Vistage: Welcome to a special edition of The Vistage Cast Series. This is your host, Marc Figueroa, and today our focus is on the wild ride in the economy, particularly with the volatility we’ve seen in the last few weeks. We’re welcoming with us today renowned economist and speaker Alan Beaulieu, who many of you know from the Vistage All-City events and his work with the Institute of Trend Research. Alan, welcome, thanks for taking some time with us today
Alan Beaulieu: My pleasure, Marc. Glad to be here with you.
Vistage: So let’s get right into it. Let’s start with just this volatility that we’ve been seeing of late. What does all this mean and for business owners and for our audience, and of course, what a lot of people want to know too as a kind of a B part is, how long is it going to last?
Alan Beaulieu: That’s a great question. We’ll certainly get to B, although the answer probably won’t be horribly satisfying but this volatility is really interesting. My brother and I, Brian and I and the rest of the team at ITR, we’ve certainly been paying a lot of attention to what’s going on. The market was poised for some correction. We have that in our ITR Trends report, you know, people have seen it and know we’ve been talking about that. Jeff, Brian and I have been out there on the road talking about it.
The end of QE2 by the Federal Reserve Board made for a natural tendency for the market to pull back. P/E ratios were still, in our opinion, too high. I mean, so we’re not surprised by the correction. The volatility I think speaks to the nervousness in the world. Problems in Europe and the Congress of the United States, the President not providing much in the way of leadership and the – Dr. Bernanke scaring everybody to death. I mean, all that kind of brings about this volatility, this noise. Yet, through it all, Marc, and everybody that’s seen Jeff, Brian or I knows this, we look at these S&P 512, 12 rated chains as one of our signature indicators. That 12-12 rated change is still going up and it’s going to continue to go up even if we end August with the S&P at 1100. Now it’s at 1200 today so it’s still – that’d be quite a drop. We don’t anticipate it but that 12-12 is still rising.
The important thing there is that it means the economy will continue to expand in 2012. That little garland is telling us that 2012 is going to see some acceleration in the US economy. So all those doom and gloom guys are wrong. We have too many lead indicators the S&Pis still providing it in an upside news. And if we see the S&P go into 1250 from say 1202, we’re going to see some 112 rise which is going to be even more obvious to us and to those at all ITR that this is a time to get kind of rambunctious as opposed to pulling back.
Vistage: How long is it going to last?
Alan Beaulieu: How long is it going to last? You asked that? That’s a great question, Marc. How long do you think it’s going…? (Laughter) Two weeks to two quarters. The nervousness in trying to get to the system. Brian just said on the radio on our Make Your Move program that he thinks it’ll last, it could easily last through September to the 3rd quarter maybe, even bleed into the 4th quarter. And I have no reason to disagree with my brother. I think this volatility is going to be with us for a while. The sooner it’s settled down, the happier we’ll all be but we would not be surprised it’s with us for another 6-8 weeks creating more uncertainty which is part of where we are in the economy. Those that pay attention to the rate of change and lead indicators will know that this is noise and they can get down to business and that’s the exciting part.
Vistage: So let’s talk about that noise. There’s been so much going on recently in recent weeks with losing the AAA rating for the first time in history. You know, the gridlock in Congress with the debt ceiling, the Federal Reserve saying that they’re not going to be raising interest rates to at least 2013. What do those things tell us, and tell business owners? What can I take from that?
Alan Beaulieu: Well, we’re quickly going to turn into a half-hour podcast with those subjects, my friend. But what we take away from that as a group is that Washington has failed in their responsibility to lead this country and to keep us on solid footing. That’s probably the fundamental lesson because you can go back to Richard Nixon, Ronald Reagan and every president in-between and find out that they’ve been talking about this day.
So there’s hardly any surprise, any shock. And anybody listens to any of us from ITR knows that we’re not taking political sides here because there’s been plenty of time for either party to right the ship.
The political grid lock, it says to the world, you know, we’re still involved in our politics. We can’t get around to doing what needs to be done. And it just adds to that uncertainty. The fact of decline from AAA to AA+ is immaterial. Interest rates were never going to skyrocket. We are never going to see it, a great unfolding and unraveling of our Western civilization. There’s a lot more noise and substance. We should understand that this is a warning shot across the bow, that it’s time for us as a nation to take action and to start dealing with our deficits and our national debt. And as we do so through the next ten years, we will move to where we need to be. The great deal that was struck… It’s just more noise. I mean, the needle barely moved. But I’m hopeful.
