The Recession Returneth - HR 4173

August/2010
http://www.dcgadvisors.com/

In April I projected that our economic indicators were pointing toward the resurgence of the great recession. Some said we were never out of a recession in the first place, though many who believed we were are now accepting that we may be headed back in that direction. Many judgement errors have facilitated this return, mostly as a consequence of government regulation. Among them the imposition of HR (Frank-Dodd) bill 4173. The bill will further tighten an already stingy lending system and will undoubtedly force banks to raise their fees on all the wrong customers. The fees will be concentrated primarily in checking and savings accounts and force many who keep a loan balance in addition to checking and savings accounts to move their money elsewhere. This migration out of larger banks will initially affect nearly 10 million accounts nationwide. Those who do not move their accounts to smaller, local community banks will move their cash to prepaid debit cards, check cashing services or into lock-safes within their homes. Already, nearly 40 million Americans do not keep their money in a bank; HR bill 4173 will definitely keep them away. Roughly translated into money, we are talking about $120 billion1 never submitted to banks and never will be submitted as a result of government “safeguards” against the banking sector.

How will this adversely affect our economy and potentially facilitate the resurgence of the great recession? Take this example and scale it to the second, third and fourth powers. If 10 million bank customers pull their money out of banks and make them for all purposes invisible to bank actuaries, you take nearly $30,000,000,0002 out of the economy at one time, further drying up liquidity and potentially causing a crisis in monetary policy. This will result in not only a second recession, but a chaotic and toxic fiscal environment to boot.

Frank-Dodd Bill HR 4173 and Resurgence

Without getting political in an economic newsletter, it remains incumbent upon me to identify some of the less talked about items included in the new bill as I am of the belief that these inserts, among other less conspicuous ones, will further cripple our recovery. Principal among them is a measure to make it easier for unions, environmental groups and other activist organizations that hold shares in organizations to put their representatives on the boards of directors of every corporation in the United States.3

The so-called "proxy access" provision, which activist groups say they will use to try to improve oversight of corporate financial practices, has provoked a backlash from various groups both on Wall Street and those not on Wall Street. This legislation includes provisions totally unrelated to the financial crisis which may disrupt Americas fragile economic recovery and “lead to increasing political battles in the boardrooms,” said John J. Castellani, President of a political roundtable.4

Additionally, as stated in the Frank-Dodd bill itself the bill would create more than 20 "offices of minority and women inclusion" at the Treasury, Federal Reserve and other government agencies, to ensure they employ more women and minorities and grant more federal contracts to more women and minority-owned businesses.5 The minorities and women hired would have direct say on “…all matters of agency relating to diversity in management, employment and business activities, including the coordination of technical assistance in accordance with such standards and requirements as the Director of the Office shall establish.”6 I am neither anti-woman, nor am I anti-minority, though the scope of these 20 offices are obviously limited as many in the majority will be excluded from these discussions and decisions. Still billions of tax dollars that the US does not have will most likely be misallocated in these offices. This will further slow our recovery and may cause a crisis in monetary policy.

Fading Consumer Confidence and Resurgence

Reports released Tuesday July 27th showed U.S. consumer confidence sank in July to its lowest since February amid job market worries that are underscoring the slow path to economic recovery, and rising home prices in May without justification or with signs of a sustained rebound.7 In fact consumer confidence fell to 50.4 from 54.3 in June and below forecasts of 51 for the month. Also consider that with the failure of a fading stimulus package, the lack of growth in the private sector, two quarters of slowed GDP growth dropping 1.3% since March, a slowing of sales at car dealerships, factories keeping inventories low for fear of further reduction in liquidity, and new home sales at their second lowest level since 1963,8 there is nothing tangible on the horizon that we can point to that will keep us from re-entering a recessionary situation.

Clearly without radical change aimed at revitalizing most of American businesses, mainly small and medium sized, our country will continue to plummet down into the death spiral and may follow such examples as Spain, France, Portugal, and Greece. Indeed over the past 18 years we have been witness to radical changes that eventually weakened our thriving economy while further radical changes over the past 18 months, I fear, have now crippled our own recovery. Small and medium business owners need to remain steadfast and follow more traditional methods of business practice by limiting exposure to liability, stockpiling cash, giving individuals more responsibilities and making alliances with overseas partners to hedge further losses incurred on behalf of repeated flawed attempts to make our economy “safer.” All the efforts to “safeguard” us have actually exposed us to the greatest dangers since the great depression.

