Jeff Bell Blog

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2009-10-08T10:52:00.000-07:00

The U.S. Economy -- 18 months into recession

2009-08-02T09:19:00.000-07:00

In my last posting, I made the statement that "fundamental" factors were weak or absent in supporting the theory of an economic recovery ("green shoots). What exactly are the fundatmental factors for us to monitor and consider?

- Unemployment
- Consumer Spending
- Consumer Debt

The US economy appears to be stabilizing, and perhaps it has reached the "half-way point" or the "bottom" of the present recession. What is driving this confidence? Government spending and cheap money are the dominant reasons. Many people commented upon my last post with warnings of "excessive government employment and spending." They may well be right. Our government increased expenditures and direct payments to our citizens by 6 percent last quarter according to the Financial Times of London. Also, the federal reserve is "printing" money by keeping interest rates near ZERO, making the residential and commercial real estate crisis seem less intense. These same dollars are chasing the stock and bond market and driving them upwards.

So back to fundamentals: if consumers spend less and save more in order to lower their household debt (mortgage, second mortgage, credit cards), then the economy will not recover to 2007 levels. Consumer spending accounts for 60%+ of our GDP. The fear of job loss or lower future incomes, or the reality of high and increasing unemployment, will also depress consumer spending. Obviously those out of work will spend less. And while it is a bitter pill for us all in the short-term, households, much like our government, need to lower our debt burden.

This is all to say that I believe we will be better and stronger after this recession, but the reasons will be 1) lower household debt with some lasting lessons for savings versus credit 2) fundamental shifts in our employment patterns from less productive and competitive industries to more competitive and productive ones and 3) new processes and approaches to business. On this last point I am speaking primarily through software technology, but also through the elimination of "good old boy" networks and approaches which were more about "who you knew" and not "what makes most sense?" The recession will help to shatter inefficient business practices, and we should all be thankful for that.

Turning to the notion of investing today based upon the above POV, I think people should be buying equities with a 5+ year perspective. In th short term, I believe that there we may see a correction as the S&P 500 approaches 1,000, and therefore use of some inverse funds (I have previously recommended BGZ) may make sense to profit from any pull back. Another defensive strategy is gold (GLD) and food commodities (MOO).

Am I still optimistic on the economy?

2009-07-28T14:25:00.000-07:00

I would say that my outlook is mixed. I believe that the panic has passed for investors. I believe that there is technical momentum in the market. But I am also concerned about the fundamentals of the economy -- commercial and credit card debt default, unemployment and finally, de-leveraging by households and its negative impact upon consumer spending. The financial marketplace has gone way up, but why? Earnings have exceeded expectations. But I worry about the quality of the earnings, and especially the impact of lower demand will have on declining revenues.

With that said, here are some thoughts on why we might want to be more positive:

1. The 2nd quarter of this year was better than the 1st...in every measure save unemployment.
2. All the data is historical, so the real question is whether we have hit bottom. I think the answer is either yes, or we are very close.
3. The stock market is a barometer for economic activity. The cost-cutting has been aggressive and this has led to profit. Inventories are low. This is why the market has increased 40% since March 2nd.
4. Interest rates are near 0%, and this is good news for consumers -- mortagages, credit cards; and for businesses -- small and large.
5. The big downers are unemployment and job insecurity. But even these figures have been less extreme than expected.
6. We are not Japan -- we have immigration, innovation and vast resources which will keep us from stagnation and deflation.
7. There has been more flexibility in the labor force. Rather than strikes, employees have accepted furlongs and shorter work weeks and unpaid vacations. This has meant that we are sharing the pain more evenly than in the past.
8. Real incomes continue to rise as pay packages are going up for key groups -- education, energy and yes, financials.
9. China is going to do whatever it takes to both succeed itself, and keep its key trading partner (us) moving forward.
10. Brazil and India are doing better than ever before -- they appear to NOT be dependent upon the USA for recovery.
11. The housing market will recover. Our population growth will outstrip even today's excess inventory by 2011. High demand over supply means prices will increase.
12. Foreign investors love us. The dollar is the safe haven. Period. All negative commentaries about the dollar are silly.
13. The black economy is flourishing. Business goes underground in recessions.
14. The non-financial benefits of recession are grand -- waiters are friendly and plumbers are available.
15. Finally, Capitalism works. It is already self correcting and we will be better off for this painful recession.

A Recovery or a Reflexive Rebound?

2009-05-06T13:29:00.000-07:00

April was good for stocks and generally for investors. The markets continue to move higher in early May as we get more information about housing, unemployment and the financial sector.

Are we seeing light at the end of the tunnel? Is it a train? Yes, there are those who argue that this is "going to be ugly for some time." There are arguments to be made supporting their position.

1. Banks may need to write off $4 trillion globally -- bad loans and worse investments. They could earn $400 billion in profit annually and we would still see a 10 year recovery period (source: Financial Times of London).

2. Consumers have radically increased savings by reducing spending and credit usage. When you strip away Medicaid/Medicare and other funny elements of Consumer Spending, you find that true discretionary spending is down 20%. If this lasts then yes, we are in for a prolonged recession or stagnation (no growth) for 3-5 years. At that time, net worth/income to debt ratios will be at historical levels (source: Wall Street Journal)

3. Related to numbers 1 and 2, "If you think residential housing was a problem, wait until the commercial real estate bubble bursts, followed by credit card defaults!" There are more than enough rumblings that banks are most exposed to commercial real estate and that prices are going to implode. Vacancies are up. Construction is down. Also, if unemployment stays at 400,000 or more each month, then credit cards defaults are bound to increase (source: USA Today, WSJ)

So am I a bull or a bear? More bullish, really.

I understand all three issues and recognize their gravity. But I stick to what I wrote last about the economy:

1. There is very little inventory overhang, so companies will recover quickly when demand increases.
2. Companies have down-sized quickly and perhaps excessively, to lower cost and improve profit.
3. Money is cheap and available to consumers and companies.

The wild card is emotion. If optimism begins then lots of virtuous cycles emerge.

1. Companies re-hire
2. Output rises, and with it profits
3. Consumer demand grows with employment, rising equity (and yes housing) markets
4. Growth begins again

We should all benefit from greater transparency and consistent regulation of financial markets.
We should all benefit from living within our means (save more, borrow less).
We hopefully can use this recession to fix some systemic problems in business and government.

Look for my new posts next week on the marketing and advertising industries specifically.

Free markets: if this is not the bottom, can we still be positive?

2009-03-16T06:07:00.000-07:00

As bad as the news is, should we be optimistic about the future? Yes. When we read about massive job losses, and individual companies deciding to lay off thousands, should we be confident in the future? Yes. Why would I say such a thing? Four reasons:

1. Cut fast and cut deep. The worse thing any company can do in an economic downturn is ignore and put off what must be done. We should hope that the cuts announced are overly aggressive, and that they will not all be needed. We should want the biggest possible cuts to insure that they are not only realistic, but overly pessimistic. Trust me; the investment markets want realism and clarity. Honesty that sales will decline will be better received than false optimism in forecasts. By over-doing it, favorable comparisons of sales, and operations and profits will come sooner, thereafter leading to more employment, investment and growth.

