The Tragedy of the Fools.
(Economists, That Is.)
(As Usual.)

I know I've heard this one before, or some close kin. But I laughed anew (that's better than crying) at this ha ha from Saturday's Wall Street Journal:

"An economist, a chemist and a physicist are marooned on a desert island. Their only food is a can of beans, but they have no can opener. What are they to do? The physicist says, 'Let's try and focus the tropical sun onto the lid—it might melt a hole.' 'No,' says the chemist. 'We should first pour saltwater on the lid—maybe that will rust it.' The economist interrupts: 'You're wasting your time with all these complicated ideas. Let's just assume a can opener.'"

WSJ author Anatole Kaletsky continues: "This little joke tells us more about the causes and consequences of the 2007-2009 crisis than any number of ministerial speeches, Wall Street research reports and central bank monographs. The propensity of modern economic theory for unjustified and oversimplified assumptions allowed politicians, regulators and bankers to create for themselves the imaginary world of market fundamentalist ideology, in which financial stability is automatic, involuntary unemployment is unimaginable and efficient omniscient markets can solve all economic problems, if only the government will stand aside." (The WSJ piece is a book excerpt from Capitalism 4.0; Kaletsky is editor at large of the Times of London.)

Discount my discounting of economists if you will. It is true that I've always thought the discipline a bit of a joke. (Though only when it matters, at times like the present. The economists do quite well in the good times, when the stakes are minuscule.)


Happy Monday!

Happy summer!

My Socialist Day

I think of my self as a free-markets fanatic. I've earned my keep on that score, through everything including testimony to Congress. Hey, I was even asked to contribute a blurb to a collection of F.A. Hayek readings from the U. Chicago press.

Nonetheless ...

I started my day, you'll be glad to hear, with a clean T-shirt. Made in China, of course, but odds are, made in China from highly subsidized cotton grown in Texas. Milk on my cereal this morning, rather inexpensive, courtesy the New England Dairy Compact. Off to the country store to get papers—traveling on a tax-subsidized road. Waved to neighbor's children waiting for a subsidized bus heading to a subsidized school. Whoops, forgot, was online at dawn's early light; most of the tools I used, microchips, Internet, etc., were to a significant degree products of Department of Defense-funded R&D.

If my sore throat doesn't get better, off to the doc's. More subsidized roads, and when I get to the office, out comes my Medicare card. Several testing devices will doubtless have been covered in part by subsidies of some sort.

And so on.
And on.

So I will go on preaching self-sufficiency, free markets, unfettered entrepreneurialism, and the like. But every now and then I reserve the right to laugh at myself for thinking that I'm a self-reliant person.

One More Time.
Economics = Psychology.

Time (1130.09) devotes a column to financial market forecasting, in particular to the wisdom of Robert Prechter. Prechter is a man after my own heart. Psychology and sociology rather than "efficiencies" drive the market: "Prechter argues," says Time, "that standard economic models of financial markets depict prices as reflections ... of true value." But Prechter believes that "waves of social mood are the driving factor" of prices.

All I can add is: Amen!
Maybe even: Duh!

Five Boo-boos

1. Jobs are not coming back. People are hurting!!!! "Some people" (me!) cheered the return of the DJ average to 10,000 last week. Yup, we're pulling out of the recession! Try telling that to the 15 million out of work in the U.S. And those still working are scoring but 33 hours per week—the least in 60 years. In a horrifying (careful word choice) article by gazillionaire Mort Zuckerman in yesterday's Financial Times ("The Free Market Is Not Up to the Job of Creating Work"), Mr. Z adds a raft of other appalling facts about the astonishing mismatch between areas where job growth might take place and the skillsets of the recently booted. Message: The recession is a long way from "waning" for a bloody lot of people! Keep your cheering to yourself! (You may have to keep it to yourself for, say, the next 10 years.)
2. So the reporter at the desk next to yours lost his job. An article in Time focused on the implications of the revolutionary transition to the "new economy." For God's sake, I've been yelling about that for 15 years. And what a bunch of bull! Yup, there is a new economy—and newspapers are getting clobbered. But the large majority of us still work in pharmacies and insurance offices and, yes, car dealerships. Why oh why do we always willfully focus on folks in big companies in sexy industries?
3. Gen X (etc.) is bringing a new look to the work force. Yeah, unemployed. Much as we focus on the 52-year-old UAW worker tossed out the door, the fact is that the older folks are doing relatively well in the "contraction"—and the younger folks are taking it in the chops. (See BusinessWeek's "horrifying" October 8 cover story, "The Lost Generation.")
4. Don't lose those superstars! Is there any credible evidence that Wall Street's superstars (about to receive mega-bonuses) are actually superstars? If so, it's not clear to me. (I admit to being a slavish devotee of Nassim Nicholas Taleb's Fooled By Randomness—which sets off alarms on this topic.)
5. Our gentle neighbors. I was in Toronto last week. (Love that city!) When "we" think of Canada, we often think it's a "very nice place." Well, it is, but life for workers ain't no walk in the park! (Understatement.) Canadian pension plans are going bye-bye like ours (Except for the public sector, like us). Fact is that only 25% of Canadian workers have a pension plan. So much for kindly Canada, the workers paradise. (Yup, they all have health coverage—no small thing. And many I talked to are really pissed off at our willful mis-characterization of their health plan, with which they are more or less quite happy.) (Source for pension information, The Globe and Mail, 10/17/09.)

Must Be a Mis-quote

Sunday New York Times, biz section, p1, "Tales from Lehman's Crypt." Quote from an ex-Senior Vice President, Ken Linton, who evaluated mortgage quality as a prelude to securitization, and smelled a rat early—or at least a rotting mouse:

"You are not paid to rock the boat."

From a front-line employee at McDonald's, single-Mom with two kids, totally forgivable. Or a 48-year-old GM employee now at Wal-Mart.

But this ...

As I said, obviously a mis-quote.
Right?

(Not.)

Tom Meets His Neighbor, Cubist Pharmaceuticals ...

And Says ...
"Who the Hell Are You?"
They Reply ...
"We're #1!"

The attitude in China a couple of weeks ago was pretty good, maybe better than pretty good. There were economic problems, but the group of mostly entrepreneurs I was with vibrated with energy and lived to turn others' problems into their opportunities. Economically (I'm not talking nukes here), the feeling was also pretty good in Korea. Moreover, I was in Seoul to be part of Korea's launch of a new growth strategy, focused on global leadership in "green" industries, and marking a radical departure from business-as-was; the goal is to go beyond "doing good work" to unalloyed planetary leadership in arenas that matter. It did not seem incongruous to them or me that we were having a refreshing discussion of a brave new & exciting future when the current economic numbers were still sketchy—and surprises, even bad ones, could be in store. (E.g., how will the world's markets react to an almost certain GM bankruptcy? For what it's worth, my layman's bet is that after a hiccup or two or three, the markets will settle down and take it in stride. Maybe six months ago the psychology would have been such that true panic would have set in, but not now.) To sum it up, there's no bunker mentality—moving ahead smartly, even audaciously, is the order of march.

In a somewhat similar vein, I've been carrying around a couple-week-old special section of the Boston Globe, titled, "Globe 100: The Best of Massachusetts Business." Some things about MA seem to bug some people, but the academic and entrepreneurial firepower concentrated here surely makes it a Top 10 "success city" in the world—or, rather, success region. (We benefit from a bunch of such regions in the U.S., like the SF Bay Area/Silicon Valley, with no real earthly parallels, Greater Austin, Greater Seattle, Greater D.C., Greater Houston, Raleigh-Durham, Madison WI, great swaths of the LA Basin, etc.)

