The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates
As discussed last week, the Jiffy Pop economy is bursting against the foil barriers, but for now the barriers are winning. Consumption, though back to trend pace, never recovered the $600 billion drop experienced in 2008. Production has suffered a similar step down as capacity utilization figures have stabilized at levels not digested since the 1970s when manufacturing was still growing. Employment levels are most distressing with the lowest number of workers in the US on a percentage basis since 1979.
Even so, the economy is growing at a consistent 1 – 1.5 percent pace. But there is so much more the U.S. economy could accomplish.
The employment situation itself provides the most evidence of this as only 58.7 percent of people are working. If we could recover just half-way to the previous peak in 2000 of 64.7 percent, 9 million more people would be contributing to the economy and society.
So, what are the barriers keeping us down?
The easiest, and most prevalent answer is “uncertainty.”
But that’s not a very helpful answer as there is always uncertainty. When U.S. Airways and American Airlines announced their plans to merge, there was certainly some risk the Justice Department might take a negative view. This is simply an example of regulatory risk – the uncertainty of government reaction to such a large and important merger. A risk that was foreseen all along.
Similarly, when Apple launched the iPhone 5, it took a risk by utilizing only a slightly larger screen size of 4 inches, just when it was becoming apparent customers might prefer something even bigger. It’s easy to see how business risk like this occurs every day as managers face the uncertainty of customer preferences.
But today it’s more than business, regulatory, or other sorts of usual uncertainties facing both business owners and consumers. Today, uncertainty regarding the rules of the game is keeping players closer to the side lines.
For decades, businesses have operated with some confidence that certain “knowns” would be constant. For example:
- Interest rates would be positive
- Companies and individuals could borrow
- Consumption would grow
- Regulation would remain fairly static
- Employment costs would be steady
- In general, market players would act with free will
But today, many of these have moved toward the “unknown” column. Much of the cause of this migration can be traced to Washington activity and inactivity alike. Perhaps a couple illustrations are in order.
First, prior to delaying the health care enrollment mandate many insurance advisors were predicting increases in healthcare costs of 35 percent across employers with continued increases in future years (this may not change even with the delay). Such a significant and abrupt increase can disrupt how firms operate rather than simply be absorbed as uncertainty regarding employment costs. Even the implementation delay of this and other provisions itself creates a new level of uncertainty regarding whether such increased costs may ever be implemented and when. Also, note the uncertainty concerns how much health care costs will rise, not whether they will rise.
Regarding the financial sector just one-third of 2010’s Dodd-Frank rules have been written. This legislation is targeted at providing financial stability by ending “too big to fail” and protecting the taxpayer from future bailouts. Even if you believe the law could be successful, the fact very little of it has been implemented in the three years since passage should make you wonder about the health of the financial system.
Unfortunately, the Dodd-Frank rules that remain to be written – as well as the ongoing debate on mortgage finance – are preventing banks from lending. For example, if you owned a bank, would you make a loan that a) you don’t know how you are allowed to fund b) you’re not sure whether you will be allowed to sell c) you don’t know what type of structure will be acceptable to regulators, and d) lies in a sector where state and local governments are suing large lenders today regarding current and past underwriting practices?
Probably not, but this is exactly what mortgage bankers are facing given such tremendous legislative uncertainty.
In addition to the above known uncertainties, and with apologies to former Defense Secretary Donald Rumsfeld for stealing his phraseology, there is also a fear of “unknown unknowns” developing. These vary much more widely than the known unknowns but primarily exist because of the intense, volatile times we live in today.
Since 2008, we have experienced the liquidity crisis and subsequent stock market crash, the collapse of well-regarded institutions such as Bear Stearns, Lehman and AIG, the first downturn in home prices in generations, the Arab Spring, the possibility of a euro zone collapse, a regulatory overhaul of healthcare and its failed challenge in the Supreme Court by more than half the state Attorneys General.
None of these were “known unknowns” before they occurred. So it’s logical to believe the typical individual is now concerned about future unknown unknowns after being surprised with such frequency and velocity in recent years.
So, yes, uncertainty has always been part of the business game. But that speaks only to uncertainty about how consumers, competitors and suppliers might behave.
Today’s uncertainty regarding the “rules of the game” has strengthened the foil in our Jiffy Pop economy.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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