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The Trillion Dollar Blunder And The Resurgence Of The Great Recession

June/2010                                                                           Want more detail on this topic? Click Here

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America’s fiscal challenge has become increasingly daunting and we run the risk of plummeting back into recession. Often times the second dip is worse felt than the first. Through too much political posturing and too little actual problem solving, we are facilitating the resurgence of the great recession. The United States fiscal policy has been described as “gas now, brake later,” without clearly establishing how and when to brake. All told, the current stimulus initiatives have added $1 trillion to the national debt. The problem is not only the amount per se, but that the stimulus packages have done virtually nothing to stimulate growth in any sector. In fact, one might venture to say that our stimulus bills exemplify the dangerous absence of any strategy that would deflect a downward spiral. Along our current path we run the risk of a recessionary resurgence, but we still have a tiny window of opportunity through which we can reverse our fortunes.

THE TRILLION DOLLAR BLUNDER

The balance of the entire $1 trillion in stimulus monies has been earmarked, but not a single penny has served to reverse the economic slide facing the US and the world. What is congress’s answer, “spend now, let someone else deal with it later.” Even without a clear action plan in place to address our hyper-indebtedness, legislation is being considered for an additional $134 billion in stimulus monies, of which, $79 billion qualifies as more band-aids to include extended unemployment and health subsidies. An additional $26 billion has been earmarked as “emergency aid” for government employees who now face layoffs while the rest of the funds are distributed to various “other” constituencies that will not contribute a dollar to battling our economic crisis. In real money terms, our mismanagement of funds over the past 2 years has cost us not only the one trillion dollars in spent money, but billions of dollars in unearned revenues. Had the stimulus monies been distributed more correctly to support the free market instead of frivolously and ineffectively expanding the public sector we could have been well clear of this recession by 2011. Despite being on the verge of a double-dip recession and enduring a colossal misappropriation of tax dollars, America may still yet have a chance to level her wings.

WHAT CAN BE DONE?

On our current course by 2015 America will suffer a structural deficit of more than 6% of GDP. This is expected to be higher than the entire Euro-zone in the same time frame. So where does recovery begin?

For starters, government borrowing for public services needs to be subordinated to private sector economic revival initiatives. Additionally, governments have pushed to depreciate their currencies in order to boost export with other countries. While this addresses one segment of the problem, it further harms another. What is overlooked with the depreciation strategy is that foreign holders of local currency will suffer massive losses further crippling a nation’s ability to stabilize its economy. Depreciation is not an effective strategy to solve the root of the problem. Funds must be redirected from massive public projects to smaller private ones with large probabilities of success. Relief shouldn’t just come in the form of tax cuts. While certainly they help, they don’t do anything to get struggling entrepreneurs cash ready to move forward building their business. They simply delay a collapse. Allocating “emergency aid” for innovative private sector projects will produce far more advances in our economic recovery than any other stimulus plan. Finally, we have to let market prices adjust to realistic levels. Many of our financiers are living in a world of over-valuation utopia. This is very harmful to a fragile economy’s recovery. According to one source our S&P Composite price/earnings ratio is still trading at 20 times earnings. The only other time we’ve experienced a spike this erratic was right before the market collapsed in the late 1920’s and early 1930’s. We can get prices back to normal faster by not giving away stimulus money that does not get a return. If our governments act on these strategies the consumers will come and the recession will be left behind for good. Our window to adjust our out of control spin is fast closing. If not probably managed through, I fear we will succumb unwillingly to a second dip in this crisis.

2010 Global Recession Outlook - Re-entry?

May/2010     http://www.dcgadvisors.com/

United States and the Developed Economies

Recall, I envisaged a “W” recovery for our economy in my January article, 2010 Global Economic Outlook. My friends, it appears this will unfortunately continue to be the case as we look ahead to 2011. Amid short term government stimulus plans and intermittent spikes in consumer spending so far this year, it does not appear that anything we’ve done has actually addressed the root of our economic woes. What we’ve in effect done was place several band aids on a wound that requires stitches. The bleeding was slowed temporarily but will not stop unless properly cauterized. Nothing has been implemented to stop the bleeding. The band aids will eventually come off later this year reopening the doors to a fresh flow recession dip toward the end of Q1 2011.

