Put All Eyes On Europe For Money Is About To Become Very Nervous

(Note: The following is an observation wrapped in a format of pragmatic business insight. It’s presented in this form so one can take away the underlying idea or premise and apply it as an overlay when thinking about, or trying to evaluate, other instances.)

When I’m having a discussion or talk with entrepreneurs or any business people in general, inevitably I’ll state the following:

When it comes to business there are generally only two rules. First: Satisfy a customer with a product they’ll pay for which generates a net profit via 1+1=2 math. That’s rule #1. And second: When any part of the first can’t be met honestly, the only variable that can bridge, or allow, for any deficiency in the first will be of the psychological nature. i.e., “Faith” in the product, brand, culture, hassle to change, et cetera. But relying on the second to fortify the first, without addressing and correcting it – is only an exercise of how much longer till the “sand” eventually empties from the glass.

More often than not, companies rely far too heavily on the latter to make up for any deficiencies in the former. The real problem occurs when you lose any part of the latter (e.g., the psychological) while any part of the former (e.g., fundamental business metrics) is deficient. That’s usually the moment when you look back with a forensic eye – you can nearly pinpoint the precise moment when the dominant brand or business of the day began its path to irrelevancy, if not bankruptcy.

Now at first, I would imagine, many initially thought of the old axiom of “Rule 1: Don’t lose the money. Rule 2: See rule 1.” And that’s fine, however, that old saying doesn’t leave a lot as far as what to do, or where to look for clues either before, or after any business loses money, which is precisely my point. After all – It’s easy to say but does little in pragmatic terms. Here’s an example of the same rule and premise. “Rule 1: Don’t sink the boat. Rule 2: See rule 1.” Problem? Does boat meets uncharted, unforeseen iceberg bring about any thoughts?

Now I know this seems a little off track and some are thinking “What does this all have to do with Europe?” I’m getting to that but this is important so one can take away and see potential problems, issues, or even crises over the horizon when most can’t take their eyes any further than the beach itself. So – back to the “boat” example…

To explain this using the above; apply the thinking this way: In times of stress (e.g., the boat’s taking on water) to stay afloat you would need the psychological effect of rallying the crew, passengers, whomever, to all be of one mind, or of resolve, as to fix or alleviate the water coming in as to allow the ship to continue on, either to make repairs, or at the least, last until rescue could be had. And here’s the key: If everyone’s aware you never properly repaired the damage afterwards? If or when there’s anything resembling a “next time?” Everybody’s heading for the lifeboats first – including the crew.

Businesses are much the same in many different areas. An example would be: a company that at one time was the dominant leader of its time or product, then, after some time, innovative sclerosis of some type sets in and the company’s sales and product vacillates. And yet? The earnings reports (think Non-GAAP) show earnings beats and more.

The issue: So well does it work the first few times the company decides the “innovation” that’s needed is no-longer customer or product related. It’s shareholder related. And it seems to work, but it works only for so long until the psychological effect can not be held any longer (i.e., the belief that the stock price will hold) because anyone looking at the “balance sheet” with any business acumen will clearly see “There’s no there – there.”

In other words, the company wasted all its time leaving the “innovation” focus to its accountants, rather, than where it should have been – on the customer.

Examples of this (in my opinion) can easily been seen in companies such as Kodak™, IBM™, Cisco™, Sears™ just to name a few. Companies which did the opposite? Hint: Apple™ (e.g., Jobs return and focus.) Same could be said for Shultz and Starbucks™.

You can see how the psychological aspect allowed for giving them the room to refocus as they shored up the product, resulting in a subsequent strengthening of both product sales as well as net profit increases. Which is, again, the entire key that makes my statement factual, pragmatical, advice. For remember:

If the satisfying of customers, generating 1+1=2 dimension wasn’t dogmatically employed as the second part was allowed to bolster the first. (i.e., the psychological giving the breathing room via some form of faith via the customer, shareholders et al) Any subsequent hiccup (i.e., a fall in sales attributable to an easily understandable cause, or other “unexpected” item) people, customers, and even share holders would be sent moving, if not running, for the exits.

Which now brings me to Europe, and why you need to pay attention…

Since the financial crash one set of “companies” has not taken or applied my rule of business imperatives. In other words (again, my opinion, as I see things) banks have not “fixed” their number one part of the criteria, and instead, have relied totally on the largesse of central bankers to give the illusion that they did. i.e., “We’ll be bailed out by [fill in the government of choice here] and most “investors” can rest assured their money is safe with us, for remember – We’re part of the TBTF club!”

The so-called “stress tests” have shown to anyone with a modicum of rational thought that “stress” deserved quote marks. And there within lies the problem. Because that thinking is precisely what will now be tested from afar. As in, “I want my money as far away from these banks as I can get. For if there’s any stress to be tested? I don’t want it tested with my money!”

Why? As I started this whole conversation: Rule 1 was never truly addressed earnestly. And everyone knows it. Only the psychological aspect allowed money to remain “invested.” e.g. Allowing for the illusion of it being in a relatively safe spot.

But now that there is a bona-fide real example of precisely what (and how) “investor” money will be “bailed-in” along with the speed (as in days) bolstered with the supposed “calming proclamations” made by bank officials on the same plane as, “No need for concern, everything is fine.” Only to have the bank be taken over and sold days later? Remember my implied implications of what would happen on a boat? Hint: “Everybody abandon ship!” is usually what takes place first, rather than last. So again, back to Europe and why you truly need to pay attention…

Overnight Spain’s Banco Popular™ failed and was closed, then immediately sold to Santander™ by the ECB via their “Single Resolution Mechanism.” So what’s the big deal about that?

It’s two fold, first: You now have precedent. Second? Hint: It’s the psychological aspect that’s meaningful going forward. i.e., “How do I make sure I (or clients) don’t have any exposure because I now know what the results will be. e.g., I/We can Loose $ overnight or instantly.

Banco Popular wasn’t just some small time enterprise. Up until not too long ago it was considered the top bank in Spain. So now you have the first “ship” which quickly took on water in full view – and quickly sank.

The real underlying problem? How many other “ships” are far from sea worthy in let alone Spain, but Italy, Greece, and others? And not to add even more “water”, but just how many of these so-called “stress tested” European “debt-tankers” floating around out there with the psychologically held illusion of “safety” have others (think not just nationally, but globally) tied their profitability lifelines to? (think cross sold/held products like CDS’s and/or other exposures)

Now suddenly risk has gone from near nil to “Wait…what?” Again, this is the first, yet remember that other old axiom when it comes to sinking ships. Hint: Rhymes with rats and cockroaches.

With Mario Draghi on tap Thursday and what exactly he’ll allude to when it comes to further ECB money pumping is now all in question, and the “markets” will hang on every word, if not syllable and facial expression.

If there’s even the slightest hint of angst or double-talk emanating from the conference what we might begin to see is an ever so cracking in the facade of the “Steady as she goes!” or “What ever it takes” surety held by many when it comes to the ECB and its banks. There’s a lot riding there in light of the latest developments in my opinion.

The other troublesome issue is exactly what this all portends to U.S. banks if suddenly there were to be even more trouble in Euro-land. Not to mention the political of the day with elections and more.

To reiterate: As I stated at the beginning as in a “Rule 1: When you play the game of playing the second part to the detriment of the first? It’s easy to see what happens next. Today, we can only sit back and watch as to see just how this may take shape going forward. But at least you now have a prism you can use to view it along with using for others.

© 2017 Mark St.Cyr