Your Assumptions for 2021, Plan B and Road Maps

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What are the assumptions you use to frame your plans for 2021? Last year I asked this question as I drafted assumptions for 2020. Of course, things turned out very differently. But we all need assumptions if we are to guide our teams forward. No vision, no matter what. If you have a vision and direction they can be judged wrong perhaps, but it helps anyway to frame a dialog. No vision, no judgement but also no frame to explore possibilities. You need some foundations in place to take decisions or create the framework on which others will take actions.  Here are a couple of assumptions that might impact information and technology investment decisions.  These are my personal assumptions based on what I read and see (not part of what Gartner officially uses for its own business planning – I don’t know what they are): GDP/Growth: USA likely to reach 3-4% annually by end of year. Pent-up demand with a COVID-free demand-driven economy will start to surge in Q3. Interest rates: USA likely to remain flat for 1H and may start to nudge up in 2H.  Year-end target: 30-year fixed mortgage: 5-6% (currently around 3.0%) 10-year treasury note rate: 3-4% (currently around 1.0%) Inflation: USA likely to pushing through 3-4% by Q4 but could well exceed this as labor/wages cost, increased regulation and interest rates nudge up and flow through; supply chain. My feeling is the US economy will be framed through two lenses.  Areas avoiding the increased  regulation and government subsidies will likely be able to grow naturally, and consumer spending will be liberated.  As such some parts of the economy will feel something like normality as we approach Q4. Other parts of the economy that fall under the new Administrations eye will feel a) more government regulation but at the same time b) more public sector investment. This leads to additional growth for sure but the economy has a whole will suffer from a debt-fueled public sector spending spree.  Collectively we will all feel that “normality” is returning but that “normality” will be a highly regulated, more complex public-sector managed normality.  The result is that interest rates and capital investment will remain crippled through 2021. Inflation has been satiated for some time. Even the Fed has changed tack over how it targets inflation and communicates its plans. It will allow the economy to exceed inflation targets as a counterbalance to periods that under shoot the target. The problem is the economy has undershot the Feds’ targets for years. This force-delayed raise in interest rates will bite us all in the behind. So much cheap debt is sloshing around in the investment-sector of the economy it won’t take much to trigger a price raise that will cascade through the economy. I believe we are about ready to release the inflation beast. What if that inflation beast does get unleashed? What if growth does not recover as planned due to over burdensome government control?  What if Congress remains gridlocked and little real changes get through? All three are possibilities and so a Plan B, a contingency plan, might be warranted. In fact, I’d recommend it. Plan B Assumes Rampant Inflation The point is not that we are planning for rampant inflation, but we are putting in place a set of actions and plans that we could trigger if they were needed, if conditions warranted it. This year is, I believe, more complex than last. The major risks/variables are: Covid-related virus mutations push the country back 8 months and we have to start again with vaccines and extreme lock-down and economic concerns. Economic growth is balanced between the liberating low regulation and freer policies attributed to Trump, coupled with plenty of cheap debt with no clear path ahead to capital growth which explains the anemic capital investment, and a return to highly regulated, government controlled economy, with even more cheap debt and the same lack of vision to normal capital return planning. Debt burden under both growth trajectories is immense and getting worse. The only saving grace is for investors and bond holders there is no where else to go, so the $ remains ‘safe’ and debt servicing affordable. But it won’t take a lot to change all that. A couple of % changes in interest rates will hit debt servicing charges in many States as well as the central government. A continued spike in raw material and import prices, coupled with a change in dynamic with wage costs such as increased minimum wages that take no account of productivity, could easily combine and start a groundswell of price rises. See WSJ Surging Grain Prices Fuel Surprise Farm Recovery and Economist Prognostication and Prophecy to explore the edges of this topic. Another ‘red flag’ to watch is the yield on triple-C corporate bonds. As yields on assets and investments that drive free market economic growth have fallen, squeezed out by government-backed and market distorting QE and bond buying, investors have been seeking out ever more riskier bets. Now triple-C are the lowest rated bonds, sometimes called junk bonds. If the yield continues to drop as investor like in, market risks will drive up. It’s just a matter of time. See WSJ: Investors Seek Out Riskiest Junk Debt. So, Plan B should use scenario planning to explore conditions such as an inflation rate of, say, 7-9%. What sourcing plans might be hedged against to protect rising input prices?  Plan B should explore what happens with GDP at 7 or 8%. What if the economy booms and starts to overheat? Which products and services should you target for supply assurance and why, if any, might you for, to preserve demand/supply balance? Plan B should explore what happens if interest rates ramped up to +8% by the end of the year. How does your cash flow change with increased debt servicing? What does your revolving debt mature? What might you do if access to cash disappears as investors start to demand real, even normal returns? In developing scenarios, you can document road maps and potential road maps that you then out in the shelf. These are kinds of war games, played out under various conditions, exploring how your organization might respond. These scenarios can be fun to explore, and they can also be scary. The effort will help you prepare and determine the range, mix and size of investments and actions you may need to undertake of things change unexpectedly. You don’t have spend hours and hours on this tuff.  You just need to explore the edges of your current plan for where contingency planning makes sense, given the largest risks you recognize in our shared future.  Who knows, maybe everything be fine and dandy by December 31st 2021 and the assumptions in this blog will have been proven to be worthless, just like last years. Either way, the value should be clear. We should all have a Plan B in our back pocket, just in case. Unless you are in total control of your own destiny, that is.

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