Turnaround Time

TURNAROUND TIME by Michael S. Malone

Difficult as it may be to believe, I’m beginning to see the first signs of an economic recovery here in Silicon Valley – a breakout that might even be big enough to pull the entire U.S. economy out of our current mess.

The question now is whether the Feds will actually let it happen . . .

This has been, from the beginning, a paradoxical recession for me. I followed pretty closely the Credit Crisis, then the Banking Crisis, and now the Employment Crisis. And though I’ve accepted the reality of this sequential economic disasters, and though I’ve been reporting on the bad quarterly financials of one local high tech firm after another – there is nevertheless something unreal about the whole thing.

Part of this, I’m sure, is sheer denial. Though it is a natural human tendency to take diverse events and intellectually string them together into a trend, there also seems to be a countervailing tendency to take large distant events, especially if they are attenuated over the span of weeks and months, and revert back to thinking of them as unrelated.

I remember my parents telling me that neither of them — my father in Washington State, my mother in Oklahoma – even noticed the stock market crash in 1929. For my mother, who was sent home from school a couple times as the horizon went black in mid-day, the Dust Bowl was the cause of thousands of farmers just west of her packing up and heading to California, not economics. Rather, the Depression was just a slow, almost unnoticed, slide into a world of fewer jobs, less money, and poverty. And it wasn’t until the Banking Crisis of 1933 that the magnitude of the Great Depression hit home. By then, my mother’s family was living off produce from her grandparents’ farms, and my father was reduced to hunting for the family table.

This downturn too has a kind of dreamy, slow-motion feel to it. But the fundamental difference is that, thanks to modern technology, information about our current predicament is omnipresent on the Web and cable television and available in unfathomable depth. I can, sitting here at my computer, hit a few keys and call up thousands of blog commentaries on the Stimulus package, watch videos of the key players in Congress (as well as in the Administration) and even read the thousands of pages of official documents and legislation related to the crisis.

Indeed, I can say without hesitation that, unlike my parents, my relationship with this current economic crisis is not one of blissful ignorance from too little information, but something close to intellectual paralysis from having access to too much information? Did anybody in 1929 draw parallels to the Panics of 1873 or 1893? Could the average citizen obtain a copy of a draft of Smoot-Hawley or listen to a debate over Hoover’s policies every hour on the radio?

But if my parents’ and grandparents’ generations were blindsided by the news coming out of Washington and Wall Street, just the opposite seems the case for us today. Sure, nobody seemed to have seen the Crunch coming, but once it began the entire U.S. economy seemed to rush out ahead of it. Even companies with good financial news embarked on massive lay-offs in anticipation of a crash. So too did everyday Americans suddenly show uncharacteristic prudence – cutting back on home purchases and most other major expenditures several months before any personal financial risk became apparent. By the same token, they uncharacteristically began to save money – to such a degree that the Feds actually had to beg folks to spend more.

As a result, it has actually been difficult to separate cause from effect. Was the jump in unemployment due to the slowing economy – or the cause of it? Did capital goods orders and building starts fall of a cliff because of true lack of demand, or in preparation for that eventuality? I’m not suggesting that the current crisis isn’t real, but I am curious as to the role that ubiquitous information – and let’s not forget all the stories (and Presidential comments) comparing the current downturn to 1929 – has had in actually moving the curve. Did it accelerate the crisis? Amplify it? And will it shorten or lengthen it?

This isn’t idle speculation, because as I wrote here several months ago, our fast-moving, digital, broadband networked society seems to be creating economic bubbles at an ever-quicker pace. Is that what just happened? And if so, is the Stimulus package that appears about to pass in Congress – all of its other egregious features aside – merely going to land on an economy that no longer needs it . . .and worse, actually set the stage for the next big economic catastrophe?

Here’s what I do know: All of my reporter’s instincts right now are telling me that Silicon Valley, and much of the rest of the high tech industry, is already starting to come out of this downturn. There is a four year boom/bust cycle in tech – and we were due for a downturn in 2008 anyway. [ Which raises the interesting question: How much the current recession in tech was due not to macroeconomic problems, but just its own natural business cycle?]

But every downturn in tech carries with it the seeds of the next boom. What I see out there as I travel around Silicon Valley is very different from what I read and watch in the news. Yes, a lot of big Valley firms are hurting right now. Demand across the board basically disappeared in December – once again raising the expectation-versus-reality question – but it also seems to be slowly returning. The shopping districts of the Valley were half-empty during the holidays, but once again they seem nearly full as consumers come out from their bunkers and begin to shop again. Even this area’s stratospherically priced real estate market – despite falling prices, foreclosures and the inability to obtain Jumbo loans – seems less prostrate than it did a few weeks ago.

Meanwhile, there are rumors that the ultimate bellwether of high tech health, the semiconductor book-to-bill ratio, which plummeted at the end of last year, is now slowly creeping back to 1:1, the official signal for the next upturn. And just this week, Intel Corp., still arguably the most important tech company on planet, announced that intended to spend $7 billion in upgrades to its fabrication plants – and not overseas, but right here in the U.S. in Arizona, New Mexico and Oregon . . .a decision that is likely to create several thousand new jobs. Apparently Intel, like its equally strategic and vital retailing counterpart, Wal-Mart, is doubling down its bets on a resurgent economy sometime in the near time horizon.

But to me, the single most important indicator that high tech is coming back is the fact that every day when I stop by Peet’s coffee in Cupertino to get my double large latte, there are at least two – and sometimes three or four – groups of men and women in tight circles hunched over a single laptop making a presentation or typing on spreadsheets. And I see this phenomenon all over Silicon Valley.

I know what these folks are doing, because I’ve been there: these are start-up teams plotting the creation of new companies. Downturns tend to bring out entrepreneurs, largely because there’s a lot more talented people with free time. And these days, with the cost of designing a new app for the iPod or Android phone next to nothing, starting a high tech company is easier than ever.

That said, I have never so many entrepreneurial teams at work as I have in the last few months. And they are the tip of the iceberg: each one of these teams represents perhaps a dozen more hidden away in rented meeting rooms and home kitchens. I may be dreaming, but what I think I’m seeing is the birth of the largest entrepreneurial boom in Silicon Valley history. And that’s saying a lot, because the last few of these booms have been powerful enough to drive the U.S. economy to unequalled prosperity.

My hunch is that by July enough of these new companies will have emerged that — combined with hot new markets blooming around eBooks, smart phones and consumer products we can’t even imagine yet – it will be obvious to everyone that high tech is booming again.

But just how big that boom will be is likely to be determined not by the marketplace, but by Washington. If the Stimulus, as many predict, has the effect of attenuating rather than shortening the Crunch, these new companies will quickly hit a wall and many will die. The same thing will happen if Sarbanes-Oxley and other economically suicidal regulations remain in place. And it goes without saying that if Washington decides to outlaw risk and reward, supply and demand, and entrepreneurship most of all, not only will this boom, but all that should follow, will never occur.

The horses of high tech are already in their gates, waiting for doors to fly open. If the track is too muddy or if there is a wall across the first turn, don’t blame them for not finishing the race.