2. Inventories are not a problem. This thing started in 2007. Even the automotive manufacturers were cutting production back then. The same is true of appliance manufacturers like Whirlpool. The truth is that inventories are not a problem, unlike past recessions. Yes, if demand falls to zero, then theoretically we have too much supply, but that is absurd. All industries are poised to ramp up production to meet increasing demand, and when they do, the profits will be real and significant. Employment, in turn will increase rapidly.

3. The cost of money is historically low. Companies will be able to invest and expand with an increasing margin. I would not be surprised if the US benefits disproportionately on both the domestic and the trade fronts. I believe that “outsourced” jobs in all sectors will come home in the next three years, and that simultaneously, our exports of all goods and services will rise. Yes, this poses significant problems for the rest of the world, but that is a subject for another entry.

4. Demand for goods & services are global and real. As odd as it sounds today, we will need to build more homes by 2012 to keep up with family formation in the United States. It seems unbelievable, but demand for all products in India and China exists; it has just been put off until we find a new equilibrium. Replacement alone for everything we have in our lives accounts for approximately 60% of our consumption today.
So be realistic, but do not panic. Be optimistic, because it will speed our recovery. Work hard and save, because this is the real lesson from the recession of 2007-2010…entitlement is dead.

Free markets? Part 2

2009-03-12T20:43:00.002-07:00

My friends, we are indeed in a severe recession. But should we call into question all of our beliefs in capitalism? No. The issue we face is one of financial market collapse. The collapse was not caused by the complex but rather by the simple. Many pundits will talk about the “CDO with ABS,” and yes, there was excessive financial engineering. But the real root cause of our troubles rests with institutions which lent money poorly. In my last blog post, I discussed my own observations as a young MBA graduating with a degree in finance from Wharton. We believed we should use advanced mathematics and some of the new learning’s from physics to “measure and eliminate risk.”” As the Financial Times recently noted, we thought we could “complete the markets.”

What would be an example of the “slicing and dicing” of traditional investment vehicles? I have discussed the dismemberment of bonds. The other interesting case study is mortgages. Perhaps it is now self-evident, but for my parents, born in 1938, the only mortgage they knew included 20% cash down payment and a 30 years fixed rate. Of course today, we have zero down payment, and no payments until 2010! Radio advertisements that sound like furniture store sales tout 1% interest rates for three years with as little as 5% down payment. The absurdity is that it continues and yet this is what caused much of the problem!

But why would banks lend to people who don’t have a job, a down payment nor a respectable credit history? Well that’s where the slicing and dicing comes home to roost. Banks used to generate a mortgage loan (literally, you would go to the bank and apply for a mortgage and speak to a bank employee). Then the bank would keep that mortgage as an asset (they own the right to receive both interest and principal from you). They made these loans based upon the checking and savings deposits, and the Certificate of Deposit held. But today there has been a radical separation of the process AND of the mortgage instruments themselves. Banks and “mortgage banks” generate loans – they accept your application and sell you a product (see above). But they DO NOT hold them. Indeed, because they do not hold them, they are more risk oriented in their lending practices. But who would be foolish enough to buy mortgages with a high probability of default? The answer is institutional investors and sovereign nations. Why? Because they were bundled together in large denominations, say $100 million dollars, backed by “quasi-government” agencies and given an AAA rating by Moody’s. With 1,000 to 5,000 individual mortgages with a “Collateralized Debt Obligation” the risk had to be reduced…right? Well, not everyone was so sure. That’s where Fannie Mae and Freddie Mac come in. They GURANTEED these debt instruments. But why did they do it when the risk of default was higher than in the past? Because of the Community Reinvestment Act, signed into law by Bill Clinton and extended under George W. Bush. This allowed FNMA and FDMA to accept mortgages into their bundling programs when the borrower had less than 20% down and when the rates were not fixed, and indeed highly speculative. This was done in the name of “allowing every American the chance to own a home.” So much for progressive intervention into the market.

But I would be remiss if I blamed the government. My main point here is that the “Masters of the Universe” thought they could use math to eliminate risk and make the markets “completely free.” And they were wrong. They gave the financial markets a false confidence. Those who did not understand the models were too embarrassed to say anything, and when people finally did question them, they were marginalized because the money was flowing and who needs a curmudgeon around anyway.

Let me go into some more detail. Banks originate loans. Fannie Mae buys them and bundles them into large assets then sold in the capital markets, primarily by long-term investors like insurance companies, pensions and sovereign funds. At this point, banks are free to lend more money. They do not have the loans on their books. The turnover of mortgages accelerated.
More loans were being made against the same capital base as before. Hence the risk had to be increasing. Now what about the “collateralized debt obligations” purchased in the capital markets? Didn’t someone wonder about the risk of these large hybrids of fixed and variable rate mortgages, and other corporate debt? Yes. That’s where derivatives come in, and insurance products against default risk. Companies started to sell insurance policies to protect buyers of these “Collateralized Debt Obligations of Asset Backed Securities.” But contrary to the idea that financial engineering was “completing the perfect market,” these securities and insurance policies were not traded. Moreover, because there was no market, there was no regulation. Ironically, a large majority of these securities ended up back with the BANKS! But they were not on their balance sheets. Instead, they were placed in off-balance sheet entities called “Structured Investment Vehicles” or SIVs. Since these instruments were not traded, they were not evaluated or “marked to market.” They were not regulated. They were evaluated by complex mathematical models which held the fundamental assumption that “spreading the risk wide enough makes it go away.” In reality, two things happened: First, people who could not afford a home stopped paying; and second, the banks (both commercial and investment) found that they indeed held securities in which interest payments declined and loans suddenly became real estate from foreclosures. As the reality set in, the “house of cards” collapsed, and is still collapsing.

Is this Armageddon? No. If you want to know the truth, we could just start over. Don’t believe me? Please pick up a copy of Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay which details the ponzi schemes of 1637 (tulip mania), the South Sea Company of 1711–1720, and the Mississippi Company of 1719–1720. Speculation led to a separation of financial markets from real economic activity. Sound familiar? We will survive, but trust me, it is likely we will do this again somewhere in the next 100 or so years…

Free markets? Part 1

2009-03-12T13:09:00.000-07:00

I want to connect two seemingly unrelated intellectual points: evolutionism and Nobel Prizes in financial economics. What do they have in common? They both are founded on a belief in reason; a belief that math and science can explain everything.

Let’s start with evolutionism.

In Darwin’s Dangerous Idea, Daniel Dennett takes a philosophical and mathematical journey. This book is not for the faint of heart, but contains a couple of really challenging ideas as they pertain to faith and evolution. To begin, Dennett’s epistemology is Charles Darwin. This is the rail that his train runs upon. Darwin’s theory of natural selection posits that organic life is continually interacting with its environment and adapting to survive. To prove that humans evolved through this process, Dennett makes the following argument:

Life is a near infinite mathematical game of chance. Just as it is possible to produce a winner of a contest to correctly “call heads or tails” 1,000 times, the Homo sapiens is indeed the outcome of a truly monumental decision tree.
Dennett points out that over the course of millions of years, millions of “human-like” species were constantly trying to survive. 99 .999999999999999999999999999% failed.
We are the outcome of this effort. We have existed for 10,000 of the earth’s hundreds of millions years.

