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Millikan Global Conference2010-Observations on Structural Headwinds

Structural Headwinds:
  • 60% of job lossesin the crisis came from firms with less than 100 employees in the latest crisis versus 23% historically.  Small business owner sediment is lower now than in the prior three recessions dating back to 1982, 1990 and 2002.
  • Financial regulation while a natural response to the massive shock to the financial industry will probably go too far and last too long.  This means less leverage for financial firms meaning they will be less efficient.  Additionally, the following unintended consequences are less risk-taking, and less innovation (3 of 4 startup companies in the United States depend on credit cards to bootstrap the business)and lower growth.  Expect more lawsuits at other Wall Street firms and banks in the coming months; Goldman Sachs is just the beginning.
  • Perception markets failed society continuing to drive policy. Government reach will continue to expand into financial services (from housing, healthcare, student loans, auto companies) and beyond. Current fiscal and regulatory policy will not change significantly unless the 2012 election brings a majority to the Congress and a Republican to the White House. 
  • Enormous uncertainty regarding government regulation and policy (combined with lack of access to credit) are keeping small and midsize businesses from hiring, representing 70% of the US economy.  Significant excess capacity exists in the United States.
  • Businesses view the current structural unemployment and underemployment of 17% to go down slightly in the coming year but remain in high on a historical basis, resulting in the lack of capital expenditures numerous industries.
  • Housing foreclosures are continuing to increase forcing prices down again in numerous markets; Bob Schiller thinks a double dip is very possible, Meredith Whitney firmly believes a double dip is beginning.
  • 15% workers in the United States work for state and local municipalities (20 million), 44 states are experiencing significant budgetary shortfalls resulting in layoffs and firings of employees; expect this number to increase in the coming months and in 2011.  The degree to which state and municipal layoffs cancel out general job growth going forward is unknowable.
  • If unemployment remains sticky in the 8% to 9% range (as most businesses expect) in the coming year there will be millions of people who've been out of work for over two years and will at this juncture be unemployable.  Remember, traditionally 150,000 to 200,000 individuals enter the workforce each month.
  • There is a bifurcation between corporations that have access to global capital markets and main street USA which is "flat on its ass".  Questions abound regarding whether corporate growth/equity prices can continue when there is no or little prospect for growth on Main Street near term.
 
Window of opportunity to deal with the structural unemployment in the next 2 to 3 years will close (if not dealt with successfully) and leave the United States boxed into a corner with only unthinkable options available. (Mohamed El Erian-co-CEO PIMCO)
  • Option 1, continued and repeated stimulus packages-that will not work and cause the deficit to be completely out of control
  • Option 2, recognize further stimulus is untenable cut spending/raise taxes- which will rise in unemployment and slow the economy
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  • Let's add one more (unrelated but very important) bullet point-Obama has decided on a policy of containment for Iran and sanctions where he can get them, Israel has other options/perspectives, expect Israel to defend itself proactively.  
 
*Above discussion points from roundtable discussions at Millikan Global Conference 2010 and my own observations.
 


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