Auto Meltdown - End of an era (Part III - Final Part)

In my earlier blogs in this series I had covered about the current state of auto industry and how the US auto industry got into this mess. In this post I be focusing on my thoughts around the future of the auto Industry.

Auto Industry is in a serious need for disruptive innovation. The internal combustion engine technology was invented in 1870's in Germany. It is the same technology that has been running our cars for well over 130+ yrs!! While there has been improvements, optimizations etc the base technology is still the same. Compare this with other fields - Energy/Power, Medicine, Telecom, IT, Aviation or any other field for that matter, we've had multiple disruptive innovations and technology has evolved leaps and bounds during the last century. Due to cheap availability of oil, the auto industry was complacent and failed to innovate. The auto industry in the current state is not sustainable. The technology running our autos need a complete refresh and be environment friendly for the industry to recover and maintain its growth. Since the beginning of this decade awareness of this issue has increased amongst auto companies. Huge amounts of money is being pumped into research in alternate technology cars. I expect this to spawn off a wave of disruptive innovations in the next 1-2 decades. We are currently at the beginning of this cycle.

Alternate energy/Clean tech cars are the buzz words these days. In terms of technology, Electric plug-ins leads the pack, Some of the other key alternate technologies that hold a lot of promise incude fuel cell, Solar etc. It will be few more years before these technologies mature. While all the auto majors(GM, Ford, Toyota, Honda etc) are researching in new technologies and are in various stages of development of alternate energy cars, there is a slew of VC funded startups that are working in parallel to come up with nextgen cars. Some of these start ups like Tesla, Aptera, Fisker etc are in advanced stages and plan to roll out their cars in the next 12-18 months. I expect some of these new startups to take off and go mainstream(if they dont get acquired!). This transition into alternate tech cars is going to shake up the industry in the next decade. Those players that are not in the forefront and capitalizing on this trend would get left behind and eventually perish. I also see the current gas-electric hybrid cars to be more of a stop gap till alternate energy cars mature . These will eventually get replaced. I expect this transition to clean tech to occur in the next couple of decades.

Next turning to key markets for car consumption US market is past its peak demand. As highlighted in my earlier post due to easy availability of credit & low fuel costs the demand had spiked during the last decade causing an auto bubble. The net new sales of 17-18M vehicles/yr is not sustainable. I see this number settling to between 12-15M vehicles/yr in the near to medium term(once we are out of this recession). US will be upstaged by China as the top car market in the world. Over the next decade I expect the car consumption in China, India and other developing countries to fuel the growth of car industry. This is the beginning of end of US domination of auto industry.

To sum up this series, we are currently in the midst of an unprecedented shake up in the auto industry. I expect this change to unravel over the next decade and will result in changing the complete landscape including technology, key players, key markets etc. It will be interesting to watch which players survive and which players will perish in this shake up. The time is here to clean up the auto industry and recreate it as a more sustainable and green industry!

Pls let me know your comments and thoughts on this series. Pls feel free to share your views on how you think the auto industry would evolve in the next 1-2 decades.

Photo credits: geeksg, cobra_x, Solaris_bot

Who should be blamed?

Here's an excellent post "Bankers aren't special.. But Banks are" by one of my friends from the banking industry. As part of this post she talks about the double standards where we praise banks/bankers when they generate great returns and slam them when things turn sour. Here's my detailed response to the same.

I agree with her view that bankers get paid more as banks are wealth creation engines. Here are couple of points I would like to add on why bankers are paid more - high level of complexity/highly intellectual nature of their work(similar to IT) and high level of risk they deal with as part of their jobs- higher the risk higher the returns! Rightly so that they get paid more.

Banking industry is all about trust and reputation. One of the reasons why people are upset today is because the trust that people had on the banking system & reputable financial institutions is now broken. Lot of people lost their lifetime savings, 401k's and big portion of their hard earned wealth due to unsustainable/risky investment practices of banks. As a layman a lot of these practices looks way too risky to me. I fail to understand how these smart bankers failed to see the inherent risks/defects in the model.

I feel that banks were focused more on short term profits than long term stability/sustainability. Otherwise how else will you justify the leverages(Investment banks have a leverage of 30-40 times their asset base) and risk taking ability in the system? These days its all about the number game. Most banks/banker's performance is judged by the short term returns they generate and in turn their bonuses are based on the same. This blinded their view on the risks and biased their thinking towards short term profits.

