Credit Crunch 1.5

I was there during the 2008/9 credit crunch and lost a £12m business — so I’ve paid close attention ever since and this is what I see…

This is a personal view on what the latest bank bailouts means for founders, business owners, job hunters, and, a suggestion on what to do.

Okay, this is not 2008/9, there will not be a widespread collapse and rescue of banks with every Sunday night delivering a new shotgun marriage.

But, this is the beginning of new credit conditions and the end of stuff that happens when money is ‘free’. Crypto finance and ‘build it and they will come’ tech will slip gently into the night…

Commercial real estate is under pressure too — particularly offices, but industrial and logistics look fine. And the pressure on offices isn’t new (think pandemic) and is, therefore, manageable.

However, inflation is rampant — today, it is focused on food, last year it was energy and for the past 20 years it has been homes and shelter. Although, central banks chose to ignore the prosperity crushing effects of rising house prices because it drove so many other parts of the economy (mortgage finance and furniture sale, for instance).

Nevertheless, the determination of central banks to ‘beat’ inflation is coupled with a new focus on the inflation of ‘shelter’. That is, the cost of renting or buying/ owning a home.

Reliable data in this space is hard to come by. Inflation statistics are notoriously hard to compare across long time frames for two reasons.

One, because the basket of inflation measures changes (smart phones were NOT part of the 2000 measure).

And, two because people swap expensive products for cheaper / different ones to reduce their personal inflation costs (think, swapping city centre apartment or small suburban home). And the stats can’t count this switch.

So, I’m using personal experience here…

Taking a 20 year view, my personal experience is that the cost of shelter has risen sharply but food discounting and a global supply chain have driven food and, to some extent, energy (eg flights) prices down. Albeit, we have swapped local low intensive food production for massive (and cheap) industrial farming. And our food quality has collapsed as a result.

Likewise, I expect that I consume more energy today than I did 20 years ago — I know that because I have done two major house renovations since 2000 and each time, I’ve added even more electricity sockets! And, even though I fly much less, I still fly more today than I did in 2000.

Oh, and by the way, there are more devices in our homes and our kitchens look more and more like machine rooms, right?

Where to focus?

Firstly, the biggest determinant of success (business or career) is not talent or perseverance (although these are essential, there are many smart/ able hardworking people and founders). Instead, what will determine your success in the next 20 years is largely down to which industry or industrial segment you pick.

If you are thinking about your pension fund — then you can afford a spread of industries — but, if you are building a business or looking for a 20 year career, then you can only choose one!

Nevertheless, the industries with 20 year growth potential are food and energy and anything that processes or converts those sources. So, I include microchips as an example of converting energy (electricity) into something useful. Likewise, energy efficient transport uses energy to move us around better and software both binds our ability to convert and extract value from the energy and movement.

In terms of food, the production of food is an industry that has been in a 200 year decline since the advent of the industrial revolution in what we now call developed nations. However, how we access our food, the quality that it delivers and the condition in which it arrives are critical factors and where we are likely to see significant innovation.

Of course, the generation of energy and food plus their distribution and use make up a large part of our carbon emissions and, hence, the reduction of emissions are a critical part of these two sectors’ future.

Of the three — shelter, food and energy — I expect shelter to perform the worst over the next 20 years — simply because the prices / costs are so elevated and extreme that the only path is no / slow growth.

Hence, the industries to avoid are residential real estate and the financial services (agencies, mortgages and mid-sized banks) and products (eg. furniture) that accompany the sale of new homes.

Likewise, finance has seen 40 years of globalised growth, which, after two banking crises and a crypto blow up in the last ten, they will increasingly become national concerns and nationalised. Why? Well, if our nation states bail out banks with tax payer funded deposit insurance, the nation state might as well hold the deposits in the first place, right?

Of course, tech will also continue to raise funds, but I expect far less for fintechs and far more for industrial tech and climate solutions.

Lastly, the defence sector will receive more funding too. And health/ pharma will continue as always.

What does this mean for you?

Credit conditions will tighten — but much less so for growth industries such as clean energy, evs, batteries, microchips, defence and industrial tech.

Likewise, how we access our food, ensure its quality and freshness without ruining our planet are critical roles that will get finance on decent terms.

Other industries will pay much more for their finance such that their route to easy growth will be restricted. You should largely avoid these industries.

That is why I am calling this Credit Crunch 1.5 — some industries will feel the full effect of a new credit crunch, others much less so.

The key here is that 2023 is a turning point. Many of the winners of the past 20 (or 40) years won’t be the winners in 2043.

The sector or industry that you choose will have more impact on your success than any other factor.

Choose wisely.

Note: I lost a £12m business in the 2008/9 credit crunch — so I’ve been paying close attention ever since! I build businesses and advise others although recently, I have place a 100% bet of my time on food and olive oil in particular.