but half said, “Take the time to do it right this time.”

There’s no doubt that 26 million American small business owners – with health care costs on their minds – had a significant impact on the November election. So my advice to the political class of all three parties – Democrats, Republicans and Trumpicans– is to take the time to get healthcare right this time. And then quickly start reducing the other eight non-operating challenges government is imposing on the most important job creators in America: the heroes of the Main Street economy – small businesses.

Write this on a rock … What’s good for small business is good for the world.

Online Poll: How do you feel about the future of America?

The Question: As you contemplate Independence Day, how do you feel about the future of America?

8% - America’s best days are still ahead.
6% - America’s best days are behind us.
83% - America’s in trouble, but we can still turn it around.
3% - Never mind America, the whole world is going to hell!

Jim’s Comments: As you will see in the results of our recent online poll above, more than eight of ten of our respondents have serious concerns about America’s condition and future, with only 8% who’re optimistic about how things are. By comparison, the national average reported by Real Clear Politics — which homogenizes seven large polls — reports two-thirds of Americans think we’re “on the wrong track.” Perhaps the reason our folks rank their concerns a little higher than other polls is because we’re responsible for making payroll every week or two, which, under the current regulatory and economic conditions, is getting more and more difficult.

The last time I saw this level of concern among Americans was almost 40 years ago, during the Carter Administration. In fact, President Jimmy gave the name to the general national feeling that was pervasive during the last half of his one and only term. In a television address, he actually said there seemed to be a kind of “malaise” in the country. He was right.

Jimmy Carter is a good man, but was a poor leader. Granted, he inherited some challenging issues, but he wasn’t a problem solver and didn’t inspire confidence. Does that sound familiar? Replace the name at the beginning of that sentence with Barack Obama and everything to follow fits, with one exception: Obama has had two terms to make a difference. Sadly, if you converted the polling numbers for our national condition under this president’s watch to letters they would spell: malaise.

And my criticism isn’t political — I worship at the throne of results. Two things cause Americans to have a positive outlook: feeling secure and feeling successful. Unfortunately, looking at the facts — and the polls — in front of our eyes, these two areas are not positive.

Here are four simple traits that I would like to see in our next president, and I don’t care which party the possessor of these comes from:

  • Proven leader who hates mediocrity
  • Passionate about America’s greatness
  • Politically incorrect about defending America
  • Believes economy can grow at more than 2%

    What does your list look like? If you’d like to tell me, leave a comment.




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