I found the "Globe 100" fascinating. Three of the top five finishers, 13 of the top 25, and 31 of the top 50 were tech companies—that number should actually be about 35; some of the so-called "service" companies are essentially tech companies. I have a house in Boston, though I'm hardly a regular resident, and business in general is my beat—hence I definitely should be plugged into "all this." So I was literally dumbfounded that of the 13 tech companies in the top 25, I had never heard of eight of them—and in particular I'd never heard of #1, Cubist Pharmaceuticals! (It's a half-billion-dollar revenue company—the rankings are performance-based, not size based.)

I actually think my ignorance is very cool—and important. You could say, surely, that it condemns me as "out of it." But I think that would be an erroneous conclusion. My conclusion is that there is a truckload or two or three or four or forty or four thousand of largely-invisible-absolutely-fabulous great stuff going on from Greater Boston to Greater Shanghai to Greater Seoul. The developed world is indeed in the middle of a profoundly troubling financial-economic crisis, and the impact will be felt for years; but unlike the Great Depression, all sorts of extraordinary things are going on or in the works or even accelerating—and the promise of a raft (a big, big, big raft) of future tech-based Revolutions (yes, with a capital "R") is mind boggling; and cause for extraordinary, almost giggle-worthy mid- to long-term optimism.

Shanghai's irrepressible entrepreneurs.
Korea's aggressive, bold green initiative.
The "Globe 100."

And now I'm off to Delhi ...*

(*NB: my trip-to-Delhi reading is alibaba: The Inside Story Behind Jack Ma and the Creation of the World's Biggest Online Marketplace, by Liu Shiying and Martha Avery. Wow!)

(It would be ironic if this Post appeared the day GM applied for bankruptcy. But if it were so, I would not change a word. While I would weep for dislocated families and shuttered businesses, I would also remind myself, and you, that it ain't a GM world, and it actually hasn't been for a good quarter century—even in the U.S.A.)

Go, Larry!

You may recall my applause for Larry Janesky, who has turned "dull" basement transformations into a powerhouse business, Basement Systems Inc. (His portfolio includes his best-selling book, Dry Basement Science.)

Well, Larry's hit a home run, as far as I'm concerned, with an idea he passed on to his dealers—in my experience it's an original.

In short, Larry distinguishes between "busy" and "growth." Simply put, "busy" is booking business in good times—which boosts your revenue growth to the heavens, in the short-term. As to "real growth," it occurs "when the troughs in sales come up, not when the peaks go up." That is, on a chart, the bad times bottom-trough today is higher than the trough during the prior problem period.

In a little more detail, directly from Larry's dealer presentation (imagine quotation marks around what follows):

"Busy": OUTSIDE forces acting positively on my business.
"Growth": INTERNAL forces acting positively on my business.

Busy:

Good news: Lots of work available, go get it (but it probably won't last).
Bad news: Can't count on it continuing—so don't let your overhead soar!!!

Growth:

Good news: [Internal-basic] improvements are paying off.
Bad news: Probably been growing because your [internally driven] good work allows you to take competitors' business. But when you [succeed and] become a "big fish in a little pond," you'll have to add higher value to your products to redefine what you do and thus expand the marketspace.

Your call, but I think this approach to business makes a helluva lot of sense—especially to those firms, the great majority in my experience, which did indeed get sloppy during the now departed "good times."

TomChirp #2

Circa 2009, lots of top performers (financially) in the U.S.A. Look at "Barron's500" (05.11). Top of the heap includes: Mastercard. (#1). Research In Motion. Western Digital. Oracle. Apple. Google. Microsoft. HP. Fluor. Philip Morris. Jacobs Engineering. Ingersoll-Rand. CVS Caremark. Charles Schwab. Best Buy. Deere. Etc.

BusinessWeek (04.27), tech companies sitting on cash: Cisco, $27 Billion. Apple, $26B. Microsoft, $21B. Google, $16B. IBM, $13B. Intel, $12B. HP, $10B.

Recession Blues RX II

Manufacturing dead in the U.S.A.?

Read yesterday's interview with Cisco CEO John Chambers on page ONE of Investor's Business Daily.

Chambers took over this MANUFACTURING company in 1994.
Revenues 1994: $1 Billion.
Revenues 2009: $40 Billion.

Prospects for technology companies and technology manufacturers in the U.S.A.? Nothing short of staggering in their potential, Chambers asserts. In infotech, let alone biological-based sciences, Chambers declares that we have many, many, and many more LARGE-SCALE REVOLUTIONS to come.

One suggestion of his, which I love, and which Chambers attributes to VC superstar John Doerr: "We should staple a Green Card to every science, technology, engineering, and math advanced degree [awarded by a U.S. university to a non-U.S. national]. The economy is struggling now, but it won't be forever, and we need to attract and keep the best and brightest in our country to maintain our competitiveness as a nation." (TP: Alas, fat chance.) (TP: Chambers is one of the many, me among them, who points out that our top research universities, best in the world by a long shot in terms of quality and quantity, are perhaps the #1 U.S. competitive advantage; we may lament the passing of "old manufacturing," but we damn well better remember that we must pull out all the stops, private and public, to support to the hilt our top research universities.)

(NB: Chambers, arguably the most Republican of Silicon Valley superstars, perhaps surprises with this: "I think the U.S. government is doing the right thing with the stimulus package, and I hope other governments follow suit.")

Welcome (?), a New Number

In an article I picked up in my wandering (Financial News, 23 March), there was a discussion of the derivatives market—by one measure, apparently it is $1,200 Trillion. If I'm not mistaken that's $1.2 Quadrillion, right?

Hey, I'm just getting used to "trillion"—I guess that's "so yesterday."

Welcome (?) ... Quadrillion!

God help us!

Richter 8.2 Earthquake?
Or Not?!

The FASB is getting ready (a vote today) to screw with "mark-to-market" reporting. It is, in fact, a very big deal. I am trying hard to extend my limited understanding of this cataclysmic move—a bank CEO in San Antonio got me going on this 10 days ago. He claims it is the singlemost important step we can take in unwinding our financial markets mess—banks, among others, have a ton of very solid assets that at the moment have no market for trading; hence they must go on the books as worthless. Of course there is a counterview that the proposed change allows the banks to pick big valuations out of thin air.

So it goes.

Gone!

Say all you want about Big Media's Big Gloom—I've said a lot in this space. Nonetheless, I found Floyd Norris' "The Money Is Gone, Now What?" [International Herald Tribune 03.19.09] very thought-provoking on a personal plane.

The best may well be yet to come, etc., etc. But the fact is, Norris says, the money is g-o-n-e. That is, yours and mine, and a lot thereof, whether the starting point was modest or immodest.

It may come back.
It may not.
Sooner.
Or later.
Or not at all.

So, act accordingly, that's Norris' message. He finishes this way: "It is not an easy reality to adjust to. But simply assuming that we deserve to live as if it had not happened will only make things worse."

Suit yourself. But it hit me right between the eyes.

AIG & Me

I was in Bogotá as the AIG story broke. It was discussed particularly vigorously at a luncheon I attended that included a nontrivial share of the nation's business leaders.

We had nothing of note to say—and perhaps that was noteworthy.

The general reaction was, myself included: "The stupidity of AIG 'leadership' boggles the imagination; there can be no sane explanation." In fact I did say it seemed to border on certifiable insanity—though I stopped well short of countenancing suicide. (Grassley had not made his "proposal" at the time.)

