The End Is Not Here

How does today's financial crisis compare with the beginning of the Great Depression and the 1930s? — Landon Romano, Johannesburg

Without doubt, you can pick a statistic here and a data point there, lump them together, and cook up a case that it's 1929 all over again.

But you shouldn't.

Yes, the current crisis is dire and will certainly worsen. In previous columns, we've predicted tough economic conditions for the next several quarters as the financial system's deleveraging is followed by a consumer deleveraging. But for many reasons, we don't see a second Great Depression looming. To paraphrase Franklin Delano Roosevelt, we believe the main thing to be pessimistic about today is pessimism itself.

To repeat: We know that real pain lies ahead. But we believe that when the pain eases—and it will—the global economy will be stronger and sounder than ever. We just have to get there—and we will—provided we stop fixating on, well, the exact question you pose.

Not to criticize you for asking! You're not alone, and we appreciate the chance to counter some financial journalists and all-purpose pundits who, like weather forecasters in a hurricane, are becoming giddy as they describe the biggest "storm" of their careers. Their excitement is understandable, but some perspective has been lost in the fray.

Let's start with the comparisons to the conditions that surrounded the decade-long collapse some 80 years ago. Sure, current times hold similarities to this period, but they're dwarfed by the differences. In 1930 the protectionist Smoot-Hawley Tariff Act ushered in years of international retaliation and discord. Today's crisis is marked by a high degree of free trade and global cooperation. In 1933 the National Industrial Recovery Act encouraged labor and industry cartels. The result was a decline in U.S. competitiveness—again, hardly the current case: American companies have never been in better fighting form. Finally, a second Great Depression is unlikely because of the institutions created to prevent one, foremost being the Federal Deposit Insurance Corp., with its authority to insure deposits, critical to stabilizing the banking system.

Instead of another Depression, some doomsayers predict a deep recession like in the early '80s, when U.S. GDP shrank in five quarters over a two-year span, with the worst quarter posting a 7.8% slide. Inflation neared 15%, the prime rate was at 21.5%, and unemployment hit 11%. Our indicators will worsen, but such numbers are miles from where we stand.

Others say we're marching into French-style socialism. Au contraire. The U.S. government has a century-long history of handling interventions with a fast-in, fast-out approach. In 1984, to take a recent example, it bought 80% of Continental Illinois National Bank but sold it just 10 years later to Bank of America. In 1989 it created the Resolution Trust Corp., which cleaned up the savings and loan crisis, then quickly packed up. TARP, the federal bailout plan, looks to be no exception, as its loan terms give banks flexibility and strong incentives to pay off the government within five years.

Our bottom line is this: Managers should stop looking back in search of the future. It's counterproductive, if not dangerous. To get through this crisis, leaders need to talk about reasons for confidence. America is loaded with energy and creativity; it's a culture that exalts entrepreneurs, who drive every recovery. Its system of higher education is envied worldwide. The country is brimming with strong companies with sustainable cash flows. And as daunting as the downturn is sure to be, it will also create vast opportunity as people heed Warren Buffet's advice: "Be fearful when others are greedy, and greedy when others are fearful."

Look, we're not Pollyannas. It's human to view your own difficulties as "the worst of times." But this painful but necessary correction will result in a healthier, deleveraged society with a renewed focus on productivity, innovation, and better governance. The end is not here. A new beginning awaits.

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What Gene Tests Can Really Tell You

If Greg Lennon is right, then the personal genome gold rush has a major flaw: There's not much gold there—not yet.

In the past year, companies have launched high-profile efforts to read the future in people's genes. For $399, a Google (GOOG)-backed startup called 23andMe collects saliva samples from its customers, looks at nearly 600,000 genetic variations in their DNA, and describes what these reveal about the donor's traits, ancestry, health, and risk of diseases. Another company in the headlines, Navigenics, not only extracts information from 1.8 million variations, or "markers," in a tissue sample, but also taps the expertise of genetic counselors and scientists at Harvard and other institutions. The price: $2,500, plus a $250 annual fee to get customized bulletins on the latest discoveries. "The technology lets you know who is at risk for Alzheimer's, diabetes, cancer, and other diseases," says Navigenics Chief Executive Officer Mari Baker.

