Economy

Volume 133, No. 18  - Friday, October 31, 2008

I sold a house a few years ago in California, right at the peak of the real estate bubble. Half the people making offers had mortgages built on negative amortization.

Every day they would pay less than what they owed, and it would keep growing. As long as home prices kept going up, they were told, in a few years they could convert their mortgage to a fixed rate.

Problem is, as always, when we start believing in schemes we forget about the business cycle. In the book I am currently writing, called “Managing by Natural Law,” I talk about how natural law governs our business life as well.

Those scientific things we learned in physics class, none of which seemed relevant, became very relevant after years trying to understand the hard work of managing. I was forced to change my glasses. Many of our worst challenges begin when our inner nature and nature’s nature aren’t dancing to the same music.

We are all familiar with the term the business cycle: “A cycle of economic expansion and contraction.” All cycles are governed by natural law, like the change of seasons.

The law that applies here is called Newton's third law of motion: “For every action there is an equal and opposite reaction.” Other more popular phrases are:
¤ What goes around comes around
¤ What goes up must come down
¤ Or, as I overheard a crazy hippie put it, when I was young, “What comes down, must go up!”

What troubles me about this latest “correction” is that the whole thing was fueled by a childish belief that what goes up will never come down, sweet music to our human nature, but completely against nature’s nature.

Luckily, we, in the cheese industry, are throwbacks to when people earned money by making real things; things that met real needs. When our Economy stopped fixing the value of money to something real when we abandoned the gold standard, the world economy switched from real production to speculation.

Once upon a time, money was time condensed on paper. Time is, if you think on it, the irreplaceable currency of our lives. The speculative economy, while it creates wealth quickly, has some very naughty sides to it, not the least of which, when governments can’t pay their bills, rather than cut spending or raise taxes, they go into debt or print more money.

The power of our economic life has been taken from those who produce real goods, like us, and given to an army of speculators interested only in grabbing short term profits.

Woe unto them that allow their human nature to act at loggerheads with Nature. We may want to live forever, we may want the economy to go up and up and up, but “what goes up must come down,” and by natural law, the greater the force used to prolong the upside against the cycle, the deeper the fall will be.

I preach diminishing the size of the ups and downs, to get a process under control and be able to improve it, leading to long term profit, and survival.

The farther we move from a real Economy, based on real goods, the more speculation drives our car, the more our economy resembles a Ponzi game, the promise of a quick return on an initial investment which lures the victim into much bigger risks than a true Economy.

So what can WE do in this very difficult situation? The answer lies in the word economy itself. The word economy, in the sense of management of material resources, comes from French économie, via Latin from the Greek oikonomia, meaning household management.

First, don’t panic! Unless you are a truly marginal business, you should survive. People need to eat, and the last luxury they give up is food.

Even during the last two major depressions of the 1980s and the 1930s, retail sales of specialty foods like cheese fell only at the lowest point in the cycle and recovered quickly, within six months in the 1980s, within two years in the 1930s.

Specialty foods are particularly buffered from the affects of recession.
“They performed well during the economic recession of the late 1980s. According to Progressive Grocer, specialty foods retailers weathered the recession because their clientele were not bargain shoppers in the first place, and because, in general, people ate out less and entertained more at home.”

So like a good householder, the key to economies in a down Economy is making good decisions and managing how you spend your money to get the most return, not different at all from what makes sense in an up economy, except you should have a lower tolerance for some kinds of risk.

Put whatever risk you can afford into promoting your product. Travel more to sell face to face, not less. Invest more in price promotions to drive sales, it will maintain cash flow and is good long term public-relations.

And there is a silver lining for those of us who manufacture real goods, our cost of business should go down.

I said manage your resources; don’t stop using them! Some companies, like IBM, keep their eyes on the indicators, and when a recession has bottomed out, and is starting back on the uphill climb, they invest in more staff, and better equipment, while prices are low, and so they can be ready when the Economy lifts itself out of the recession, as it always does, it’s natural law!

Contrary to the floating heads that pass as experts on TV news, most economists will tell you that by the time we realize we are in a recession, we have already hit bottom.

The best minds are saying another six to eight months and then the recovery begins.

Timing is the key. A few months after my house sold, interest rates went up, gas went up, the real estate market started to plummet, and so began the current crisis.

That was four years ago. That time I caught the wave right at its crest. Doesn’t always happen that way, but you have to keep on surfing or you drown, it’s called “Managing by Natural Law.” •


Dan Strongin is managing partner and owner of Edible Solutions, a consulting company focused on helping companies making great food make a profit. He will be writing a monthly column in Cheese Reporter. Strongin can be reached via phone at (510) 224-0493, or via e-mail at dan@danstrongin.com

 

Other Strongin Articles written for Cheese Reporter

dotPartners
dot Diamond Cutting:
dot
It's What You Don't Know That Can Hurt You
dot Integrity and Ethics
dot Pricing:  The Perceived Value
Designing the Effective Sell Sheet
Common Sense
It All Begins in The Mouth
Of Cars...

The Gathering Storm
As Our Industry Evolves, So Should Our Terminology:

Other Cheese Reporter Guest Columnists
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Visit Neville McNaughton

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