Don't Fear The Recession
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2022-06-23 07:00 by Karl Denninger
in Macro Factors , 1393 references Ignore this thread
Don't Fear The Recession
[Comments enabled]

"Oh nos, there's a recession coming!"

CHEERS, say I.

What, you say?  You must be nuts!  People lose their jobs in a recession and the economy stinks!

Oh, so what's going on right now doesn't stink?  Sky-high gas prices and a 50% inflation built into the PPI which has yet to work itself through the system -- and won't for at least another year even if all the crazy policies stopped now?  Of course it does.

The only reason to fear recessions and higher interest rates is if you, or your firm, is over-levered.  To put not so fine a point on it you cheated to obtain what you claim as "prosperity" and now you're staring down getting caught out while both unprepared and having done stupid things.

Key to this is that you did the stupid things.

What was the smart thing to do in such a time?

Live below your means and sock back capital during the good times.

Why?

Because then you have it, and its yours, when the bad times come -- which means you get to pick on the people who did stupid things and, by doing so, get far ahead and you didn't have to cheat in order to do so.

Twice in my time running MCSNet I feasted on other people's stupidity in regard to taking on leverage they could not service.  Neither time was I personally responsible for the stupidity of said others, but both times I made out like a bandit -- precisely because I had cash and, when the opportunity arose, could slap it on the table in exchange for what I wanted to grow the business at a ridiculous discount to what I would have otherwise paid.

One of those was Class "A" office space in downtown Chicago which I was able to lease for $8/ft, about one fifth of the going rate at that general time.  I had cash and thus was able to slap a big check on the desk in the management office and prove that I was able to fund the space and wanted it now.  I got it.

Why was that so critical?  In business you make your money when you buy things, not when you sell them.

This may sound counter-intuitive but it isn't.  Marketing (and its subset of advertising) are expenses. You not only have to out-market the other guy you must do so while every dollar you spend on same dilutes the results.  That's hard, and while marketing is necessary going at competitors from that angle is an uphill slog.  Necessary, yes, but still uphill.

On the other hand if you can acquire office space at a fifth of what the other guy had to pay now you spend less on said overhead every single month until the lease runs out, and during that time your operation costs less to run than his does.  That's a wild advantage that, assuming you're both equally good at what you do, drops immediately to your bottom line.

So do not fear recession, rather plan for it and patiently wait for the advantage, then take it.  There is nothing wrong with exploiting someone else's stupidity and it is in fact the way the patient and smart make money over time.  Not instantly to be sure, but certainly, and with no or little risk of blowing yourself up economically.

If you're one of those people screaming about an imminent recession you just marked yourself as either one of those who has been stepped on by various corporate interests over the last decade (in which case you have a valid complaint, but its not with an impending recession) or you're over-levered and starting at your own economic destruction, knowing its coming, and demanding that someone save you from yourself.

Sorry, not this time.

And, incidentally, my expectation is that this won't be over quickly either.  The closest analog is the 1970s in our recent economic past and the sucky economic picture went on for about four years.  Thus it is likely to this time as well, and in fact the PPI data, which I have reported on repeatedly, strong suggests that the Biden Administration component of this is just starting to show up at the consumer  level in the last few months and even if we were to stop all the craziness right now, which of course we won't, it would be 12-18 months before it started to improve.

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