Would it be absurd to say that in the most perverse way this act makes me feel better? I have spent an enormous amount of time and psychic energy in recent months examining my own role in all this—and I don't see how I can evade responsibility for inadvertently acting as co-conspirator. (Everything I stand for is opposed to "all this"—but I did not say so forcefully enough, and, in fact, dismissed part of what was happening as a more or less capitalist necessity.) But what makes me feel better in an odd way is the realization that these people, some subset of them, are almost literally insane—and that is beyond my responsibility. (I guess.) (Any serious analysis of why what happened indeed happened must necessarily mimic political scientists' efforts to explain the rise of the likes of Hitler.)

What should "management gurus" do, or what should I do to participate in the cleansing process? Should management gurus resign their posts, as it were, en masse?

I'm really not sure.

(As I finished this brief post I did remember one point of particular interest that arose at the luncheon mentioned above. We agreed that regulation would come and should come—but we also agreed that it probably wouldn't matter much. All rules can be evaded. The issue really concerns civic virtue and moral responsibility—not the crafting of legislation.)

(Anyone seen any stats on how many, if any, of the recipients refused their bonuses?)

Playing Catch-up

Between travel and a Richter 7.8 sinus infection, I've fallen behind a bit. Going back to 10 March, I heartily recommend, from the Financial Times (p11), "Lost Through Creative Destruction." One quote, from Gillian Tett: "Greed, fraud, cheap money, managerial failure and lax oversight all played a part in bringing about the crisis—but at its heart was the complexity and opacity of modern finance."

The analysis is superb.

Jennifer and Brad and Angelina and the Great Recession

Is there a celeb magazine that doesn't cover Jennifer and Brad and Angelina each and every week? With the next story more outrageous than its predecessor? That's the way it feels from the grocery check-out line.

Well, it seems to me that the Eastern press is covering the Great Recession the same way—every story using adjectives more dire than its predecessors. To be sure, bad news piles on top of bad news. And every other day, it seems, GM or Citi needs another $10 billion of your and my money.

And yet there's more to the story of America in 2009 than the lurid webs spun by Chris Matthews, Lou Dobbs, & Co. And more to the U.S.A. than Detroit and Manhattan and the bookends of PA Avenue in D.C.

Lots more.

The news is bad in California, to be sure. The state's budget deficit is catastrophic. Foreclosures occur at the speed of light. But there's more to California than that.

Lots more.

Though I'm in New Zealand, I email California friends and read the daily papers from SF and San Jose, my stomping grounds for three plus decades.

The panic in CA is minimal.
There's a ton, or at least a half ton, of news about start-ups and staggering new technologies; it almost feels like business as usual.
The world continues to turn in CA.
The same world that's stopped turning—according to the East Coast press, the Washington Post and the New York Times and CNN and MSNBC, all of which resemble an economics National Enquirer these days.

We're in for a tough slog. Could go on for years. Yet entrepreneurs and incipient entrepreneurs and university research scientists and any number of companies (Oracle comes to mind) continue to embrace the future—at warp speed, as they have for years. (Such full speed acts of creation, smaller in number to begin with, were effectively AWOL during the Great Depression.)

There seems to be grave concern but little panic in California—remember, about 40,000,000 of us live there, though you'd never know it from the press, which seems to consider Michigan the western boundary of the U.S.A. And there's significant, though not grave, concern and no discernable or incipient panic in New Zealand.

Yes, I think we're in for a tough, tough slog, and a long one at that. But the Panic-from-the-East may be overblown—and thence, to some extent, perhaps to some great extent, it has the makings of a self-fulfilling prophecy.

I wish Mr. Obama would come to Stanford or San Jose. I wish Chris Matthews would return for a while to his beat at the SF Examiner. I wish Lou Dobbs would take a Zen class in breathing.

A friend sent me a Peggy Noonan column from last week. Okay, she lives in the East. But she made her bones as a Reagan speech writer—Reagan is the guy, most will recall, whose sunny disposition per se squelched the panic of the eighties. (That, and, I'd remind you, a whopping deficit.) My "a friend," Bo Burlingham, longtime superstar and spirit of Inc. magazine (and a liberal's liberal), all but ordered me to cast my eyes upon the column's final paragraph. I offer it below as the last words of this post:

I end with a hunch that is not an unhappy one. Dynamism has been leached from our system for now, but not from the human brain or heart. Just as our political regeneration will happen locally, in counties and states that learn how to control themselves and demonstrate how to govern effectively in a time of limits, so will our economic regeneration. That will begin in someone's garage, somebody's kitchen, as it did in the case of Messrs. Jobs and Wozniak. The comeback will be from the ground up and will start with innovation. No one trusts big anymore. In the future everything will be local. That's where the magic will be. And no amount of pessimism will stop it once it starts.

(The picture above, from a beach in Abel Tasman Park, is a stingray on patrol. Below, NZ's signature fern.)

Never.
Ever.
Ever.
Forget.

"It" (the current economic mess) is 100% about psychology. Fixes must first and second and third and fourth be directly aimed at our inherent irrationality—times ten in periods of high stress, and at least as true of the "bestest and brightest" as of the rest of us.

Mr. Buffett

"I don't invest in anything I don't understand."—Warren Buffett

Is there more to the current crisis than this?
I (more or less) don't think so.

That I Should Live So Long

Agree with Jim Cramer?
Agree 100% with Jim Cramer?
Agree 100.00% with Jim Cramer?

Yup.

He was interviewed by Chris Matthews last night on Hardball. In his typically, shall we say, raised voice he said-screamed-ranted that we need the giant stimulus package.

Right now.
Not on President's Day.
Right now.
Or insane amounts of shit are quite likely to hit the fan and get sprayed, to be selfish, all over you and me—from head to toe.

I agree.

(FYI, try this link to "The Horrible Jobs Report May Save the Economy.")

The Bullock Cart and the Race Car

Imagine you are trying to travel from your town to another town on a bullock cart. It may be hard for some of you to imagine that. Coming from India, I know that there are lots of places where this is very common. It can take a long time for you to get from one place to another place. If there is one thing that's positive with this arrangement, it is that, in case of an accident, the damage won't be much.

Why? Simply because you can't travel at breathtaking speeds on a bullock cart.

Now, imagine you are on the same journey but now you are traveling in a race car instead. (While people can't imagine that in many parts of India, you can totally imagine it here.)

First, you will notice that you can reach your destination considerably faster than before. It's not only more comfortable to travel in the race car, it's also more fashionable. I can go on with all the positives, but there is at least one negative. As you drive at breakneck speeds, if there is an accident, you may really break your neck.

Now, you may be wondering why we are talking about bullock carts and race cars?

Let's go back to history a bit.

There have been several major economic downturns in the past hundred years. The first one was the Great Depression in the 1930s. Then came the oil crisis in 1973. After that, there was the stock market crash in 1987. The next was the dot-com crash in 2000 and now we have a mess triggered by the sub-prime mortgage in 2008.

You will notice that the gap between the first and second recessions was a few decades. The gap between the second and third recessions was just twelve years. The gap between the third and fourth recessions was even lower—just eight years. The gap between the fourth and fifth recessions is the lowest—around six years.

Why is the gap shrinking?

One reason: the progress we have made in technology. We have moved from the "bullock cart" to the "race car" when it comes to technology. In the knowledge economy, we can create new possibilities way faster than before. The convenience because of technology (for those who have it) has gone up by leaps and bounds. We can also create a mess a great deal faster than before.

Think about it. We were able to make a new promise—create a product like "sub-prime mortgage" within no time. We built the systems to fulfill on that promise. Very shortly, we were able to accelerate creating the "sub-prime mortgage mess" like nobody's business. Then, finally—we crashed. Quickly.

