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The Pulse of the Global, Domestic, and Agriculture Economies - By Dr. David Kohl

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By Dr. David Kohl

The quarter-century mark of the 21st century is now upon us with a wide spectrum of challenges and opportunities. When game planning for 2025 and beyond, there are some key words that must be integrated into thoughts and perspectives for strategic planning. Let's examine these pivotal words and discuss the implications to financial and business decision-making.

Bifurcated

A key word in planning is “bifurcated.” Globally, the U.S. economy is analogous to the best house in a bad economic neighborhood. The U.S. economy is outperforming economic powers around the globe. The implication is a strong dollar, which inhibits exports and is detrimental to producers who are aligned with the global markets. For various reasons, key trading partners to U.S. agriculture such as Canada, Mexico, and China are experiencing economic struggles.

Years of spending on social programs, green energy mandates, and declining export markets has resulted in an economic decline in Canada. This was part of the reason that Prime Minister Justin Trudeau resigned recently.

Mexico has observed a similar fate as Claudia Sheinbaum, the newly elected President, inherited an economy from the previous leader whose mandate was more social spending and spreading the wealth. Moody's, the international rating agency, recently downgraded the Mexican federal debt outlook from “stable” to “negative.”

China, the second largest economy globally, is caught in an economic slowdown vortex. Despite government initiatives to stimulate growth, the recent gross domestic product (GDP) growth figures are approximately 5 percent. This is much less than the 10 to 15 percent annual growth experienced during the go-go years of the great commodity super cycle earlier in the century. The combination of a slowdown in birth rates, aging demographics, a decline in paper wealth as a result of the housing and stock markets, and slower export growth to Western nations finds an anemic Chinese economy. The threat of tariffs and sanctions by the U.S. and other countries only increases the probability that Canada, Mexico, and China will struggle both in the short and long term.

The U.S. agricultural economy is also bifurcated. Grain and row crop enterprises are in a multi-year downturn due to supply and demand imbalances, stubborn inflated costs, and interest rates that have doubled from previous years. The result has been negative profits and drains on working capital, particularly inventories in situations where marketing and risk management programs have not been executed and monitored. With the exception of the beef sector, farms and ranches that are more diversified, operations mainly in livestock, or producers with outside sources of revenue and income are performing in the black, but not at stellar levels. Again, positive supply and demand coefficients along with a strong U.S. economy are propelling these businesses to above breakeven levels. A word of caution to this segment is that the worst business decisions are often made during positive economic cycles. Prudent strategies and actions and the execution of marketing and risk management programs will be a high priority for this group. Building and preserving working capital and a balanced capital expenditure growth plan with a well-thought-out business plan are necessary.

The general economy is also bifurcated and can be described as a K-shaped economic distribution. The downward sloping line of the K represents individuals of lower income and wealth who are struggling. This segment is often called ALICE, which stands for asset limited, income constrained, and fully employed. This group often has two or three jobs or side gigs and, in recent years, has been dependent on government stimulus checks to make ends meet and cover discretionary spending. This group of consumers are building up credit card and consumer debt and now have record delinquency rates. While the ALICE segment is struggling, it is not a large enough part of the general economy to hinder average GDP growth in the United States.

The upward sloping part of the K-shaped economy are the higher income individuals and others that have accumulated considerable paper wealth and are doing quite well economically. This paper wealth is often in stocks, equities, real estate, and cryptocurrencies. The upper level of the economy has two distinct groups: HENRY and HERMAN.

HENRY is an acronym for high earners, but not rich yet. They are employed in high earning jobs netting six figures, but they cannot afford to purchase a house as a result of the combination of college debt, mortgage interest rates above 7 percent, and higher insurance premiums and real estate taxes. This group often spends money in the service-based economy on items such as consumer goods, travel, dining, and other experiences. This segment is extremely vulnerable to possible job layoffs in technology, government, and the service sectors. The HENRY group has not had the luxury of having time to build up paper wealth gains in the stock and real estate markets.

Individuals in the HERMAN group are high earners, rich, mobile, and have appreciated net worth often between $1 and $10 million dollars. These individuals on the upward sloping part of the K-shaped economy are often members of an older demographic where time and compounding have paid dividends on their strong balance sheets in the form of stock and real estate appreciation. Looking forward, any major spike in unemployment for high earners would result in a recession for this group, similar to the HENRY group. However, layoffs compounded by a major bear market, meaning at least a 30 percent decline in stocks, housing, real estate, cryptocurrency, and other paper wealth investments, could create a steep and prolonged recession. This would result in a negative wealth effect. That is, when stocks and paper wealth increase, people tend to spend four cents more, but eight cents less when the decline occurs. The negative wealth effect may even be worse with the older demographic in the upward sloping part of the K-shaped economy because older individuals tend to be more risk averse.

Transformative and regenerative

Transformative and regenerative are key words in planning for the macro economy, businesses, and individuals. There is no magic silver bullet. Whether it is saving your business or personal finances, quick fixes very seldom work. One needs to be focused on the process and time required to right the ship to positive outcomes by focusing on transformative strategies to set you up for future success, and regenerative practices that build resiliency.

In the United States, deregulation is a positive influence for the general economy. There is an old saying that the U.S. innovates, Asia replicates, and Europe regulates. Global competitiveness requires a strategic investment in technology and innovation for regeneration. In recent years, the effects and costs of layering regulations have been quite daunting. In the Obama administration, the additional cost of regulation was $1.1 trillion and an additional 240 million manhours. In Trump's first administration, the additional cost of regulation was $25 billion and 60 million manhours. In the Biden administration, the cost was $1.3 trillion with 260 million additional hours of paperwork. Regulation is needed, but balance is required for business and industry to adopt and quickly change in a global marketplace.

Finally, the struggle between inflation and lowering interest rates by the Federal Reserve will be a challenge. Tariffs, sanctions, immigration policy, and possible workforce issues in critical industries tend to be inflationary along with our federal deficit spending. Expect inflation to be sticky, if not occasionally increasing, resulting in slow changes in the reduction of both short-term and longer-term interest rates.

With this outlook and after taking the pulse of various segments of the economy, the following are some final thoughts and perspectives for planning.

  • Focus your energy on the controllable variables in your business and life. Manage around the uncontrollable variables.
  • Develop a good set of financial projections, cash flow, and balance sheet that can be monitored monthly or quarterly.
  • Future proof your balance sheet with strong liquidity and working capital that can be deployed when opportunities arise or utilized when adversity occurs.
  • Assemble an advisory team and also attend educational opportunities.
  • Focus on your physical, mental, and spiritual health for a balanced approach to business and life.