I dont think its a problem with the banks alone, this is an inherent problem with our system (Btw I'm not a socialist, I'm a hardcore advocate of open markets). Who should be blamed for this mess - The Banks? Bankers? Government? or we as individuals who perpetually crave for higher returns? To give you a small example when we are putting our money in a fund/bank most of us by default put our money where there is a higher return and in a normal scenario we hardly care about the risks. When we encourage banks to take higher risk, generate higher return and provide them with our money how do you expect the banks to take the blame?

While i still hold the banks/bankers accountable as it is their responsibility to take the right decisions to safeguard/grow our wealth, we as individuals are equally responsible. We need to wake up to the fact that with higher returns come higher risks and be cognizant of this when we push our bankers to generate higher returns. We as stock holders need to realize that companies/banks cannot keep growing forever and generate unreasonably high returns, we need to take a long term view. To conclude, we need to keep our greed in check and come to grips with reality. End of the day its your money that is lost and you are the one who is affected!

Pls let me know your views/comments on this post!

Photo Credits: Nick.Hider & ilovepiano

Auto Meltdown - End of an era (Part II)

In my previous post I covered details on the current state of auto industry and the reasons that led us into this bubble. In this post I will be focusing specifically on US auto industry and how it got into the current mess.

The top 3 American auto companies(GM, Ford, Chrysler) are teetering on the brink and are currently going through the worst crisis of their lifetime. They have been piling up huge losses, losing market share to Japanese, Korean and German auto majors, their shares have been battered and are trading at 50-70yr lows and are almost on the verge of collapse due to a steep drop in sales. Feb '09 was the one of their worst months in several decades and most of them saw a big drop in demand - GM's YoY sales reduced by 53%, Ford reduced by 48% and Chrysler by 44%. For Q4 2008 GM alone lost around $30 billion and Ford lost around $5.9 billion. All the top 3 companies are running low on cash reserves, their corporate rating has suffered making it both expensive and tough to borrow in the market. They are currently looking to the US government to bail them out.

The decline of the big 3 companies started couple of decades back in the 80's when Japanese cars started making headway into US market. Here are my thoughts on some of the reasons that led them to the current state:

• Lower Product quality: Japanese cars are known for their quality and reliability. This was one of the key factors that helped them differentiate effectively against American cars and grab market share. The big 3 had ignored this for too long. By the time they started to improve their product quality, the flood gates had been breached and Japanese cars had established themselves in the US market. Though the gap has reduced over the last decade still Japanese cars are ahead of US manufactures in terms of quality and reliability.

• Lack of Innovation: The big 3 got too comfortable and were slow to innovate. Japanese cars had better technology & fuel efficiency than the equivalent American cars, which lagged Japanese cars in terms of technology by few yrs. Classic example is hybrid vehicles. Toyota had a head start on competition in hybrids. US car manufacturers are also lagging in their research for alternate technology cars. The internal combustion technology has been around for over 100+ yrs around and cars today are still based of the same technology that ran cars beginning of 20th century. Compare that with technology change in computer industry! The fact that oil is finite is well known. Car manufacturers are just waking up to the fact and developing alternate technologies.

• Slow to change to evolving market trends: American cars are traditionally known for their big, powerful and gas guzzling vehicles. Over the last few years due to steep increase in price of gasoline and increased awareness of environmental issues, consumers are starting to migrate to smaller more fuel efficient vehicles. American car manufacturers had failed to forecast this trend. They suffered heavily when oil prices shot up last summer due to their weak line up of small cars. In the small car market they are the underdogs today.
  

• Higher Cost of ownership: Though the purchase cost of American cars tend to be a little lower than equivalent Japanese cars their operational cost is higher due to lower fuel efficiency and lower reliability(especially as they age). The expected lifetime of American cars is also lower than Japanese cars. These factors together result in higher cost of ownership for American cars.
  

• Unsustainable Labor agreements: American car manufacturers had entered into unsustainable labor agreements with union back in the sixties when they were doing well and were flush with lot of cash. They are stuck with these contracts now and the cost of benefits/Pensions runs up to around 10% of car cost. This is unsustainable and is a big drag on American companies, forcing them to spend valuable cash into benefits than in R&D.

