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An Plain English Explanation of the Economy

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Yesterday while driving back and forth across the bay area, I listed briefly to an interview with Law professor Michael Greenberger, professor at the University of Maryland School of Law and the director of the University’s Center for Health and Homeland Security, on NPR’s Fresh Air. This interview is one of the best descriptions of the current economic situation in the United States that I have heard to date. Greenberger’s explanation of where we are and how we got here (as well as what else we could expect) is simple enough for the layman to understand. Granted, you still need to pay attention and think through all the connections while trying not to get confused with all the complicated financial terms, but you should be able to do that without needing to reference any text books.

Every person in the United States should listen to this interview. I think the general population would be shocked to learn that (according to Greenberger) this whole mess happened because of a rider added to an omnibus appropriate bill that was passed by Congress in December 2000. And that this rider wasn’t really understood by the authors of the bill, it was written by lawyers from investment banks on wall street. The effect of this rider was to de-regulate certain financial markets at both the federal and state levels. The end result of this bill is the current situation…sub-prime mortgage crises, credit crisis, recession, and a tax payer bail out of some of the same investment banks that created the entire mess. What happened to the motherly wisdom of teaching your children a lesson: “you made the mess, you clean it up”?

And the real kicker…wait till you hear who the person is that was responsible for that original bill and was talked into adding the rider…and what he’s doing now…

Signs of Recession

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Today I overheard a strong indicator that we are in a recession. Listen to any economist and they will say that the one thing that has kept the economy humming along was the housing market. People were still spending money either on their houses or because of the equity in their houses. Once the sub-prime mortgage crises came to lite, we had various opinions on what would happen to the economy.

Today I learned that 3 Day Blinds will be closing 64 of their stores/showrooms. This is almost 40% of their 170 stores across the country. For those who aren’t familiar with 3 Day Blinds, they make custom blinds with a 3 day turn around (as if you couldn’t figure that out from the name). They do business via their website as well as their stores. Considering the nature of buying blinds, most of the time you want to see what you’re going to get before placing your order, it makes sense that they would have stores. With the strength of the housing sector, they had good business and growth.

But, now with consumers spending less, even on their homes, they are shuttering stores. It will be interesting to watch the stock returns of the other companies that revolve around the home owner (i.e., Home Depot, Lowes) and see what their returns are from the last quarter. If the consumer isn’t spending as much money on their own house…that’s the strongest indicator that we we are in a recession.

SaaS-ing A Recession

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I came across this interesting article a few days ago talking about how SaaS companies might be vulnerable in a recession. This was timely as yesterday I was having conversations with some entrepreneurs on a similar topic. These were all early stage startups and I was curious what their thoughts were about the current economic situation in the US and abroad.

This group didn’t have much though about the the current economy (Are we in a recession? Are we heading toward one? Are we coming out of one?). Largely, this is because in an early stage startup, all your energy is focused on just getting stuff done. Recession or not, it’s still a struggle for a startup to close those first few customers, build that buzz. One interesting bit that came out of the question was a sense that the cost of outsourcing will continue to go up over the next year. There are indications that outsourcing to Eastern European locations will catch up to the cost of outsourcing to India within a year. A rising tide raises all boats…eventually.

I find it interesting that this article focuses primarily on SaaS for the enterprise. If/When there is a recession, SaaS offerings for consumers would be the first ones to be hit. If a consumer is spending $25/month or $150/year for a SaaS service, they may start asking themselves if they really need it. And that is the beauty of it, if they don’t or can’t afford it anymore, cancel it.

The really interesting question is will consumers do that?

As the economy shifts, you will start to see the true management abilties of the leaders behind all SaaS offerings. How efficient is their operation? Do they have a cash cushion to weather the storm? What will they do during that storm? There was an interesting interview with the CEO of SaaS provider Zoho who boot strapped his company and continues to do so. I found an interesting correlary to the previous questions and how AdventNet (who own’s Zoho) weather a few previous storms in their past. I find it interesting how they used downturns in their market and economy to spin up other SaaS based offerings. I also found the comment about the number of Engineers at SalesForce very interesting.

SaaS will be an interesting area to watch in the next 9-18 months.