For the United States, the following indicators reinforce the need to continue precaution as you forge your roads ahead for 2011. Personal income has not improved at all and has remained flat for the past 18 months. Unemployment remains high with a real figure closer to 10.6% nationally. In April, car sales lagged behind their usual average by 35%. Traditionally, car sales touched $17 Million in sales in April. This year car dealerships collectively reported sales of only $11.2 M. Consumer spending did increase, however this is a superficial, artificial and temporary indicator as the spending was the result of short term government stimulus programs that are nearing their end later this year and early next year. Several economists are optimistically projecting a 3% GDP growth for us by the close of 2010 but I don’t see how this is possible. I have witnessed nothing over the course of this year to support a growth of this size. Considering small and medium businesses still do not have access to liquidity or leveraged capital, nor has anything stimulated the revitalization of this economic segment it is nearly impossible to exceed a 2% growth in GDP for the U.S. by end of Q4 2010 unless we consider government expansion in the equation. I anticipate the real figure to be somewhere around 1.5% growth, and that is if we are lucky. Furthermore, tightening policy in the face of rising EM inflation puts a double-dip scenario back into play. Asset bubbles may also be forming, as extremely loose monetary policy in the developed states pushes foreign cash that seeks higher yielding returns over to emerging markets. Consequently, I anticipate our double dip recovery to actually begin toward the end of Q1 2011 and remain generally wary of the 2011 outlook, as stimulus packages and monetary aid packages unwind making the basis for a “V” recovery prediction appear less favorable than many anticipated earlier this year.

The developed world as a whole will see an aggregate growth of 1.5%. Eurozone growth specifically will reach .6% in 2010 and 1.7% in 2011. Slow growth and recovery in the Eurozone can be attributed to the uncertainty over the fiscal health of Greece, Spain and Portugal. Conversely, emerging Europe will enjoy an aggregate growth of 3% this year and 4.2% in 2011.

2010 Looking Rosier for Emerging Markets

Emerging markets should outperform developed states with aggregate growth of 4.8% in 2010, compared with 1.5% in developed states. If anything, the risks for the emerging markets for the 2010 forecasts lie on the upside, depending on the base effects generated by potentially strong H209 GDP figures. Emerging markets have proven that they are not only innovative and resilient but highly competitive in the global arena as well. Many of the main emerging market players are going global themselves. The UN world investment report calculates that there are now around 21,500 multinationals based in the emerging world. Additionally, these companies are expected to contribute 70% of the world’s growth over the next few years with China and India being the primary drivers. The number of companies from Brazil, India, China or Russia (BRICs) has more than quadrupled since 2006. Still I expect Indonesia to outpace Russia in overall growth this year and next year to potentially take Russia’s place among the BRIC nations.

Emerging Asia is projected to grow by 6.9% in 2010, which is up from 6.7% last month. Our China outlook is the driver in this forecast, as we see the country’s economy expanding by 8.8% in 2010, on par with my 8% prediction in 2010 Global Economic Outlook, and 7.5% in 2011 on the back of considerable government stimulus. For the region as a whole, we will see a slowdown to 6.4% in 2011 (down slightly from 6.5% previously) before growth picks up again in 2012 and beyond. China is also in danger of a double-dip “W” recovery.

In Latin America, we can expect an aggregate growth projection of 2.8% for 2010 with the most significant performance in the region coming from Brazil, which we can anticipate to grow at 5.0% this year and dip to 4.6% in 2011 in response to a U.S. “W” recovery while aggregate growth in Latin America respectively will dip to 2% growth in response to a strain in U.S.-Mexico trade relations. The global emerging markets are not without risk however. The biggest risk to the emerging markets is their strength to withstand the likely torrent of capital inflows that will occur over the coming years, which could easily lead to an asset price bubble at some point and repeat another Iceland or a Japan of 20 years ago.

H.R. 3590 and Business 2010

April/2010     http://www.dcgadvisors.com/

OBJECTIVITY AND CLARITY

Researching the necessary information to compile an objective perspective for this month's newsletter was no small task. The quality, clarity and availability of credible, unbiased, unprejudiced sources on the subject was scant to say the least. As such, there are some elements of this issue that I was able to elaborate upon more expansively while others had to remain thinly interpreted. On occasion, to preserve information integrity I have broken down the legal jargon on more complicated insinuations of the law so that they are more simply put, but did not tackle the task of interpreting dual meanings. I have done my best to bring you fair, objective and credible insights into the impacts of this law on your businesses without clouding the waters with personal sentiment. I hope you find this information useful in charting your course ahead.

