Great Depression? Nah, Great Reality Check

I’ve about had my fill of hearing the words depression, recession, crisis and crash. So I’m looking for a new way to characterize the situation we now face.

The good in what we’re going through now is that maybe, just maybe, this is the grand finale of more than a decade of neglecting what real value is, and what real values are. We’re in a crisis (both risk and opportunity), but there is nothing beneficial about describing it in negative, defeatist terms.

So as opposed to the Great Depression, let’s call this the beginning of The Great Adjustment – a time when we finally adjust our values and our perceptions to acknowledge what constitutes value creation and growth.

Every day, real companies with real management teams and real employees are producing real products and services, and creating real value. With all the wailing and gnashing of teeth, it’s sometimes tough to keep that in mind. Absolutely, things are ugly around the world.

But this offers the chance for us to readjust our priorities, clear our heads, and finally get back to figuring out what creates long term value in business and the markets. I remember in the 1980s scratching my head and wondering how anyone could see the value in junk bonds, or how the prospect of high returns on paper with so little real value appealed to so many so-called intelligent investors. Yet the country forged ahead. Good people ran good businesses and good people worked for and invested in those businesses.

I wondered in the late 1990s how Internet and technology companies with ludicrous business models, impossible revenue projections and no timetable for becoming cash flow or earnings positive could attract billions of dollars in financing and soaring projections from analysts whose financial and economic degrees said they knew better.

A lot of people lost a lot of money, but we kept on plugging. I was perplexed as the 21st century made its rocky debut that, in the face of the horrible realities of terrorism and the World Trade Center and Pentagon attacks, that a coven of individuals could be so reckless and greedy in their behavior, harming shareholders, employees, and shaking the country’s confidence in corporate America. Yet real companies continued to generate real value.

Perhaps a bit desperate to find a bright spot, we set unrealistic expectations that, for the first time in history, we would have an endless housing bull market and the dream that everyone who got financing deserved it. We imagined there was long-term value from investing in a mountain of poor loans that should never have been made.

Yet again, we happily drank the Kool Aid. Our eight cylinder economy is running on five and making loud, grating noises. Seems like a good time to take it to the garage for a long-neglected overhaul. This is the time for us all to assess what constitutes real value creation – things like revenues, margins, cash flow, return on invested capital, smart management, and sound business strategies.

Yes, everybody’s numbers are ugly and they will be for at least a few quarters. The good news is so much gas is out of the balloon that there’s very little pressure to justify current valuations. It’s not too early for companies and their executives who believe they are viable and have solid long-term prospects to start communicating that information to the investing public. A ton of cash is sitting on the sidelines, and it will be coming back into the market at some point unless someone has figured out how to make cash in a dresser drawer generate double-digit returns.

I’d really like to believe that after more than a decade of seeing the disastrous results from deluding ourselves into buying products, concepts, companies and markets with make-believe value, we’ve learned our lessons and we won’t do it again. Which means real companies with a real investment opportunity stand a reasonable chance of being listened to. That would be a refreshing change.

Comments

[venividivici:]

Mmm the history of the human race would seem to suggest otherwise.

2008 Oct 12 08:29 AM

[Pessimistic...:]

did we just get too greedy and excessive or what? Buy this, float that, credit card this, loan that. The culpability of the USA is astounding. We did it.. we should own it. I still say start at the top, go for the CEO's and Gov't figures.. salaries should be docked commensurate to that company or position. Bonuses should be re-invested in that company. Not to benefit the CEO either. John Q homebuyer with an ARM, who bought and was either duped into the unpayable mortage or knew and figured on losing the home to the mortgage company at a later date should also be held accountable.
I bought a home.. pay my mortgage and continue to pay taxes. And my house deflates with the market. That will continue with no gov't aid for me. many people made tons of money and that cash should be taken back. The hearing with both CEO's questioned about whether they deserved or was it fair that they had such huge bonuses? Shame on them? that is it? Laisse-faire attitudes. Let's slap their wrist and suffer the little guy.
I am pissed. My thoughts..like the rancher tying the dead coyote by the hind leg to the barbed wire fence.. as a warning to the rest. Hold them to it, make them accountable. Do not shirk their responsibility. Put their feet to the fire. I want to believe that many little guys just got duped beyond their wildest dream but I do not have enough knowledge about it to really know what happened. Some did just take advantage and knew hey could bail out.. bail, humm how fitting as term

2008 Oct 12 12:57 PM

[henarl:]

A refreshingly optimistic post and one would hope a prophetic one. However, the middle class will not give up their extravagent lifestyles easily. The American dream is no longer a 1,400 sq ft three bedroom, two bath bungalow on Elm Street with the white picket fence and a single car garage containing the ten year old family sedan. It has now morphed into a 3,000/4,000 sq ft McMansion in a gated community with a three car garage containing a new BMW and a big SUV and a boat. Inside there are a few computers and TVs including a 60" plasma with surround sound, and a kitchen with every appliance known to man and 100 sq ft of granite counter tops. All of this on a half acre lot with swimming pool, hot tub, and big built in barbeque. Of course it takes at least two good full time jobs and max credit to support all of this, but at least we're as well off as the Jones next door. Returning from this back to reality will result in a lot of social unrest, but it will have to happen. The party is almost over.

2008 Oct 12 05:12 PM

[Tad Gage:]

I'm certainly not feeling pie-in-the-sky optimistic by any means, but I continue to meet and work with many business people who are not going to give up because the "markets" are volatile or reflect the greed and poor decision making of a small number of individuals and corporations. However, the points above are well-made -- the real difference will be if Americans come to their senses and once again exercise discipline in their lifestyles. When I was a kid, if a family only had the cash for one television, that's all you had in the house. You didn't borrow for a second or third. And only "rich" people drove expensive foreign and US cars because people stayed within their means on financing. And therein lies my hope that things are rough enough for enough people that we might re-learn some more positive values. After all, we've enjoyed this incredible materially high level of lifestyle, and frankly, people seem angrier, more stressed out, less relaxed and more miserable than ever in my lifetime. Obviously, the illusion of a luxurious lifestyle doesn't equate to real satifaction with life.

2008 Oct 17 12:34 PM