Interest rates are still high! What should we do?

Well at first it might not seem like something to cheer on, but it actually represents a positive return to normal, and you should prepare your business accordingly. Here is what that means. 

But before I go into that, let me first explain why the business environment the past, let’s say 30 years, has been the outlier and probably won’t return any time soon. It’s all about the irregularities in the periodic debt cycles. These vary in frequency and severity, but in more recent times, the clear tendency has been for the frequency to slow down and the severity to increase. In other words, the economic upswings have been longer and more dramatic than ever before and our recessions somewhat half-hearted, all things considered.

How has that affected companies?

In an economic upswing, more companies operate with a risk-on profile. There is a growing market to capture, and companies must expand in accordance with demand to stay relevant. This requires large investments in scaling production or hiring skilled people, that are now in short supply, as well as lavish marketing campaigns.

Now if the economy is just coming out of a recession, or if the past recession is still in the back of the mind of decision makers, the company will to some degree be geared in a way as to be able to withstand a similar event. However, the longer the economic upswing the more companies will be operating with a full risk-on profile. There are two specific reasons for this.

Firstly, people tend to forget, or at least downgrade the probability of a certain event, if the last occurrence of said event, is sufficiently far back. Secondly, the greater the upswing, the stronger the competition. Now what this means, is that if you are in a continued upswing and your competitors are geared for full growth, you will eventually be out-competed if you keep saving for a rainy day, or if your products are priced at sustainable margins. Thus, the companies, that run with the smallest margins, and the most reinvestment, wins and this has been the case, for the last roughly 30 years, where any potential cash-flow issues were easily covered with cheap and readily available credit. To say it lightly, it hasn’t been a very healthy business environment.

So, what has changed?

The reason why economic upswings have been able to continue for so long, is because central banks have consistently lowered interest rates and increased the monetary supply. But such a policy is not sustainable and when you do this long enough, inflation will eventually increase dramatically. The reasons for this are too extensive to cover here, but if you want to know more about this, I touch on it in this clip from one of my latest talks

To ward off inflation, central banks have, as you know, raised interest rates again, and this is now increasing cost of capital, while at the same time reducing demand. In a short matter of time, we moved from a risk-on friendly business environment with plenty of cheap capital available and tons of demand, to a very uncertain and low demand environment.

What does the future look like, and what does this mean for my company?

Well in terms of the future, no one really know for sure, and I won’t pretend like I am any different, but what I can tell you, is that the abundance of capital and the growth rates we have gotten used to are a thing of the past and as weird as it sounds, this is positive and represents a new era where being competitive means gearing your business in the classical sustainable fashion, where cash is king, and cost cutting, customer retention and focus on your core business is more important than marketing.

If you want to get your team up to speed with the necessary tools to analyze and navigate the macro environment or get tips on how to prepare your business accordingly, you can book me for your next speaking event. Alternatively you can read more about my services and how I might be able to assist you in the link below.