© David Conklin
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In the final part Professor David W. Conklin from Western University provides an insight into how to prosper in the Global Financial Storm.
Prospering in The Storm
It seems that the storm will last for several more years, with ongoing crises and collapses in economies and financial markets, and with ongoing changes in foreign exchange rates. Volatility will be the central feature of the storm.
- Recognize the features of the storm that are most important for your firm and your investments. Not all firms or investments will be impacted in the same ways. Consequently, optimal strategies will differ. For example, in some nations prices of natural gas will fall as a result of shale gas, and firms that rely on natural gas may need to alter their location decisions. Of particular importance is the degree to which a firm may be impacted by changes in exchange rates.
- Recognize differences among regions and nations. The storm will not impact all regions and nations to the same degree and at the same time. In particular, the storm will be most intense and most pervasive in Europe. It is necessary to analyze the geographical location of a firm's activities, and so understand the unique pattern of economic risks to which it is exposed. Firms that were traditionally seen as US firms are now global and so the direct link between the US economy and the prosperity of "US" firms has been severed. For example, in 2012, Ford's global profit was severely reduced by the losses in its European operations. Even within Europe, the storm will not occur in a uniform pattern: Eastern European nations may not suffer as much as those nations in Southern Europe.
- Be aware of the impact of the inevitable government austerity programs on your firm. Households and governments feel they should adopt austerity as a way of restoring their fiscal balances, but austerity will maintain inadequate aggregate demand. A revival of house prices in the US, Spain and other nations will require many years, yet this may be necessary in order to restore consumer wealth and confidence. Perhaps some major innovations, like the railroads, the auto, or the computer will be necessary to restore consumer and investment demand. Meanwhile, continually focus on cost containment. Do not be fooled by temporary increases in demand.
- Prepare for rapid inflation. The recession may continue indefinitely, with periodic recoveries in financial markets. At various times and in various nations inflation may suddenly escalate, creating another set of challenges in the midst of the recession. The enormous money supply expansion in recent years will inevitably lead to inflation at some time in the future. While inflation offers hope of reducing the debt to GDP ratios, nevertheless, inflation being variable will disrupt business plans and will hurt some sectors and some individuals. Develop contingency plans based on alternative inflation scenarios. Don't buy bonds, unless they are inflation-indexed. Conversely, negotiate fixed rate loans for an extended period.
- Maintain flexibility. For individuals and businesses, plans must be more flexible. Strategies will be preferable to the degree that they will offer options as time passes. This rule is true for location decisions as well as purchasing decisions. Always have plans to shift production and purchases from one nation to another. China's exchange rate may escalate, its wages may increase, and transportation costs may rise. Mexico or Brazil may be a viable substitute. If so, prepare now for such a shift.
- Accept less business risk in the context of more economic uncertainties. The global uncertainties add a new level of risk on top of the business risks of a particular decision. What was once seen as a decision with a certain degree of business risk, now must be seen as a decision with that certain degree of business risk plus the enhanced risk of greater economic uncertainties. Rules and guidelines for decision-making should be changed.
- Be aware of opportunities to merge or acquire other firms whose strategies have failed in the context of the storm. Inevitably, many firms will not be able to survive the storm, and these may become inexpensive targets that you can turn around with your more appropriate strategies.