Archive for the 'Money & Market Behavior' Category

The Global Business Context: A Davos CEO Panel

Here are key themes from the Davos panel about the strategic, organizational and operational issues that are reshaping how businesses operate worldwide. The CEOs on the panel included:
• John T. Chambers, Cisco
• Thomas Enders, Airbus
• Klaus Kleinfeld, Alcoa
• Duncan Niederauer, NYSE Euronext
• Ferit F. Sahenk, Dogus Group
• Patricia A. Woertz, Archer Daniels Midland (ADM)
• Hans-Paul Bürkner, The Boston Consulting Group

Themes:

  • 24/7 mindset is yesterday. The volatility and velocity of change requires a 25/8 mindset.
  • We are going through rapid market transition, economic transition, and technological transition… the big question for organizations: how do we reinvent ourselves? Unless you can reinvent, you will have your “Kodak Moment” and die.
  • Deleveraging is here to stay. Together with higher capital requirement this chokes credit and makes for a tough environment for small and medium businesses.
  • You must build flexible organization with dynamic human capital.
  • We all want to live better and do better.
  • Think One World.
  • Think collective wisdom.
  • We are all watched in real time.
  • A quarter of global aircraft orders is for china.
  • Maintain a bifocal focus on short and long term. Be realistic about what is possible in the short term. But for the long term strategy you must plan for growth with two billion people entering global market and aspiring for urban life style. You cannot entrench and grow. Manage the short term with the long term in mind. Work on the long term by capitalizing on opportunities here and now. You must earn the right to grow.
  • The potential for upside breakout is in better collaboration between government and the private sector.
  • Most successful needs to give back most.
  • Execution is leadership.
  • The only sustainable competitive advantage is your people and having the brightest talent.

You Cannot Make This Stuff Up

Junk fees are bad ethics and bad business.

We just refinanced our home. Chase collected $30 on Facsimile fees even though no one is using fax anymore. And then to add insult to injury Chicago Title collected $54.75 for (get this) – EMAIL DOC DELIVERY FEE TO CHICAGO TITLE INSURANCE CO.

“How many emails did they receive for this fee?” I asked the loan officer.

“Should we walk away on principle because this is stealing in broad daylight… or would you call the people at the Title Company and ask them to go directly to the highest officer available and say, it’s unethical and how would they feel if it appeared in the WSJ, do they think it would be good public relations?”  They waived the email fee.

Don’t tell me not to sweat the small stuff. I am not sweating. I’d like business to behave ethically.

© Aviv Shahar

The KEY: It’s Not Coming Back – It’s Going Forward

There is a shift taking place in the semi-conscious of society, the market and the global system. The fulcrum of the change is invisible and hard to grasp. To sense it, see it and decipher it, you need a certain detachment. Here are a few starters about the question: What is the meaning of this crisis and how to begin looking beyond it? Read the KEY and my 16 future gazing items, including the “New Fifth Day.

© Aviv Shahar

Tectonic Shift

Every earthquake has an epicenter and a deeper hypocenter. Hypocenter is where the tectonic shift takes place. This below is a tectonic shift in the global monetary system.

Financial Times: “China and Argentina in Currency Swap.” China, which is pushing to end the dominance of the dollar as a worldwide reserve, has agreed to a renminbi 70 billion dollar swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American Countries.”

We anticipated this here on FEB 1st:
There are four potential scenarios to emerge in the global monetary system:
1. Patch the Bretton Woods dollar centric system. (That is what the powers to be hope to be able to master.)
2. Create a new universal currency backed by the G8 or G20. (A dream for some, but the fear of many.)
3. Create a new equilibrium of three or four regional currencies – Euro, North America, Asia. (Russia and Latin America could constitute a fourth and a fifth currency if they do not feel accommodated in this framework.)
4. Fragmentation with each nation operating on its own, backing its currencies by its precious assets and commodities.
The major effort underway now is to find a path to scenario one. Politicians always try to preserve an existing paradigm. What would likely be the result?
No one knows. It will be difficult to preserve Scenario (1). Scenario (2) is highly unlikely right now and scenario (3) is unlikely too. Unfortunately, there will have to be much more pain for such arrangements to take place. Bretton Woods took place following two decades of tremendous global strife and pain. Let’s hope we do not have to go through so much strife again.