Now this argument is nearly flawless in its simplicity. While it may be true that it does not deal with “why” life continued to press towards intelligence, consciousness and speech, I believe Dennett would argue that it was indeed random and not purposeful.

Dennett uses a fascinating theoretical example to prove his point. He says that chimpanzees have been taught to type on a typewriter (press keys). If an infinite number of chimpanzees were put in front of an infinite number of typewriters and proceeded to randomly press keys on the QWERTY keypad, Dennett argues that they would randomly generate The Canterbury Tales, the Old Testament, War & Peace, etc. They would also generate versions with minor errors. They would also produce meaningless babble. This is his proof that we evolved from a random experiment of trial, survival or death.

Let us now turn to economics and financial markets.
So what about the application of calculus and physics to modeling the behavior of financial markets? Well here I will give you a personal reflection. As a student seeking my MBA from Wharton in 1988, we were all introduced to the Black-Scholes mathematical model of the market for a stock equity, in which the equity's price is a stochastic process. It was used extensively in valuing put and call options. We were introduced to Markowitz, whose work on Efficient Market Theory won one of the first Nobel in economics for this approach. We were told, and for the most part, we believed that we could break down the “crude market” and its financial instruments, into discreet parts and by doing so, predict cause and effect through probabilistic outcomes.

As an example, bonds were originally pretty straight forward. A debt issuer (public or private) would receive a lump sum of money (the coupon) from a debt buyer in exchange for a promise to pay interest upon that amount, and then one day repays it. “Back in the old days,” a debt buyer would receive a certificate which had coupons around the border which were detached and sent into the debt issuer for payment. Upon maturity, the coupon would be returned for redemption. But when I was in school, new markets had started in the 1980s which separated the interest payments from the repayment of the “lump-sum.” The “coupons for interest” were “stripped” off the certificate and sold to a buyer who wanted just the stream of payments. There were called “strips.” The certificate leftover was called a “zero coupon bond,” and would be sold to someone who needed a “lump-sum” payment in the future.
This is just one example, but suffice it to say that “straddles” “swaps,” “puts,” “calls,” and all the other “financially engineered” products took off in the 1990s.
For home mortgages, FNMA, GNMA and FDMA were all established to lower the risk for banks lending to consumers. They allowed banks to sell off to these institutions those mortgages which conformed to certain standards – namely as 20% cash down payment and a fixed rate 30 year term. The bank would originate the mortgage locally. The government would bundle thousands together into the equivalent of a huge bond, and then markets would again split up the interest rates and the principle repayment. Imagine further how complex this became when the markets introduced variable rates!

I recall that most of my corporate finance and capital market professors worked as consultants on Wall Street and were trying to find ways to reduce risk, increase return, and basically try to tailor products to the exact needs of different types of clients. Well-intended, but as we now know, unsuccessful. The belief and early performance of these products led to an overconfidence. With the fall in REAL assets, like home values, and with REAL default due to poor lending practices, the confidence collapsed. All the rocket sciences could no longer understand the complexity of the system that they created…not in a systematic way. Rather, much like Mr. Dennett’s argument, the global financial marketplace evolved randomly. Each action was purposeful, but in aggregate they came together in ways that were not coordinated nor understood.

For me personally, I spoke frequently in the fall of 2008 about how the world economy and the financial marketplace would “learn and adapt.” I cited the savings & loan crisis of 1983-85, the Eastern European currency crisis of 1998, the “Asian Contagion” of 2003 caused by the collapse of Long Term Credit. For the US and world economy withstood the challenges and evolved. I’m not certain today. I am not as optimistic.

So how do parts one and two relate? Perhaps it is self-evident, and if it is not, my apologies.

Dennett argues that nature randomly generates something as unique as life. The corollary to economics is that a “completely free market” will generate perfect outcomes for all participants. Both are wrong.

The belief that everything is either determined by human reason – through math and science – to create and control “completely free markets” is also flawed.

So do we quit? No. We eat some humble pie, and we find the balance of freedom and regulation.

Where do blogs fit in the history of social media?

2009-03-03T13:57:00.000-08:00

In my opinion, blogging is the first and one of the earliest forms of social media. Blogging is the first phase of “the wisdom of the crowd.”

As I have written before, the first websites were brochure-ware, controlled by Webmasters. After the “Dot Com” bubble burst, the web came back much improved. Some people call it Web 2.0, and some dispute whether it improved that much, but it certainly enabled anyone to participate, and to publish. Participation came with bulletin boards and forums, and participation came with blogs. Blogs let anyone sign up and start publishing. Of course for most blogs, no one knew they existed and did not read them (like mine). But even at their best, blogs are a form of “one to many” publication. Some blogs have "comments" but they are hard to use, hard to follow. They read like the dead sea scrolls...literally.

With Facebook or MySpace, you see the next evolution. Anyone can publish themselves, and others can comment or post or share photos and links. This is better but not the same as social publishing.

But there is a change on the horizon. Whether Wikia, or Ning or Wetpaint, a new evolution is arriving. They each present the first generation of social publishing platforms – the "many to many" model. A platform is created on any topic wherein everyone who cares to contribute can contribute.
My point is actually very simple...blogging is just a rudimentary form of "the wisdom of the crowd." The technology which allows anyone to comment on anything, known as blogging, is empowering. It makes no distinction between those qualified and competent, and those who are not. Blogging is not journalism. Journalists can blog, that is true. But journalism has legal and professional and commercial standards. Blogging does not...at least not in the same way. Blogging is a form of mobocracy. That is what Aristotle called the extreme form of democracy.

Now in social publishing, a funny thing happens to the wisdom of the crowd...it gets wiser.

You see, when a community publishes, it also edits. So you can get the facts straight. And you get two sides of an argument. Blogs and forums tend to ramble on, and be very one-sided. Blogs almost never reflect and organize and gain some consensus. But that will improve as social media and publishing improves with wikis. The tools exist. One person makes a case or prepares a review. Then others add, in an organized way
or correct mistakes, etc. And the "wisdom of the crowd" is actually a unique entry versus the "expert" reviewer or journalist. Wikipedia does a good job with facts. But bloggers must evolve to be the "passion" but in a more coherent and valuable way. They will do this when they stop being individuals and start forming communities.

The Academy Awards: Who will win an Oscar?

2009-02-22T07:25:00.000-08:00

I love movies. Grew up on them. Cannot imagine how many I have seen in my life. For the past few years, we have tried to see all the major nominees for the Oscars prior to the awards show. Last year I predicted No Country for Old Men, Daniel Day-Lewis, Tilda Swinton and Javier Bardem. I completely disagreed with Marion Cotillard.