Technology accelerates everything.

No, I don't want us to be in the bullock carts. Race cars are great. What we can't forget is that, with the convenience and style that comes with race cars, there is a new level of responsibility. Forget this responsibility and we pay a heavy price.

The sad story is that you can act in a responsible way, but you may still have to pay because someone else is irresponsible. You have to face the consequences even if the mess was created by someone else.

What you can do (in addition to being responsible) is be more than prepared to face these consequences. In fact, be not only ready to survive but be ready to think and act differently so that you thrive in these environments.

The choice really lies with us—we can participate in the recession and contribute to it or we can think and act differently and be part of the solution.

[Cool Friend Raj Setty is intimately involved in working with like-minded entrepreneurs to bring good ideas to life and spread their adoption. You can learn more about him at www.rajeshsetty.com.]

Stay Tuned ...

I do not pretend to be an expert on financial markets. However the financial markets amateur in me offers a big "Hmmmm ..." when I see headlines like this one from yesterday's Wall Street Journal: "Prime Time? Investors Bet Against AAA." In short, prime AAA mortgage bonds are going for 30 cents on the dollar. Yup, AAA!

Bottom?
What bottom?
(Hmmmm ...)

Ear Pablum!

The latest favored term from the Fed referring to pumping money into the banking system is "quantitative easing." BusinessWeek (12.15) columnist James Cooper tells us the definition of quantitative easing is "printing money."

Upside Down

I am depressed, a word not used lightly. Part of it may be winter-in-Vermont. But the larger part, I think, is the world of business ideas, that I've participated in as more than a bit player, is being turned upside down. I feel somewhat like Alan Greenspan, who said his core beliefs are undergoing close examination. This is not a "hair shirt" Post—it is a musing of importance to me, and perhaps you. The following are not "assertions," for they are not definitive by any means. They are instead Question Marks, and I've illustrated each one with a single anecdote, offered without analysis:

***The guiding premise of ubiquitous Globalization, of which I have been among the most vociferous champions, is under assault:

"The world has become normal again. The years immediately following the Cold War offered a tantalizing glimpse of a new kind of international order, with nation states growing together or disappearing, and increasingly free commerce and communications. ... People and their leaders longed for 'a world transformed.' ...

"But that was a mirage. The world has not been transformed. In most places, the nation-state remains as strong as ever, and so, too, nationalist ambitions, the passions, and the competition among nations that have shaped history. ... Nationalism and the nation itself, far from being weakened by globalization, have now returned with a vengeance."

From: Robert Kagan, The Return of History and the End of Dreams. The title of the 2008 book is, in effect, a stinging rebuke to The End of History and the Last Man, a wildly influential 1992 book by Francis Fukuyama, in which he argues, "What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government." (Kagan is on most anybody's top five list of influential foreign affairs intellectuals—as is-was Fukuyama, a leading "neocon.") (Not so incidentally, the "exponentially interrelated global commerce ends the likelihood of war" theme was predominant among Europe's "leading intellectuals" in 1910–1912.)

***The Ubiquity of the benefits of extensive outsourcing and new organizational forms emerging is turning out to be a much more complex "transformation" than many expected, me included, again as a "cheerleader-in-chief":

Boeing, according to the Wall Street Journal [1205.08], is getting ready to announce another 6-month delay to delivery of its Dreamliner, bringing launch delays to date to two years. Part of the latest cock-up is attributed to "the volume of work that Boeing outsourced." I.e. coordination is turning out to be nightmarish.

Outsourcing is hardly a discredited idea—but the implementation [ah, execution, the "last 98%"] of extensive outsourcing has been far more difficult than most anyone imagined.

***Good ideas, private equity buyouts aimed at rapidly shaping up ailing firms, are often resulting in unspeakably predatory behavior:

"When [private equity firms, including Chrysler owner Cerberus] bought Mervyns from Target, they promised to revive the limping West Coast retailer. They stripped it of real estate assets, nearly doubled store rent, and saddled it with $800 million in debt while sucking out more than $400 million in cash for themselves. ... The moves left Mervyns so weak it couldn't survive."

From: "What Have You Done to My Company?" BusinessWeek, 1206.08. In July 2008 Mervyns entered bankruptcy and a few months later 18,000 employees were let go without severance. The title, "What Have ..." was uttered in October by 88-year-old Mervyns founder Merv Morris as he visited employees recently at a shuttering store, and was cheered by employees.

This literally sickens me.

While acknowledging the downfalls of private equity deals, I more or less drank the Kool Aid. The saving grace, of some sort, on this one is that many, but not all of us, have been taken waaaaay aback by the magnitude of the expression of greed revealed with each passing day—but that's hardly an adequate excuse. The bloated "guru class" is supposed to issue red alerts long before the bombs drop.

Shit, what a year.

[Belatedly, albeit with a vengeance, I have turned 163.82 degrees toward a radical "back to basics" approach—which was more or less the In Search of Excellence melody. Recall one of the chapter titles from the Bogle book (see immediately above) was: "Too Many Twenty-first Century Values, Not Enough Eighteenth-Century Values."]

Sorry About the Understatement!

In a recent Post, I recalled a story from Maryann Keller's Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors about the extreme deference paid to GM middle managers. I did it from memory, but ordered the book anyway. I got the stocked refrigerator and the torn-out hotel room wall part right (mostly—it was soft drinks, not beer), but had forgotten the story that preceded it—which made my little vignette small change by comparison. An exec reported this to Ms Keller about a not-atypical incident that marked his more junior days as a GM staffer:

"When [the assistant general sales manager] would fly in from the Chevrolet Central Office in Kansas City, I was assigned to stand outside the door of the Muehlenbach Hotel in a snowstorm and I was not to move, because whenever he showed up, I had to be there to open the door. We bought the elevator and blocked it off so he'd have an elevator to go to. We had somebody assigned to stand outside his room all day to take his shirts to the laundry and perform other tasks. And—this is true—we had learned that he had to have his morning orange juice a certain temperature, so we had somebody in the kitchen every day who tested the orange juice with a thermometer." [My italics.]

NB: Pondering Senator Obama's recently announced national security team and the Big Three execs returning with their begging bowls to D.C. this week, this thought occurred: While autoworld's Big Three CEOs took home about $40 million in compensation for their individually and collectively disastrous performance in 2007, the combined pay for the Big Four Generals responsible for our global security (military heads of the Army, Navy, Air Force, and Marine Corps) was about $1 million!

"Socialism" Versus "Capitalism" In Modern America

The Socialists are going berserk!
(The Republicans, of course.)
The Capitalists are in retreat!
(The Democrats, of course.)

Bill Clinton deregulated financial services!
Bill Clinton didn't bat an eye when the dotcom bubble was pricked!
Bill Clinton gave us "welfare to workfare"!
Bill Clinton got NAFTA passed over fierce resistance from both parties!
[To be sure, Mr Clinton had a little help on the ground from Newt Gingrich & Co, and the intellectual support of Alan "Ayn" Greenspan.]

George W. Bush, to the conservative rag, the New York Times, this morning's edition, has through yesterday unwound the Clinton radical pro-capitalist legacy via $7,800,000,000,000 [$7.8 trillion] in government assistance and guarantees.

(1) To quote Margaret Thatcher, it's a funny old world.
(2) In all seriousness, to those blinded by partisanship who say Mr Bush is sitting out the financial crisis, I say, Baloney! [And thank God.]
(3) Now what?