TIMELINE

Consider this, in 2009, the average cost of a family healthcare plan offered by employers was $13,375. Conversely, employees paid about 20% of the premiums (approximately $2,675) while the employer made up the difference (approximately $10,700 per employee). As the employer, if your employees elect coverage under the "Exchange," you will still be obligated to cover at least a portion of their premiums on two levels, as an employer and as an individual taxpayer. While the actual amount of obligation is still unclear we can take this real example:

The average household income for a family of 3 is $50,303. Costs for individuals entering into the "Exchange" would be capped at 9.5% of their income or $4,779 per family, $2,100 more than they have previously paid into coverage.

So even if you, the employer, can save costs on premiums, you, the individual will still have to pay the difference one way or another while your employees end up paying more for coverage on average.

The following effects of the law will take place immediately:

i) Employers with no more than 25 full time employees and pay an average wage of $50,000 or less are eligible for phase one tax credits of up to 50% of the premium cost for 2 years if the employer contributes at least 50% of the total premium.

ii) Employers who provide Medicare part D subsidies to retirees will have to immediately revise their accounting practices to account for the future loss of that deductible item.

iii) Medicare payroll tax will be increased by .9% in addition to a new 2.9% Medicare tax on non-wage income such as dividends, interest and capital gains.

iv) Temporary re-insurance programs for employers providing retiree health care coverage to persons over the age of 55 will begin 90 days from March 23rd, 2010.

v) Pre-existing condition coverage begins 90 days from March 23rd employers are prohibited from sending individuals to high-risk pools and can be subject to stiff fines.

vi) Group plans can no longer favor highly compensated individuals starting 6 months from March 23rd.

vii) All self-insured plans within six months will have to cover dependents up to age 26.

Business Impact 2011:

i) All employers must include the aggregate cost of employer sponsored health benefits on their employees' W2s excluding contributions to HSAs, Archer MSAs and salary reduction FSA contributions. This law goes into effect on benefits beginning after Dec. 31st, 2010.

ii) Tax on distributions for health savings accounts increases to 20% from 10% if distributions are not used for qualified medical expenses.

iii) Employers seeking to insure less than 100 lives can adopt "simple cafeteria plans."

iv) All employers will be required to enroll their employees in a "national public long term care program," unless the employee opts out.

v) All business owners will be subject to "expanded federal tax requirements," on payments of fixed or determinable income or compensation.

Business Impact 2013:

i) Those who itemize their federal income tax returns can see their allowed deductions for unreimbursed medical expenses rise to 10% AGI from 7.5% AGI. This is waived for individuals over the age of 65 until 2016.

ii) All employers will be expected to notify their employees of the existence of state-based exchanges.

iii) "Cadillac Tax," goes into effect. In case of a fully insured group, excise tax can be as much as 40% on plans with a value in excess of $8,500 per individual and $23,000 per family. This cost can be expected to pass fully to the employer.

Business Impact 2014:

i) An employer with more than 50 employees (either full-time, part-time or seasonal) that does not offer coverage but has at least one full time employee who receives a premium assistance tax credit to buy coverage through "the exchange," must pay a fine of between $750 and $3,000 on each full time employee per year. Coverage must meet "required essential benefits" to be considered compliant.

ii) Construction industry must provide coverage for all employees if employing more than 5 persons and carries a payroll of more than $250,000.

iii) Employers with a waiting period for coverage of more than 60 days must pay a $600 per employee fine.

iv) The "employee free choice voucher program," takes effect and requires employers who contribute into health care programs for their employees to give them vouchers toward the cost of coverage if said employee's household income is less than 400% of the federal poverty level (about $60,000) and does not enroll in employer sponsored health care programs.

v) Employers of 200 or more employees will have to auto-enroll all new employees into any available employer-sponsored health insurance plan. Actual effective date is unclear and may be sooner but can be anticipated in 2014.

Business Impact 2017:

i) States may elect to allow employers with more than 100 employees to purchase coverage through their exchanges.