This year I have seen all 5 films nominated for "best." I believe Slumdog Millionaire is the best of the lot. Frost/Nixon is a close second, and should win Best Director for Ron Howard. Milk was too one-sided in its portrayal of history. The Reader was a very good, but not great film. And Benjamin Button now looks like a novelty compared to the rest. The snub was Gran Torino.

For best actor, I have seen all the nominees performances and think that Mickey Rourke is the best. Some wonderful performances, but Mr. Rourke brings you in, holds you close and plays the most honest and real of all the actors.

For best actress, I go with Anne Hathaway. I will not disparage the other performances nor suggest this is a weak field, but suffice it to say that this was a big change for Ms. Hathaway, who showed promise in "The Devil Wears Prada."

For best supporting actor, Heath Ledger rivets and awes upon each viewing. A master of his craft, and taken from us too soon.

For best supporting actress, I go with Viola Davis. Perhaps the most powerful 5 minutes among all films in 2008. Her performance is notable and stands out in a film built for actors.

Barack Obama’s inauguration speech in full.

2009-01-22T20:19:00.000-08:00

My fellow citizens:

I stand here today humbled by the task before us, grateful for the trust you have bestowed, mindful of the sacrifices borne by our ancestors. I thank President Bush for his service to our nation, as well as the generosity and co-operation he has shown throughout this transition.

Forty-four Americans have now taken the presidential oath. The words have been spoken during rising tides of prosperity and the still waters of peace. Yet, every so often the oath is taken amidst gathering clouds and raging storms. At these moments, America has carried on not simply because of the skill or vision of those in high office, but because we, the people, have remained faithful to the ideals of our forbears, and true to our founding documents.
So it has been. So it must be with this generation of Americans.

Serious challenges
That we are in the midst of crisis is now well understood. Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered. Our healthcare is too costly; our schools fail too many; and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet. These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land - a nagging fear that America's decline is inevitable, that the next generation must lower its sights. Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America - they will be met. On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord.
On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics.

Nation of 'risk-takers'
We remain a young nation, but in the words of scripture, the time has come to set aside childish things. The time has come to reaffirm our enduring spirit; to choose our better history; to carry forward that precious gift, that noble idea, passed on from generation to generation: the God-given promise that all are equal, all are free, and all deserve a chance to pursue their full measure of happiness. In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of short-cuts or settling for less. It has not been the path for the faint-hearted - for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things - some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.
For us, they packed up their few worldly possessions and travelled across oceans in search of a new life. For us, they toiled in sweatshops and settled the West; endured the lash of the whip and ploughed the hard earth. For us, they fought and died, in places like Concord and Gettysburg; Normandy and Khe Sahn.

'Remaking America'
Time and again these men and women struggled and sacrificed and worked till their hands were raw so that we might live a better life. They saw America as bigger than the sum of our individual ambitions; greater than all the differences of birth or wealth or faction. This is the journey we continue today. We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions - that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America. For everywhere we look, there is work to be done. The state of our economy calls for action, bold and swift, and we will act - not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology's wonders to raise healthcare's quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. All this we will do.

Restoring trust
Now, there are some who question the scale of our ambitions - who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage. What the cynics fail to understand is that the ground has shifted beneath them - that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works - whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end. And those of us who manage the public's dollars will be held to account - to spend wisely, reform bad habits, and do our business in the light of day - because only then can we restore the vital trust between a people and their government. Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control - that a nation cannot prosper long when it favors only the prosperous. The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on the ability to extend opportunity to every willing heart - not out of charity, but because it is the surest route to our common good.

'Ready to lead'
As for our common defense, we reject as false the choice between our safety and our ideals. Our founding fathers, faced with perils that we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expedience's sake. And so to all the other peoples and governments who are watching today, from the grandest capitals to the small village where my father was born: know that America is a friend of each nation and every man, woman, and child who seeks a future of peace and dignity, and we are ready to lead once more. Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with the sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint. We are the keepers of this legacy. Guided by these principles once more, we can meet those new threats that demand even greater effort - even greater co-operation and understanding between nations. We will begin to responsibly leave Iraq to its people, and forge a hard-earned peace in Afghanistan. With old friends and former foes, we will work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet. We will not apologize for our way of life, nor will we waver in its defense, and for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that our spirit is stronger and cannot be broken; you cannot outlast us, and we will defeat you.

'Era of peace'
For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus - and non-believers. We are shaped by every language and culture, drawn from every end of this earth; and because we have tasted the bitter swill of civil war and segregation, and emerged from that dark chapter stronger and more united, we cannot help but believe that the old hatreds shall someday pass; that the lines of tribe shall soon dissolve; that as the world grows smaller, our common humanity shall reveal itself; and that America must play its role in ushering in a new era of peace. To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect. To those leaders around the globe who seek to sow conflict, or blame their society's ills on the West - know that your people will judge you on what you can build, not what you destroy. To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist. To the people of poor nations, we pledge to work alongside you to make your farms flourish and let clean waters flow; to nourish starved bodies and feed hungry minds. And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to the suffering outside our borders; nor can we consume the world's resources without regard to effect. For the world has changed, and we must change with it.

'Duties'
As we consider the road that unfolds before us, we remember with humble gratitude those brave Americans who, at this very hour, patrol far-off deserts and distant mountains. They have something to tell us, just as the fallen heroes who lie in Arlington whisper through the ages. We honor them not only because they are the guardians of our liberty, but because they embody the spirit of service; a willingness to find meaning in something greater than themselves. And yet, at this moment - a moment that will define a generation - it is precisely this spirit that must inhabit us all. For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies. It is the kindness to take in a stranger when the levees break, the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours. It is the firefighter's courage to storm a stairway filled with smoke, but also a parent's willingness to nurture a child, that finally decides our fate. Our challenges may be new. The instruments with which we meet them may be new. But those values upon which our success depends - honesty and hard work, courage and fair play, tolerance and curiosity, loyalty and patriotism - these things are old. These things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths. What is required of us now is a new era of responsibility - a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

'Gift of freedom'
This is the price and the promise of citizenship. This is the source of our confidence - the knowledge that God calls on us to shape an uncertain destiny. This is the meaning of our liberty and our creed - why men and women and children of every race and every faith can join in celebration across this magnificent mall, and why a man whose father less than 60 years ago might not have been served at a local restaurant can now stand before you to take a most sacred oath. So let us mark this day with remembrance, of who we are and how far we have travelled. In the year of America's birth, in the coldest of months, a small band of patriots huddled by dying campfires on the shores of an icy river. The capital was abandoned. The enemy was advancing. The snow was stained with blood. At a moment when the outcome of our revolution was most in doubt, the father of our nation ordered these words be read to the people: "Let it be told to the future world... that in the depth of winter, when nothing but hope and virtue could survive... that the city and the country, alarmed at one common danger, came forth to meet [it]." America. In the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children's children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations.

Thank you. God bless you. And God bless the United States of America.

