Famed investor Michael Burry (‘The Big Short’) predicts a U.S. recession “by any definition.” That sounds ominous but let me attempt to articulate why I believe a soft landing or mild recession is more likely.
Two, we ARE moving into a period of tighter access to capital, so industries dependent on cheap, easy money to backstop long-term negative cashflow business fundamentals, or robust public markets for ready liquidity (e.g., Venture Capital) may very well face serious challenges.
In a healthy way, the present is very much a time for re-set of valuation metrics, and re-classification of assets, as in:
- Is that asset really a liability?
- Is the valuation premium too rich given risk factors (think: Crypto, Tesla)?
In other words, if you are in an undifferentiated money-losing business (or industry), the present time is reminiscent of the narrative that:
“When your friend loses her job, it’s a recession, but when YOU lose your job, it’s a depression.”
The point being that not all segments are created equal, and even in good economic times, plenty of businesses fail.
Then, why am I relatively bullish?
One, so much of inflation, and by extension, the cost of EVERYTHING, is driven by energy costs, which anyone who has gone to the pump recently can see has fallen by 35% since its peak in June.
Equally important, the economy seems to have weathered the initial shocks created by Russia’s invasion of Ukraine.
Three, the job market remains very strong, and unemployment remains low.
One impact of that is the durability of brick and mortar retail.
My company, Datex Property Solutions, tracks the rent collections and sales data of thousands of shopping centers and tens of thousands of retailers nationwide, and while individual retail categories and specific operators are always at risk of getting “Amazon’d,” the actual data remains strong.
We have seen no material weakening of retail sales and/or rent collections, based on highly validated data that goes back from pre-pandemic to the present.
Four, while companies are preemptively laying off workers, the fact is that corporate profits have been off the charts strong, so self-interest suggests they won’t over-cut, and in the case of the tech sector, much of the cutting is driven by over-staffing based on the last cycle’s ethos of growth at all costs.
As the crash and burn of Southwest Airlines over the holiday underscores, much of corporate America and most SMB’s are relatively early in their adoption of tech-powered innovation, be it better data to make smarter decisions, or automation to drive better process and improved productivity.
Plus, we are just now seeing the realization of the promise of artificial intelligence, which is ready to transform the way companies operate in the same way personal computing, the internet and mobile transformed our economy.
The difference between when those technology waves kicked in, and now, is that much of the technology adoption lifecycle is at the “applied” phase.
This means that technology is reaching a point of maturity that given a dollar of investment, the return on effort, spend and human capital is much clearer and with a much shorter ramp.
The point here is that unlike the stagflation period of the 1970s, which I grew up in, when American innovation felt dead, our ability to innovate and APPLY innovation to better operations is very strong.
Six, the pandemic and global politics have awakened the notion that the best way to mitigate bottlenecks in the supply chain is to (re)build manufacturing domestically.
This feels like 5-10 year trend that is only accelerating.
Seven, with a tightening of the economy comes a healthy revisiting of the question of Work From Home vs. Work From Office, and the bet here is that while the right answer is a hybrid of both, the tilt will shift back towards Work From Office, which will provide needed oxygen to many a beleaguered business district, and the ecosystem that services it.
To be clear, no one holds the crystal ball, and ultimately, scenario planning is about assessing probabilities based on catalysts, constraints and other human factors, but from where I sit, I am more optimistic (than not) about the outlook for the year ahead.