The coming collapse in business spending – made visible today

Smart managers react quickly and strongly to changed conditions.  Unfortunately, when those conditions are a systemic event visible and affecting everyone their actions re-enforce the event.  Positive feedback.  This creates much of the business cycle’s volatility, the big swings.  The “dampeners” of Keynesian economics, contra-cyclical monetary and fiscal policy, fight these in order to maintain equilibrium.

We see this a work in this “bootleg” summary of a recent presentation by Sequoia Capital, one of America’s A-team venture capitalist firms (originally posted at the subscription-only site TheFunded).  Their companies will cut expenses — operating expenses, people, and capital investments.  This in turn will force other companies to cut.  Your expenses are my revenue, another example of Keynes’ paradox of thrift.

Thanks to globalization, the world has synchronized into one business cycle.  So this cutting is happening right now in every nation.  This will be the first global recession, not including wars (the third world and communist states did not participate in previous cycles).

I recommend reading the full set of notes.  The slideshow at the end is one of the best overviews of the economy I have seen this year.  Not deep, but it touches most of the key points.

Here are three excerpts from “Inside Details of Sequoia Capital’s Doomsday Meeting With its Companies” by Om Malik, posted at Giga Omni Media (daily news about emerging technology) on 9 October 2008.

(1)  {These} are drastic times and that means drastic measures must be taken to survive. His message to companies was don’t worry about getting ahead, instead, “We’re talking survive. Get this point into your heads.” He warned that companies need to be cash-flow positive, and if they are not, then they need to get there now, because raising capital without being cash-flow positive is going to be tough. He was warning that there will be a price to pay for those who hesitate to act.

(2)  This could be a 15-year problem, he said. This comment was accompanied by many slides that showed historical charts of previous recessions averaging 17-year cycles. He pointed out that the issue here is not the equity markets but the credit market, and that will take a long time to recover. He was ominous in warning the startups that this is a global issue, it is not a normal time, and is a significant risk not just to growth but to personal wealth.

(3)  Recommendations

  • Cut spending. Cut fat. Preserve capital.
  • Throw out the models and spreadsheets, because all assumptions will be wrong.
  • Focus on quality.
  • Reduce risk.

The brief explanation of the Paulson Plan, in pictures

See “Banktron“, posted at Sinfest, 12 October 2008 — I highly recommend reading this!

Originally published at Fabius Maximus on Oct 15, 2008 and reproduced here with the author’s permission.