The search for happiness Part 2

2009-01-19T18:19:00.000-08:00

In our first discussion of happiness, I rooted my argument squarely in Christianity, with the teachings of Jesus Christ and Mother Teresa (See below Part 1). Suffice it to say that the point was that humans are never happy being selfish, and only happy when they give to others.

Now I would like to turn some attention to what some might view as the other extreme -- the legacy of Sigmund Freud and the writings Ernest Becker. As we know, Freud became an atheist during his lifetime. Becker was not an atheist, but attempts reconciliation of some of Freud's concepts on happiness in life.

My good friend, Gerry Zyfers reminded me that in Becker's work we find a similar concept to one of "giving to others leads to happiness." Gerry wrote me, "I think Becker's basic point was that human beings have a mythology about their own independence, but we are radically dependent on others to give us a sense of meaning and even sense of self. To have meaning you need a meaningful role in a meaningful society. Hence meaning is derived from society. When you recognize other people, you reach out to other people. You engage and give to other people. It helps give them meaning and life, and in turn, you get it back. It’s a virtuous cycle." Indeed, Gerry is correct that in Becker's 1974 Pulitzer Awarding winning Denial of Death he writes, "Man is overwhelmed by his loneliness and separation and negated by the very burden of his own life. If Rank, Camus and Buber are right, man cannot stand alone but has to reach out for support." (Chapter, the Nexus of Unfreedom).

But is this the same concept of seeking and finding happiness? Jesus taught that happiness comes from pouring oneself into the service of others. Interestingly, the etymology of the word God comes from the word "to pour." There is some debate whether God pours into you or you pour into God or both. I argue that while Becker fully embraces the German concept of a dialectic of the individual and their environment (including other people), that there is a fundamental difference in motivation. But let me spend a moment recapping some of Becker's philosophy.

Becker argued that humankind has a innate drive for procreation. Our brain stem is coded for survival. Instinctively we respond to a threat with "fight or flight." What makes us human, and distinct from animals, however, is our consciousness. With consciousness comes the realization of mortality. The transition from child to adult is accompanied by the realization that death is inevitable. We fear death. We fear the pain of death, the loss of control, and leaving others behind. But as humans, we have the ability to think in symbols. We can understand cause and effect. We can exert some control over our reality. We can dream of the future and reflect upon the past.

This is where Ernest Becker redefined the problem. Culture is a shared set of beliefs about the nature of reality developed to help us deal with our death anxiety. Culture is a collective fabrication used to maintain security in an unsure world. The idea of an eternal soul soothes the fear of mortality. Symbols of immortality are in all religions and cultures. Becoming part of a collective leads to an emotional escape from mortality. Individual achievement is driven by a desire for immortality. Achievement, collective and individual, is driven by a need for permanence. We all want to make some "Hall of Fame" because we feel like we will be remembered after we are dead and gone. Becker felt that creativity was also driven by the need to be immortal. The creation of art was not merely an expression of one's perception of society, but also the desire to leave something which lasts beyond a human lifespan. Moreover, achieving wealth provides for power and control of others. In the face of mortality, wealth allays fear by presenting the myth that a person can "buy their way clear." Interestingly, a lack of success, as defined by each culture, is equivalent to social death. Each culture defines sanity for its collective citizens. Hence, war is caused when people fight to exert their belief system over an opposing or threatening one. Basically, people will fight to remain sane.

Returning the Becker quote above, we find that he affirms that individuals cannot be alone. It is too terrifying. We all die alone. We can only find sanity in the norms and values and customs of the unique circumstances in which we find ourselves. We can only define ourselves in the context of our environment. Even the pursuit of virtue is done as a response to our fear of death.

Hence, Becker defines a human motivation which is very different than that taught by Jesus Christ. They are profoundly different. For Christ, the motivation was for a unification with God via eternal life through the giving of oneself to others. It is an act of hope, not of fear.

Our Nation: So where do we go from here? Part 3

2008-12-29T09:40:00.000-08:00

In my humble opinion, the two most distinctive elements of the United States of America's economy are freedom and entrepreneurialism.

The First Amendment of the U.S. Constitution states, "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances." What is so striking about this, and quite frankly all of the U.S. Bill of Rights is the negative language. "Congress shall make no law;" or "shall not be infringed" (2nd); or "No Soldier shall" (3rd); all are written to limit or forbid the Federal Government from entering into the lives of its citizenry. This is one of the most profound statements of freedom in the history of politics, society and I will argue, economy.

The Declaration of Independence is more positive in its tone, calling out "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."

It is this complete commitment to freedom which beckons millions to our country each year -- from India, from Vietnam, from Korea, from Central and South America. It is this commitment to freedom which inspires so many Americans to pursue their personal visions and start new businesses -- in technology, in medicine, in transportation, in communication, in services.

This second element is the spirit of entrepreneurialism, which beats proudly in the heart of the United States of America. My father was an entrepreneur, and growing up, I saw the passion and conviction he brought to being a founder and owner of a small business. For Jerry Bell, there was no other path. It was his purpose. He was not interested in being part of a larger corporation.

What are the hallmarks of the entrepreneur, regardless of field? I would argue that the entrepreneur is exemplified by four key traits:

A clear vision of the future, many times based upon intuition, for how things should be, but are not that way...yet! Yes, there are observed facts, but the entrepreneur puts them together in a new way, or sees things in a different light. They wish to right the wrongs. They wish to make things more efficient or effective. They see solutions for problems that others do not see.

They have an unique approach to power and authority. In the case of established power structures, they tend to question and rebel. They are the first to call out abuse of authority, and the evils of bureaucracy and politics. When it comes to their own companies, there is no "right way," but entrepreneurs tend to make decisions effortlessly, and eschew structure for speed. They attract people both like them, or better said, who accept them. This is why some famous entrepreneurs are autocrats, and others democrats, but both models can be successful. They are comfortable with power and authority, and pursue it in a way that is natural for them, and they attract people who are drawn to their specific approach.

They embrace risk. This is not to success that they are fool-hardy or do not consider some risks too great to take. Every successful entrepreneur will have a risk/reward analysis. Every one will evaluate the likelihood of success. The different comes in the entrepreneurs ability to ACT! They will move forward when the odds are in their favor...meaning 51% versus 49%. Most people will only move on an idea when they see a 90% chance of success. This is what distinguishes the entrepreneur from the rest of us.

They have the ability to galvanize support for their vision. They can persuade those who fund, and those who execute, and those who purchase the vision. They tend to appreciate diversity of opinion, and can incorporate input without losing the essence of their vision.

Freedom and the spirit of the entrepreneur are indeed the two keys to our nation's past and future success. Now do they also apply to our established corporations? Can they serve as lessons to fix the financial and banking sectors? Can they help the automotive, retail, technololgy sectors? Yes, as an inspiration for new entrants, but can they help reform that which is broken? I believe the answer is yes.