Not so fast, says Lennon, a PhD geneticist and entrepreneur. Contrary to the hype about genetic testing, this first wave of direct-to-consumer ventures is likely to be a bust, he believes. The slim, soft-spoken Lennon, 51, is in a good position to know. He's a veteran of both the government's Human Genome Project and biotech startups, and he has ridden the roller coaster of hype and failure. He predicts that the payoff from the explosion in knowledge about human genes—and from the business model espoused by 23andMe and its ilk—won't come for 10 years. Right now, the personal gene-testing companies glean medical insights from individual bits of DNA, rather than from whole genes. So far that may be no better than what is learned the old way, from family histories: "Most people can save themselves $1,000 just by asking Aunt Clara what runs in the family," says Lennon.

"PARLOR GAME"

Such skepticism is surprisingly common among scientists. "I see personal genomics as a kind of recreational parlor game rather than a useful endeavor," says Dr. James P. Evans, professor of genetics and medicine at the University of North Carolina, Chapel Hill. "There's a potential for harm in false reassurance and false anxiety, but mostly it's a waste of money."

Of course, even parlor games can make money. And in the long run, Lennon, Evans, and others think that reading people's DNA will prove to be a tremendous medical boon. Lennon himself is a believer and continues to place bets on the field: His latest venture, called SNPedia, is a repository for all the data streaming from around the world linking genetic variations to health and disease. Launched in 2006 by Lennon and a computer-whiz buddy, it's a Web site supported by ads and licenses, which anyone can browse for free.

But Lennon and many academics contend that the claims of the new gene-testing startups are premature and overblown. 23andMe, which is also backed by biotech powerhouse Genentech and was co-founded by Anne Wojcicki, wife of Google's Sergey Brin, promises on its Web site to "help you understand how your genetics influences more than 80 diseases, health-related conditions, and traits." Another gene-testing company, deCODE Genetics (DCGN), also makes some grand claims on its deCODEme Web site: "You'll find out where your ancestors came from" and "make more informed decisions about your health." Yet the information we can extract from common DNA variations falls far short of a predictive blueprint for future health. It provides only small statistical links to illness, along with imperfect hints at a customer's origins.

This reality struck Lennon when he had his own DNA tested several years ago with the same basic technology now marketed by 23andMe, then analyzed it using his SNPedia database. Getting the results seemed exciting at first, he says. He was intrigued to learn he has genetic markers linked with an increased risk of heart disease and decreased risk for certain cancers.

Flir Leads in Night-Vision Gear

It's late at night on a foggy country road and you're behind the wheel of a new BMW 7 Series when you fail to notice a deer in your path 30 feet ahead. But an infrared camera, tucked inside the grille of your car, detects its body heat, produces an image of the deer on the dashboard screen, and sounds an alarm. You slam on the brakes, avoiding a potentially deadly collision.

Once found only in the imagination of science fiction writers, infrared technology is now being deployed to detect land mines in Afghanistan, scan the U.S.-Mexico border for drugs and weapons, and extend the nighttime vision of drivers beyond the distance of their headlights. These and other applications for "dual-use" thermal imaging (which means it's utilized by commercial and military customers) make up a $2.5 billion industry that's growing nearly 20% a year, according to market researcher Maxtech International.

And the leading provider of infrared technology is little-known Flir Systems (FLIR). The Wilsonville (Ore.) company, founded in 1978, may be less familiar to the public than the bellwethers that dominate BusinessWeek's ranking of Tech Hot Growth companies, such as No. 3 Apple (AAPL), No. 5 Google (GOOG), and No. 6 Microsoft (MSFT), but Flir ranks No. 8 on our list this year. (The company made its first appearance on our list last year, at No. 16).

Law Enforcement's Eyes

Flir is an overnight success 30 years in the making. The company's bread and butter has been the high-end infrared cameras it develops for commercial and government use—such as law enforcement and border protection—and then soups up for the military. Mounted on helicopters, ground vehicles, ships, and on the telescoping poles of foot soldiers, the cameras have proven crucial in nontraditional combat zones like Iraq and Afghanistan because they can locate explosives and also help discern civilians from armed insurgents. "What's happened is that there's been a change in the nature of warfare, and finding people in ones and twos and threes is more important now than in battle situations in the past," says Earl Lewis, Flir's chairman and chief executive.