• Spread too thin and wasted money in acquisitions: Over the last couple of decades American companies spent lot of their cash on buying up multiple brands. They were looking at acquisitions as a key strategy of growth (inorganic growth). If you look at their portfolio there will be multiple cars from different brands in the same segment with little differentiation. Each of their brands were also fighting against each other and grabbing market share. A lot of these acquisitions were also overpriced and were not managed well. Classic example is Ford acquisition of Jaguar and Land Rover. Ford sold them last year after losing billions of $'s. In comparison, Toyota & Honda were very focused on organic growth and invested in their improving their products. They invested in improving the technology, quality and reliability of their products and used it to effectively differentiate and grab market share.

All the above factors had led to a gradual decline of American car companies over the last couple of decades. The last straw to break the camel's back was the sudden increase in oil price last summer and subsequent credit crisis/depression leading to a steep fall in demand. At this moment of crisis they are stuck with a line up of big, powerful vehicles that are not in demand anymore, precariously low cash reserves, excess capacity etc. Though their very existence is in question now, I think they will survive this crisis. However they are past their peak and I doubt if they can ever get back to the original market position.

Please let me know your thoughts on the above. If I've left out any more key factors feel free to add to the above.

In my final post of this series I will be covering my thoughts on the future of auto industry.

Photo credits : dsheubert

Auto Meltdown - End of an era (Part 1)

This is the first of a 3 part series on Auto Industry meltdown. As part of this post I will be covering the current state of auto industry and my reasoning on what led to this bubble.

Current State

February 2009 has been the worst month for US auto industry in decades. The overall auto industry demand has fallen to 4 decade lows of 9.1M vehicles in 2009. The top 3 US companies sees their demand halved from last year's base. GM was the worst with 53.1% decline, Ford 48% decline and Chrysler 44% decline. The Japanese car companies fared slightly better than US companies however still took a significant hit. Toyota saw 40% decline in sales, Honda saw 38% decline and Nissan 27% decline. There is a virtual blood shed happening in auto market both US and globally.

US has been the top auto market in the world for years peaking at 17M+ vehicle sales in 2007. China was a distant second coming in at around 7M+ vehicles in 2008. For the first time in history Chinese car sales exceeded US car sales in Jan 2009. Is this going to be trend in future?

Auto Bubble - How did this happen?

Over the last couple of decades US has been experiencing an 'Auto Bubble' similar to the housing bubble or the dot com bubble. The demand in US auto industry is unsustainable. Overall there are around 251M vehicles in US and 199M licensed drivers this translates to around 1.3 vehicles/driver. I think this would most likely be the peak vehicle ownership ratio. It will start going down from here and eventually settle down between 1-1.1 vehicles/individual. Here are some of the key factors that led to this bubble:

• Low interest rates and easy availability of credit in the last couple of decades fueled an increase in consumption(similar to housing) leading up to a bubble. It will be interesting to check out the foreclosure(or equivalent) rate for auto industry.
  

• Low cost of Fuel - Low gasoline cost in US meant low operating costs for owning a car. This spurred people to travel more and buy more cars and less fuel efficient vehicles. In fact the average miles/gallon in US is 17.1 which is very low by global standards. People really didn't mind this low fuel efficiency till recently due to low fuel cost in US(one of the lowest in western hemisphere).
  

• Reducing ownership cost -Technology improvements, innovation and automation has made cars more affordable and cheaper to operate at the same time offering more features and comforts. Opening up of US economy to Japanese and Korean cars also contributed to this trend.
  

• Increase in disposable income - Over a 30 yr window between mid 70s to mid 2000's the average car price of american cars increased by 15% in constant currency terms. The average per capita income increased by more than 270%.

All the above factors led to building up of a bubble over the last couple of decades leading to peaking of demand in 2007. When the economy took a turn for the worse last year due to credit crisis things really started falling apart and auto companies started taking big hits with a drastic reduction in demand culminating in halving of their sales this Feb.

Please let me know your thoughts on the above. If I've left out any more key factors feel free to add to the above.