I used to call myself an intrapreneur while working at Ford and Chrysler and Microsoft. The degree to which I was able to effect positive and lasting change, I embodied these four truths. When I failed, and I indeed have had my share, I was not successful because one or more of these four elements were not clear, compelling and well executed:

The vision was too much of a stretch for the existing culture and structure. The new vision was at odds with what people saw as that which made the company successful in the first place. The new vision threatened internal power blocks, and elicited overt and covert hostility by those threatened.

The change was seen as a power play for the benefit of the instigator, and not as a solution for everyone's success.

Large companies have more to lose when they take a risk, and are therefore prone to the "90% certainty" and not the "51% certainty."

The people in large corporations chose them because they were large and "safe." They are not the same as those who "choose" to join a start-up or follow an entrepreneur. With that said, when an intraprenuer or change agent has time, people will "opt in and out" of her or his team.

As I now spend more time with start-ups, I see clearly that they will be the engine of our renewed economy. I also believe that their values can indeed inspire great reform for our nation's "old school" corporations. One reason that there are "break-ups" of companies is so they can unleash this spirit of freedom, innovation and growth. Let's hope that politics does not get in the way!

Our Nation: So where do we go from here? Part 2

2008-12-16T08:24:00.000-08:00

U.S. Interest rates
Over the next two years, rates will be low by historical standards. This will be bad news for fixed income investors, and good news for borrowing costs. In the 5-10 year time frame, there will be pressure for U.S. interest rates to rise due to the size of the U.S. government budget deficit. In addition, as the economy rebounds (and trust me, it will rebound), then the Federal Reserve will raise interest rates to hold inflation in check.

So when the government spends more than it collects in taxes, who pays the difference? Today, the shortfall caused by taxes collected being less than government expenditures, has been funded by foreign government purchase of Treasury bonds of various durations. Indeed, of all of the "savings" in the world, the U.S. consumes 85% of it to finance its borrowing. Mind you, the shortfall could be funded by US citizens buying government bonds, and if investors become more risk averse over the next two decades, this may occur. But even if that happens, the U.S. government needs foreign purchase of bonds.

Quick aside: if private pensions invested more in U.S. Treasuries, safeguarding retirement contributions, we could solve two problems at once.

So let's examine this question of foreign ownership of U.S. Treasuries, and consider whether they will continue to buy them as they are today.

As in most things, there are two sides to this argument -- those who think foreign governments will not continue to buy U.S. Treasury Bonds, and those who think they will. I fall in the latter camp, but let's examine the former.

Some financial and economic observers say that foreign governments will stop supporting the U.S. government's issuance of debt. They argue that diversification theory promotes holding non-U.S. debt. They argue that the lower interest rates that are being offered are not sufficient (hence mid- to long-term interest rates should rise). They also suggest that foreign governments may "blackmail" the U.S. and threaten to stop purchases unless the U.S. does what they want geopolitically (say withdraw troops from Iraq).

On the other side, there is an argument that the "savings" in the rest of the world are driven by the sales of goods and services to the U.S. by its trading partners. For example, ask yourself, "where would China sell their goods if not to the U.S.?" The same is true for everyone. Yes, the U.S. is the 2nd largest producer of oil, but it still imports from Canada, Mexico and Venezuela (and a little bit from the Middle East, maybe 15% of the total). So the question becomes, "why would our trading partners harm their single largest customer?" The answer is, they will not. This is why the blackmail argument is spurious. Let me make certain that this point is clear -- the world builds and sells products which are sold in the USA. Without question, they sell the most profitable (e.g. highest margin) in the USA. The profit they reap from their sales of goods and services can either be repatriated (which causes an increase in both their money supply and inflation) or they can keep the profit in dollars. The way that do it is through the purchase of Treasury Bonds. If they stop buying them, they hurt their biggest customer, AND they run the risk of hyper-inflation at home.

Also supporting the argument that foreign investment will continue is the simple fact that the the U.S. government is without question the safest place to invest. Please review below all the reasons I articulated in Part 1 that make this true. The ability of the government to tax and collect; the ability to maintain law & order; and the raw assets available as collateral; all support the credit-worthy nature of the U.S.A. Where would you trust your money in lieu of the U.S.? Russia, China, India, Brazil? All have political risk. The UK, France, Germany? All have significantly lower levels of assets and a smaller tax base. Unlike our developed friends, the United States has the ability to grow. The economy is huge, but can still grow 2-3% because our population is growing; because we have space for new citizens; because we invest in education, research and development (especially with venture capital start-ups).

So will interest rates rise? Yes, they will, but more in response to the very low rates we have now. There will be pressure to fund the federal deficit, but remember, the Clinton Administration ran a surplus on the back of the Reagan/Bush/Clinton economic expansion after the last major recession (Carter). This too is possible in the next two decades.

The U.S. Dollar
Should the average citizen care whether the dollar buys more or less units of another currency? Probably not. Most Americans do not travel extensively abroad. Moreover, the travel industry is very competitive, and deals are always available. With that said, there are several reasons why the U.S. Dollar will fall over the next decade.

1. There will be higher relative growth rates in other parts of the world. In Europe, there is still considerable growth to be unlocked by the continuing elimination of national trade and competitive barriers. There will never be a "United States of Europe," but it is clear that there will be 2-3 Euro champions in each industry as opposed to the historical "national" champions (think banking, energy, aer0space & defense, consumer durables, autos, consumer perishables, fashion). Moving beyond Europe, the BRIC nations will grow faster than the U.S. in the future.

Word of caution -- the $ amount of growth that the U.S. will generate on a $13 trillion base at 2.5% growth is $325 billion per year!!! Notwithstanding, the dollar will still fall due to relative changes.

2. A lower dollar makes U.S. exports more competitive, and makes imports more expensive. This is a check upon the trade deficit. A weak dollar is one reason why oil rose so fast so far. It is denominated in dollars! Same is true of gold and other commodities. The dollar's weakness explained 20%+ of the rise in commodities in 2008.

3. The most important reason the dollar will fall from today's level, however, is that it makes the debt paid in the future cost less than paying it today. This has been a specific Bush Administration policy, and quite frankly, a good one.

To summarize, the interest rate is not the reason foregin governments buy U.S. Treasuries. They do it to maintain balance of payments for international trade and to support their biggest market. Domestic interest rates will rise but will do so for domestic economic and inflation reasons, but not to attract buyers of U.S. Treasuries. And finally, the U.S. dollar will fall again for global macroeconomic reasons, and it is not a bad thing for our nation.

Our Nation: So where do we go from here? Part 1

2008-12-15T15:29:00.000-08:00

I wanted to write optimistically about our nation's democracy and capitalism. But before I address what I see in the next 3-5 years, I should start with my underlying assumption, and why I believe it to be true:.

The United States of America is an incredibly unique social, economic and political construction, and it is the best the world has ever known. Not perfect, but perpetually driven towards auto-improvement.

Natural Resources: which other country has the vast amounts of natural resources, in quantity and diversity, as the United States? None.

The USA has 30% of the world's natural gas, 22% of its coal, 8% of its oil, copper 15%, Gold 15%, Silver 13%, Aluminium 17%, Magnesium 29%...

