stock market

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What the Boogeyman and the Economy Have in Common

Our economy has had its ups and downs in recent months and years. The experts say that we can’t technically have a double-dip recession because of the time that has passed since the official end of the first recession, but in my opinion, we’re not going to enter a double-dip recession because we never got out of the first one.

Definitions are important and valid, but at the end of the day the economy is an idea, and a recession is one shade of our attitude towards this idea, not simply a result of unemployment, debt, an unbalanced budget, and impotent spending.

What’s In Our Heads

If the economy is an idea, then we must believe in the idea for it to be and work. That is not to say that the idea, in this case the economy, does not exist without our belief in it, but that our belief in and about it colors the way the economy affects us and causes us to behave. Just consider the erraticism of the stock market recently and why I contended it’s behaving this way (click here).

For instance, when people believe that the economy is good, they are more inclined to spend. Why not? many figure. Things are looking up; the job market and salaries are rising; others around me are spending; deals are good.

However, when we’re told that we’re in a recession, that unemployment is at record highs, that the stock market is all over the place, that this or that company is not even giving cost-of-living wage increases, we’re inclined to use the phrase “tighten our belts” more often, spend less on credit cards, hedge our bets at work by doing more for the same pay, and generally become more fiscally conservative with our personal budgets.

All of this is fine and natural, but it’s important to remember the power the economy has as an idea on a very personal level. After all, plenty of people don’t have jobs in good economies, too, and opt to spend less for various reasons and feel like things aren’t great from a monetary perspective. When the economy is bad, though, this is just happening to more individuals, and on the aggregate level the perception becomes greater that the economy is bad.

A Booga Booga Booga

Consider the Boogeyman.

Kids are afraid of the Boogeyman not because they’ve seen him and he’s affected their lives in a physical fashion. He doesn’t really come out of their closets or from underneath their beds when parents leave the room. He’s terrifying as an idea because the environment is scary – e.g. it’s dark, noises sound stranger at night, parents aren’t around to protect kids, etc. – and because kids can’t even imagine all of the terrible things he will do to them if he finds them. Thus, kids cry and get upset and run to mommy and daddy. They are reacting to an idea that affects them because they believe that it has power.

In order for the idea of the Boogeyman to work, kids must have faith in it, and the same goes for our economy. In order for it to work, we must have faith in it.

When we allow the aggregate noise of those disappointed with the economy to make us all afraid of its power and badness, we all take the actions and attitude that further cripple the economy. It’s a spiral. We lose faith in the economy’s power to be strong and do right by us, and that’s part of what the economy is: our reaction to it. It has power as an idea.

Stand Up to the Idea

We are in a recession, but for most of us, it’s the idea of the economy rather than a lost job or failed business that keeps us in this recession mindset. Rather than dread the recession and lose faith in the economy, I contend that we need to change our attitude towards it. We need to prize austerity and appreciate the positive effects this environment can have on our fiscal responsibility and understanding of the things we do have.

Consider the Boogeyman again. It is the kid who braves the night alone instead of crying to his parents, believing that the Boogeyman is always on the brink of getting him, who gets more courageous every night, increasingly able to withstand the fears of lurking dread. Let’s stop whining about the horrors of this economy and getting wrapped up in the definitions of a recession.

Now it’s about how we react to this recession that matters.

How have you been reacting – both mentally and practically – to our economic climate?

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Stay Occupied, My Friends

The stock market plunged 390 points yesterday. Are you surprised? I’m not, especially in light of the sentiment I’ve been sharing in my recent posts.

Our stock market is a gut reaction to what’s happening out there, and right now, that’s in Europe. The market is only as smart as the last person it talked to.

On Tuesday things were looking up because the Greek Prime Minister had agreed to resign.

However, since we weren’t sure what was going on today with fears that Europe’s sovereign debt crisis was widening, we went into a market spin. Bond yields in Italy surpassed 7%, which means that it may be getting ready to follow in the footsteps of Greece, and of course this was most upsetting for our stock market.

Again, let’s not undermine the complexity of our markets and the systems behind them, but there’s a reason that I keep pointing all of this out to you. This is what it looks like when companies go through crises. Many of them – or at least their CEOs – become as smart as the last person they talked to and the last news they heard.

Learn from the example that international markets are setting for us – and the example of our own market as it reacts to the world’s problems.

Apply this lesson to your personal life, your personal finances and your business’s finances as well. While everyone is selling and reacting and worried, do other things. Go golf or scrapbook or play Metal Gear Solid or whatever it is you crazy kids are doing these days. Get a hobby, but make sure that hobby is not overreacting to the financial situation around you.

Studies consistently show that those who do not get mired in the day to day financial swings around them – and who learn to tune out the related noise – make better longterm financial decisions, are less stressed and are more likely to make their financial goals a reality.

Why? Because they’re not as smart as the last piece of information they heard and they’re not acting on everything! If you bought and sold as fast as the market swung you’d be nothing more than strung out, stressed out and broke.

Instead of the Dos Equis, “Stay thirsty, my friends,” I encourage you to, “Stay occupied, my friends.”