In my next post I will be covering my analysis of how Detroit got into this mess

Planning to invest in Real Estate? Watch out the market hasn't bottomed out yet!

I came across this interesting graph on index of American home prices for the last 120 yrs that was originally produced by Professor Robert J Shiller and later updated by a reader and posted at www.ritholtz.com. Shiller had initially come up with this analysis as part of his book 'Irrational Exuberance'. The magnitude of the rise in housing values during this boom cycle was in excess of 100%, that too within a short span on 6-8yrs. In some of the hot markets like Florida, California, Nevada etc the price increase was much higher than the national average. No wonder the fall has been equally dramatic! Comparing this with the previous boom/bust cycles puts lot of things in context and brings out the magnitude of the bubble. As you can see from the chart, while the real estate prices has come down by a significant margin in the last couple of years, we are still at the mid-point and have a long way to go before the markets bottoms out.

Source: www.ritholtz.com

Note: The above chart is an adaptation of the classic Shiller housing price chart with updated data. The original graphic is via NY Times.

Here is another interesting graph from Reggie Middleton's boom bust blog. The below graph is an extrapolation of the Robert Shiller's analysis in comparison with interest rates, population growth, building costs etc and it highlights at what point the market is expected to bottom out. As you can see from the below graph, the interest rates and building costs came down during the 80's and 90's, setting the stage for this historic boom. Another interesting statistic to note is that, the last time the housing crash happened back around 1920 it took almost 25 yrs for the market to recover!

Source: www.boombustblog.com

One of the important parameters to consider for market recovery is the foreclosure rates. So far the housing bubble has led to foreclosure of around 2.3 million homes. In 2009, with all the economic issues and lay-off's that are happening, this trend is expected to accelerate further leading to foreclosure of around 2.4 million more homes. Looking at a longer term, around 8.1 million homeowners are expected to lose their homes by 2012. So we are in for a prolonged real estate downturn. If you are planning to invest on a home, wait and watch for another year or two before you take the plunge!

For those interested in reading more you could check out the below links:

United States Housing bubble
Causes of the United States Housing Bubble
No Ceiling yet on Home Losses: Report: Expect 8.1 Million Foreclosures by 2010

How to Survive the Economic Downturn?

I was reading an interesting case study in HBR blogs couple of days back. The case study was about a Home improvement store chain whose sales/profits were going down. The company was faced with a tough decision to cut costs in order to survive. Headcount reduction seemed to be the only course of action. The author lays out the various thoughts of the company's leadership team and employees and asks for our opinion on what is the best course of action.

This seems to be a pretty common occurrence these days with lot of companies facing similar situation. Economic downturns & recessions are an inherent part of capitalism intended to shake up the market and weed out the weak companies. It’s all about survival of the fittest. Companies can either become stronger or weaker based on their response to the crisis and the actions take take during these tough conditions. As part of this blog I've attempted to list down the possible solutions they can adopt to survive and thrive in the downturn. These solutions typically fall under three major categories which are:

Optimization & Cost reduction solutions

These solutions are aimed at reducing wastage in the system and costs.

Solutions for fixing issues/Problems

These solutions are aimed at identifying the root-cause for sales/profit decline & fixing them.

Growth enabling solutions
These solutions are aimed at improving the competitive advantage of companies and enabling them to come out ahead of their competition.

There is no single solution that will fix the issue. Companies need to undertake a combination of all the three major solution categories listed above in order to sustain & emerge stronger from the downturn. Here are top 10 solutions that companies could adopt during tough market conditions:

1. Eliminate excess fluff

Most large organizations as part of their growth create lot of redundant roles, position and non-critical functions. All the roles and functions that are non-critical need to be reviewed and pruned down as appropriate. In addition for each of the functions we need to analyze if there are ways and means in which productivity could be improved thru automation etc and if it can be performed with reduced effort. If feasible some of the people displaced thru this reorganization should be re-trained and deployed in core functions. Companies could also explore options like outsourcing their manufacturing, services etc to low cost locations to reduce cost.

2. Weed out the non-performers

In most environments non-performers are a big drag on the system. They generally are very negative and low on morale. Not only is their productivity impacted they also impact the morale of the good people in the system. Identify the bottom x% of non-performers and weed them out of the system.

