As I've been traveling the country this summer and talking with leaders from many different walks of life, the conversation has inevitably drifted to our assessments of when things will noticeably improve.  Back in March, I wrote a short piece on when things will start turning around so I thought I'd revisit the question.

Aside from the slowing rise of new unemployment claims, the 40% rally in the equity markets, and Q2 earnings reports which generally met or exceeded analyst expectations, the mood in this country is cautiously optimistic at best.  Interestingly, when the market corrected a bit this week (which is healthy and to be expected) it was somewhat surprising to hear some predict that the sky is falling and that we may retest the bottom.  It's clear that the fear and pain is just below the surface, and people will get scared quickly if a major correction occurs.  Having said this, almost everyone feels that things will get better in 2010.

But what are the triggers to get us moving?  In March, I pointed out that we watch two trends to predict improvement in the executive search business; namely CEO turnover and M&A activity.  Interestingly, CEO turnover has been reported to have increased 20% this past month, and while a month does not make a trend, it is the first sign that CEOs and Boards are ready to move on.  In addition, the private equity firms and investment banks are preparing for a healthy resurgence in the IPO market.  Lazard just hired a senior banker to lead their activities and private equity firms are preparing for IPOs to show returns for their investors.  Without exits and leverage, the deal market has been dead, but the signs are there for a significant increase in transactions over the next 12-18 months.

While these trends drive management turnover which is good for my business, they are also the signs that value creation opportunities are in greater abundance and that visibility is improving.  These leading indicators of a turnaround are improving, but two additional things need to happen to really clear the decks for growth.  First, the US Government needs to move past healthcare and demonstrate a unified focus on jobs and economic recovery.  Obama has tested our patience and more government spending will only postpone a recovery at this point.  Secondly, the government's role in the financial markets needs to be curtailed.  As one real estate investor told me, "There are great deals out there, but investors will not invest if they think there is another government subsidy or regulation coming out."

With Obama's poll numbers slipping and the timing for a vote in Congress quickly approaching, my bet is on a grand compromise to move past healthcare in the Fall.  Obama will work to improve his approval rating, and consumer confidence should improve; perhaps not in time for the holiday season but probably in time for the spring.  As a result, we should see solid growth in 2010 as long as these trends continue.  Whether the growth can be sustained to avoid a "W-shaped" recovery is a debate for another day, but I'm cautiously optimistic we'll be "breaking out in 2010".

What are your thoughts?  Do you see other key trends to watch?

With a summer rally underway in the equity markets and glimmers of good news coming out of Corporate America, the pendulum is getting ready to swing.  Just as we suffered from the reversal of irrational exuberance and the speculative excesses in the financial and real estate markets, we are poised for a positive upswing that may surprise some people.

I've been saying for quite some time this recession is likely going to be longer than most of us are prepared for, but I'm beginning to feel like I'm following the herd.  Conventional wisdom at this point suggests that we will technically come out of the recession in Q3 and certainly by Q4.  It is also believed that growth will be modest and primarily driven by inventory restocking rather than consumer spending as unemployment continues to rise and people continue to save where they can.  As a result, the expectations for a noticeable rebound are relatively low and 2010 is not expected to produce big upside surprises...this is the conventional wisdom.

Having said this, the acceleration of the global recession on the downside suggests we may see acceleration on the upside as the economies around the world recover together.  This momentum may create a "V-shaped recovery" which was talked about and then discounted by most over the last few months.  But the market move from 660 on the S&P to 1,000 during this same timeframe suggests that investors have become increasingly worried about missing the upside rally.  As a result, Goldman's prediction of the Dow rising to 10,000 by year end appears highly probable, and the pessimism of the day may give way to optimism early next year.

The holiday season could be the next big moment.  While expectations will be low given the current pessimism, the potential for surprises on the upside is there.  If inventory levels are once again diminished and the consumer proves to be more resilient than is currently expected, the momentum will shift and an impressive rebound in 2010 may take place.  As a result, don't be surprised if the equity markets hold onto the gains from this year and rise another 20% next year.  We would also see unemployment start to come down and the long, drawn out period of stagnation to give way to much improved and growing economies around the world.

So, get ready for the pendulum to swing and watch the Fed.  Higher interest rates and inflation are just around the corner if the optimistic scenario plays out.  This will require just as much expertise by Bernanke to control inflation as he has demonstrated in shoring up the financial system.

