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CFOs Feeling Like Sisyphus

Posted by Larry Doyle on September 23, 2010 12:47 PM |

The lessons of history are so great. Regrettably, all too often those lessons are not fully learned and are thus repeated. My days at Boston Latin School in the early ’70s introduced me to the great ancient civilizations of Greece and Rome. The stories of the battles, the empires, the pride, and the downfalls held many lessons which stay with me to this day. These memories came back to me this morning as I reviewed a recent poll of our nation’s CFOs. Let’s look both forward and backward as we review CFO Magazine’s That Sinking Feeling, Again:

Optimism about the U.S. economy has fallen back to recession levels among U.S. chief financial officers, despite the fact that they expect earnings to grow by 12% in the next 12 months and capital spending to increase by 7%.

According to the latest quarterly Duke University/CFO Magazine Global Business Outlook Survey, which polled 937 CFOs in early September, only 14% of U.S. CFOs are more optimistic about the economy than they were last quarter, while 57% are less optimistic. This puts the optimism level at 49 (on a scale of 0 to 100), a result not seen since the first quarter of 2009, when CFOs rated the economy at 40.

Seven quarters of ‘rolling that economic rock’ and our CFOs are hardly more optimistic than the first quarter of 2009? Let’s continue:

Furthermore,  half of CFOs say there is only a 6-month window — and a quarter believe it’s a 12-month window — during which they can maintain current levels of business activity without improvement in the overall economy.

Blame the twin demons of unemployment and (lack of) credit. Thirty percent of CFOs say borrowing has become more difficult than it was a year ago, compared with 25% who say borrowing is easier. “There has been no progress in fixing the credit problem over the last year,” says Campbell R. Harvey, a professor of finance at Duke’s Fuqua School of Business and founding director of the survey. “Indeed, half of the small businesses say credit conditions are worse than in 2009.”

He continues, “The math is simple. A, banks are sitting on cash because of their poor health and general uncertainty. B, small and medium-sized firms have employment-generating projects that they cannot get financed because banks will not extend credit. C, in usual circumstances, small and medium-sized businesses account for the majority of employment growth. A plus B plus C implies we are stuck at 9% or 10% unemployment.”

Despite the relatively strong earnings and capital-spending expectations, CFOs expect employment to increase by only 0.7%, not enough to reduce unemployment.  Moreover, nearly one-fourth of recent hiring has been targeted at contract and part-time employees, up from 17% prior to the recession. Such numbers translate into reduced consumer demand, which finance executives once again cited as their top external concern.

Will our CFOs, like the ancient Greek mythological character Sisyphus, ever get that rock to the top of the hill? Let us not forget that Sisyphus was doomed to that fate because of bad behaviors. In much the same way, we are now paying for the financial excesses and wasteful spending over a protracted period.

Will we ever learn these lessons, or are we forever doomed to pushing that rock?

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred

    Clearly, the feds “monetization policy” is providing $ for gov’t spending which is crowding out commercial lending as banks reinvest profits (less banker bonuses), that are nothing more than lowered reserve req’t due to Feds buying up $1.00 for $1.00 bad bank loans/mtgs, into treasury bonds. Why lend and take the risk and hassle when you can get a sure thing in T Bonds?

    “The only sure thing about sure things, they always end badly”. Semper ubi, sub ubi.

  • Joao Fiore

    Great info from the trenches!

    “…half of CFOs say there is only a 6-month window — and a quarter believe it’s a 12-month window — during which they can maintain current levels of business activity without improvement in the overall economy.”

    A pretty good timeline from the people that know how their businesses are going to be effected if the economy doesn’t pickup in 6-12 mo., which isn’t likely with the reduced demand, since:

    “A plus B plus C implies we are stuck at 9% or 10% unemployment.”

    Thanks, very informative.

    • coe

      Don’t forget that part of the lending malaise extends to the disinclination of the banks to extend credit in residential and commercial mortgage space – despite a need for assets, for margin, and recognizing the positive carry arb available to them due to the manipulations of the Fed…there are some customers knocking on the door. I’m forced to think of the twin concerns of housing and unemployment yet again. My “cents on sense” brings me back to the fact that credit liquidity and leverage are the lubricants of the economic engine – and on one level you really cannot fully blame the banks for holding back given the economic uncertainties, capital charges, militant regulators, and the awkward demand equation… but their follies and greed helped create the mess in the first place. I love the story of Sisyphus – and believe that my variation on this story of what hell must be like is driving the length of the NJ Tpke in bumper to bumper truck traffic only to be whisked back to do it again and again as you reach the final toll plaza. What say we also try the Greek myth of Daedalus and Icarus on for size – in order to escape King Minos, Daedulus fashioned wings made of feathers held together by wax – he told his son, Icarus, not to fly too close to the sun or the wax would melt, nor too close to the sea, or the water would weigh down the wings. They escaped the Labyrinth, flew away from Crete, but Icarus reveled in his freedom and flew too close to the sun – the wax melted, he dropped into the water, and drowned. Daedulus was left to mourn the loss of his son and how his invention contributed to his son’s death. Can anyone say option Arms, SIVs, leverage feathers, CDOs, accounting and regulatory wax, and banker hubris? Those Greeks and Romans knew much about the human condition, and both empires essentially committed suicide. Can anyone say America?






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