by Joseph R Weiland, CFP®, Managing Partner
We are hearing a great deal of noise about the looming recession lurking around the corner. If you are not worried, you clearly have not been listening to enough media. T.V., Radio and the internet are afire with tales of inverted yield curves and global collapse.
Recessions are a natural part of economic cycles that we have participated in since the beginning of time. It is not the easy part of the cycle, nor is it the fun part. It is the part of the cycle where people lose jobs, have a hard time paying bills and companies pare back division or shut down altogether. How can this be good?
Recessions are when bad ideas quit getting money thrown at them. The worst restaurants in town close, as do the marginal stores. The least profitable division of a company is cut lose, to be sold or folded up. In otherwise healthy companies, people least suited to their jobs are offered the opportunity leave. Layoffs work to keep the best staff while cutting the dead weight and overall head count.
It sounds cruel but it is natures way. In California, the end of summer is the dry season and all the grass and green plants die. In the Midwest, where I was raised, winter is the time for natures pruning, giving room for new growth in spring. In our economy, commercial space becomes available, workers are looking to support new ideas and capital is selective in only funding the ideas with the clearest path to success.
As stock investors, we count on recessions to keep our companies efficient. During times of economic expansion, the hard decisions, by the manager all the way up to the CEO’s, are not forced to be made; whether it be to shutter a money losing division or let go of an employee with family at home. When times get tough and money is tight, only the best ideas are maintained, and the companies are trimmed back to the essential components and the strongest players. This provides a solid platform where the next level of business expansion can happen. This natural cycle is essential to our economy to reach its full potential over the coming decades.
As a firm that invests for our clients entire lives, we are not afraid of the next cycle, we welcome it.