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This is Not a Recession!


What we're seeing is the end of an 80-year expansion fueled by debt.

Three years ago, I walked away from executive management in the banking industry. Since then, I've told friends that the biggest benefit, beyond more time with my wife and family, has been time for reflection. In our 24/7, global, email-filled world, business management too often requires immediate reaction and leaves little time or energy for contemplation.

Two weeks ago, I spent some time nestled in the Green Mountains of Vermont hiking, canoeing, and reflecting on the economy. So let me share with you where my head is.

Contrary to most, I don't believe in a V-shaped recovery. Beyond the headwinds of substantially greater private-sector deleveraging, continued high unemployment, and further deterioration in credit quality ahead, I think there's an equal, if not more severe and profound task ahead in this country -- and that's the enormous "resizing" of the American economy.

By resizing, I'm referring to the need to bring US economic capacity down to a much lower level of long-term domestic demand. Choose just about any industry in America and you will see too much capacity. Our debt excesses enabled it and now our debt destruction will require the elimination of it.

Just look, for example, at what's underway with General Motors (GMGMQ), Chrysler, and Ford (F): Their entire supply and distribution chains are being downsized by at least one-third. And I'd offer that what's happening at the auto companies is just the tip of a much larger economic iceberg. For what's ahead, I think we need less, not more manufacturing; less, not more distribution; and particularly less, not more retail.

And it goes beyond typical industries. At the risk of encouraging hate mail, consider the current oversupply in private education, religion, golf courses, art museums -- I could go on and on. There's simply too much supply -- and that's even before one considers the changes in demographics and technology that are afoot. I, for one, still think a lot of industries have failed to fully grasp how the Internet has permanently changed consumer behaviors.

I'd offer that for what's ahead, dramatic change will be a necessary prerequisite for basic organizational survival. As I shared with family and friends this weekend, the good news is that we've survived the crisis. But to recover from the crisis, our economy requires rehabilitation. And to me, rehabilitation means a fundamental resizing.

To date, the expense eliminations we've seen from most corporations represent temporary cuts which assume a typical "post-recession" economic recovery. But this wasn't and isn't a recession. This is the end of an 80-year economic expansion largely fueled by debt. And as a result, what lies ahead of us will be a much longer term "L," requiring a far more dramatic response.

To those Minyan business owners out there, I'd strongly consider the following questions:

1. What would be different today about your business if in 2015, your revenues are the same as in 2009?

2. With weak competition already largely eliminated from your industry, what clear competitive advantages do you have relative to your surviving competition? Are those advantages sustainable?

3. If the economy turns down again, what internal capital and liquidity resources do you have? How clear are you regarding your 2011 and 2012 cash needs?

I'd describe what's ahead as the economic equivalent of a siege, where "just keeping what you have" is a success. I also anticipate unprecedented competition where any existing industry-wide cohesion devolves into The Lord of the Flies.


Absolutely. But bad news doesn't get better with age.

What's ahead is going to be a living "L." The sooner we accept it, the better prepared we'll be.
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Positions in SH, JPM, SKF, and SPY.
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