Peter Kuper: The Mother of All Bubbles

For the past ten years or so, we have gone from one bubble to the next: stocks overall in the early 90’s were further pumped up by the tech bubble through to the turn of the century; then by housing, commodities, and arguably safety as certain Treasuries were, in the heat of last year’s meltdown, selling for more than face value. Yes, that’s right – the cost to buy this certainty of value resulted in a negative yield.

The driver of this was that the U.S. economy itself had popped – there finally came the day of reckoning when there weren’t any assets left to pump up. This final pop is a good (and necessary) thing and is how markets are supposed to correct for improperly valued assets. But now, just as realistic valuations are being derived, we have an entirely new and quite dramatically larger bubble – one not born from assets but from printing money. The U.S. Government has its foot so hard to the gas pedal in an effort to reignite our country’s economy, it is creating an entirely new of problems. The “reflation trade”, as Wall Street likes to call it, is being put on by Uncle Sam and quite frankly it is not a good thing for many reasons.

Yes, cheap money does help stimulate economic activity -- but that’s almost exactly how we wound up in this mess to begin with. One can’t simply keep up appearances - there’s always an unintended consequence of trying to stave off the inevitable.  

Moreover, inflation (while still nowhere to be seen) will eventually come back, quite likely with a vengeance. The flood gates that have been opened take some time to close, and my bet is it will be too late to be effective. Things aren’t really getting better no matter how hard the geniuses on CNBC try to convince you. In fact, this illusion of economic health may well lead to a “head fake” that will only extend the weak economy, not improve it.

Banks are not back to full strength, as they and other financial firms still have asset quality issues; with unemployment still on the rise those issues will worsen before they improve, potentially leading to some nasty stock market moves. Burned investors will again sell stocks and be even more tepid to re-enter a market with +/- 35% 60-day swings. Happy days indeed…

Specifically, to those in tech-land, the government’s efforts just made your jobs a whole lot harder: given the likelihood of a false start, we expect budget pressures to remain weighing heavily on both capital expenditures (new technology purchases) and operating expenses (maintenance renewals, your salary) so efficiencies and value-add projects are critical to being secure both professionally and personally.

We have been advising our clients to demand major discounts – 50% or more are not uncommon in this environment as vendors are struggling to generate sales. We continue to recommend this strategy especially in market segments where large players are aggressively going for market share (e.g., SYMC vs. MFE).

Playing one against the other is not only simple, it is practically done for you as the providers are more than happy to show the cost benefits by starting the cuts at 30% off the competitor product. Having said that, once the economy starts to recover and activity picks up, the discounting will be relatively less – still healthy but a little harder to secure as a busier sales rep is that much less attentive. Cash is king, but when cheap money is flowing everywhere the crown loses some of its luster.

Meanwhile, we have also suggested that security professionals find themselves the creators or key players in worthy projects, encouraging the layoff axes starting to come around to look elsewhere. When times get tough, cuts get nasty and unemployment has spiked to nearly 9% - reported (we specify reported given the data reflects only active claims and not cases where an unemployed person exhausted benefits – they’re still without a job but now without any checks coming their way).

We cautioned this group that security is not immune to budget pressures, unlike what we had seen in the previous recession when security spend actually increased. Our latest sampling of security budgets was not very encouraging.

 

Over 85% of the respondents suggest this year will see flat-to-down spend in security while next year approximately two thirds expect a flat-to-down budget – and 22% of the group expect it to be down by 10% or more from this year. So we go from bad to worse or flat to down year-over-year – that is not a pretty picture and we expect more interesting data from our New York Metro Forum finishing up today. It is not too late to find that project that delivers value to the firm, but every day lost is a day against your job security.

But isn’t the recovering economy going to lead to increased budgets, you ask? Unfortunately, we need to be the cold shower of reality here – Wall Street rewards stocks with better earnings. If sales are still lower, the only way to increase earnings is to spend less and that means the flat-to-down budgets we’re expecting both this year and next may persist or potentially even worsen. The career advice therefore remains to find ways to be a source of value add to the firm – those who can be creative or just plain determined to deliver that benefit will be the last ones to go.

The suggestion is to become a risk adviser to your organization making sure the policies are in place to have business owners take responsibility for risk to the business and educating them with clear metrics as to the threats to their critical assets; signing off on that risk when they aren’t willing to allow you to remediate rather than becoming the “Mr. No” with a stick who is simply a line item on the operating expenses line of the IT budget. Enabling initiatives is far more valuable than ignoring them.