CLOSING THOUGHTS

As you can see, the way we have done business in the past has changed dramatically. Whether or not the plan is good or bad is impossible to decide at this point. I have my ideas but this April edition is neither the forum nor the platform in which they are to be discussed. We can however point to history as a potential indicator of how things will turn out. Compare the contrasting policies of 1931 and 1981. Programs that were implemented to reverse the 1981-82 recession took on quite a different skin then programs we have committed to today and similarly to those implemented in 1931. As a result of 1981 policies and programs, inflation dropped from 13.5% in 1980 to 4.1% in 1988. Interest rates dropped from 18% on a thirty-year fixed mortgage in 1981 to 8% in 1987; and unemployment dropped from 10% in 1981 (today's rate is 10.6%) to 5.5% in 1989. The programs of 1981 were rooted in an exact anti-thetical foundation than the one we have taken today. Accordingly, these programs created over 43 Million jobs and $30 Trillion in wealth over the course of 25 years. In contrast, glean the results of the 1931 initiatives in this journal entry from Henry Morgenthau, Jr., Franklin Roosevelt's treasury secretary, "We have tried spending money. We have spent more than we have ever spent before and it does not work. I say after eight years of this administration we have just as much unemployment as when we started, and now an enormous debt to boot."

Will today's programs follow the fate of those similar programs from over 80 years ago? One will of course hope that they will not but we cannot say definitively. We do know that today's radically different business environment supplants traditional business practice and will require some considerable adaptations to our day to day operations.

As always I welcome your comments and feedback to (305) 720 2932 or email me at merahs@dcgadvisors.com.

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Modeling in Decision Making

March/2010     http://www.dcgadvisors.com/

Making good decisions is rarely an easy task. The problems faced by decision makers in today's competitive, fast-paced business environment are often extremely complex and can be addressed by numerous possible courses of action. Evaluating these alternatives and choosing the best course of action represents the essence of good decision analysis. Sadly, during the past decade, millions of business people, customers and modelers alike were duped out of the very fundamentals of good decision analysis and ultimately good decision making. That is of having good solid historical and present data and constructing numerous constraints and variables that could entirely derail or support eminent hypotheses.

Without question, one of the most effective ways to analyze and evaluate decision alternatives is to build "virtual" models of the decision problems we face. A virtual model is a set of vital data, mathematical relationships and logical assumptions that are factually anchored in historical evidence, current variables and conservative future projections. The intent of a virtual model is to simulate the real world and the many possible outcomes of a single decision. In a recent survey by our firm we found that more than 80% of the business people we spoke with rate the electronic spreadsheet as their most important analytical tool, apart from our brain of course. As such, it is no surprise that a world modeled on impractical, unrealistic and unsupported assumptions produced a global financial meltdown of epic proportions.

Sound and practical virtual modeling however is one of the most powerful tools the business community has at its disposal. In fact, superior models can be done on Microsoft Excel, a program that has been around for more than 25 years and which the greater portion of 76% of computer users has on their desktops. So if modeling is so readily and easily accessible, how come the bulk intelligencia of the business community failed to amass a sizable arsenal of virtual modeling? Four answers could be possible, i) laziness, ii) greed, iii) lack of familiarity with excel and modeling tools readily available as well as iv) poor oversight and selection of the necessary data required to construct a reliable model.

I myself am a huge supporter and avid user of virtual modeling and analysis. I rely on the tool heavily to make decisions for my firm and for my clients. I am very meticulous in the selection of the variables I use and am ultra conservative in my future projections. As a result, my decisions are right 87% of the time. Of course we cannot discount the power luck plays in all decisions we make. Luck can tilt the table both positively and negatively in our favor. A prominent economist at the University of Edinburgh notes, "...heavy use of models may have changed the markets they were supposed to map, thus undermining the validity of their own predictions." If you are not practicing sound and reliable virtual modeling, consider the commencement of such a practice essential for the successful navigation of your company through tumultuous times ahead. If you are practicing virtual modeling, revise your data numerous times and as often as necessary to meet the above mentioned requirements for a good model. For more information on virtual modeling click here or call me, (305) 720-2932.

