Welcome to TMA Talks, a regular series of podcasts hosted by TMA Global CEO Scott Y. Stuart, Esq. Each segment features prominent TMA members, industry experts, and other special guests. These exchanges, edited transcripts of which are printed in the JCR, offer insights into key markets, forward-thinking economic outlooks, insider thoughts on industry trends, and much more. TMA Talks podcasts are available on the TMA podcast channel. Subscribe to our channel wherever you find your podcasts.
To register for the 2019 TMA Distressed Investing Conference, please visit distressed.turnaround.org/registration.
SCOTT STUART: Good day, and welcome to TMA Talks, where we talk all things TMA. Today we have the privilege and honor of talking with economist Dr. Brian Beaulieu, CEO of ITR Economics and this year’s TMA Distressed Investing Conference keynote speaker. Thanks for joining us today, Dr. Beaulieu.
BRIAN BEAULIEU: My pleasure, Scott. Thank you very much for having me.
SCOTT: We’re excited for your keynote, but for our members today, we wanted to give them a chance to get to know you a little bit ahead of the conference. Why don’t you give us just little bit about you, about the man behind the knowing everything about the world economy?
BRIAN: I’ve been doing this, all told, for about 37 years now. Every year, I learn a little bit more, which is one of the great reasons to keep on doing it, as a matter of fact. As you could imagine, over the course of almost four decades, you encounter a lot of different situations, meet a lot of different people and learn how they make decisions—good or bad—and you make some observations along the way. I think some of those observations are going to be particularly applicable to the audience in February.
Other than that, I have six grandchildren, a wonderful wife, and four daughters, so I’m used to living on the go. I’ve co-authored three books with my brother, and we are working on our fourth in 2019. It will be out in 2020. My wife and I are avid tennis players, and we enjoy going sailing as well.
Our home is in Naples, Florida. The office is in New England, so I commute up there, and that’s where the kids and grandkids are, so we go up there fairly frequently. But our home is Naples, proving yet again that I’m smarter than the average bear.
SCOTT: Absolutely, and a beautiful place to be.
Lots of things are happening in our global economy right now. Tell us, at a high level, what you’re seeing and what 2019, from a global standpoint, looks like from your perspective.
BRIAN: 2019 is going to be a year that is going to create stresses for many businesses, particularly those that are trade-related, and particularly from the European, Chinese, and U.S. perspectives, and Japan, of course.
One of the dominant trends—and we’re going to see this come to light in 2019—that we’re going to be contending with for quite some time is the world has shifted away from globalization. It’s moving evermore toward nationalism, bilateral trade agreements, “me first.” It’s all about “my country,” and you see that from President Trump to Brexit to the president of Italy, the chancellor of Austria, what’s going on in China, and the president-elect in Brazil. It’s all trending toward me first, my country, my interests above all else.
That’s going to create inefficiencies. It always has, if you look through the economic record. There are always winners and losers. If there weren’t winners, politicians would never be in favor of it, but the inefficiencies that creates, not only in ‘19 but also for the coming decade, are going to rewrite some of the rulebooks in terms of which companies are going to be able to make it and which will have an increasingly difficult time making it in the future.
SCOTT: Where people are looking at globalization, you’re going to break it down to people becoming more nationalistically oriented, which leads me to my next question. Our members are very deal-driven, and special situations, to them, provide opportunity. Are there any sectors you think people should keep their eye on, that either have cracks or might face troubled waters in 2019 in a more obvious way than in the past year or years during this period of prolonged prosperity?
BRIAN: I think the cracks are going to show for companies that are relatively labor-intensive here in the U.S., for instance. The labor shortage that we’re facing in manufacturing is quite acute and is not going to go away, even though the global economy and the U.S. economy are both slowing down. That’s going to require capital
to be deployed and automation to be employed at a time when the profitability that has been driving
the stock market higher is not universally shared.
You’re going to find some cracks developing because companies are going to be unable to protect their balance sheets while they’re deploying the capital they need to remain competitive in the tight labor market. That’s the overriding scenario for the next several years.
SCOTT: We talk about a tight labor market. At the same time, there’s a lot of fear, if you will, around disruptive technology and automation, whether it be factory-type automation or disruptive technology that’s going to take people out of the workforce as we get into, let’s say, self-driving trucks. Even though we have a tight labor market right now, do you see disruptive technology and automation impacting, in a negative way, the economy, if not next year, then in the next five years?
BRIAN: It will impact it in a negative way at a very micro level. It will negatively impact some of the drivers, some of the workers that, theoretically, will not be able to get that job or will lose their job because they’ve been replaced by that disruptive technology. But they’re on the margin. I know we have to care, we have to look at that, but from the macro perspective, this has to happen.
Joseph Schumpeter, a famous economist of the past, coined the phrase “creative destruction.” Without creative destruction, we will not progress, we will not see the standard of living continue to rise. This is an absolutely necessary part of capitalism, and to fight it is foolishness.
Yes, there may be some truck driver positions that are going to be filled with AI (artificial intelligence) or with self-driving trucks, but that doesn’t mean we’re not going to have a need for those people in other functions or that they can’t be trained to fulfill other roles in other satisfying occupations. Just because people are not operating that welding torch and a robot is doing it instead doesn’t mean we are not going to need them elsewhere.
