Where's the bottom? When do things get better?

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These are two questions I receive often on social networks:

Where’s the bottom?
When do things get better?

First, a disclaimer: I am an armchair economist at best. I’ve never taken a course in economics, but I do own Economics for Dummies and have read it cover to cover many times. That’s enough for the barest of basics, but I don’t want you thinking I’m some elite economics expert. I am not.

That said, theoretically, I can’t do worse than the “Experts” who have driven their companies into the ground in search of short term profits, can I?

Where’s the bottom?

The economy as it stands now hinges on two factors, employment and housing prices. Housing prices are important because an inordinate number of loans and investments based on loans rely on housing prices. As long as housing prices continue to fall, the value of those investments will continue to fall, and the credit, lending, and investment parts of the economy cannot recover. The exception to this is if a company that wholly owns its loans can write down the loans and sell them immediately, or devalue them so significantly that the book value of the loans is lower than housing prices will ever get.

Employment is the other piece of the puzzle, which controls the domains of consumer spending, productivity, and retail investing (including real estate). As long as employment continues to decline, more consumers will be benched on the sidelines, more people will not be able to afford homes or even basics. Demand for assistance in every form will deplete government by depriving it of both taxes and additional costs for services.

Of the two, employment is by far the most important. With employment and income, consumers will be able to afford real estate, especially if prices continue to decline. Once enough people are employed gainfully and can begin participating in the economy again, buying everything from commodities to homes.

How will you know the bottom? The same way you knew the top. Probably a quarter or two of waffling, neutral employment with neither gains nor losses, then two quarters of sustained growth in employment across broad sectors, with velocity towards the upside. Once employment ticks upwards significantly, you’ll see all the markets dependent on the consumer begin to recover as well – so figure real estate and housing prices stabilize a quarter or two after employment stabilizes, then ticks upwards a quarter or two behind employment.

When do things get better?

I don’t know. I wish I knew. I do know that many of the crap mortgages won’t flush out of the system completely until late 2011. There’s no telling whether broader economic declines will hasten the expiration of those mortgages or whether a recovery package inadvertently spawns new stupidity in lending. Both scenarios are possible. I’d say conservatively that 2009 is a write-off in terms of broad economic growth. 2010 may or may not show a turn.

Why don’t we know when things will get better?

Back to economics 101. GDP – gross domestic product – is a formula. C + I + G + (X – M).

C: Consumer spending
I: Investing
G: Government spending
X: Exports
M: Imports

Right now, consumer spending is in the toilet.
Right now, investing is in the toilet.
Exports are down.
Imports are down too, but our few exports – autos and airplanes – are in more dire straits than imports.

That leaves government. There is no way that the government can singlehandedly carry the entire economy by itself, no matter how great you think Barack Obama or Timothy Geithner is.

Government spending will increase, to be sure. What government is counting on is multiplier effects – throw enough matches and even a wet forest will eventually catch. The question is, how many matches is that?

So what do you do?

Look objectively at the situation. Cut costs. Conserve cash. Save like crazy, because there’s no telling if your job is next on the chopping block, as grim as that sounds. If you’re a business, spend wisely and invest in your people if you can.

In this environment, time is the only thing that will heal the economy. Time will flush out the poison.

In this environment, we are rich in time and poor in money. Thus, spend time rather than spend money. If you have the ability to pursue alternative forms of marketing that are lower cost – direct email marketing, social media, new media, PR, etc. – but time intensive, that might be a fair trade right now.

Give your company or business an objective and then give your team the freedom to get to that objective by any legal means necessary. Take the time to prune out processes that don’t work. Take the time to do inventory and jettison things that you’ve outlived, outgrown, outlasted.

If you’re unemployed or underemployed, time is an enemy because capital is limited. Spend it wisely, focus on job search and income generation. Be unrelentingly aggressive in your job search. If you have a choice between offending a few people with unsolicited email and putting food on your table, as Emperor Palpatine instructed Darth Vader, do what must be done. Do not hesitate. Show no mercy. Network as you can, but if you have to pull out the red saber, no one will fault you for wanting to take care of your family and home.

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