3. Reduce Wastage

Wastage of resources is a big drain on enterprises. In normal working conditions these go unnoticed. This is good time to ‘go green’ and reduce wastages in the system. Some of the examples of reducing wastage include – Utilize power saving techniques, Encourage Paper-less office (reduce consumables usage), Reduce T&E expenses (utilize collaboration tools, video-conferences etc), Optimize supply chain (Just in Time, low inventory etc).

4. Renegotiate contract with Suppliers/Vendors

This is a good time to relook at the contracts with your suppliers and see if some of the rates can be renegotiated. Most enterprises get into multi-year contracts with vendors/suppliers and are stuck with the high rates thru the conract. These rates would have looked attractive at the time of signing contracts however due to market pressures they could have reduced later. As an example during the early-mid 2000’s companies that had multi-year contract with telecom service providers realized that as an outcome of dot com burst telecom prices came crashing down due to huge availability of bandwidth however lot of companies were still stuck with old pricing. Some of them pushed their carriers to revise the pricing based on current market conditions.

5. Identify reasons for fall in sales and fix it

This is one of the most important activities that a company needs to do. In a lot of cases companies attribute fall in sales to macro economic conditions and dismiss it. A good indicator for this would be to check how your company is performing w.r.to its industry and some of its key competitors. If the company sales is falling more than its competition it’s an indicator for a problem. Some of the reasons that could impact sales include Product quality, Customer service, Differentiation, Market perception of the company/product, Cost etc. A detailed root-cause analysis needs to be done to identify the problems and appropriate action items need to be taken to fix it.

6. Identify loss making division/products and fix them

In a lot of cases there might be specific products/divisions in the company that might be pulling down the whole company. Identify the non-performing divisions/products and fix them. In case some of these are non-core to the company it may be divest them. It also makes sense to run each of these products/divisions as separate profit centers.

7. Identify what’s core to your company and focus on it

One of the foremost strategies recommended during downturn is to focus on core operations of the company. Over course of time companies tend to deviate off their core offerings and venture into multiple areas. Companies need to clearly identify what is core to their operations and stick to it. In order to be successful they need to have razor sharp focus on their core operations and continuously invest in it to stay ahead of the field. All non-core operations could be spun-off and divested from the company. This would also help to generate much needed cash for running the core operations.

8. Improve differentiation against competition

In order for enterprises to be successful they need to successfully differentiate against competition. Companies need to constantly ask themselves the question - why would customers want to buy their products/services? They should identify unique value proposition that customers would get by engaging the company. Differentiation can be in terms of superior service, Higher quality, Unique features, Customer experience, Better value for cost etc.

9. Invest in Innovation and research

Innovation is a necessity in order to drive sustained growth and market domination over the long term. Companies need to be aggressive and encourage innovation and invest in research to help develop new products and new ways for delivering services to customers. Innovation could also help with operations more efficient thereby driving down cost/Time to Market etc. As an example companies like Google, Amazon, Ebay, Facebook etc kept their focus and invested in innovation and research during the dot com bust and have emerged as the industry leaders today. Similarly American car manufacturers are in the brink of collapse today as they did not innovate for the last few decades.

10. Invest in talent

Challenging market conditions are the best time to hire the top talent in the market. Lot of good talent will be available in the market due to lay-off, company closures etc during challenging times. Successful companies are constantly on the look-out and hire the best talent in the market during challenging times.

I have made the above list generic so that it will fit a wide range of Industries. Pls let me know your views on the above solutions. If you feel that there are other ideas in addition to the ones i have listed above pls feel free to add to this list.

Credit Crisis demystified by Jonathan Jarvis

Here's an excellent educational video on the credit crisis by Jonathan Jarvis. The video explains how the whole mortgage & credit system works and what went wrong with the system leading us to the present crisis. This is a "must watch" video for folks who are closely following the credit/economic crisis and wondering how this all happened and why no one has caught this earlier.