Look at the job openings for manufacturing in this country today. You realize that GM laying off 14,000 people, not all of whom will be in manufacturing, is a drop in the bucket. It makes the headlines. You get people wringing their hands over it, but I have little tolerance for thinking that’s going to shape the course of our economy. Indeed, I think it creates turmoil in the short term, but it’s a good long-term signal that we’re willing to do that.
SCOTT: That’s a good point. We’ve been in such a prolonged period of prosperity that a ripple in the water seems like a tsunami to many. Is that kind of mentality, since people have not had to navigate the smallest bit of chop in over decade, going to be impactful in terms how we react to things that are small, yet might become large just by perception?
BRIAN: Yes. Historically, under these circumstances, people tend to overreact on the one side, and others will be extrapolating the past and saying, “Well, it’s not really going to happen, or there won’t be any pain at all.” Then when they get that paper cut, then they’re really shocked and they overreact.
That’s the wonderful thing about economics and our companies run by people who are prone to these foibles, one way or the other. That’s why if you can see the future first, you know how to prepare mentally and financially, and you can take advantage of it.
I think you’re going to see some distress along those lines over the next two years, because people are not going to have their balance sheets ready for the softening that’s coming in the economy. They’ve just been mentally extrapolating over the last 10 years and thinking, “OK, everything’s going to be fine,” and they’ve been ill-positioning their balance sheets.
You know how individual investors have a very strong tendency to get very bullish on the market at the very top? Businesses have a tendency to do that also, and that’s where the opportunities lie in terms of restructuring.
SCOTT: Many of our members are focused on corporate health, kind of like the checkup you get every year from your doctor. It’s something that hasn’t been necessarily part of the inner fabric of the restructuring and corporate renewal world in the past but has become more important now for the very reasons that you just laid out.
A global economy says we have to think globally, notwithstanding your view that we’re moving toward more nationalistic economies. Are things happening in both the U.S. and abroad, whether it be Brexit, the trade war, etc., that people should keep an eye on that may affect our own economy in 2019?
BRIAN: Yes. I’m not sure businesses in the U.S. have been following closely enough the shift of manufacturing out of China, for instance. I find people are still too focused on what’s going on in China, and they’re not aware that manufacturing is slowly but surely leaving China to re-establish itself in Thailand, Cambodia, and other places where labor is plentiful, relatively well-educated, and cheaper, without all the regulatory hassles being created by virtue of the trade disagreements and China’s renewed self-interest as expressed in pouring money into state-owned enterprises.
That’s an interesting trend, and one that I’d like to see more businesses taking advantage of in 2019 and 2020.
SCOTT: So, would you consider this the unusual part of what this next cycle is going to be about?
BRIAN: I think the unusual part of this cycle is also going to be the dramatic movement in share prices relative to the economy. We do not expect the economy is going to be moving into a dramatic down phase of the cycle. Nonetheless, it’s the down phase of the cycle, but if you look at the stock market, particularly if you look at the VIX (Chicago Board Options Exchange Volatility Index), the uncertainty surrounding the financial markets right now is extreme. It’s hard, at least for me, to separate the economic uncertainty from the political uncertainty from the global uncertainty. That’s going to create a disconnect between what’s real and what’s not real.
And by “not real,” I mean most businesses are actually going to live and die by what’s happening to the S&P 500 because that’s what makes headline news. If it goes down 500 points, it’s talked about as if the world is coming to an end, when it really isn’t coming to an end for the vast majority of businesses. It just is changing the tone and tenor of conversation more than anything else.
SCOTT: That sounds like a very practical and pragmatic approach to our economy, something that the headline writers out there sometimes don’t grasp in such a sane way. One last question: Many of our TMA professionals have learned to expect the unexpected. What, if anything, is the wild card out there that our corporate renewal professionals might want to focus on?
When the subprime market broke, for example, it was right in front of everyone’s face, but no one was willing to face that it was going to be so impactful in a negative way on our economy. I’m certainly not intimating there’s anything that dramatic out there now, but it’s always the unexpected that ultimately defines any particular cycle, market cycle and economic cycle. Do you see anything out there that you’d classify as the unexpected to be watched out for?
BRIAN: You’re essentially asking if we have identified any Black Swans that we should be on the watch for. Almost by definition, you can’t spot those very well in advance. I need to draw it in a little bit to nearer terms and answer your question this way. It’s in the volatility. The answer is in the volatility, whether that’s the S&P 500 or, closer to most businesses, oil prices.
The volatility in oil prices has been amazing. That is indicative of how much liquidity there is out there and how, as I think of it, it is able to slosh from one side of the boat to the other. In this case, the boat that I imagine is an oil tanker. There are going to be other opportunities. There are going to be other threats like that because of this liquidity function. What that next ship has in its hull, I haven’t figured out yet, but it’s going to be an asset class that will be the next darling. We’ll see it go up dramatically, and then we’ll see it come down in a very short period of time also.
That makes them hard to spot in advance and makes them hard to capitalize on, because they come and go almost as fast as you can identify them. Within a matter of 12 months, it’s passed.
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