Wartime has been a boon to Flir: Over the past eight years, the company has seen annual growth rates of nearly 25%. Sales last year reached nearly $780 million. On Oct. 23, the company reported third-quarter revenues of $276.7 million, a 45% jump over the same period last year. Although most of its business still comes from contracts with the U.S. and foreign governments, analysts believe Flir is well positioned to diversify into several emerging commercial markets.

Flir works with other manufacturers to integrate its technology into the dashboard of a car or the navigational screen of a boat. Vehicle makers then use Flir's technology as a selling point, touting the systems as safety options to customers. Flir also makes its own home-surveillance systems. And it sees potential in what's called thermography—handheld devices that allow building inspectors and homeowners to detect gas and water leaks, poor insulation, other inefficient use of energy, and structural damage invisible to the eye.

The company hasn't cracked the consumer market because its products are pricey: Most of its low-end consumer products run around $3,000. But the company hopes that its base of government and commercial contracts will help drive volume up across its many businesses, sending manufacturing costs down to the point where average consumers can afford the products.

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Sony Blames Profit Warning on Yen, Weak Demand

So much for the renaissance at Sony (SNE). On Oct. 23, the Tokyo electronics and entertainment company issued a profit warning for this year, blaming the yen's sudden surge and lower expectations for TV and digital camera sales. Sony officials now concede that it's unlikely the company will achieve some of the ambitious targets set by CEO Howard Stringerless than four months ago (BusinessWeek.com, 6/26/08).

That's a painful admission. For the past three years, Stringer's management team has rebuilt a company that was falling behind more innovative rivals such as Apple (AAPL) and Nintendo. This year was supposed to be the first of a three-year move to recapture some of Sony's past glory (BusinessWeek.com, 1/31/08).

Instead Sony officials are going back to the drawing board. For the year through March 2009, Sony predicted that operating profits would fall 58%, to $2.04 billion, from last year, despite a 1% uptick in sales, to $92 billion. The company also reset its net profit forecast at $18.5 billion, down 37.5% from what it had estimated in July. "We are considering an action plan that will go beyond the cost-cutting measures we have taken so far," Chief Financial Officer Nobuyuki Oneda told reporters in Tokyo. Though Oneda declined to offer details, he said everything—from research spending to factory investments to plans for new products—would get a second look.

Not Alone

Sony isn't likely to be the only blue chip Japanese firm to offer a gloomier earnings outlook. Next week, Panasonic (MC), Nintendo, and Sharp are slated to announce first-half earnings, as are automakers Nissan (NSANY), Honda (HMC), and Mazda. Prior to the announcement, Sony's shares finished the day 6% lower in Tokyo trading, compared with a 4% drop for the industry bellwether electrical machinery index.

The Sony revision wasn't completely unexpected. The company had based its earlier forecasts on the assumption that exchange rates would be 105 yen per dollar and 160-165 yen for every euro. Normally, Sony hedges against the risk of unfavorable currency swings. But the yen's unpredictably wrenching move appears to have caught the company off guard. As the financial crisis played out over the past few weeks, the dollar and euro have weakened against the yen. Late on Oct. 23, the dollar was trading at around 98 yen and the euro at 125 yen, down significantly from around 109 yen and 147 yen, respectively, in early September. The yen's gains create a problem for a company like Sony, which made nearly three-quarters of its revenues outside Japan. Those revenues get converted back to yen when the company closes its books at yearend.

And even after Sony tweaked its forecasts, officials didn't rule out the possibility of another downward revision. The new targets are only attainable if the yen weakens to around 100 yen per dollar and 140 yen per euro, Oneda said. "Keeping all other factors constant, if the currencies stay where they are, it could reduce operating profit by an additional 80 billion yen to 90 billion yen ($820 million to $920 million)," Oneda said.

Bleak Horizon

Faced with the prospect of a global slowdown, Sony is bracing for lower yearend holiday sales in Europe, the U.S., and China. It trimmed sales forecasts for some of its most popular products, by 9% for Handycam video cameras, 8% for Cyber-shot digital cameras, and 6% for Bravia flat-screen TVs from earlier projections. Competition is also driving down prices faster, Oneda said. Sony's electronics business accounts for 70% of overall sales, so the cuts will dent earnings. Plunging share prices will hurt Sony, too, because its insurance and banking unit invests heavily in stocks and bonds.

