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How a CEO's Mindset Could Guide the Fed

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A long term outlook and an understanding of the business cycle would be a good place for the Federal Reserve to start.

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A good CEO looks right through these swings of investor sentiment and stays focused on executing his/her plan. Putting a plan in motion and executing against that plan is not easy. It typically entails a very complex set of parts; literally, a puzzle with ten thousand pieces that has been set in motion. And it's generally not a good idea to make sudden changes.

On the NetApp (NTAP) quarterly conference call last week, the firm's CEO summed it up (and I paraphrase), "Why would we change our plan because of two lousy weeks when the world was focused on the reality show train wreck that was Washington D.C.?"

If the crisis persists for a few quarters, or the world does indeed have another credit crunch, he will alter his plan. Though if he does, it will likely just be a tweak. Things must have really tanked in his/her market for a CEO to change plans.

Good CEOs Understand the Basics of a Successful Business Cycle

They know from experience that most recessions are caused by the normal cleansing of bad business decisions. They know that corrections in inventory are what really slow down commerce. I mention this because the majority of CEOs are looking at the world around them saying, "Where is the excess inventory?"

  • It's not in my warehouse.
  • It's not in my channel's warehouse.
  • It's not in my customer's warehouse.
  • It's not my payroll. (Maybe I laid off some people in 2008/2009 and decided not to hire many during this recent cycle. I certainly don't have excess employees right now.)
  • It's not in my community.
  • How many more construction workers can get fired?"
  • How many more health care workers can lose their jobs?
  • How many more state and local workers can they let go?
  • How many more federal workers will they fire (I wish).

And so on.

Where's the excess that needs to be worked off... other than maybe in risk assets and the Federal government?

Why are the excesses of a traditional business cycle not there right now? Because CEOs treaded very carefully this time. They knew that short-term fixes don't work. They knew "cash for clunkers" was not going to work. They knew QE2's $600 bln over nine months was not going to work. They knew that spending "stimulus" in the form of transfer payments was not going to work.

So they moved slowly, invested overseas (if they could), and played for the long haul. Some call it "investing through a downturn". But most have been investing in overseas growth because they don't think the US is doing the right things to fix its problems.

Having no material excesses that need to be corrected almost guarantees that any slowdown will be shallow.

My firm believes if the average CEO could provide advice to Mr. Bernanke or our political leaders, it would be:

  1. Whatever you do, make it a long term program. Stop "priming the pump" and start filling the tank with gas. If QE2 had been a little for a long time perhaps the outcome would not have been the roller coaster ride that brought us right back where we were this time last year. Remember, we like stability and visibility. Please give us something predictable to plan and invest against. If the markets are addicted to stimulus, take it away slowly. Rehab is a process.

  2. Remember that its people with jobs that pay taxes. More jobs means more tax revenue. So aim your remaining bullets at things that make us want to hire US-based employees. Stop watching the birds floating in front of your eyes (envisioning the cartoon character that just got bopped on the head with a mallet), and focus on the reason we are not hiring homegrown workers.

  3. A fast changing regulatory landscape is the opposite of stability and visibility.

  4. Never forget that the "intelligence is at the edges". We only have an Internet because nobody controls it. Trust in American innovation and competitiveness.

What's my point?

  1. The current market hysteria is overdone and will be relatively short lived. Without major excesses to work off, business might change a bit at the margins due to the recent uncertainty, but projects will go on. The rest of the world will continue to grow their middle class and companies will invest to serve their needs. It's not 2008 where the excesses that needed to be worked off were obvious.

  2. If our leaders take some of the CEO advice outlined above, like something that encourages companies to add jobs in the US, things will get better quickly. It's not going to be the 90's, but it won't be 2008/2009 either. CEOs have growth in their genes, and there is pent up desire to grow.

  3. Technology will continue to drive the changes to how we do business and live our lives. At the heart of every piece of digital electronics is software. As Marc Andreessen wrote recently in a Wall Street Journal article: "Why software is eating the world" ... "That's the big opportunity". And software companies are on sale today.
No positions in stocks mentioned.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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