There's a new phrase in economic circles: the new normal. This noetic turn was recently coined by Mohammad El-Erian, the Chief Executive at Pimco. Because of who he is and because of who Pimco is, and as a result of the earthshaking events of last year, everyone seems to be talking about it.
El-Arian said this in Pimco's Secular Outlook announcement in May:
...After all, recent months have been dominated by unprecedented volatility in factors that have conventionally anchored market relationships. Indeed, some of you have already heard us argue that the world is traveling on a bumpy road to a new destination – or what PIMCO has labeled the “new normal.” And, reminiscent of what happened a few years ago with Bill Gross’s concept of a “stable disequilibrium” and Paul McCulley’s “shadow banking system,” the notion of a new normal is increasingly resonating in policy circles and among market practitioners. [Ed: emphasis mine]
I'll say.
From this link (you have to register after you've browsed the Financial Times a couple of times) we get from El-Arian more of what this is about:
...Last year's shocks have given way to a greater sense of stability in financial markets. Yet it would be wrong to conclude that we are returning to "business as usual". The next few quarters will be about the aftershocks, driven not by a financial system in disarray but by the lagged reactions of the real economy, the political system and the financial services industry.
At its most fundamental level, 2009 is about the interaction of three factors: the healing of financial markets, second-round economic and political effects and partial reconfiguration of the longer-term landscape. We face the challenge of navigating a bumpy journey to a "new normal"...
El-Arian's rationale seems rooted in sound economic thinking. It seems appropriate to gauge the global impact of the travails of the global financial system and the impact of unheralded government intervention in free markets.
But how is it resonating with the press, companies and the public? What's the "downhill" result?
Recently, Microsoft's CFO characterized their 'permanent diet' in the context of slashing $3 billion in operating expenses and cutting 5,000 jobs:
Microsoft is working on the assumption that the global economy will expand at a rate of 1 percent to 3 percent annually once the recession ends, Liddell said. That’s a reflection of the “new normal,” he said, borrowing a phrase from Mohamed El- Erian, chief executive officer of Pacific Investment Management Co. and chairman of Microsoft’s investment advisory committee.
ABC news has an ongoing story, Finance: Americans Adapt to the 'New Normal' Readers Share Their Stories of Hardship and Hope in the New Economy, with a byline: "From cutting their own hair to bartering for food to moving in with family, Americans have adapted to today's tough times in a variety of ways."
To state it baldly, what's represented in the press about the "new normal" is "everyone just has to cope with less."
But this isn't what El-Arian and other analysts have been saying is it? Their message has been primarily this: there are two overall emerging dynamics that have a significant impact on the resulting global economy: less leverage, and more government intervention.
Hopefully less leverage means that there must be more responsible behavior by financial institutions as we move into the future. That's a good thing for those of us that function in the 'real' economy of goods and services.
More government intervention is certainly greeted by economic analysts as a harbinger of continued economic trial. In the global context, government moves to increase regulation, act as capital sources, and exercising outright intervention raises the risk of financial protectionism. Companies who work to avert such protectionist policies aren't strategizing to 'cope with less'. They are preparing for opportunity.
A recent article in the McKinsey Quarterly (registration is required) on the "new normal" ends with:
This much is certain: when we finally enter into the post-crisis period, the business and economic context will not have returned to its pre-crisis state. Executives preparing their organizations to succeed in the new normal must focus on what has changed and what remains basically the same for their customers, companies, and industries. The result will be an environment that, while different from the past, is no less rich in possibilities for those who are prepared.
It sounds hopeful, but is certainly not how the "new normal" is being presented in the press.
As for Al-Arian, he evokes Bob Dylan in consideration of navigating the "new normal" (italics are his emphasis):
May your hands always be busy
May your feet always be swift
May you have a strong foundation
when the winds of change shift
Clearly, the brightest economic analysts in the world are communicating that the global economic climate has fundamentally changed, and that it is incumbent on business to be prepared to navigate that changed climate - opportunity abounds.
We've been thinking now for some time about the "new normal". How might we navigate through these troubled waters? It's certainly apparent that the macro economic trends of lower financial leverage and increased government intervention are powerful forces going forward. From our own perspective, the market dynamics that we track in our market sectors also create additional tension within the Supply Chain space. In this context, we can react in fear or we can seize opportunity.
El-Arian chooses Bob Dylan as a coda. Let me take a little different approach. One of my favorite stories in the Old Testament is a very short one. It's a single verse in 2nd Kings, Chapter 13, verse 21:
Once while some Israelites were burying a man, suddenly they saw a band of raiders; so they threw the man's body into Elisha's tomb. When the body touched Elisha's bones, the man came to life and stood up on his feet.
This brief rendition is a sort of aside within the story of the prophet Elisha. Whatever you think of scripture or the numinous or miraculous, I'm not seeking to sermonize - I'm simply looking for metaphor.
During the course of ordinary life we may be confronted by fearful conditions. When that happens we may discard our ritual, our course of ordinary life. But sometimes, something completely unexpected happens. Sometimes it's a second chance.
From the perspective of what is being discarded - say, because of economic conditions, for example - there are times when you can't get much lower. It does seem from some of the ABC stories that some are making preparations for burial. But can you imagine the experience of having something completetly unexpected happen when driven by fear to abandon something important? When I read this little one verse story, I imagine the discarded man, abandoned in the face of fear, literally springing up from the unexpected touch of the numinous. To me, he's not just standing on his feet, he's like a rifle shot bouncing up, eyes lit with fire, hair on-end, ready to rock.
Whatever shocks the global economy has suffered, there are some, perhaps unexpected, magic bones in the warp and woof of markets. Technological innovation, increased efficiency, human capital, and sound strategy are still, in the context of the working out of the economy, indistinguishable from the prophet's bones.
I have the temerity to suggest that perhaps we consider a NEW new normal. It's a frame of mind where we choose to take the risk of utilizing practices that always work whatever the conditions are. To take the perspective that, though things have changed, sound principles still work and in some way, our belief, in and of itself, creates opportunity.
If your business is supply chain and some aspect of the new normal is driving you or your organization to choose between fear and aggressive pursuit of market share please get in touch. I have some magic bones to talk about with you.