Go to www.allcountries.org/uscensus/natural_resources.html to see the entire data set.

Human Resources: which country has the size, scale and scope of the US education system? None.

The USA has 4,140 colleges and universities with 17,500,000 undergraduate and graduate students? No other country comes close by any measurement.

Economy: which country has the size, scope, freedom and investment of the USA? None

The United States has a GNP/capita of $46,000. While there are some countries mathematically above it, the only statistically significant difference is Luxembourg, Kuwait, Norway and Brunei (all $59,000/person and above). The United States represents 25.4% of the World's Gross National Product. At $13.8 trillion, it is 3.2 times larger than Japan (#2) and 4 times larger than Germany and China (#3 and #4).

See the World Bank data at: http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf

Population: What nation is more ethnically diverse than the United States? None.

For Darwin fans, that means the law of natural selection is working in our favor. We also know that we are becoming increasingly diverse. See:
http://www.prb.org/Articles/2004/USGrowingBiggerOlderandMoreDiverse.aspx

If you exclude refugees, the United States has the largest number and percent of population from legal and illegal immigrants. But the key here is that people WANT to come to the United States to be free! Freedom of religion, of speech, of political expression, of opportunity. People come to be safe, get jobs and educate and raise their children.

Arts, Science and Culture: By any measurement, the United States has more diveristy, opportunity, funding and excellence of the arts & sciences.

That's enough for now. I will return with some thoughts about what is next.

Post script: My son, Jon, asked me what nation was the greatest. My answer is the USA

US Autos: whichever way we go, let's get this right

2008-12-15T11:39:00.000-08:00

A sound plan from Tom Epley's Bold Exec Blog. I agree with this 10 point plan. Worth reading...

http://www.boldexec.com/boldexec/2008/11/show-me-the-plan-gm-part-i-items-15.html

The search for happiness Part 1

2008-12-14T15:27:00.000-08:00

Perhaps it is a consequence of middle age, but more and more of my friends are pondering the meaning of life. To be fair, the terrible economy is also a causal factor, as far too many of my friends have lost jobs or fear losing them shortly.

I have friends who are atheists. I have friends who are agnostic. I have friends who are both committed and causal Christians, Jews, Hindus and Muslims. I find, however, that the questions are very much the same. What is the purpose to my life? Am I loved? Do I love others? Does my life matter? Can I be happy?

Today, I was reminded of words of wisdom from Mother Teresa. As we approach the second most important Christian holiday, Christmas, we find that one of the key lessons from Advent is the discovery and pursuit of JOY. First and foremost, I should clarify that joy is not pleasure. Pleasure is sensory-based. Joy is spiritual.

Due to the fact that I graduated from Kenyon, and majored in the history of ideas or philosophy, most of my friends tend to have a bias towards intellectual exploration of happiness and the meaning of life. I find a large number of people depressed. They have an emptiness in their lives. And interestingly, the more they focus upon themselves the harder it is for them to be happy. The more they look inward, the farther they seem to be from getting to an answer.

Mother Teresa had some thoughts on this. She said that JOY should be understood as Jesus, Others, Yourself. Mother Teresa said that by reading, reflecting and implementing the Word as revealed by Jesus, people would find happiness. She also said that when one is in doubt, or sad, or troubled, then focus upon helping Others. It was this act of self-denial and focus upon giving support and care and love to Others that makes everyone more Christ-like. Now comes the interesting part -- like nature, God does abhors a vacuum. When you give of yourself to Others, then God fills the void left behind, and You feel happier. You feel content. You lose the feelings of disappointment and loss and sadness.

Big 3 Part 3 -- Closing in on the finish line

2008-12-10T13:26:00.000-08:00

As we get closer to an agreement for supporting General Motors, Chrysler and Ford, I continue to press for structural reforms.

What concerns me is the lack of discussion around several issues:

1. Rationalization of brands and dealer networks: whoever becomes the Car Czar will rue the error of not being granted sweeping powers to supersede state franchise laws. GM had to pay millions to dealers when they retired Oldsmobile. This cannot be the case going forward. Furthermore, continued consolidation of GM, Chrysler and Ford dealer networks is required -- and speed and low cost is the key.

2. We need to incentivize consumers to "Buy American." I am perplexed by the failure to address this requirement. It should be a hallmark of the Obama-Biden stimulus program. I favor tax credits, like those for hybrid vehicles.

3. There are two meta-goals above this issue. President-elect Obama should use the U.S. auto industry crisis as a "laboratory" for fixing Medicaid/Medicare and Social Security. We must move to a defined contribution plan for retirement. We must get people to pay fair value for medical services. Insurance should be for catostrophic accidents and illnesses. We need to have a cost associated with not taking care of oneself (smoking, over weight, lacking exercise, etc.).

So why not Chapter 11?

2008-11-23T12:25:00.000-08:00

I agree with my good and respected friend, Don, who kindly left a comment. We need to accelerate the pace of de-consolidation or break-up of the parts of the Big 3 Automakers. How fast we can move is limited by socio-political structures. The key here is the UAW. Either they exist in a radically modified sense or they may not exist at all. Clearly the import manufacturers in the USA are not unionized, and they are much better off. I believe politics (especially for the Democrats) will necessitate that the UAW must exist, but with concessions and modifications. Hence, I think we evolve to Don's vision of a new approach to auto manufacturing through either Chapter 11, or a government guaranteed loan program with concessions.

Why do I favor a 1979-type of approach? The answer is two-fold:

Chapter 11 will kill consumer demand. I was riding in a cab in San Franciso, and the driver, an African immigrant, said, "Hey, I'll ride in a plane of a company in bandruptcy, but I don't want a car with a warranty from a bankrupt auto maker." I think this is emotional, but real.
Chapter 11 will take too long. I also think that Chapter 11 will take 2-3 years of NEGOTIATION before real work starts getting done. Yes, the companies still operate, but they will do so under "busness as usual" approaches. I want to get the radical restrucuring agreed to in the next 2-3 weeks!

Comments welcome. This is really important!

Big Three Rescue Part 2 -- Let's learn from Chrysler 1979

2008-11-21T10:07:00.000-08:00

I am hopeful that my proposal for government-guaranteed loans and credit lines for the Big Three, in exchange for the meaningful structural changes, will soon become reality.

Without knowing it, I was in some ways recounting what happened under President Jimmy Carter in 1979 with Chrysler. Check out this wonderful article from Time Magazine’s archives:

http://www.time.com/time/magazine/article/0,9171,947356-1,00.html

To summarize,

The government guaranteed loans to Chrysler totaling up to $1.5 billion
Chrysler had to secure another $1.43 billion in private financing at reduced rates from banks
Chrysler had to gain concessions from suppliers on cost and financing
Chrysler committed to $462.5 million in concessions from the company’s union employees, plus another $125 million from salaried workers.
Chrysler shed unattractive assets (wholly owned parts and components factories), cut the workforce.
The US government also extended the deadline by two years for Chrysler to meet C.A.F.E. requirements.