I loved the way Jonathan has demystified this complex issue and presented it in such a simple and entertaining way. I've spent countless hours reading up numerous articles/blogs & discussing with my friends in financial world to understand the credit crisis, This is the best and simplest explanation I've seen till date. Hope you like it:-)

For those interested in reading more, here's an stirring article from Orin Woodward on why government shouldn't get involved in this credit crisis and use taxpayers money to bailout banks. He says that this is creative destruction and this would help us evolve much stronger from this crisis. While I do agree with Orrin's reasoning, Govt sitting back and letting things take its own course is definitely not an option given the current recessionary conditions & scale of this crisis. Some of the banks/bankers who were the prime reason for this crisis might stand to gain from this Govt intervention, that cannot be prevented and its part of the deal. The risk of Govt not intervening and letting the country/world go into prolonged depression is way too high. It is going to be more expensive to clean up later and people will have to go through more pains (similar to 1929 depression) before we get the system back on track.

Layoff by Profitable Companies - Is it Ethical?

Jan 2009 has been a bad month for US with around 598k jobs being laid off. This is on top of the 2.3M layoffs in 2008. One of the trends that we saw during this cycle was lay-offs by profitable companies like Microsoft, IBM, Intel etc. This garnered a lot of press coverage and prompted a big debate on whether layoff's by profitable companies is ethical.

IMHO layoff by profitable companies is ETHICAL. Here's are some of the reasons why i feel it is ethical:

• Shedding excess baggage: Most large companies over a period of time build up a lot of fluff (redundant positions, over staffing etc) in their operations and this typically goes unnoticed when they are growing well and are profitable. When the going gets tough and margins are starting to take a hit they wake up shed lot of these excess baggage, trim down their operations in order to be more efficient & competitive.
  

• Rollback of excess hiring for anticipated growth: It normally takes between 6-12 months to induct a new employee and have him fully productive in a typical enterprise. Lot of companies do anticipatory hiring based on their targeted growth. When a downturn occurs, most companies realize that a slowdown is occurring only when they start feeling the pinch. When growth suddenly starts tapering out and they don't have sufficient work for the folks that were hired ahead of time. Hence leading to lay-offs.

• Declining Demand/Consumption: One of the key reasons for economic slowdown is decline in consumption. People tend to spend lesser due to risks/tough market conditions and this leads to worsening of the condition. A lot of industries take a hit due to reduced consumption/demand. Its only natural that they reduce operating expenses(shutdown factories, layoff workers etc) to remain profitable.
  

• Weeding out the Non-Performers: Weeding out the bottom x% of non-performers is a standard practice in most enterprises. When the going is good the tolerance level in the system is higher and non-performers get more leeway and lesser folks are laid off. Non-performance related lay-offs also get very little attention/coverage. During difficult times, companies utilize this opportunity for flushing out the non-performers. In most Fortune 500 companies the bottom 2-3% itself can be sizable(few thousands). This whole process also gets more press coverage in tough market conditions.

• Protecting share holder interests: One of the key agenda's for boards and CEO's is to maximize shareholder value. These days there is an enormous amount of scrutiny on company performance, operational metrics, profitability etc more so when the going gets tough. We as share holders & individuals also demand better performance and improved value from corporates. Due to this boards and CEO's take a very conservative & precautionary approach during tough economic conditions to optimize their operations, reduce costs and minimize risks. If boards/CEO doesn't take these tough decisions they will be replaced with folks that can take these decisions.
  

In most cases lay-offs are done due to a combination of one or more of the above factors and hence it is ethical. Pls let me know your views on the same. Also if you feel there are other factors in addition to the ones listed above pls feel free to add to the above.

2008 Economy & Stock Market Highlights

2008 will go down as a record year in the history. Most analysts and economists were predicting a slowdown in the economy and a soft landing earlier this year. However no one was even in the ballpark w.r.to the actual events. The complete world was taken by shock with the magnitude of the financial mess and global recession/slow down. There was unprecedented volatility in global stock markets, commodities like oil, Gold etc, Currencies, interest rates and a whole bunch of key economic fundamentals. This is expected to be the worst recession (some are even calling it depression) since the great depression in 1929. Almost all developed countries and key emerging/developing countries like China, Russia, Brazil, India etc are impacted in this global crisis.

