What Does the Future Hold?

What do the near and long-term futures hold for IT investment given the current recession and governmental responses around the world? I see two significant events unfolding. Underneath these opinions are an interesting and undereported fact: the large Asian economies of China and India are not in recession but are, in fact, growing at a very aggressive pace. Their rate of growth is declining but a declining rate of growth is not a recession. (Wouldn't it be nice if news agencies put some perspective on their reporting once in a while.)

First - the United States will lead the developed economies out of recession in Q3 of 2009. The equities markets will start to predict this in mid-Q1 2009. (Remember that stock markets are leading indicators and labor markets are lagging indicators. The unemployment rates will lag the return to growth by many months.)

The return to growth will be weak at first (maybe 1 percent in all of 2009) but will pick up speed in 2010 as the Federal Reserves money printing takes hold. (I just looked at the Monetary Base numbers for 2009 and the almost-no-growth line up until August 2008 has been replaced with positively explosive growth since then. The Federal Reserve was truly asleep at the wheel regarding the Monetary Base this year --- but at least they seem to have awakened now. http://www.federalreserve.gov/releases/h3/Current/)

This revving-up of the Monetary Base is not yet showing up in the other supply numbers like M1, M2, etc. (http://www.federalreserve.gov/releases/h6/Current/). Students of monetary policy will recognize this lag.

There are two potential results - both of which are already being discussed in the financial media. This governmental response will cause a 70s like stagflation or a rocketing return to growth. We won't know which for several months.

Second - How does this affect IT investment where you work? IT is to a modern organization like the Monetary Base is to a financial system - it is a multiplier. I don't have the research at hand but I personally accept it as gospel that every dollar wisely invested (caveats beware!) will return several dollars in increased productivity and profit.

Good managers understand this relationship. A business school staple is that research and development investment should increase in a recession so that when strong economic activity returns, the business has better products to sell and an edge on the competition. There is a similar perspective in IT.

It is best to invest in IT when an economy slows for two reasons. The first is a personnel issue. It takes the best and brightest on the business side to correctly implement a complex IT system. These people are in high demand when business is good. When business is slow, they are better able to work on large IT projects. The second is similar to the R&D perspective: investing for the IT multiplier in a slow economy will create larger productivity and profit multipliers when growth returns.

So, here's my prediction. Good companies are taking advantage of the current recession to increase (yes, increase) their IT capital investments right now, December 2008. They understand the IT multiplier and want that productivity boost when the economy resumes growth. Which companies are these? More on that in a moment.

Unfortunately, it is only the wise market leaders that will do this. Your average company looks at its diminishing cash pile and pulls in its horns. R&D investment diminishes, new plant and equipment investments diminish, people get fired, and IT spending declines. These are tough decisions made by smart people doing the best they can. But, these are the companies who will perform weakly when an expansion returns.

Now, who are the companies that are investing in IT right now? Let me take a cue from market analysts. Even in this current market turmoil, there are many companies with stock values at all time highs. These are companies with solid balance sheets (i.e., low debt ratios) and steady income streams. I will try to find a few examples and revise this post later.

The reason these companies are performing well even in a bad economy is that their managers understand these macro-economic trends and use them to pummel the competition. Right now they are investing in R&D. Right now they are hiring the best-and-brightest being shed by the weaker companies. Right now they are looking for the IT multiplier and starting up the productivity enhancing IT projects.

I just wish I could figure out how to make money off of this trend.

Simulflation

Is there an emerging trend of capital substitution in the greater worldwide economy? As some areas deflate (oil, houses, etc.) do other areas inflate (medicine, health care)? Financial market watchers call this trading asset classes (selling one like oil and using the proceeds to buy another like health care).

The link is a very speculative but still very interesting look at these trends and the author calls it Simulflation. The web site is not terribly well organized for linking but follow the link and search on the term "Specunomics".

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