The next three to five years may be a transitional period – a battle royale between scenario (4) the growing fragmentation of the global monetary system, fueled by protectionism, nationalism and patriotic demagoguery, and the opposing forces trying to hold on to a unified global system of scenario (1).

There will be those who will push to scenario (2), but it is highly unlikely they will prevail. A new paradigm of scenario (3) may emerge in three to five years (2012-2014).
© Aviv Shahar

Davos Reflections and Capitalism 4.0

The Davos webcasts tell a story. If the World Economic Forum is a gauge of the current global economic mindset, it tells us that decision makers are in “Stage two” and in part “stage three” of the five stages of grief – they are in the anger and blame phase and beginning the bargaining phase.

The grief framework originally pioneered by Kübler-Ross includes Five Stages:

1. Denial – This is the shock phase.
You think: “This can’t be happening, not to me! Not to us!”
The global economy was in this stage back in September. Some investors are still in denial.
2. Anger – This is the phase of screaming and blaming.
You think: “It’s not fair!” “NO! NO! How can this happen!”; It’s the fault of…”
That’s what we are seeing in Davos this week.
3. Bargaining – This is the phase of irrational desire (and attempt) to resurrect what has been and is no more.
You think: I’ll do anything if you give me back what I had.”
There is evidence for such irrational “Bargaining” on the global stage too. The attempt to save the banks and the big three has Denial, Anger and Bargaining in tow.
4. Depression – This is the hopeless bottom of complete despair.
You think: “There is no hope, why bother with anything?”; “What’s the point?”
Leaders will do anything to avoid this phase. Modern economic theories hope to accelerate, skip or avoid this societal calamity. We hope they are successful.
5. Acceptance – In this phase one finds a new agreement and settlement.
You think: “It’s going to be OK.”; “there is no need to fight, I can enjoy or come to terms with what there is.”
In economical terms, this is the reemergence of a new cycle of growth.

Masters of the economy prefer to skip phases and move in a V shape recovery. But it is not always possible to V everything in life. Even a massive stimulus package cannot solve everything. To make informed decisions, it is critical to understand what has happened. Crisis is how we come to know that an existing framework can no longer support the confluence of dynamics active within the system.

Before answering the question “what will a new framework look like?” we must ask – what are the imperatives? A new more moderate paradigm needs to appear. The framework needs to adaptively support global needs with principles of transparency, fairness and sustainability. The new framework needs to support sustained growth and local, national, regional and global imperatives. But before a new framework can emerge the system needs to moves beyond the point of anger and blame.

Capitalism is a framework for realization. Ideally, the best ideas, innovations, strategies, commitment and hard work win the greatest support and reward, and are therefore realized. Lack of creativity, bad decisions, and ineffective execution fail to gain support and die. At core this is not a man made idea but a universal principle that has governed nature long before modern market theories were popularized.

If the system works right, it incentivizes and benefits innovation, performance and delivery of the best solutions. The systemic breakdown we are witnessing brings to focus the challenged capacity of the system to self correct, heal and self regulate. Incidentally, this nature of crisis tends to take place every 60-80 years, which is enough time for both an institutional memory loss and a fundamental shift requiring a system upgrade.

There are four potential scenarios to emerge in the global monetary system:
1. Patch the Bretton Woods dollar centric system. (That is what the powers to be hope to be able to master.)
2. Create a new universal currency backed by the G8 or G20. (A dream for some, but the fear of many.)
3. Create a new equilibrium of three or four regional currencies – Euro, North America, Asia. (Russia and Latin America could constitute a fourth and a fifth currency if they do not feel accommodated in this framework.)
4. Fragmentation with each nation operating on its own, backing its currencies by its precious assets and commodities.

The major effort underway now is to find a path to scenario one. Politicians always try to preserve an existing paradigm. What would likely be the result?

No one knows. It will be difficult to preserve Scenario (1). Scenario (2) is highly unlikely right now and scenario (3) is unlikely too. Unfortunately, there will have to be much more pain for such arrangements to take place. Bretton Woods took place following two decades of tremendous global strife and pain. Let’s hope we do not have to go through so much strife again.