Note to the Appalled on Bear Scat

My neighbor brought me the bear scat. (See immediately below.) He had it in his hand—and handed it to me. Basically, it's modestly digested bark and nuts. (Period.) I surely wouldn't take a knife and fork to it, but it's a long, long way from what city folk might imagine. Particularly when the world goes wobbly, it is pure joy to be imbedded in the land, listening to bear calls at night (they sound like owls), waking up to farm sounds and having an oasis a long way from Citicorp HQ. I'm one of the old fashioned types—I guess it's the new fashion, in point of fact—who think we were designed to be in touch with the land in one way or another. (I say all this, while I claim with equal sincerity that I left my heart in San Francisco. Lucky me.)

Hold Your Nose!
Bail We Must!
Scrooge Not!
Spend As If Your Life Depends On It! (It does!)

What follows is an economic primer from a non-economist:

Warts and all, America is the lynchpin of the global economy.
(And probably will be for next 25 years.)
Citi is a, maybe the, lynchpin of the lynchpin.
In fact, probably.
Psychologically, beyond doubt.
More than ever in a connected, hyper-tangled, wholly mangled world.
Financial system outcomes and movements are a "pure expectations play."
1% math.
99% individual and group and herd psychology.
(Basis of entire system is pure "psych": You deposit a little, they lend a lot, we both pray to any and all gods that the depositors don't all knock on the door at the same time. Hint: they did-are-will pound & wail for the foreseeable future.)
Hence, system precarious 100.00% of the time.
Vicious and virtuous circles are always in play.
Always.
There is no normal.
Never.
Ever.
(Wish there were a psychologist on Mr Obama's top econ team.)
(Or at least someone with a normal IQ.)
("One who knows" reports that Citi CEO Pandit has an EQ of approximately zero.)
(Sorta like L. Summers.)
Soooooo ...
Citi fails.
Depression follows.
(Or at least the odds go up not imperceptibly—and, hence, unacceptably.)
Therefore bailout justified, at almost any cost.
Pump Citi up with a few tens of billions.
Save not improbable downside of as much as tens of trillions.
Globalization threatened if Citi tanks.
25-year setback.
Bailout awful, unconscionable.
Bailout bodyblow to pure capitalism.
No bailout, possible capitalism knockout—or at least a wretched decade or two.
Fact—nobody has a clue.
Systemic interdependencies of this order are truly novel.
And psychological irrationality and the utter madness of crowds—of smart people as well as not-so-smart people—is a perpetual "given."
In a clueless world, one must assiduously attend to lowish probability outcomes with catastrophic consequences.
"Catastrophic" is not a hyperbolic word these days.
"Catastrophe" is an ever-present "plausible" outcome.
"Net net": Bailout "least worst" solution.
Welcome to the real world!
Happy Thanksgiving!
Happy Friday-After-Thanksgiving!!!!!!!!!!!!!!!
Consumption rules!
Buy presents!
Give to the homeless!
Make those Salvation Army buckets sag with Susan B. Anthony coins!
Pray that every sumbitch makes this Friday "Open Wallet Day"!
Got a Great Aunt Maude?
Haven’t seen her for 20 years?
Buy her a 60-inch flat-screen TV!
Better yet, a Ford hybrid!
Better yet, a house at list price!

(Photo below, bear shit from a beast estimated to be 250 pounds—from my farm, up the hill a couple of hundred yards from the main house, exhibited on a wall outside my working studio. Great symbol for a Bear Market, eh? Deposited on Citi Bailout Day. Ah, all is not lost—there are deposits out there!)

Naught for Twenty Years

There was this GM sales VP—a senior job, but hardly stratospheric. As I recall he was to attend a regional sales meeting, and his pre-visit specs called for a refrigerator filled with beer to await him in his hotel room. In this instance, there was no way to get the fridge upstairs, so the enterprising local sales types hired a crane, removed the exec's would-be room window and inserted the refrigerator through said window. The tale was one of many of a similar sort in auto-industry analyst Maryann Keller's Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors.

The book appeared 20 years ago.

Needless to say, the story crept from the depths of my brain yesterday as I watched, upon arrival from a seminar in Dubai, the industry's PR-blind execs describing the dire necessity of bringing their begging bowls to Congress on their private jets.

Have these incompetent dirtball idiots* no shame? (*My apologies for the gutter language—it is offered not casually, but after deep reflection.)

More important, since they have accomplished approximately zilch in two decades (see the Great Refrigerator Caper above), why should they reach into my wallet to fund their jet fleets—and extend their collective incompetence for a few more futile months or years?

Yesterday morning I supported the bailout. I hated the thought of giving these clowns the family loot—but I was extremely fearful of the wallet-closing effect on the economy as a whole if GM went into bankruptcy. Given the gross and utter stupidity publicly exhibited by Rick Wagoner, my fears of more national economic meltdown have not been assuaged, but the utter national negligence that this bailout would signify has flipped my switch.

My heart does indeed go out to the GM workers who will be dislocated, but it'd be wrong and, in fact, counterproductive to toss a lifeline to GM.

(I returned home from Dubai, temp 90°F, to the night the main farm pond froze all the way over for the first time this fall-winter. A frozen pond seemed a good image to accompany this tale of auto-industry woe.)

What's the Difference Between a Recession and a Depression?

Last March, a London-based Financial Services Company Executive I know quite well used the term "depression" to describe the extent of the economic crisis he saw ahead. At the time, I was quite shocked at his use of that term and told him so. We ended the conversation in polite disagreement, and I wrote a blog on this site to see what readers thought about the scale of the coming financial crisis. The popular view then was that we were all talking ourselves into a financial crisis and that my "depression" blog was an example of the kind of unhelpful negative behaviour that was undermining confidence!

Well, six months have passed and I called him again this week fully expecting to get the "I told you so!" treatment. He well remembered how shocked I had been at his previous "doomsday" forecast, and used words like "turmoil," "massive consolidation," and "never the same again" to describe the disruption going on all around us in London financial circles. But I am pleased to say that his forecast of a 1930s-style crisis ahead has been downgraded (or is that upgraded?) to an "official recession." I was again somewhat surprised—to put it mildly!

I wanted to share this more optimistic prognosis again on this site, and to say that for me at least, this person is a highly credible source on this subject. If the remorseless barrage of negative economic news and harrowing expert comments that we have to endure these days undermine people's confidence, and bankers, Prime Ministers, and Presidents are among those people, then maybe more positive talk may have the reverse effect. Could it make the economic outlook better than it would otherwise be? Maybe in this current financial mess, created by whomever we prefer to blame, and whoever's job we think it is to sort out, the only difference between a depression and a recession ahead may turn out to be a big intangible one, i.e., confidence.

Reading Assignment!

The Financial Times today, 25 September, first section, is wall-to-wall great material about the financial markets madness. I highly recommend it.

All Else On Hold

It is hard to imagine posting on the usual topics when one considers the import of this simple paragraph fragment from the lead article in today's Washington Post, "In Crucible of Crisis, Paulson, Bernanke, Geithner Forge a Committee of Three":

"As [Treasury Secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke and Timothy F. Geithner, the president of the Federal Reserve Bank of New York] chart a government response to the crisis, the stakes could hardly be higher. If they succeed, they could tame the economic downturn and orchestrate a restructuring of Wall Street with minimal collateral damage. If they fail, the toll could be millions of jobs, trillions of dollars in lost wealth and a crisis of confidence in global capitalism."

FYI, consider this comment, from the same Post article, on Paulson's predecessor, and the followup description-analysis of Paulson's management style:
"[Former Treasury Secretary John Snow] closed the Treasury's monitoring room, where staff members keep an eye on global stock, bond and currency markets around the clock, to save money.

"Snow's contact with Bernanke, then in office just six months, was mainly limited to formal weekly breakfasts. There was little communication between Snow and Geithner.