Some of the key highlights/statistics from an economic perspective are listed below

ü All major stock markets down from their record highs in Oct 2007

o Dow is down almost 40-45% from its peak

o NASDAQ is down by around 45%

o S&P 500 is down by 40%

o BSE Sensex is down 55-60%

ü S&P 500 market has lost $6.17 trillion dollars in Market cap in the last year

ü S&P broad market index which has around 11,000 stocks in developed and emerging markets has lost around $17.7 trillion YTD

ü The entire Investment banks segment has been wiped out – Bear Sterns & Lehmann doesn’t exist anymore, Merrill Lynch has been acquired by BoA, Morgan Stanley and Goldman Sachs have converted into commercial banks

ü After Lehmann collapse the entire global credit market was frozen and there were massive money injections from multiple governments (US itself is investing over a trillion dollars this year to re-energize the market)

ü Several large & reputable US financial institutions have failed – Wachovia, Washington Mutual , Fannie Mae, Freddie Mac, AIG etc.

ü 25 US banks have failed so far this year and has been acquired by FDIC

ü US Federal Reserve interest rate is at a 50yr low of 0.25% with today’s cut

ü Oil started our 2008 at little under $100/barrel and reached a peak of $147/barrel in July and dropped to $40/barrel in Dec

ü In the last 15 months Gold which is typically the most stable asset went from <$700/ounce to a peak of $1020/ounce and is now back to $800/ounce

ü US Dollar has bucked a multi-year trend of weakening against global currencies and has appreciated against major global currencies by almost 15-20%

ü The US auto industry is in Doldrums and giants like GM, Ford and Chrysler are on the verge of going bankrupt

o GM’s stock is at a 80 yr low

ü US unemployment rate has gone up to 6.7% and number of unemployed people has increased by around 2.7 million during this year

ü All major global economies are either in recession or in the verge of getting into recession

o Ireland, New Zealand, France, UK, Germany, USA, Japan, Italy, Singapore, Spain to name a few

o China growth is expected to slow to 7.5 – 8 %. This is its lowest since 1990.

o India growth rate is expected to slow to 7.5% (from the 5yr average of close to 9%)

After reading the above the first question that comes to mind is have we seen the worst of this crisis?

I think we are in the middle of this crisis what we have seen so far is the first half of the crisis. There is more of financial crisis that is yet to come, Lay-offs are just starting out and has accelerated in the last 3 months and it will continue thru most part of 2009. There will be budget and spending cuts leading to reduction in customer spending and consequently impacting a wide range of industries etc. To cut to the chase the current scenario will continue thru the first half of 2009 and should start flattening out as we go thru the year. I expect the stock market to be volatile and fluctuate within a band during most of 2009 and start the climb up in 2010.

Is this shake out/recession good for us?

At the outset some of the news we hear and what we see in news would seem scary. However this is part of the economic cycle. The best part of open markets/economy is the self-correction. Companies start becoming inefficient and add lot of fluff over the years. These economic downturns are the times when some of the weak players are eliminated and strong players become more efficient and focused. While we go thru lot of pain in the near term it is good from a longer term perspective. Stock valuations, real estate valuations etc are very attractive now and while there is a little down side to it in the near term over the medium to long term they will start climbing up and this is a good time to start investing.

Stop worrying & start investing!!!

US Economic Outlook 2008 - 2011

Here's an interesting read on US economic outlook. This article talks about how some of the historic decisions made by Federal Reserve and US Govt are contributing to the currrent economic downturn. Though it paints a very grim picture of dollar being replaced as the world's reserve currency in the near future, I dont see it happening atleast for a few more decades till we get to a multi-polar world. US is still the only super power and has a good amount of leverage & influence on the world economy and countries. It will pull all levers at its disposal to prevent this from happening. US Economic Outlook 2008-11+ (Updated)

US Economic Outlook 2008-11+ (Updated 28 May 08); Discussion of Money, Federal Reserve, Dollar as World's Reserve Currency, Inflation, Deflation, Oil, OPEC, Debt, Saving Rate, Housing Bubble and Future Outlook for US Economy

An analysis of economic downturn by Sequoia Capital

I was browing the net and came across this presentation by Sequoia Capital about the economic downturn and what startups need to do to survive this downturn. Its a very insightful, creative & well structured deck.

Sequoia Capital on startups and the economic downturn

View SlideShare presentation or Upload your own. (tags: depression recession)

Sequoia Capital recently made a presentation to its portfolio companies about how to try to survive an economic downturn. Here's the presentation

SlideShare Link