With all the bad news and worrying these days, it's sometimes hard to look on the bright side.  People have the tendency to believe that what's happening today will happen again tomorrow.  So, the double dip recession talk and the gloom and doom dominate the news today.

While timing the market and predicting what will happen tomorrow is best left to the gamblers, the truth is that things change and cycles come and go.  What goes up must come down and the momentum of large scale change typically shows us where we're going.  I was reminded of these simple truths the other day when a private equity investor likened the current change in direction to the power of the flywheel.

Let's face it; the financial market meltdown and the crash in the real estate market created the momentum on the downside.  The effects were severe on a global basis and the speed of the collapse surprised nearly everyone...the flywheel was in motion.  Today, the flywheel is beginning to spin in the opposite direction, and the speed of the recovery might just surprise us on the upside.

Consider this...the emerging markets of China, India and Brazil are growing at 8-10% in spite of the fact China is trying to slow it down.  Interest rates have been held at artificially low levels on a global basis for a very long time, and financial institutions are much stronger.  The private equity industry is more active than they have been since late in the last cycle and more than $1 trillion will be put to work over the next couple of years.  Productivity is way up and wages have been held down for a sustained period of time. 

What does this tell us?  I fundamentally believe it tells us that a solid recovery is right around the corner and that inflation is unavoidable.  This is clearly not the conventional wisdom these days as most predict a flatline economy for the foreseeable future, but the fear of inflation is overblown.  A little inflation will intially be good.  The momentum of the flywheel should drive growth and improve the prospects of lowering unemployment and reversing the fall in real estate for the foreseeable future.

The momentum is shifting.  Valuations and stock markets will rise, companies will make investments, and senior level executives and investors will do well.  The only thing for certain is that things change and I for one am trusting the flywheel.

9/9/10. 

After meeting with a variety of private company owners and private equity investors this summer, I've been surprised by the tentativeness in both camps.  While I'm a firm believer that M&A activity is poised to pick up and is a leading indicator of a recovery, I have to ask, "What are they waiting for?"

We have all heard the same comments from small and medium sized business owners who say they've weathered the storm and feel the worst is behind them.  They reflect on the anxiety they experienced during the crash, and the vast majority of those still standing feel they were fortunate to have saved the business.  While clearly relieved, they also express cautious optimism for the future with a lack of conviction of how quickly things will noticeably improve.  I then ask if they've considered selling the business, and almost to a man I hear, "the private equity guys have disappeared, but that's OK because I sure wouldn't want to sell anything right now if I didn't have to".

As for private equity firms, they've been busy fixing the companies in their portfolio they can save and calming investors.  They've also taken a look at potential deals, but they're extremely skeptical of the future potential of any company that is on the block right now.  As the private company owner says, "Why would anyone want to sell anything right now unless they have to?"  There we have it.  It really isn't about a lack of capital or leverage, it's really about a lack of confidence and unrealistic expectations.  Sellers still haven't adjusted their expectations on valuations to address the risk private investors still see in the market. 

For the buyers, they continue to wait for that magical day when valuations appear more reasonable.  For sellers, they're keeping their fingers crossed that their businesses continue to improve and that private equity buyers will come back.  While it seems like a standoff, I believe the buyers will come rushing in when they feel they may miss the window.  Buying good companies at a bit of premium is going to look a whole lot easier than buying marginal companies at a discount and trying to turn them around.  You get what you pay for.

So, where are the private equity guys?  What are they waiting for? 

Let me know your thoughts. 

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?

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.