"That changed rapidly with Paulson.

"A creature of the financial markets prone to firing off rapid phone calls to any potential source of information, he took to calling Geithner and Bernanke at all times of day, to bounce ideas off them or discuss the latest trouble spot in the markets.

"'Overcommunication never hurts,' Paulson said. 'If it is something significant, I would just pick up the phone and call Ben. ... One of the things I do is I create an atmosphere where I am so direct and so open and collaborative with people I trust that it brings out the same in them.'"

Finance's "100-year Storm"

What follows is hardly new-news. Frankly, I'm in a bit of a state of shock. What follows is a slight extension of a list I scribbled on a piece of paper—as in, What's going on here?

***Hubris

Axiom [upon which Nobel prizes were won]: We can eradicate risk [with the new math, the new instruments].
We can refine the eradication process ad infinitum [derivatives of derivatives of derivatives].
A few tens of trillions of $$ of exposure—so what?
We don't want to be the first1st to bail—only wimps quit when they get their third consecutive $10M bonus at age 29.
I got this because I'm smart—this was not repeat not luck; I deserved every damn penny.
[Counter text: Fooled By Randomness—Nassim Nicholas Taleb]

***Quant primacy

Too much faith in super-smart intellectuals [Reminds me to the point of dotting of the "i"s and crossing of the "t"s of David Halberstam's The Best & The Brightest—on the Vietnam quagmire]
If you're not a 100% quant convert, you're "old school" and held up to ridicule—even if you're Warren Buffett.

***Step shift in complexity

Fact is, "it" became incomprehensible.
Connectedness [in general, global] totally new and, again, incomprehensible.

***Greed

Duh.

***Perception Is Everything

Financial markets are, by design, a house of cards—e.g., basic idea is to take a dollar of deposits and lend 10 based thereupon, depending on the depositors not to withdraw all at once.
Emotions rule as much on Wall Street as at the football stadium!!!!!!!!!!!!
Expectations are everything!!!!!
Madness of crowds is just that—madness!!!!!
It is axiomatic that house prices will rise and rise and rise—and then rise some more.

***Basics Rotten

Mary and Joe couldn't have paid the loan back if hell had frozen over—they were not, simply, creditworthy.
The incentives were nutty—lend to anyone and everyone and collect the full commission when you book the loan and get fired if you don't.
[Message from In Search of Excellence, in another context, It's the basics, stupid—Japan is killing us, circa 1980, because (1) their cars work and (2) they ask their workers how to make them even better.]

**Good Ideology Run Amok

De-regulation = Holy.
If de-regulation is good, then more is better.

***Black Swans

Believe it: Shit happens. [See Taleb once again—The Black Swan.]
NB: Your response to one or two black swans is your life legacy—it's easy to be a genius when the market is rising rising rising.

***History repeats repeats repeats itself

South Sea Bubble
Tulips
Etc.
Etc.
Etc.
S & L
Junk bonds
Dot-com
Sub-prime
TK
TK
TK

***No One Knows the Ending to This Story

***Thank God for Paulson—it'd be worse without him.

Nothing New Under the Sun Redux Redux

"For Real Globalization, Look at Ancient Rome": "There is nothing new about a global world. We were living in one 2,000 years ago. ... The Roman in the street ate bread baked with wheat grown in North Africa or Egypt, and fish that had been caught and dried near Gibraltar. He cooked with North African oil in pots and pans of copper mined in Spain, ate off dishes fired in French kilns, drank wine from Spain or France. ... The Roman of wealth dressed in garments of wool from Miletus or linen from Egypt; his wife wore silks from China, adorned herself with diamonds and pearls from India, and made up with cosmetics from South Arabia. ... He lived in a house whose walls were covered with colored marble veneer quarried in Asia Minor; his furniture was of Indian ebony or teak inlaid with African ivory. ..."—Peter Jones and Lionel Casson, The Spectator, 0521.08

The value of this Post? You decide. For me it's a reminder that our foremothers and forefathers have been through "all this" before—often as not—so enough with the "Oh my Gods"! Instead, enjoy the summer—even if the $4 gas keeps you a little closer to home.

26 Rules for Recessions

I spoke last Friday to the Pacific Coast Builders Conference—those left standing remain at the heart of a Perfect Storm. One solution to passing my 90 minutes would have been a prayer meeting. Passing on that due to lack of leadership qualifications, I decided, at the urging of the conference chairman, to talk about "excellence in tough times." I began with a list of assertions, which I reproduce here. The ones which were totally limited in scope (remarks about Barry Bonds, Sandy Koufax, Port Hueneme CA, et al.) have been excised. Though some of what follows is still narrow in focus, most of the "assertions" have reasonably widespread applicability. I have only lightly annotated my simple statements:

**That which goes up also comes down.
**That which goes waaaaaay up also comes waaaaaay down. ("It was in the Beginning and now and ever shall be. Amen."—maybe I could have led a prayer meeting after all.)
**IQs rise as markets go up. (Isn't it amazing how smart we all were 18 months ago?)
**Why have we done this s%^# over & over & over?
**Why will we do this s%^# again & again & again?
**The "madness of crowds" is the most profound statement of truth ever.

[Sooooooo many "smart" people get conned over and over and over. This is the second time in a single decade—dotcom crunch time was 2000 more or less. Near the end of the dotcom era, I admit that I tossed a few bucks at the market. I'm not all that interested in stocks—real estate is my indulgence. But my irrational side said, "Sure, it's overpriced, but you can't sit the whole damn thing out." So I invested, and a year later got about 2 cents back on the dollar. Timing is, of course, everything—but that's not enough to explain our chasing markets whose valuation is nutty-squared to the naked eye. The dotcom cycle was even more absurd, if lower in impact—companies valued at fives of billions of dollars, without a penny of revenue in sight. It is plain madness, the provenance of shrinks, not economists.] [And, alas, forewarned is definitely not forearmed.]

**Bigger is almost never better.
**Big mergers are stupid.
**Big mergers spring naturally from big egos.

[At times of market uncertainty, the biggies, even the so-called "good" biggies, bulk up to defend themselves. We've seen it in financial services, consumer goods, pharmaceuticals, steel—you name it. The strategies invariably lead to the loss—rapid loss—of even hundreds of billions of dollars in market cap. And yet we do "it" again and again, and the perps are often our most "heroic" execs.] [And, alas, forewarned is definitely not forearmed.]

**It doesn't get any better than this—the likes of U.S. Grant, Abraham Lincoln, and John C. Fremont were born for moments such as this. There is no such thing as a good-great leader who has not confronted, been battered by, and stumbled through-overcome a catastrophe. The Upside for the resilient and gutsy and creative is as high as the downside is low for those who attempt to hide in the closet until the fur stops flying.

[Find me a single example of someone who made the history books who hadn't had the crap kicked out of him-her—typically time and time again. Adversity is the soil of great accomplishment—period. Which doesn't make getting kicked around any more fun at the time. I'm at a bit of a loss here for pragmatic ideas—assuming you are not the boss of bosses, perhaps a good bet is to form some sort of offensive support group—The Resilience Rambos? The idea is to dwell on the opportunities that doubtless lie amidst the wreckage.]

**Take advantage of others' timidity; tighten the belt with a mighty tug, but in a key area or two, double the strategic project budget rather than halve it.

[When the dotcom implosion occurred, most IT budgets were slashed and slashed again—but Sysco's CEO saw a once in a lifetime opportunity in others' timidity, and pulled in the reins very hard in general to free up money to act hyper-aggressively on IT. Some others in this wee wise wedge have taken advantage of slower times to juice up the training budget, hence increasing the quality of the workforce.]