The next three to five years may be a transitional period – a battle royale between scenario (4) the growing fragmentation of the global monetary system, fueled by protectionism, nationalism and patriotic demagoguery, and the opposing forces trying to hold on to a unified global system of scenario (1).

There will be those who will push to scenario (2), but it is highly unlikely they will prevail. A new paradigm of scenario (3) may emerge in three to five years (2012-2014).

© Aviv Shahar

Kaleidoscoping & Doing Your Shadow Work

Kaleidoscoping is a pattern recognition exercise. You seek to decipher the meta-process at play. You endeavor to discover the archetypal nature of what’s moving through the systems you are observing.

Here is a kaleidoscoping exercise (written originally during October 2008). The process zooms into one field and looks to identify a pattern and recognize its potential in other fields.

What is the significance of the great deleveraging of Wall Street?

The last two decades brought a rapid growth of financial derivatives.  Derivatives are side bets. You buy a bet on what a stock will do – will it go up or will it go down. A second degree bet is a bet about the bet. It is no different from gambling, only instead of Las Vegas it was centered on Wall Street. The pyramid of bets evolved into a 60 Trillion dollar mountain of bets. The pile of bets that people ‘bought’ was mostly purchased as a debt. This means that buyers paid a dollar to take a 20 or 50 or 100 dollar loan with which to bet on a bet that someone else made.  The game was given a free unregulated ride. It propagated a shadow banking system. There was no open transparent exchange. The bets were made between two parties, over the counter. It was shadow banking because the transactions were not made in the light of an open exchange – they were made in the shadow.

The great deleveraging is a process of unwinding the bets. The collapse of Leman Brothers triggered an irreversible process. It was a disaster waiting to happen as the mountain became overwhelming.  What started on September 15, 2008 was the clearing of this great shadow. A dramatic free fall dives in the stock market followed. The pattern suggested in this description is the shadow work needed to heal the system – the shadow in this case being derivative bets.

Metaphoric Kaleidoscope thinking then asks: What is the shadow work we need to do at a personal and organizational level?

Shadow work is the process of removing all that is not fundamental and core to the system. Clearing what has no intrinsic value. It is a process of coming back to basics. If this represents a bigger pattern at play, then people and organizations ready to adapt faster to this process will be in a stronger position.

You dare to ask “why?”; “Why is this needed?”; “What value does it add?” You help the system clear what is not essential. You do the “shadow work” to undo “weak bets”. You focus on basics. You support what is core. You communicate proactively. You lead.

© Aviv Shahar

The 90/10 Rule Of Investment

The 90/10 rule shows up in a variety of ways in all fields of life.

In money management and investment the 90/10 rule says that—over long periods of time (think your lifetime or 100 years) you will come out on top 90% of the time by following conventional wisdom, known also as the wisdom of the crowd. It follows that in the other 10% of the times you are better off going with the contrarians and against the crowd. The 90% represent periods when the trend is your friend. In the other 10% of the time, markets go through inflection points of trend reversals. Recent months represent just such an inflection point of trend reversal where the contrarian position is wiser and safer than the crowd.

Study your options. Explore a range of ideas and strategies. Make decisions that fit your situation. Position yourself with the 90/10 rule in mind.

© Aviv Shahar

The Greatest Tax Increase

The greatest tax increase is neither in McCain’s programs, nor in Obama’s plans.

The greatest tax increase is in the breakdown of communication and civil discourse, the breakdown of trust and the ability to work through differences to find optimal solutions. Breakdown of trust and leadership is going to cost individuals, families, organizations and the economy as a whole, and the consequences will be greater than any tax change we will see under either presidential candidate.

The arts of conversation, of trust building, of open collaboration and of true leadership bring the greatest gains. These are the kind of gains the government cannot penalize. Developing the Three Pillars of Trust and collaboration is the ultimate leverage – it produces dividends that cannot be taxed.

© Aviv Shahar

The KEY: The Lethal Jackpot

This KEY can save your life. It saved mine. As a young fighter pilot I read with keen interest the investigation reports of accidents. I figured it was going to help me stay alive. Pilots who were better than I, with more experience and whom I admired crashed. I was scared. It made me ask: “What is the anatomy of accidents? Can I learn something from what happened to them that will help me stay alive?”

