SLID with Dr. Erevelles on how to predict the future in business
Thursday, 8 August 2013 00:00
The Sri Lanka Institute of Directors in association with the Institute of Chartered Accountants of Sri Lanka presented a Power Evening with Dr. Sunil Erevelles, better known as the ‘Guru on the New Economy,’ who spoke passionately on ‘The Future of Business: Seeing Around Corners’.
“Over the last four years we’ve had a global financial crisis. We have had a meltdown in many countries; Europe, US, Japan and elsewhere. Why was this not predicted on time? The question on everyone’s mind is ‘as we go forward, how do we make decisions for our company?’ and the challenge is, ‘are we able to see beyond the horizon, look around corners and see things that other people can’t see?” Thus began a journey into the future on how one can make better decisions both with regard to one’s business as well as to one’s personal lives.
Many people depend on predictions by economists in order to look into the future, but what most of us do not realise is that 93% of the time these predictions have turned out wrong. Stating that most economists do not understand the main things that drive the market, Erevelles pointed out that this was because economists think linearly as opposed to a geometric outlook. “Nothing in life moves linearly,” he opined. “Life moves in cycles and ups and downs and your ability to see where those inflection lines are would be your ability to take advantage of the greatest opportunity you will have in your life today.”
The future however can be predicted, if one uses the right tools. Japan, a business giant over 20 years ago is faced today with a sinking economy. However with the election of Shinzo Abe and his ambitious economic plan better known as ‘Abenomics,’ one wonders if the country’s economy will jolt back to its former glory.
Chief Executive Officers have a crucial role in navigating one’s company through economic hardship. Explaining this position further he referred to a common excuse given by many CEOs for the failure to deliver good results; that of ‘environmental factors beyond our control’.
Stressing on the unacceptability of such an excuse in today’s context, he noted that a company’s failure is due only to one reason and that is an over investment on ‘what is’ at the expense of ‘what could be’. Also disagreeing with the popular argument that there is no such thing as a ‘sustainable competitive advantage’ in a world that is changing rather rapidly, he believed that it actually exists, not in terms of a product or service but in terms of a value system and the capacity of reinventing one’s business before circumstances forces one to do so.
So how do we reinvent our business before circumstances force us to do so? According to him, it all comes down to quite a simple procedure known as the ‘Business warfare,’ a strategy that can be traced back to the days of Julius Caesar himself. When the Romans invaded England, strict orders were given to his generals to burn the ships as soon as they crossed the channel and landed on the shores of Britain, so that the soldiers could not retreat. The primary reason for failure was the acceptance of defeat before the very end. If one is given an option to retreat from a confrontation, the chances are that they will take it. Therefore an elimination of all options will prompt a better response from all involved, he stated.
According to Erevelles, past economic activity such as unemployment and customer sentiment is not the most suitable method to predict the future. An economist uses symptoms like the rate of unemployment to predict the future. “It’s a chicken and egg problem. Does unemployment predict the future? Or is it the other way around?” he questioned. Also is it easier to predict the future on a long term or short term basis? Using factors known as the ‘fundamental causes.’ He added that “the short term is tremendously difficult, almost impossible to forecast accurately whilst the long term is set out in stone”.
“Your economic destiny was set far before you were born and it is called the macro trend of your life.” This doesn’t mean that if the economy in general is going upwards, you are going to become rich. But rather it is your ability to notice an approaching change of wind and reset your sails accordingly. “There is a greater chance that you will get wealthier on the down turn simply because markets rise gradually, but when they fall, they fall off the cliff and if you can see that coming ahead of time you stand to make a fortune,” he added.
“It doesn’t matter what angle you take when looking at the economy, the economy boils down to just one thing; people. If you understand people, you have the power to see the future as long as you possibly want. In fact to get a little bit more specific, an economy can be redefined as nothing more than a group of people spending money or not spending money as the case maybe.”
People are usually measured with demographic trends such as the number of people. But it is not the number but rather the age of the population that drives the future and this again is driven by three things which are the birth rate, death rate and immigrations. The effect of these may differ from country to country with immigration playing a key role in countries like USA and Australia, whilst the birth rate plays a key role in most of the other countries.
Although the spending method of people varies from country to country, it can still be predictable to a great degree. “What most people don’t understand is that people spend in highly predictable ways throughout their lives. We are not looking at individuals; we are looking at groups of people. Young people are very expensive and are the main cause if inflation in a good way. Young people are an investment in the future, but they do very little to help the economy. Young people cut coupons; they live in rented houses with three or four. They try to save every dollar they can. But they are our investment for the future,” he noted.