**Women rule. And make (almost) all the residential real estate decisions.

[Tom on his high horse again—women make the purchase decisions, yet my audience was mostly male. Stupid. In talking with folks afterwards two themes emerged: First, women are less ensnared by competition for competition's sake; their drive for excellence is as high as any man's or higher, they are just less inclined to try and prove themselves by outbidding "the other guy" for an already overvalued asset. And second, women simply are better listeners—which makes them particularly more effective in the homebuilding world, where the customer's decision is one of the most important in her life. Listening is also a miracle strategy when times are tough—e.g., the Great Listener is far more likely to get the loan extension!!]

**Decency must not be sacrificed in tough times.
**Decency is more important than ever in tough times.

[Insanely, great numbers of businesspersons, panicked by rotten market conditions I suppose, resort to shortcuts and churlish behavior to last out the day. In fact, bad times are the best times to behave well—for pragmatic as well as philosophical reasons. At the very least, if you go under, your personal reputation will be in tact—which is the ultimate cornerstone for a comeback.]

**Painful decisions must be made—make them as gracefully as possible; doing so is the best investment in the long term possible. Your reputation will be shaped by the long memory of how you behaved when the fan was covered with yogurt.
**Tough decisions mostly affect other people's families. You must still make the tough decisions, but the minute they cease to be agonizing, resign—you're not worth saving.
**Character rules in adverse times.
**Now is when investment in relationships pays off—and now is when you pay the full price of not having invested in relationships when times were good and you didn't "need to be nice" to others.
**Keep good people—if it kills you.

[Don't mess with your franchise players. Nurture them as never before.]

**Practice transparency to a fault.

[People in the know—from receptionist to EVP—are far more likely to be positively engaged and supportive during a nasty downturn. "In the know" means "the works," not just a few breadcrumbs of sanitized info.]

**If your world is in relatively good order do not be tempted to use this "opportunity" to "consolidate" by acquiring questionable assets at firesale prices—you are not good enough to turn cow pies into gold; only your ego thinks you are, and your ego is, as usual, wrong.

[For example: We'll see, but the Bank of America seems to believe that it can sprinkle some sort of pixie dust on the remaining Countrywide staff, and create a real estate powerhouse down the road. I, instead, see a washout and 6,000-foot drop at road's end.]

**Smaller but really good is a better place to be.

[As always, in my remarks I referred to Germany's "Mittelstand," its middle-sized, focused stars that propel Germany to the top spot in global exports. I am the unabashed fan of the smaller or middle-sized focused enterprise. The Mittelstand Spirit and commitment to Excellence are also the best defense against hard times!]

**Work out more and harder in bad times—get high or less low on chemical cocktails generated by killer workouts.

[Bad times are killers, literally, especially if you respond with strings of 20-hour days. Among other things, your judgment goes to hell in a handbasket—and your inevitably irritable disposition is an inspiration to no one, starting with your 9-year-old.]

**You will be remembered in the long haul for the quality of your work, not the quantity of your work—the quantity part is just your defective ego talking—no one evaluates Picasso based on the number of paintings he churned out.
**Take advantage of tough times to realize that in the long haul you will be remembered for your humanity not your net worth—think Tim Russert.
**You, too, God willing, will be 65 some day—and when you look back it's never the easy times that pop up in the viewfinders; it's the valiant struggles and adversities suffered and occasionally overcome that fill the highlights tape.

**If not Excellence, what? If not Excellence now, when?

[Pursuing Excellence in all we do is the ultimate turn-on, and the ultimate source of resilience in difficult times, in particular. And, as I see it, there is literally no way to lose. All that "stuff" about "the journey is the reward" turns out to be 100.00% right.]

The Train Keeps on Rolling ...

There's the "imminent" threat to American economic pre-eminence from China and India. There was a similar, "on our last legs" threat 25 years ago from Japan. And economist and former MIT biz-school dean Lester Thurow claimed a decade or so ago that Europe would eclipse us in the years (or was it weeks?) to come.

There were the all-important management pronouncements of Peter Drucker—peaking in the 60s or early 70s. There was Michael Porter, and perhaps yours truly, in the 80s and 90s. There was the Carter-Reagan recession. The Bush I recession. The Bush II recession. The Internet-new economy moment—and subsequent implosion. The savings and loan crisis, the sub-prime crisis. The Latin, and Asian, debt crises.

In the meantime, and despite the startling rise of others (Japan and Southeast Asia and Europe, now China and India and Eastern Europe), the Good Ole American Economy just seems to mimic the Energizer Bunny. In "The Future of American Power" (Foreign Affairs, vol. 87, no. 3, May/June 2008), Fareed Zakaria delivers these fascinating statistics on the United States' share of global output:

1913: 32%
1960: 26%
1980: 22%
2000: 27%
2007: 26%

Recession. Bubble. Drucker. Porter-Peters. Doesn't seem to matter much—the train just keeps on rolling. As I said or implied, pretty damned amazing that, as huge parts of the world have gotten wealthy, our overall share has not declined ...

Reasons?
Save that for another day.

The goal here: The world as "we" (Americans) know it ain't exactly coming to an end in the next few weeks—so, with good conscience, fill up the tank (ha!) and head to the beach, or at least the couch, for some old-fashioned summer relaxation and, uh, Kindle reading.

CEOs with A Sense Of Humor

BP just reported very nice results. (I'm sure this comes as a great surprise to Americans paying $4.00+ per gallon at the pump—and Brits springing for $10.00+ for the same amount of petrol.) The "humor" part of the news item was the relatively new CEO, Tony Hayward, claiming that the good news was a product of "the first signs of real change inside the company." (He inherited a bit of a mess.)

He was joking, right?

If 100.00000000000% of BPers had been sound asleep at their work stations throughout the quarter, BP would have had great results as oil hit $120 per barrel.

Do these guys—e.g., "Big Tony"—really believe that their "programs are paying off"? I know it's a game, but surely they must understand what complete idiots they sound like.

On second thought, I guess I can understand their reluctance to tell it like it is: "Wow, are we ever lucky blokes! The Chinese are inhaling hydrocarbons by the gazillions of barrels with no end in sight, the guzzlin' Americans still think "conservation" is a 4-letter word, and the Royals in Saudi and their pawns at OPEC know they have the world over a barrel, as it were. Hence, with no action whatsoever by us, demand is soaring, supply is constrained, and our shareholders are rolling in the resultant loot. Plus, we'll be able to keep capital expenditures well under control, since there is utterly no incentive to find or refine more hydrocarbons and thence increase supply and thereby wound the geese that are laying the golden eggs. You can confidently look forward to us doing absolutely nothing except hiring more accountants and acquiring bigger vaults."

Wish I Could Bring Myself to Giggle (or At Least Smile) in Public

There's nothing to smile about in the world financial markets. The pain is spreading by the nano-second. But it's hard not to giggle at least a little. Just watching these Geniuses-of-Wall Street, who had Paul Simon perform at their kids' kindergarten graduation parties, pissing on one another is such an incredible spectacle. First, pissing on oneself: Former Citigroup chieftain John Reed celebrated the 10th anniversary of the mega-mega-mega Citicorp-Travelers merger he crafted by calling the deal a "mistake." Reed: "Stockholders have not benefited, employees certainly have not benefited and I don't think the customers have benefited." (Thanks, Johnny boy.) Mr Reed and his partner in crime, Travelers honcho Sandy Weill, of course benefited with a capital "B." Weill, having deposed Reed and run Citigroup, hand-picked Chuck Prince to succeed him, then blamed the Citigroup mess on Prince, calling the problem "poor management," as opposed to an infantile theory Weill and Reed concocted in the first place (e.g., "huge-er is better than merely huge").