What are your thoughts?  Are we overly pessimistic or do you believe that our problems are so big that we'll have trouble recovering for years?

As we all know, the debate rages on as free market advocates wrestle with the almost unprecedented government intervention led by the Obama administration.  While The New Deal legislation in response to the Great Depression is the historical comparison, we've entered a new era and looking to the past gives us perspective, not a roadmap.  This week, General Motors declared bankruptcy in what most expected would come, but the reaction to the government's activism raises questions again from the free marketers.

During the last several months, I've had this conversation with many of the brightest minds in business.  From CEOs and CFOs of large corporations to senior partners in some of the world's most successful private equity firms, the conversation is very similar.  Experienced business leaders are uncomfortable with the government's role in TARP, the "stimulus" plan, AIG and GM, and the prospect of a big government spending plan and intervention in healthcare raises further anxiety.  The argument is simple - government's share of GDP is becoming unsustainable and will squeeze out the more efficient and productive influences of free markets.  With very few exceptions, business leaders do not like big government.

In spite of such a consistent chorus of doubters in today's business circles, Obama's popularity remains high as the general public continues to look to Washington to cure our economic woes and the stock market rebounds while most believe the financial system crisis is almost certainly in the past for good.  What hasn't been factored in however is the rising cost of doing business, and what is sure to come from massive government spending - higher taxes, higher interest rates, higher rates of inflation and lower standards of living.  Today, few feel these effects as the Fed fights to maintain low interest rates to support housing and the consumer, and the contraction of our economy has dampened the inflationary pressures that will come. 

While most leaders in business today oppose the massive government spending on the horizon, few have confidence in the Republican Party leadership and most blame Congress and not Obama for the inefficiency of government.  What surprises me is that the Republican Party hasn't figured this out - the party doesn't need to radically change or even take on Obama directly.  All they really have to do is lead with great ideas based on strenghtening our economy and foreign policy.  After quieting Cheney, leaders in the party should join Obama on foreign policy and demonstrate the patriotism Americans expect.  On the economy, they should simply promote efficiency of government and restraining it's share of GDP rather than use the "tax and spend liberal" argument - a subtle difference but an important one.

By avoiding the traps set by the talking heads from the right wing of the party, the Republicans could harness the strength of business leaders and provide some useful balance to the big government advocates.  Bigger government is certainly not the answer over the long term, but in a vacuum there is no other attractive choice.  Where is the Republican Party and why haven't the reasoned voices of today's business leaders made an impact in Washington?

Let me know your thoughts.

We're all angry about the bonuses at AIG and on Wall Street but I say, "Enough about the bonuses!"  Going back to the day several weeks ago when Wall Street announced $18B in bonuses, we've been listening to the outrage and feeling more and more angry.  Remember when Obama called those bonuses "irresponsible" just a couple of weeks into his presidency?  Well, AIG then announces bonuses of $165M this past week and we've reached the tipping point.

Well I say, enough already.  This debate is topical and we all can relate to it, but that's exactly why it's been blown out of proportion.  In the grand scheme of things, these bonuses are small rounding errors in the whole mess, but it really puts things in perspective.  When the news is dominated by multi-billion dollar bailout packages nearly every week for one thing or another, the money starts to lose it's meaning.  How many zeros are in a trillion?  So when we think about some executive at AIG or some Wall Street firm bringing home a $5M or $10M bonus, we get angry.  Why should they get paid when their companies got us into this mess?

What we should really be angry about is that Congress has been acting just as irresponsibly, and in the name of fixing things!  How can Congress honestly get on their high horse and grandstand when they didn't even take the time to read the bill that gave AIG the discretion to determine the amount of these bonuses?  You can't have it both ways.  Regardless of your political leanings, Congress is being exposed for how irresponsibly they spend our money.  It's really that simple.

The bottomline from my perspective is that we need continued action by Treasury and the Fed to fix the financial system.  Let's keep Congress out of the spending business and allow our companies to make their own decisions on how to allocate capital.  Executives in financial services make a lot of money.  Unless the government plans to nationalize the banks (and they don't), we're just going to have to let great CEOs like John Mack and Jamie Dimon make those decisions.  Quite frankly, I'd rather have those two guys making more decisions, and I hope this uproar over bonuses doesn't empower Congress to really screw things up.

What do you think?  Do you think that capping bonuses or having AIG executives pay them back will make any positive difference?  Could it actually have huge negative consequences?