Using data from different countries such as the USA, Brazil, India and China, he explained that no matter how you look at the economy and its growth, it still consists of three aspects which were consumer expenditure, government expenditure and net exports. “If you look at a country like China, 30% of its GDP comes from exports and Taiwan has a 65% export based economy. In the USA if you look at the last 30 or 40 years, net exports have been marginal and really steady. Consumer expenditures account for 70% of the economy and government expenditures accounts for 30%. In other words it is the consumers that drive the US economy.”
This position however differs from that of Britain, France and Canada with their vast social systems. For example the tax rate in the US is 30% whereas it is an astounding figure in Canada with its free healthcare and similarly in France with its free education.
According to Erevelles the landmark incidents that changed the US economy were the baby boom (the time period of 1946 – 1964), the Women’s Liberation Movement and the number of women in the work force in the 1960s which for the first time accounted for more than half the population of women in the world. Back then the ratio between the young to the old were 9:1. Today this has reduced to less than 2:1 and it is expected that this will reverse itself in the year 2020.
Real life examples
Any lesson is better taught through real life examples. Taking the USA as such an example, he explained the economic cycle of the average person. “The average person enters the work force around the age of 20. At this age they start contributing to the economy, but still their spending is rather low. At the age of 26, the average American gets married and suddenly they start living a normal life. They move into a rented home, buy a car, furniture, healthcare and they start contributing to the economy and spending to help the economy. At the age of 28 they have kids and then the spending accelerates. They have to buy furniture, a different car to accommodate the kid … etc. At the age of 37 to 43 the average American trades up to a larger home just as the kids are close to high school and at 41 it is said that the mortgage debt is at its highest.
“At 49 they are spending at their peak with the kids about to leave to college. They spend on real estate more than they spent in their entire life. They own more cars than they did and are spending more on health insurance, automobile insurance, kid’s education, vacations… etc. In the last two years of one’s life you are going to spend more on your healthcare than you did in your entire life put together. But what most people don’t understand is that most Americans die broke. The reason for this is that although they retire extremely healthy, they don’t understand that they are going to live another 35 years. To put it more simply, higher earning and spending starts at 26 and ends at 49 in the USA. This group of people drives the economy and the 49 group drives it to a greater extent than the 26 group.”
So the question is, if you know that the average person enters the work force, gets married, buys a home, sends their kids to college, trades up to a larger home and stops spending and saving at a certain point, then why can’t you predict the future? The answer is: you can.
Risk of deflation
At present there exists a real estate bubble with the real estate market in the USA going up by two and a half times more than what it was in 2000-2005. Given the above as well as the present context with many countries and more particularly the US printing money at an excessive speed, the question arises on the effect the above would have on inflation and possible controls that can be introduced in order to counter it. In other words should not the stock market also go up at an increasing rate together with inflation and if it does, what can we do in order to counter it?
Erevelles is of the opinion that the world is more at risk of deflation rather than inflation in the future. “What is inflation? Inflation is a lot of money for choosing a few goods.” Most of the money being printed by the USA today will actually make up for the consumer draft in spending with a huge write off of assets. If you have a house worth US$ 100,000 and it suddenly goes down to US$ 70, 000, what has happened to the US$ 30,000? It disappeared into thin air.
He was very critical of US Fed Chief Ben Bernanke and his policies on Quantities Easing and Qualitative Easing including the Government bailing out and buying-up of bankrupt companies and toxic assets in the US. Apparently US$ 12 b has been pumped in to the economy by printing money and Government borrowings over the last four years to support this policy. So if you put US$ 12 b into the economy, even if 10% of that is written off, you are going to have US$ 1.2 b and it is impossible for the government to continue to put that into the economy. So the massive write off is going to be greater than the money any government can put in. Rather than having an expansion of money you are actually going to have a contraction of money resulting in deflation.
“With the US baby boomers coming into the retiring age by end 2013 with their earnings and spending drastically contracting and the US will face a deep recession or even a depression by beginning 2014 until 2024 when the micro boomers will rise with enhanced earnings,” he predicted.
If interest rates are really low, why is real estate not going up? In response he stated that the fundamentals to be noted is that no matter what your monitory and fiscal policy is, if there are no people buying anything, then the above policies will have no bearing on the economy stating that “Interest rates and monitory policy can print all the money they want. There is nothing so powerful in any country as people. So, we are going to have deflation and are going to spend the most of the rest of this decade in the US in deflation and a depression.”