Speaking of partners in crime, former Merrill Lynch boss of bosses David Komansky called the work of his chosen successor, Stan O'Neal, "absolutely criminal," the Financial Times reports. (Not a whole lot of restraint, or even vaguely adult behavior, there.) UBS, the Swiss gang of geniuses, spent a decade relentlessly "consolidating" to provide wall-to-wall-to-wall financial services to retail and commercial clients alike; and as part of the UBS flavor of the blame game explaining the loss of billions of Swiss Francs, in addition to crapping all over America per se for its bad genes, have decided that breaking up may be the new, revised wisdom du decade. For what it's worth, there's a pretty vigorous move afoot to chop up Citigroup as well; and pretty much everybody else, whose "realized synergy" was, in fact, measured by the barrels of red ink.

And, naturally, you heard it here last, Jerome Kerviel, the "rogue trader" who trashed France's SocGen almost single-handedly, is defending himself by blaming the bank for not catching him sooner!

As I said, it's all rather amusing, or would be, absent the global economic chaos that continues to boil. As an avowed enemy of almost any giant consolidations in the name of either "synergy" or the provision of "one-stop shopping," I am secretly, until now, drowning in smugness. Also, watching these geniuses turn out to have feet of maggot-infested clay is also chortle-worthy to one who has trouble with the whole Welch-ian (Jack, he who walkethed on water for 20 years—then bequeathed his successor a financial mess), "leader-as-God" phenomenon.

There's such a bizarre element of "obviousness" to this fiasco. E.g.: (1) That which goeth up and up and up doth not goeth more up and more up and more up forever and ever and ever. (You may want to write that one down.) (2) The fact that the experts (economists and mathematicians, for God's sake) had-have no idea how to value the derivatives-of-derivatives-of-derivatives, created by the bucket-load (to the tune of trillions and trillions of buckaroos), should have told anybody with a brain that the doggy doo-doo would splatter all over the fan sooner rather than later. (3) Then there was the notion that these un-understandable instruments could banish risk from the face of the earth "forever and ever and ever and ever, Amen." (4) And anybody near the coal face, with the greed meter dialed down even a little bitsy bit, might, just might, have seen that lending a half-mil or so to a jobless-homeless person might "eventually" present a problem. (Of course, history tells us that the greed meter is never dialed down in the slightest—never has been, never will be.) (5) And now the tragicomic spectacle of the creators of the mess calling the guys they stuck with the mess "criminals" for executing with vigor the strategies they concocted in the first place. (6) Not to mention Tom's favorite: Big mergers suck in 9 cases out of 8 and produce "synergistic-value" in 9 cases out of 7 and destroy lots and lots (and more lots and more lots) of value along the way.

What a hoot.
Not.
(Okay, sorta.)

Sub-prime Primer

A friend sent me the attached. I'm not in the habit of using this Blog to, effectively, forward email, but this was-is too good to pass up.

Brilliantly rendered!
All too true!

[We'd love to credit the person who put this together, but her-his name did not accompany the file. We'll certainly add a credit if anybody claims ownership.—CM]

Headline, page 1, Boston Globe, 20 January 2008:

"Broker's clients detail web of dashed dreams"

"When Marcia Neilson couldn't qualify for a home loan in early 2006 because of poor credit, her mortgage broker, Nicole Lyder, had an unusual solution: Add Neilson's daughter to the loan application.

"Neilson's 21-year-old daughter had just lost her job, but Lyder remained undeterred. 'That wasn't a problem,' Neilson recalled her broker saying.

"Neilson's real estate agent said Lyder enlisted him to drive Neilson and her daughter to Brockton City Hall. The pair filled out a business certificate that claimed they owned a hair salon in Brockton.

"The Neilsons qualified for a mortgage and bought a Dorchester house in June 2006 for $565,000. Last fall, Marcia Neilson learned from state investigators looking into Lyder's business practices that her loan application was padded in other ways: a statement for a $25,000 bank account in Neilson's name that she had no knowledge of.

"Fake documents, a phantom borrower, and other irregularities were common features of five subprime mortgages brokered by Lyder between November 2005 and June 2006 that were examined by the Boston Globe. Lyder's clients ranged from the barely employed to struggling working-class couples; one had just left a homeless shelter and two others gave up government-subsidized housing to buy homes. They said Lyder arranged loans that they later realized had monthly payments that far exceeded their means. All five loans are now in foreclosure."

Vile Bile!
Dearly Deserved!

Wall Street Journal, 22 January 2008: "Our fourth-quarter results were severely impacted by ongoing dislocations in capital markets and the slowing economy," said Kenneth D. Lewis, [Bank of America] chairman and chief executive officer. "However, we are cautiously optimistic about 2008 ..."

TP translation: "We made total asses of ourselves, allowing ourselves to be conned by a bunch of out-of-touch Nobel-winning 'economists' with their 'portfolio-risk smoothing models.' Then, as inevitably happens amidst the madness of crowds of overpaid executives bent upon 'keeping up with the Joneses,' we were flattened by that silly old saw, 'That which goes up eventually comes down.' Wow, talk about 'What they didn't teach us at Harvard Business School'! Truth is, we all ought to be put in stocks where people can throw rotten tomatoes at us—they'll have lots of time to do that given expected unemployment #s that we have wittingly facilitated. Meanwhile, I wish the very best to Angelo Mozilo, Countrywide CEO & Subprime Principal Perp, as he ponders how to spend the $112,000,000 I'm helping him pocket, obtained by shafting hundreds of thousands of innocents using sales 'incentive' schemes that make the numbers racketeers on the streets look squeaky clean by comparison. As to my 'cautiously optimistic for 2008,' what the hell else do you expect me to say? If I told the truth, you'd string me up even higher. Okay, okay, you win, I'm an idiot, an overpaid clown, conned like some mark for Three-card Monte on 17th Street in lower Manhattan. But I'm a rich idiot; you know what they say, 'Only in America.' Glad I wasn't born in Russia—Putin would already have shipped me, and probably my family, to Siberia; I hear it's colder there than in Charlotte, though given the cocoon in which I live, soothed by the dulcet tones of my executives singing my praises to me, I actually haven't been out in real weather for years."

(For those of you who wish to share the above, including this morning's
opening 446 point drop of the Dow, Tom has created a short PowerPoint, "The Subprime Times.")

Welcome 2008!
Red Ink, Department of:
$6,000 per ... Second!

Sometimes it feels to "us" (me) (Americans) that the "China problem" (trade imbalance) is all about cheap goods aimed for Wal*Mart's shelves here in Rutland VT. True, but there's much more to it—and it's much more universal than it seems to "us."

Consider: The European Union's trade deficit with China is growing at 15,000,000 Euros (about $22,000,000) per ... hour.

(That's about $6,000 per second if you do the math.)

Wow!
Whoa!
Some world!
Welcome to 2008!*

(*As if the possibility of 60 or so loose nucs in Pakistan were not enough to extend your NY's Day hangover—hey, it lowers our fear of Iran's "someday" nucs.)

(Speaking of "Welcome 2008," the picture above is our Grey Meadow Farm on 1 January 2008.)

Just Like It's Supposed to Work

Dollar way down. Euro likely to be strong-very strong for the foreseeable future. Airbus contemplates factory in Alabama. (More to it than this, obviously, but this is exactly the way markets are supposed to work. In New York City last Friday, the onslaught of European tourists—walking around with big bags of electronics—was a small version of the above.)