What do you do to tune out the financial noise and distract you from the market’s volatility?

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How Greece and the Stock Market are Conspiring Against You

If you’re a news person or you follow finance then you’re no doubt already aware of the situation in Greece. That country is a mess. It’s debt is astronomical; it has no capacity to repay; the political situation is volatile at best; there are mass protests, and nobody has any idea what to do. That’s my definition of a mess.

Let’s Help or Face the Mess Ourselves

In order to prevent some kind of catastrophic ruin that affects the governments and finances of the rest of Europe – after all, Greece is on the Euro and its economy is intimately tied to the rest of the continent – European leaders have been working on some kind of deal to manage Greece’s debt (a large part of which they’ll just dismiss or fund) and get its economy back on track.

And Greece isn’t the only European country riding this roller coaster. It’s just got it the worst right now and is in the lime light. Spain, Italy and others are also going through quite a bad spot.

With the state of the world’s economic intimacy, we’re all affected by the situations around the world. Hardly a country is free from the ripple effects dealt by other members of our global union. But what’s fascinated me recently is the degree to which that intimacy is more emotional than logical.

Up and Down and Up and Down

As I’ve watched the stock market plummet and rebound over the past month, I’ve seen that movement tied disturbingly to our reactions to Greece’s economic situation.

When news came that Greece was tanking and talks were stalled, the market dropped. Last week, as news landed that Europe had reached an agreement on how to bail Greece out, the market rallied 340 points. Yesterday, the market closed down nearly 300 points. Here’s how CNN explained it:

“New fears about the fate of the European rescue plan reverberated through stock markets in the United States and around the world Tuesday. Following European markets, U.S. stocks ended sharply lower across the board. Bank stocks were hit especially hard. The bad news was propelled by Greek Prime Minister George Papandreou’s surprise announcement that he would put his country’s participation in last week’s European debt plan to a voter referendum.”

Now, I understand that the stock market is not merely a bunch of mercurial people making decisions but an enormous number of trades made on the backs of incredibly complicated financial equations and algorithms, but when it swings so violently back and forth at news about Greece, I can’t help but think that things are getting a little ridiculous. And this is just news, mind you. Nothing is actually happening in any of these instances. A deal was reached but no money moved. A referendum was proposed but no vote actually taken. These may as well be rumors for the bearings they should have!

Don’t Be As Smart As the Last Person You Talked To

This reminds me of the business leaders I’ve dealt with who change their entire course of action every time they talk to someone. As I pointed out in my 5 Foolish Faux Pas of CEOs in Crisis, some CEOs are only as smart as the last person they spoke to. That’s what our economy feels like: as though it’s only as strong or relevant as the last thing it heard.

And I don’t want you to be this way!

Making plans and sticking to them is an important part of being a good leader and developing and growing a sustainable business. It’s especially important when you’re in a crisis. You can’t be flopping all over the place in rough times. Of course you change course when things are going wrong and you actually take the time to evaluate the situation, but if you’re changing plans after every conversation your people will lose faith in you and nothing will ever get done.

How do you keep focused when things around you get topsy turvy?

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The New Norm is Becoming the Norm

How long is something new before it just starts being the status quo?

It’s been three years that our economy has been like this. I predict another 5-7, which could get stretched out to 10 years before we get back to a pre-2007 economic climate.

I’ve been saying for a while that we’re headed for another recession and that the economy is going to be flat for the next 5-7 years. By definition we can’t have a double-dip because we’ve had two quarters of growth.

But we keep getting held back from further recovery due to our own folly and the interconnectedness of the world economies.

The stock market has dropped 3.5%, giving up all of its upside for 2011, and no one could predict the tsunamis or the nuclear fallout in Japan. Another episode in Europe or elsewhere could put the U.S. right back on its butt (if we haven’t already tripped and we’re just in that pre-getting it state before we wind up on our butts).

If you read the papers in the last couple of days, you heard that the knocked-out power-plants that were supposedly controlling only 5% of of Tokyo were actually controlling as much as 25% of the electricity in Tokyo. This has slowed and will continue to slow Japanese manufacturing and business dramatically. Due to the Japanese “just in time” inventory method that most modern businesses have gone to in the last 15-20 years, Japanese auto makers in the US and others in the manufacturing sector are going to be slowed down. This will only further exacerbate our own recovery.

Who knows how far the Japanese market will go down at this point, and the more problems that arise the more this market will spiral. This will affect us.

Why am I throwing all of this out? No, I don’t like dread and doom. I like facing reality, and I’m sharing this because the recovery is going to get stretched out more and more and problems compound problems.

So what do you need to do? You need to prepare yourself and your business for this situation.

It can be hard to change because change is hard. But you need to look at what you can change to be proactive, even if something’s been working for 20 years. It may not need to be the product itself, but it may need to be your manufacturing processes or something else that let’s you stay ahead of this curve.

Separate the emotions, and look for practical solutions.

And beware the alligators. They may already be chomping.

What do you predict for the economy in years to come? How soon will a full recovery be in effect?