Economy 1996 Face-Off

NORM BRODSKY
Nowhere to Go but Down
'things couldn't be rosier, people keep saying. But if things can't get rosier, then what?'
Jack, you're a good businessman, but you've been listening to too many bankers, economic forecasters, and government officials. Tell me, when was the last time those people were right?

Look, I'm not a doomsday guy, far from it. I'm generally an optimist. But I am nervous about this economy. And I get especially nervous when I hear people say, "Inflation's down. Interest rates are down. The economy's growing. Things couldn't be rosier." You know what? They're right. Things couldn't be rosier. And if things can't get any rosier, then what?

Not that we're heading into a depression, but I do think we're in for a period of sluggishness and deflation that will last for years. I expect the turn to come in the next 6 to 10 months. No later than the end of 1996. It will probably start with a big drop in the stock market and snowball from there.

I don't think we are prepared for this. Most of us have never lived through a really bad market, in which values go down. And down. And down. And they never come back. People generally think, "If there's a crash, the market will eventually recover. Look at 1987." But what if the market doesn't recover? What will happen to the $3.4 trillion in mutual funds? How are people going to respond as they see their savings, their retirement money, their entire net worth shrinking year after year after year?

The fact is that the consumer drives the economy, and right now the consumer is seriously overextended. We're in the midst of a downsizing trend that isn't going to stop anytime soon. Part of it has to do with overseas competition, but the root cause is technological innovation, which is accelerating. I've heard estimates that a billion-dollar company will need just 1,000 employees 10 years from now, versus about 7,000 today. What's going to happen to the other 6,000 people?

One thing I know for sure: discretionary income is going to fall. It's already fallen a lot. The problem is, spending hasn't fallen nearly as much. People have made up the difference by going into debt, a lot of it on credit cards. They can't keep it up. Eventually, they'll stop buying, and we know what effect that will have on business. I mean, what happens when you're stuck with inventory you can't sell? You cut prices, right? I think we're going to see a lot of price-cutting in the coming years. It's already begun. People think the cuts are temporary, a passing phase. They're wrong. This will become a way of life. So while everyone is guarding against inflation, the real danger is coming from the opposite direction: deflation.

What might offset that trend? Not the government. We're looking at long-term massive cuts in government spending, which means more layoffs. And the private sector won't pick up the slack, either, at least not in the short term. Companies are very cautious. Even with interest rates low, they aren't borrowing, and the banks are getting desperate. They're going after loans they wouldn't have touched a few years ago -- which means they're taking on additional risk. It also means some companies are taking on debt they won't be able to repay.

Meanwhile, the stock market is haywire. It reminds me of August 1987. I see the same mentality. I hear people talking about all the money they've made in mutual funds and stocks, and these are not knowledgeable investors. I see deals being done in my own industry that make no sense from an operating standpoint. Then I see the stock of those companies trading at multiples that are out of whack. It just can't last.

Of course, the trick is to be ready when the bubble bursts. Take my storage business. I'm not the low-cost provider, but I could be. Right now I sell on quality and service. Maybe I should prepare to sell on price. I want to position myself so that if I'm right, I can take advantage of what happens.

You may be in a different situation, Jack, but I have to say this seems like the wrong time to be adding capacity. And, yes, I do think people should be careful with their cash. They should think twice about going into new markets. They should resist the temptation to take on additional debt. I'm not saying pull in your horns. Companies can still expand, but you should expand into something that takes advantage of the change.

I don't mean to sound glib about all this. I take no pleasure in seeing people suffer. But good things can come out of bad times, as you know. Any change makes for opportunity. You lack opportunity only when things are stagnant. There are going to be a lot of opportunities in the coming years, no matter which of us is right. The important thing, I suppose, is to follow what you believe. In business, the worst thing you can do is to sit on the fence.

I wish I could believe your scenario, Jack. Listening to you, I have half a mind to move to Springfield. On second thought, however, I think I'll wait a couple of years. By then, you should have plenty of empty warehouse space you'll be able to rent to me real cheap.

JACK STACK
Looks Like Up to Me
'We're in an economic boom that could last another five years. The driving force is capital.'
I've always admired your street smarts, Norm, but I have to wonder which streets you've been hanging out on lately. Here in the Midwest, the future looks nothing like what you're describing. In fact, it looks so good it's almost scary.