The only good news from the day's press conference, held at a hotel in downtown Tokyo, was that sales of the PlayStation 3 and PlayStation Portable video game consoles are likely to be as strong as—or possibly even better than—earlier projections (10 million PS3s and 16 million PSPs for the fiscal year), thanks to a redesigned PSP and an array of new online services aimed at the PS3.

Perhaps the toughest part for Sony's management came during the question-and-answer period. Asked whether the company could manage a turnaround of the money-losing TV and video game businesses this year, as Stringer had promised in late June, Oneda said: "It's looking doubtful." TVs have been hemorrhaging money since the fiscal year through March 2005, and games since March 2007. "In my personal opinion, next year could be another difficult one for us," Oneda added.

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Shifting into Cost-Cutting Mode

Back in 2002, Scott Chatel's business remodeling brownstones and apartments in Brooklyn and Manhattan was so good that he set a goal to increase annual sales from $2 million to $5 million by 2005. He signed a three-year lease and renovated new office space, expanded his staff, and printed four-color brochures. His firm, Chatel Contracting, was busier than ever, but the costs of expansion erased Chatel's profits, leading him to take on debt. "It was the overhead that was doing us in. The jobs were always profitable," Chatel says. By the end of his lease in 2005, Chatel dropped his expansion plans and went into cost-cutting mode.

Many small business owners may soon find themselves in Chatel's situation, with rising costs and stagnant sales in a sour economy. Recent surveys of economic trends by the National Federation of Independent Business found weak levels of capital spending over the past six months. And in its latest survey, conducted in September, just 21% of respondents expected to make capital purchases in the next few months. The survey also found businesses reducing inventories, with a net 12% cutting stock rather than adding. While business owners are nervous about the economy, many have refrained from more drastic cuts or layoffs, says Jennifer Rockne, director of the American Independent Business Alliance, based in Bozeman, Mont. "The local folks are typically very reluctant to lay anybody off because a lot of their employees tend to be longtime employees," she says.

Still, by recognizing the problem early and making moderate reductions, small firms can avoid more severe cuts later on, financial experts say. Companies that ignore warning signs can erode their profits with rising costs, and those that borrow to meet those costs can wind up insolvent.

Financial Ratios Give Warning

Chatel took serious steps to cut his overhead. He gave up his office space—gutting the $50,000 renovation he had done when he moved in—and moved the office back into his home. Instead of laying people off, Chatel left vacant positions unfilled until his staff shrank from 15 to five—about the number of employees he had before expanding. He went from doing 60 jobs a year to just 13, and he cherry-picked the most profitable ones that wouldn't require subcontractors. With the help of a workout firm, Paramus (N.J.)-based Corporate Turnaround, he negotiated payment plans with his creditors.

Today Chatel's sales are down to $700,000, but the firm is far more profitable because of his cost-cutting measures. Eliminating the office saved $500,000 a year in expenses. "Sooner or later you have to know when to say enough's enough," he says. Chatel counts himself lucky for acting when he did, but many small business owners don't see their financial troubles coming. "A lot of [businesses] are financially ill but don't even know it until it's too late," says Sam Bornstein, a CPA and professor of accounting at Kean University in Union, N.J.

Bornstein advocates using financial ratios as an "early warning system" to signal when a business should cut costs or make other adjustments. Comparing indicators like the gross profit ratio—which shows the proportion of profits to total sales—to industry averages can tell business owners whether their costs are too high or their prices are too low. Other ratios can show whether overhead costs are too high, even if individual transactions are profitable. Bornstein says having an accountant check such figures annually will show business owners signs of trouble before they take on too much debt to cover growing costs.

Taking New Measures

Robert Welton wishes he had acted to cut costs earlier. His eight-year-old company, WelTec, based in Egg Harbor Township, N.J., builds and maintains infrastructure for telecom and cable companies. His business was doing well in early 2006, with sales of $3.

Emerging Markets: Foreign Currency Debt Troubles

When Daniel Ion bought his first home last year, his monthly mortgage payment was $704. Now it's $939—and rising. "We wanted so much to have our own house, but now we are really starting to feel the burden," says Ion. Soon, he frets, his salary as a manager at a toy factory may not be sufficient to cover the payments.