Commenting on gold, he noted that it may not be a good investment in the future because it is actually a hedge against inflation. “The minute people start talking about deflation, gold will collapse,” he said.
Speaking further, he added: “What will shock the economist more than anything is at the end of all this, the dollar will be the only safe haven in the world and the dollar will go up by 2022. If there is one thing for sure, too much debt and too many dollars floating around are bad for the dollar. As these dollars get wiped out and banks write off huge assets, the number of dollars will come down. At the end of all this, in the long term, I am 100% sure that the US dollar is going to go up.”
Driving force of the economy
Once a population has reached their peak in spending and particularly if the majority of its population is aged, there is nothing much that can be done to stimulate its economy. Emphasising the above with regard to the situation in Japan, he noted that it is not mere population but the ‘right population’ that signifies a driving force of the economy.
“The most powerful driving force of the economy is the ‘people spending multiplicative function,’ which is a function of the population, their age profile and earning capacity, which in turn drives people’s spending and the economy,” he said. “This is how you can very accurately predict and forecast the future and the cycles of an economy and make the right investment decisions for your company and yourself.”
He advised that one thing you should never do is take financial advice from anybody. “For a variety of reasons, some people are not as sophisticated as others in investing. There is no place to hide conservatively except in two ways; cash and high quality government bonds. That is the simple answer for a timid investor. Therefore in a deflationary environment cash is king.”
In the 1930s more millionaires were created in the US than any other given period of time. The last greatest bond bull market was also in the 1930s. This may happen again with people who are rich in cash having the ability to make a killing as they buy assets during the period of 2015 to 2019. Referring to this strategy as the ‘Inflection leadership’ he went on to state that in the present context development and reaching the pinnacle can be achieved by ‘outrunning your competitor’ rather than beating all obstacles of the market. In other words, “If a bear is chasing you, you don’t have to outrun the bear; you just have to outrun your competitor because you have the ability to cut him in, take over his market share and in some cases take over his company.”
Brazil, Russia, India and China
It has been said that the future of the world lies in four countries; Brazil, Russia, India and China. However he opined that even though China’s economy will peak in 2015, it may start declining gradually afterwards due to its ageing population, claiming that it may never archive its full potential.
Another down point for China is the fact that it is export oriented with 35% of its economy being export based, hence when the USA and Europe gets hit, it will hit China directly. The country’s real estate industry has witnessed a boom over the last ten years, with the creation of dozens of mega cities for millions of people. To this date some of these remain uninhabited. Hence this may be a bubble that will burst. But given its planned population this decline will happen so gradually that even when the world economy crashes, China will recover rather quickly.
Quoting Phillip Longman he stated that ‘China will grow old before it gets rich and India will get rich before it gets old.’ Given the current scenario in India and its population growth over the years and it large young population coming into the earning phase, he claimed that the Indian economy will only go up and peak and start declining only in the distant future of 2063.
Australia on the other hand may be thinking strategically by focusing on immigration as opposed to a sole reliance on the birth rate of the country. Disagreeing with the view that population growth will condemn a country to poverty, he pointed that it was the right population growth that is required. Brazil is another country with a steady growth which will reach its peak gradually. Russia’s growth was prompted by commodities, but as its birth rate has been dropping drastically which may turn out to be a hindrance to its economic growth. Russia is one of the few countries in the world where the life expectancy is actually falling.
The world may consist of powerful 25 year old MBA students and powerless 55 year old CEOs, but what one needs to remember is that change rarely starts at the top. More often than not these changes are created by those who had no formal power such as Mahatma Gandhi, Martin Luther and Nelson Mandela who had a dream, a vision, an incredible passion and incredible persistence apart from serious jail time. Powerlessness after all is a state of mind and not a way of life.
In conclusion Dr. Erevelles reiterated certain key points such as demographics still remaining as the main factor for economic development and organisations being prepared for the abandonment of everything it does at a given time quoting the great race car driver Mario Andretti, “if things seem under control you are just not going fast enough” as well as legendary Citi Bank chairman Walter Wriston who said “the future isn’t what it used to be. It always arrives a little before when you are ready to give up the past”.
The zeal and passion with which Dr. Erevelles presented was incomparable! He garnered an excellent response from those who attended and their curiosity was satisfied. SLID was joined by Cinnamon Grand, Colombo as the Hospitality Partner, whilst the Electronic Media Partners were Yes FM, Legends FM and MTV Sports.