Without sounding alarmist, what does the probability of a real estate/consumer-debt driven recession mean for the sustainability of this disconnect? Not long ago I sat down with a good hedge fund trader who reeled off some disquieting statistics that recommended that the end of the debt-driven asset bubble was nigh. He argued that consumer spending is the engine driving America’s financial engine and that the engine is beginning to sputter. For example, economists think that consumer spending accounts for two-thirds of current financial growth.
The market hangs on the monthly consumer confidence index as a predictor of future economic activity. The VC industry is banking on the consumer with the Internet also, device, and semiconductor investment theses predicated on strong consumer spending activity. In my four years in the VC business, I watched the industry moves away and then back towards the buyer completely. The question this post addresses is what exactly are the implications of early indicators of a slowdown in consumer spending activity, a fall in housing prices, and a growing crisis in consumer confidence? Also, if a slowdown will happen, it may pay to ask if the technology in one’s portfolio is pro versus counter-cyclical.
Market experts are starting to question the sustainability of financial growth dependent on a consumer facing record high gas prices, home debt, and rising interest rates. What’s driving the stock market’s concern about consumer-facing businesses. Q106 of 18% (ie. The truth of the matter is that I am never sure how to take into account the data above. It seems clear that a cyclical shift in the economy is underway with consumer spending no longer a dependable engine of financial growth.
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Counter-cyclical stocks, WMT and Costco, will probably reap the benefits of a shift in spending from high-end stores. Similarly, in IT and on the web it is conceivable that technologies that drive efficiency, reduce costs, and deliver WMT-type benefits to consumers (be they the enterprise or consumers) will do well. Companies that focus on discretionary spending (ie vacation travel, gadgets, consumer financing) will likely suffer.
On the web, we all are profiting from an allocation of spend from offline to online. Will a tough economy accelerate that allocation – ie if the total pie of dollars shrinks even, will the hard ROI of internet marketing business lead to an increase in total dollars spent on-line? Will a downturn accelerate the adoption of open up source IT solutions, lower TCO, and deployment technologies such as SaaS, and virtualization technology that increase asset utilization? Or will a slowdown not only reduce the total pie of available dollars but also retrench spending towards incumbent vendors and established business processes (think more not less of newspapers advertising and IBM).
If VC returns and start-up potential customers are truly uncorrelated to the equity marketplaces then these questions may be moot? GOOG and VMWare (proxies for start-up-related activities) will end up being counter-cyclical. GOOG delivers suitable value and makes marketing a more scientific lever to create ROI and value. VMWare provides more flexible IT environments, whereby utilization rises, cap ex is reduced, or ex is reduced, and the return on assets rises.
Despite the ominous surprise clouds on the horizon, I believe that the best lessons of the last downturn were to concentrate on companies that deliver value for lower costs. It’ll be interesting to view how counter-cyclical these technologies prove to be and if a financial slowdown accelerates the rate of deployment and allocation of dollars. If we are incorrect, it might be a tough year or two.
If off-street parking requirements are ill-advised and unscientific, what would we say of planners building a set amount of street parking without regard to the land use expected in an area? A market-based method of parking on the other hand DOES give a mechanism to look for the amount of parking to be built. Think of a shopping mall’s car parking, the spots near the doors are almost always in use during the business hours, the places at the farthest place from the entranceway are always unfilled, except maybe once every year.
