Smart managers react quickly and strongly to changed conditions. Unfortunately, when those conditions are a systemic event visible and affecting everyone their actions re-enforce the event. Positive feedback. This creates much of the business cycle’s volatility, the big swings. The “dampeners” of Keynesian economics, contra-cyclical monetary and fiscal policy, fight these in order to maintain equilibrium.
We see this a work in this “bootleg” summary of a recent presentation by Sequoia Capital, one of America’s A-team venture capitalist firms (originally posted at the subscription-only site TheFunded). Their companies will cut expenses — operating expenses, people, and capital investments. This in turn will force other companies to cut. Your expenses are my revenue, another example of Keynes’ paradox of thrift.
Thanks to globalization, the world has synchronized into one business cycle. So this cutting is happening right now in every nation. This will be the first global recession, not including wars (the third world and communist states did not participate in previous cycles).
I recommend reading the full set of notes. The slideshow at the end is one of the best overviews of the economy I have seen this year. Not deep, but it touches most of the key points.
Here are three excerpts from “Inside Details of Sequoia Capital’s Doomsday Meeting With its Companies” by Om Malik, posted at Giga Omni Media (daily news about emerging technology) on 9 October 2008.
(1) {These} are drastic times and that means drastic measures must be taken to survive. His message to companies was don’t worry about getting ahead, instead, “We’re talking survive. Get this point into your heads.” He warned that companies need to be cash-flow positive, and if they are not, then they need to get there now, because raising capital without being cash-flow positive is going to be tough. He was warning that there will be a price to pay for those who hesitate to act.
(2) This could be a 15-year problem, he said. This comment was accompanied by many slides that showed historical charts of previous recessions averaging 17-year cycles. He pointed out that the issue here is not the equity markets but the credit market, and that will take a long time to recover. He was ominous in warning the startups that this is a global issue, it is not a normal time, and is a significant risk not just to growth but to personal wealth.
(3) Recommendations
- Cut spending. Cut fat. Preserve capital.
- Throw out the models and spreadsheets, because all assumptions will be wrong.
- Focus on quality.
- Reduce risk.
The brief explanation of the Paulson Plan, in pictures
See “Banktron“, posted at Sinfest, 12 October 2008 — I highly recommend reading this!
Afterword
If you are new to this site, please glance at the archives below. You may find answers to your questions in these, such as the causes of the present crisis. I have been writing about these events for several years; since November 2007 on this site. As you will see explained in these posts, the magnitude of the events now happening is beyond what most Americans have — or can — imagine.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
- A solution to our financial crisis
Key posts about the financial crisis
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A solution to our financial crisis, 25 September 2008
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A picture of the post-WWII debt supercycle, 26 September 2008
- America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
- A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
- Forecasting the results of this financial crisis – part I, about politics, 13 October 2008