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US Banks - Yesterday, Today & Tomorrow

February/2010     http://www.dcgadvisors.com/

BANK RESPONSE TO LEGISLATION

According to a national poll in December 2009, 64% of Americans felt that bailing out banks was a mistake. Whether we like it or not, the fact of the matter is, banks have been bailed out for years, some restructure and rebound, and others fail and fall to the wayside. Banks are the target of massive legislation that is intended to make the banking sector safer. One example is the “Financial Crisis Responsibility Fee,” which is a levy on financial institutions to cover forecasted taxpayer losses from the TARP program. Each bank will pay into the FCRP 0.15% of its eligible liabilities, measured as total assets minus capital and deposits (A-C+D=L*0.15). As such, the banks with fewer deposits will be hit much harder than their larger counterparts. Agree or not, it is happening and any costs incurred by banks as a result will be passed on to the consumer in one form or another further angering public response to the banking sector while limiting available capital offered as loan funds.

CURRENT CONDITION OF INSTITUTIONS

Loan activity to individual consumers will remain weak for 16 months. Tougher rules on capital will hurt banks’ return on equity and could push them further out of profitability in some key areas. JP Morgan expects to incur a cost of $500 M in annual profit due to forthcoming credit card restrictions. Citigroup expects FICC revenues (estimated at $190 Billion in 2009) to be 15-20% lower this year. A further 15% of the pie could be lost if most over the counter derivatives migrate to exchanges. Any shrinkage in FICC will hit Goldman Sachs the hardest. Moreover, banks may be forced to reduce the principle on outstanding loans and they will struggle with maintaining interest-rate risk as rate cuts in 2007 and 2008 temporarily boosted bank profitability. When short-term rates start to rise again net interest margins will come under pressure.

INVESTMENT SITUATION

I project therefore that the liquidity crunch will continue through 2010 and we will in fact see a recovery more resembling the “W” I spoke of in last month’s newsletter and not the “V” that many economists are touting. Banks will loosen liquidity in the 3rd quarter of 2011. Private equity firms, individual investors and venture capitalists will see a bevy of excellent deals this year and would be wise to take advantage of them during this window.

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2010 Global Economic Outlook

January/2010     http://www.dcgadvisors.com/

After a harrowing and catastrophic global recession in 2009 will 2010 bring brighter promises? The world is in recovery, though the healing will most certainly not be quick and best business practices will not resemble anything we have been exposed to over the past 3 generations. In fact, the most traditional business practices are now replacing the most “modern business practices” to put it lightly. So polish off your great grandfather’s diary and get to studying best business practices for 2010 and beyond.

In this issue I will briefly highlight the causal variables of the 2008 global financial collapse and continue on in greater depth about the emerging trends for 2010. I will point to some countries I feel will lead the world out of recession and where I think you should consider putting forth your business energies. On behalf of DCG Advisors worldwide I sincerely thank those of you who took the time to answer our year-end report card survey. In honor of the value you brought to this newsletter I have structured this issue according to your wishes and hope that throughout the year I can continue to improve upon our services to you.

THE WORLD SNAPSHOT

Over this past year and half, Companies have suffered a long and ferocious beating. Many have expired. Those that remain will emerge the strongest and be the most durable over changing economic flux. Purely entrepreneurial firms will displace traditional market leaders. Contribute this to their ability to quickly respond to turbulent economic signals, and change direction more rapidly than the larger more anchored firms. America was the first country to stumble into recession and it will be among the first countries to pick it-self back up though it will not be the top performer nor will it lead the world out of the collapse. This task falls unto the 12 less exposed economies which I will discuss later.

CAUSAL VARIABLES

In 2009, world output shrank by more than 1% (on a purchasing power parity basis). This marked the first time the global economy actually got smaller since 1945. In addition to the most common variables we have seen reported in the news and “heard it on the street” sources, the fact remains, through 2009 households had lost over $12 trillion or 19% of their wealth because of the collapse of housing and stock prices. Consequently this sapped their ability to provide strong purchasing power as most people are now focusing on saving rather than spending. As such, consumer spending which contributes about 70% of GDP will necessarily grow more slowly than the statistical bureaus are projecting. High unemployment will hold back wage gains for at least 2 years to come, wage cuts are already commonplace. Inflation may slip to zero and possibly set off a deflation spout which drives up real debt burdens and further saps a consumer’s ability to spend. The recovery felt during the latter half of 2009 was artificial, though slightly helpful, for 2 main reasons. Factories shut down at the first signs of a global contraction at the opening of 2009 but feverishly restocked nearly empty shelves beginning in the 3rd quarter. Second, massive public-spending programs began feeding through to beleaguered organizations, taxes were temporarily cut and interest rates were reduced. While this showed a positive impact on the slowdown it did nothing to address the underlying problem of consumer spending and purchasing power.

