Client Portals

A Look At Business Cycle Confidence3 min read

Feb 20, 2019 - John Osbon ( 5 mins to read)

John Osbon

The business cycle has gone onward and upward for ten years. That has meant positive returns for investors in equities, debt and real estate alike. The question of when it ends seems to be a perennial question. It’s a question that we hear often from clients, prospects, friends and family. Headlines can be particularly unhelpful as their news model is often reliant on triggering emotional reactions for clicks. To us, it doesn’t look like the cycle ends anytime soon. Here is why:

Discount it

Many of our clients do not pay much attention to the business cycle or worry about it. They are entrepreneurs so they are used to negative cycle talk and they discount positive cycle talk, too. They believe that the cycle “just is” and that they have more important things to do or talk about. That means they keep debt in check and enough cash on hand to weather the average downturn, however unpleasant.

Technology is helping to prolong the cycle

Experts say that technology is replacing jobs and we are heading for a long, hard fall. Michael Corbat, head of Citibank, is the latest to weigh in on the subject. He says 20,000 Citibankers will lose their jobs due to technology. However, we’re not sure that this change will happen as suddenly or aggressively as the experts claim. It is very hard to replace people completely even with great technology. It also takes many people many labor-intensive hours to implement new technology solutions once they become available. The result is often a workforce enhanced by tech rather than replaced by it. That is one reason why we are optimistic about the business cycle: lots of workers are needed to install, calibrate and maintain all of this new technology. That has been true from banking to car building.

Debt awareness

Another reason for our cycle confidence is that debt awareness is high. Borrowers and lenders can get better information about the cost of debt and the structure of loans. If there is less than a perfect match, the loans are not getting made or the loans get paid off. Car loans and student loans are more likely to lead to negative long term wealth effects on their holders rather than a short term outright crash of the total debt market. Because of awareness, both sides get choice. Awareness leads to healthy borrower-lender relations.

Who gets hurt the most

It’s not all roses and champagne even in a positive business cycle. Many assets and investments can fail in a positive cycle environment. Those with business models that are too aggressive, too optimistic, or overly indebted can lose any time. Those that require asset pricing perfection are at significant risk in all business cycle environments.

Ways to be an all-weather investor

Keep a rainy day fund is the first thing an entrepreneur does. That cash level can be stated as a percent of assets or a fixed dollar amount. Rain or shine, downcycle or upcycle, a cash reserve is necessary.

Keep investment leverage low is the next thing to do. Today, keep investment leverage at 10% or less, or 20% including mortgages. If you have no debt, consider borrowing up to 10% for investment or 20% for overall leverage.

Match the risk of your assets with the size of your liabilities. For example, does a particular tech stock represent the capital you will need to pay taxes in April? If the numbers are large, it’s probably wise to sell to reduce your risk. At large levels, leverage like this is a problem. It’s best to manage and keep an eye on these problems over time rather than try to fix them all at once.
If you would like to know more about how we collaborate with entrepreneurs through the business cycle please call us. And please don’t hesitate to share your own experiences. We’d like to hear from you.

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