And this is different than Brian. Brian thinks it’s just, you know, noise. I think maybe the needle moved and we would find ourselves with the beginning of a movement. And we’ll know that next year with the congressional elections going next year. If it’s the beginning of a movement, then we will find ourselves in a much stronger position in business as we’ll enjoy that as we go forward. Between now and then, just more uncertainty as we wait to see how the elections unfold. Dr. Bernanke’s statement, to finish… to answer your question: bad idea. I don’t know what possessed him to say he’s going to hold interest rates that low for that long. He never should’ve said that. That says that, “things are much worse than I anticipated and they’re going to be bad for a long time, world. And I have to do this. They’ll come in here and save the world for two years.” Give me a break, Dr. Bernanke. You just tied your hands and left yourself wide open to criticism and you have to raise rates next year because of inflationary pressures. He just threw more fear into the system than existed before. Bad idea.
Vistage: Alan, you mentioned a key word in your answer that I want to talk about. Hopeful. A lot of people are talking about doom and gloom and a double dip. And the noise that you say that people are creating and some of these actions that are making people feel nervous and scared and jittery. You have, you and your brother have kind of different outlooks on this. Can you share that? Share that view with our Vistage members that’s going to make them feel a little bit more positive about the future?
Alan Beaulieu: Sure, I’d be happy to. You know, at ITR we’re all about the leading indicators and our rates of change and our cyclical theories. And a cyclical theory, first off says that now is not the time for that really deep recession that a lot of, not a lot, some folks are calling for for 2012, a couple in particular.
But when we look at the leading indicators, I come up with a negative, and the purchasing manger’s index and another negative with the velocity of money. That’s two. But then I can tick off four that are saying that 2012 is going to be a slightly better year than 2011. That would be the US leading indicator which is put out by the conference board. Corporate bond prices, which as far as I know only ITR tracks and it works very well, by the way.
The money supply and the S&P 500 1212 rate of change. They’re all saying that things are going to be more than okay, it’s going to be a little better next year. Then we can add into that the fact that some jobs are being created. Retail sales in July moving up. A wholesale traded is showing a lot of Phase B above your goal levels of activity and still expanding. Consumer nondurable goods new orders still in Phase B which means they’re still expanding. I mean, I look at all those things, Marc, and I go, “why should we be depressed about next year?” There’s more going to right than wrong, right here on shore, here in the US and I just frankly wish the other folks that are calling for the end of the world next year should just be quiet because they’re just providing that uncertainty and destabilization that is no help to anyone.
Vistage: Right. So as a business owner then, you know, we talk a lot about these leading indicators. Are there specific ones other than the ones you had mentioned or maybe just cutting them down of things that we should, as a business owner should be looking at specifically? Or is it a combination of all those things you discussed?
Alan Beaulieu: Well it’s a combination. And anybody who had seen again the three of us in the Vistage presentation in the last 6 months or so know that one of the last things we put up is a slide of 7 things to watch. And by the way, that idea to have that slide came from Vistage here in Northern California. So I tip my hat to Vistage for helping us out with that. We’re always learning from Vistage as well as vice versa. But we watched the 7 things because any one or two can lie to you or be telling you contrary evidence. They go with the majority. And the majority as we’ve already discussed is telling us that things are going to get better not worse. And the times when the majority is wrong, very few and far between. I mean, the stock market can give you a bad signal. The famous quote in economics is that the stock market has accurately predicted 9 of the last 5 recessions. You know, it’s… if you only watch the stock market, you think the end of the world IS here. But when you look at the rate of change and the other things we talked about, you gain confidence and you start making decisions and acting on those decisions that will put you ahead of your competition.
Vistage: I want to talk about international business. So much of what we’ve been talking about has been US-centric. But as our members are thinking about, you know, either international growth or even operating there, what are the hot spots that we… that they should be concerned about in looking at?