TRENDS FORECAST 2010

In 2010 I forecast the following trends. While many economist and optimists are wishing for a V-type recovery, I anticipate the pattern to more resemble a W. We will see strong healing signs in our first two quarters of 2010 and sharp pains will be felt in our last 2 quarters, though the 4th quarter will be less painful than the 3rd. We will bask in slight to moderate recovery over the first two quarters of 2011 and feel the sting of the second leg of our W in the last 2 quarters of 2011. Global output will expand by only 3.2%, well below the 5% recorded in 2007. Richer more developed countries will expand by 1.7% while emerging economies will post a greater than 5% expansion. Global trade will remain weak in 2010, growing by 3.7%. Figures indicate that many countries will raise trade barriers as currently they are well below WTO trade limits. E-commerce will grow by 5.5%, “green” efforts will be subject to continuing compromises by the Obama administration and cannot be looked at as a significant business opportunity this year. Bank loans will rise, by 5.9% globally but will still amount to less than projected. After a terrible 2009, private-equity firms will find more quality buy out opportunities this year. After a 16% drop in construction in 2009, we are set to drop another 12% in 2010 according to the American Institute of Architects. Hotels, shopping centers and corporate offices will be the hardest hit, while infrastructure projects will show the greatest development. Current government rhetoric points to the prospect that just as government spending tapers off, America is set to raise taxes sharply on high earners and investment income, further slowing recovery. History shows clearly that this can be dangerous. In both America in 1937 and Japan in 1997, ill timed tax increases sent fragile economies back into recession. Businesses and business owners will need to figure out a way to avoid this same peril less suffer the same fate. I recommend employing the “Sword and Shield” strategy whereby the sword symbolized aggressive efforts in these first two quarters to move product while the shield indicates a defensive posture in the last two quarters to save cash. For example, a more concentrated program should be deployed to save dollars in quarters 3 and 4 of 2010 in anticipation of a strong first 2 quarters of 2011.

Companies should focus the bulk of their efforts on balancing the need for short-term looseness and medium term prudence and reach out to a frugal consumer and incorporate a good citizenship program to reach out to their communities. Deflated customers need you, the business owner, to show them you care.

TOP 12 COUNTRIES TO LEAD THE RECOVERY

2010 is a terrific time to expand and here I identify the top 12 countries worthy for consideration in your expansion strategies for this year. First, look for Indonesia to replace Russia on the global stage. I submit that the BRIC’s will be replaced by the BICI’s. The Eastern European myth of fast recovery was entirely over-rated. Listed next are our unlikely heroes of 2010. Qatar will post a 24.5% increase to its GDP followed by China at 8.6%. Congo and Turkmenistan are in third place with an 8% GDP growth projected. Ethiopia and Uzbekistan show promise with a 7% projected GDP growth succeeded by Djibouti at 6.5%. Sri Lanka and India are in a respectable tie for 8th place indicating a 6.3% rise to GDP over 2009 while Iraq, Madagascar and Vietnam all rate high touting a 6% anticipated growth.

WHERE ELSE IS THERE PROMISE?

The much hyped up Poland will demonstrate a modest 1.9% growth and will be helped this year by rising investment. Look for Poland to be a player in 2011. Lithuania will sink another 4.5% after plummeting by 15% in 2009, their budget deficit will swell to 6.5% of GDP and hopes for adopting the Euro this year will fade but not be entirely unattainable. Germany, France and Italy will show modest and painfully slow increases just touching .5% this year. In Latin America look to Brazil, Chile, and Cuba to lead the recovery with greater than 3.5% GDP growth forecast in 2010.

2010 ADVICE

I made some bold predictions above; however, I'm always an optimist about the future, but a realist in day to day planning. This coming year will be challenging and sometimes bring anxiety as we try to make sense of all the experts making predictions for the future. But we must remember that as leaders it is imperative that we listen to and consider all opinions, but deep down we need to focus on our business’ core strengths and continue to move forward with realistic expectations until the tea leaves change and we develop a clear vision for our company's future.

Please feel free to contact me with your thoughts and opinions for 2010 merahs@diabconsulting.com or (305) 929-8462. I wish you a very prosperous and productive new year. See you next month.