Another subprime hard-luck story? Not exactly. Ion lives in Bucharest, and his plight illustrates one reason emerging markets such as Romania are in trouble. Like U.S. subprime borrowers, Ion was lured by a mortgage with easy up-front terms. But a bigger problem is that his loan is in euros while his salary is in lei, the Romanian currency, which is off by 12% against the euro in the past year. Foreign-currency loans are popular in developing countries because they offer lower interest rates than those in local currencies. In Romania, for instance, foreign currency loans run as low as 8%, vs. 10% or more for loans in lei.

All told, borrowers in emerging markets owe some $4.7 trillion in foreign-denominated debt, up 38% over the past two years. Many developing countries still look strong on paper, with big foreign reserves and healthy trade surpluses. But the statistics can mask heavy dependence on offshore loans to keep economies buoyant. "It's amazing that people don't pay attention," says Mark Mobius, head of Templeton Emerging Markets Fund (EMF). Borrowers have been taking out "mortgages in yen and Swiss francs because they thought the money was so cheap."

Governments and international lending agencies are scrambling to rescue the hardest-hit countries. The hundreds of billions of dollars the U.S. and Europe are pumping into frozen credit markets also will help. But for some countries, it's already too late to avoid a painful hangover, says Morgan Stanley's (MS) Ronny Rehn in London. "There will be extreme repercussions," he says.

Who could suffer, and how? Romania, Hungary, and Bulgaria—where more than half of all debt is foreign-denominated—could be pushed into recession, joining the Baltics, where the economies already are contracting. "The only sector that's doing well is collection agencies," says Tomass Barilo, managing director of WorkingDay, a recruitment company in Riga, Latvia. Barilo says he expects WorkingDay's revenues to shrink 25% to 30% this year as consumers and businesses struggle to repay foreign-denominated debts. And Ukraine is bracing for draconian cuts in social spending under terms of a $14 billion emergency loan it is negotiating with the International Monetary Fund. Some 49% of the country's debt is foreign-denominated, and Ukraine's currency is down nearly 9% in the past year.

Lenders are at risk, too—especially in Central and Eastern Europe, which have gotten some $1.5 trillion in credit from foreign banks. The three biggest foreign lenders—Italy's UniCredit, and Austria's Erste Bank and Raiffeisen International—have all had their debt outlooks lowered recently to "negative" by ratings agencies that cite deteriorating economic conditions in the region. And Sweden's SEB and Swedbank (SWDBY) have written down more than $100 million on credit losses in the Baltics this year.

HEALTHY RESERVES

In South Korea, the global credit squeeze has sent the won plunging 33% against the dollar this year, making it virtually impossible for local banks to borrow from overseas lenders. Some banks, in turn, stopped lending to small and midsize companies—prompting Seoul to swoop in on Oct. 19 with $100 billion in guarantees on foreign borrowings. But most analysts expect Korea to weather the storm, in large part because of its healthy $240 billion foreign-exchange reserve.

Other countries are vulnerable not so much because of corporate or consumer borrowing in foreign currencies but because their governments are at risk of default. In Argentina, President Cristina Fernndez de Kirchner wants to nationalize $30 billion in private pension funds. Although Kirchner says the move will protect retirees from falling stock prices, critics say the real reason is to strengthen state finances as Argentina prepares to make billions of dollars in foreign debt payments next year. In Pakistan, meanwhile, foreign reserves have dropped to $4.3 billion, enough to cover only 45 days of imports. Pakistan's rupee has plunged 22% this year as exports have slowed.

To preserve foreign currency, Pakistan's government has ordered companies to pony up, in cash, one-third of any import bill before banks can issue letters of credit. That has forced businesses to slash imports. "My company is in a pretty deep crisis right now," says Muhammad Imran Khan, chief executive of Lahore-based steel products company Conductor & Cables, which has cut its imports of raw steel and cables by half this year.

Slumping stock markets aggravate the problem. More than $20 billion flowed out of emerging-market equities in the third quarter, estimates the Institute of International Finance, a Washington association of financial firms. Ukrainian stocks are off 77% this year, shares in Bucharest have plummeted 67%, and Sofia's bourse has dropped 66%. In Moscow, where the RTS stock index is down by 71%, oligarchs who pledged shares in their companies as collateral on loans from Western banks now are having trouble making payments.