Alan Beaulieu: Well Brazil is a hot spot. Hard to do business, requires a J.D. and an understanding of the culture and an understanding that they’re not in a hurry for a lot of foreign direct investment. But nevertheless, Brazil has to be on the radar. There’s a growing infrastructure need there and that means there’s going to be a lot of money spent.
India is also a place people want to keep an eye on. It’s slow in changing. There’s a negative certainty with inflation. Interest rates have been going up there in the last year 11 times and the potential for political instability. So I’m aware of the negatives. But on plus side, they’re going to be doubling their infrastructure spend over the next 5 years. And that means a lot of opportunity for Vistage members. And anecdotally, we’re seeing that the population food consumption is changing. And as they are changing more to proteins and better diets it speaks to an improved standard of living, improved health and a middle-class that is growing and that should speak volumes to Vistage members. So certainly you want to be well aware of what’s happening in India and Brazil. And in Latin America also you’re seeing some good things going on, not just in Brazil but that seems to be the center of activity right now.
Australia offers some really good opportunities as well. As does Canada. Everybody that’s heard us speak knows that China is going to continue to grow. That China and Russia, make you just more nervous than the countries that I just talked about.
Vistage: I was going to say, that was my question as far as China goes. Since they have been buying up so much US debt, what can you tells us about China? And is that a place where… How should we consider China to be now?
Alan Beaulieu: Well China is not our enemy but China has a growing problem in social unrest. They’re dealing with inflationary pressures which is hard for them to do as they have this enormous job creation need because of the population moving from inland China to the cities and the pressures that that creates. I think we’re likely to find that China’s rate of growth slows, that they become more nationalistic. We want Chinese saying we want to buy Chinese products. And that this growth of middle class that everybody’s been hoping will be the answer to all the world’s problems will be the answer to a lot of Chinese problems but not necessarily the world’s problems. I think there’s going to be that growing nationalism which will become more interesting for firms to deal with. And that will slow down FDIs as we go along. China’s not going to implode anytime soon. They’re not going to explode anytime soon but neither are they going to become the super economy of the world like the US is anytime soon despite the fact that 51% of all Americans, according to a study I saw, 51% of all Americans think that China is now the larger of the two economies. That’s just… there’s nothing further from the truth. That’s actually amazing that most Americans could be wrong.
Vistage: Interesting. So as we wrap up, Alan, what are one or two action items that the business leaders must take right now in all this volatility and uncertainty? What are just some of your final thoughts that you’d like to leave Vistage members with?
Alan Beaulieu: Let me give you three if I may, Marc. And one would be, watch out for employee burnout. I know we’re not in a hurry to hire but this is not the time to burn out your best players either. So hire to fill skill gaps or to avoid burnout, very important. And with your employees you’re also going to be giving out some raises. So under employees, we can take care of that.
Number two is, this is the time to borrow as much money as you can before inflation comes. Negotiate with the banks. Even if you have lots of cash, borrow the money and invest in your businesses for the long haul. Those things that will produce cash, moving into new markets. Those things that will allow you to open up in Brazil or in Texas, some place where you’re not already where you need to be.
And the third thing would be to make sure that you invest in your firm in terms of your competitive advantages, your marketing position and statements, which that follows your competitive advantages and your customer service. Which again, follows the other two. Those three things line up inside your firm. And this is actually a time of optimism and opportunity as we go through 2012 and into 2013 as opposed to the doom and gloom that we started talking about a few minutes ago.
Vistage: Well we like terms like, we like the term opportunity. And hope, which is great. (Laughter). Well thanks, Alan, for your time today. And before we end, how can listeners get more information and updates from you and the Trend Research Institute?
Alan Beaulieu: Well thank you for asking. We have two very easy ways of doing that. One is the ITR trends report which a lot of Vistage members subscribe to. You can go to our website and check that out. And that’s 12 issues a year, $800, complete access to all the economists including Brian and I, and Jeff at ITR. With as many questions as you want during the year. And the other one is the ITR Advisor, which is a monthly newsletter, 4 pages, and that one is $150 a year, and that’s an easy way to keep current also. So those two ways are available to keep the ITR thought process going inside a firm.
Vistage: Wonderful! Well thanks again, Alan. And to our Vistage audience, thanks for listening. Until next time.