I have rarely spoken about this in my 25 years of teaching and never wrote about it until now, as the Wall Street meltdown unfolds before our eyes. Click here to learn about The Lethal Jackpot and to find out what you can do to intercept and avert it.

© Aviv Shahar

Yellowstone Fire On Wall Street?

The three Ds—the three legged stool of the prosperity economics since WWII—were: the Dollar, the Debt economy and the Drive of entrepreneurialism.

1. The Dollar offered a stable monitory framework. Its universal reserve currency status based on the Bretton Woods agreement and the belief that “the dollar was as good as gold” made for monetary stability.
2. The Debt driven economy produced a framework in which everyone could profit. It was designed in two layers. Any person or business taking a loan (going into debt) could find creative ways to turn this leverage into profit by producing goods and services that returned more than the cost of the debt. The banks were at the top to manage this leverage of borrowing money. They, of course, made the greatest profit. The banking system utilized the fractional system and monetary inflation controlled by the Federal Reserve to create opportunity for all and made profit in the process.
3. The third leg of the prosperity was the eternal Drive of ingenuity and optimism embodied in the entrepreneurial spirit. Drive was unleashed in the market of opportunities and ideas, supported by a stable dollar, debt and property rights.

Suddenly, it appears that the first two legs are breaking down. The dollar status has been shaken. The debt derivatives economy has been stretched to the point where it had no choice but to snap. It snapped like the Yellowstone Fire of 1988. This is the meaning of the Fannie and Freddy government takeover this weekend. All of a sudden everyone is deleveraging – trying to exit debt and replace it with cash and the system crumbles.

Why did it take 60-80 years for the big stock market cycle to suddenly change? Active earning and investing life spans usually average some 40 years. One and a half to twice this duration is enough to eradicate institutional memory. That’s when the system snaps and the rules of the game shift.

What can the Yellowstone Fires of 1988 teach us?
On August 20, 1988, a day now referred to as “Black Saturday”, gigantic firestorms in Yellowstone sent flames as high as 200 feet into the air. These fires grew so large that they created their own wind. Smoke plumes pushed up to 30,000 feet. Many people, including leading ecologists thought that Yellowstone would never recover or that it would take hundreds of years for its fauna and flora to populate the park again. Here is what scientists learned and what it can teach us about the deleveraging fire storm on Wall Street.

1. Expect a lot more pain as a result of the great deleveraging of Wall Street – The Yellowstone fire burned more than half the total acreage of the park. 793,000 acres were affected by fire and bout 300 large mammals perished.

2. The Treasury efforts to contain the crisis will help some come out better but it’s overall impact will be limited – The 1988 firefighting efforts included 25,000 people, the largest in U.S. history. 120 million dollars were spent. This huge effort saved human life and property, but had little impact on the fire itself.

3. The natural cycle of deleveraging will run its natural course – The advance of the 1988 fire was finally stopped in September by rain and snow.

4. An amazing new cycle of innovation and opportunities will be unleashed – The Yellowstone fires created a mosaic of burned and unburned areas that provided new habitats for plants and animals and new realms for research.

5. When the deleveraging cycle has finally run its course and everybody is exhausted and depressed, recovery will be faster and stronger than anyone imagines – In Yellowstone Park, seeds released from pinecones took root almost immediately. Lodgepole pine seedlings began to grow at the rate of an inch or two per year. Wildflowers were abundant by the following spring, and the grasses and shrubs were green and flourishing.

6. Certain sectors and businesses will benefit from the deleveraging cycle and will come out on top – In Yellowstone some of the grasses that the elk needs were more nutritious after the fire. Bears grazed more frequently in burned sites than they did in unburned sites. The fires have had no observable impact on the number of grizzly bears in greater Yellowstone. Cavity-nesting birds, such as bluebirds, had more dead trees for their nests. Nutrients from the ash caused the vegetation to prosper and grasslands returned to pre-fire appearance within a few years. Aspen reproduction has increased because fire stimulated the growth of suckers from the aspen’s underground root system and left behind bare mineral soil that provided good conditions for aspen seedlings.

7. A major economical shift takes place every 60 to 80 years. This is part of the cycle of life – In Yellowstone, the fires turned out to be a necessary and beneficial part of the natural cycle of life, death, and re-birth.

© Aviv Shahar

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