Small wonder, then, that businesspeople around the world feel whipsawed. "The value of the [Turkish] lira doesn't depend so much on the performance of the Turkish economy, but on decisions made by people that have invested in Turkey," laments Mahmut Derya Uras, general manager of Transturk Holding, a machine tool company in Istanbul. Uras concedes, though, that the crisis underscores the need for economic restructuring in Turkey. "It can be used," he says, "as an opportunity to change."

Pakistan Faces Default on Its Huge Foreign Debt

Pakistan Faces Default on Its Huge Foreign Debt

Global Stocks: Should You Pull Out?

Humdinger's Wind Power Alternative

As an MIT engineering undergraduate visiting the rural fishing village of Petite Anse, Haiti, in 2004, Shawn Frayne hoped to devise a way to convert abundant agricultural waste into cheap fuel. But the budding engineer soon found that the community's mainly poor residents faced an altogether more immediate need. Unconnected to the local power grid, they relied heavily on dirty kerosene lamps, which are not only costly to operate but also unhealthy and dangerous. He decided to devise an alternative—a small, safe, and renewable power generator that could be used to power LED lights and small household electronics, such as radios.

The result is the Windbelt, a miniaturized wind-harvesting power generator that has absolutely nothing in common with the traditional, towering wind turbines that dot the fields and shorelines of developed countries. The simple device was awarded $10,000 in late September as a finalist for the Curry Stone Design Award, a charitable prize that aims to boost design and innovation projects for developing countries. Frayne, now 27, also won a Popular Mechanics Breakthrough Award last fall, earning him a coveted spot on that magazine's annual list of up-and-coming scientists and engineers. Now Frayne and his five-man startup, Humdinger Wind Energy in Honolulu, Hawaii, are working on turning a promising prototype into reality.

Exploiting Vibrations

"Wind power has pretty much looked the same for the past 80 years," says Frayne over the crackle of a Skype phone call from Xela, Guatemala, where Humdinger is working in rural locations to develop production-ready versions of the Windbelt. After his initial prototypes proved too expensive or inefficient (or both), Frayne took a different tack, eschewing a propeller-type design for an entirely different idea. About the size of a cell phone, the final Windbelt prototype employs a taut membrane that, when air passes over it, vibrates between metal coils to generate electricity. Frayne claims it is the first wind device of any size not to employ turbines.

Indeed, the roots of his innovation are unexpected: Frayne says he was inspired by studying the Tacoma Narrows Bridge in Washington State, which dramatically collapsed in 1940 due to powerful vibrations caused by the wind (see here.) The Windbelt harnesses those same dynamics to generate power.

Adaptable to Developed Economies

Frayne's device joins a growing array of simple, inexpensive technologies created for developing countries that have also garnered considerable attention in the U.S. and Europe. "Innovations arising from problems in developing economies should meet the challenges of developed economies, too," says Frayne emphatically. With that in mind, Humdinger is taking "a market-oriented approach," he says. That means pitching Windbelt technology as a green way to power air-quality sensors or WiFi transmitters in new buildings in the developed world, for instance. "People are realizing that smartly designed micro-installations can have a big impact," says James Brew, a principal architect with the Rocky Mountain Institute, a green think tank in Aspen, Colo. The Windbelt's small size and negligible cost, adds Brew, make it potentially applicable in developed settings—such as new skyscrapers—as well as the more rugged conditions of the world's rural villages.

Though he won't reveal how much funding the group has received to date, Frayne says it would cost upwards of $30 million in venture capital to expand the company so it could manufacture Windbelts itself. More likely, Humdinger will end up licensing the technology to other manufacturers, which would assume development costs.

Undeterred by the obvious challenges of marketing an entirely new type of wind power generator, and even though wide distribution is still some years off, Humdinger is forging ahead. In the past year, the group has established pilot programs in Guatemala and Haiti as well as rapid-prototyping facilities in Hong Kong. They are also working on larger versions that could generate significantly more power. The Windbelt may have started with personal curiosity, but Frayne's mission has changed dramatically. "We're really trying to develop the new building blocks of wind energy," he says.

Wind: The Power. The Promise. The Business