As referenced in the above article, the Holy Grail was the K car platform. Since I drive one, a 1986 Plymouth Reliant to be exact, I am obviously a big proponent. The K car was under development and would lead to over 10 million vehicles produced off of one platform. The first minivan was derived from the K platform.

The other point made in the article was the charismatic sales leadership of Lee Iacocca. But the substance of the turnaround was both operating changes, AND new great product. Iacocca had to fire thousands of managers and salaried staff. The UAW leadership begrudgingly agreed to concessions. While many suppliers initially balked at the concessions required by the company, they all eventually agreed. Finally, the U.S. banking system, 442 lending institutions, agreed to terms which led to Chrysler accessing the loan guaranteed by the U.S. government.

As I have argued, a radical restructuring must take place.

The other point which cannot be forgotten is that we must stimulate demand. Iacocca did it through pragmatic patriotism. I don’t know if patriotism will work this time around.

Also remember, Chrysler benefited from falling interest rates and a rebounding economy.

Oh, and yes, President Ronald Reagan imposed a “voluntary” restriction on Japanese imports. It may be wise for President-elect Obama to consider that as well for 2009.

I believe some intelligent form of "buy American" -- I have suggested Tax Credits but another idea is more than welcome -- is necessary. Comments welcome!

Everybody wants to know what I think about the Big 3!

2008-11-17T13:53:00.000-08:00

Well, because I spent 17 years in the auto industry, I am getting a great number of inquiries about "what should we do with the Big 3?"

What I share here are my own opinions. I do not suffer from naivete about how hard this will be. But I do wish for a sustainable resolution, and not just another short-term fix, which inevitably leads to more pain and hardship in the near future.

Here are my thoughts for beginning to truly address the Big 3 issues. I believe that there should be no "free lunch." I do not support a "no strings attached" plan for the Big 3. They need support and encouragement to make the changes they have discussed for decades.

If our government supports the domestic-owned industry with loans or grants, then in exchange, it must seek to create a viable business for employees, and a return for investors. The only way to guarantee employment is to create an ongoing and viable business model that can compete and win. To survive, and in the future prosper, the industry must reform.

Here are the types of radical changes needed in these dire times:

Topic One: Lower labor cost per unit, health care cost per unit, and pension cost per unit.

1. An immediate reduction of UAW payroll and benefits is required. I estimate a 20+% may be needed. In exchange, employment is guaranteed for one year at today's level, and the dollar value of the lost wages and benefits is placed in a government regulated health care and pension program. This same wage reduction would apply to all white collar employees, but their employment must continue to be rationalized further, with perhaps 25+% potential job losses. The white collar workers are more fungible than their blue collar counterparts. This is why employment is so critical. Re-allocating the UAW labor is not an easy thing to do.

2. I cannot do justice to the idea of creating a health and pension program for the auto industry in this blog. This process has been underway for some time. John Devine's genius work to secure a Trust for GM Pensions is one model. There is funding now, but it needs to be set up separately from the auto business. We must have a defined contribution program, and not a defined benefit program. Those days are over. Health care also needs to establish emergency support for major illness and accidents, and set a floor for support. But a new system must begin to insure some semblance of market forces. People need to make good decisions about whether to smoke, be overweight, etc. based upon the true costs to their lives. In the same way, the medical decisions they make must have some association to reality. Insurance can help for the unnatural, but elections must be market-based. I will have another entry to express the similarities between an entitlement mindset for credit (I want it now and will pay later) and the entitlement mindset for health care (I can do whatever I want and somebody else will pay).

Topic Two: Get Consumer Demand Up for Domestics

1. I can say without any embarrassment that GM, Ford and Chrysler automobiles are high quality automobiles. I am a brand marketing expert, and I know that the quality issues of the past still bias many consumers against the Big 3, and towards imports. There are also other reasons why some people like imports, but that is irrelevant to review here. Suffice it to say that if we can get people to "Try a Ford Lately?" then we will not disappoint them. Same is true for fantastic vehicles from GM and Chrysler. Up and down the line, they are really strong.

2. So what do we do? I believe that the U.S. government should provide consumers with a tax credit when they buy American cars. These are CREDITS. They would in effect be a check if no tax is due, and reduce taxes owed dollar for dollar. There should be a $1,500 minimum growing to a maximum of $5,000 (10% of net price paid).

Topic Three: Lower Fixed Costs, Research & Investment

1. Closure of excess capacity. I don't have access to the details, so I am making an informed estimate here, but General Motors has 5, Ford 2 and Chrysler 3 plants that have been frequently targeted for closure. They should be closed. It is ugly and painful, but necessary. As plants close, remaining plants must absorb as much union labor as possible. The goal will be for all plants to go to a 3 shift format. Investment from the government must go to increased plant flexibility to build 2 or more models in each factory, and move towards specific emissions and CAFE goals. There may be permanent layoffs of UAW workers after one year, but we can address that with other programs.

2. All capital expenditure for new model development should be deferred by two years to conserve cash. The only exception would be for alternative fuel power trains. Have all R&D focus on bio-fuel, electric, and fuel cell. I agree, if only to gain support for the plan, with Jennifer Granholm that we should further energy independence and national security with this rescue. I would not be opposed to having the U.S. military partner on development and deployment of new technologies.

Topic Three: Suppliers and Dealers must also contribute.

1. There may be some reductions for suppliers, but they have been squeezed a great deal in the past decade. Some of them may need to participate in the government-led wage/benefit concession for health and pension programs.

2. We learned at Chrysler in the early 2000s that dealers have options. Even still, this is very serious and I believe they will be willing to contribute if they can help save the Big 3. I believe they need to accept a lower margin on all aspects of their business (retail minus wholesale). In exchange, they could receive 180 days or more of interest free floor plan to hold full inventory in return. Again, this stimulates lending, which is good for the economy.

To summarize, the government support leads to creation of a single health and pension program. It guarantees employment and viability via management and labor wage and benefit reductions. It also incentivizes consumers with a stimulus program. There could also be a pro-lending element for financing autos, and supporting inventory and wholesale with dealers.

The alternative to government support is Chapter 11 (which is also a form of government supervision). In bankruptcy, the unions will lose. The question will be how much. They come before shareholders and after creditors. They will not easily be re-employed. They need to accept their role in all this, and take a cut for some certainty. They will say it is not there fault that Detroit cannot design cars people want. That is offensive in its absurdity. There is blame to go around. Time to put up and shut up.

There are no winners in my plan, save consumers, in the short-term. Shareholders will likely lose everything. All employees take a hit. Some factories will close. But the industry survives, and will eventually prosper. If done correctly, the pension and health care programs created can pave the way for solving our national health care and Social Security crises. In the long-term, the industry will move towards a cleaner and more prosperous future. And by long-term, I would target 2010.

Another Trend -- Nostaglia

2008-11-12T10:53:00.000-08:00

What do Glen Campbell, Seal and James Taylor have in common? They have all put out cover albums in the past month. Is it co-incidence? Maybe, but mark my words, as the economy continues to suffer, people are going to be going for nostalgia. We will see it in music, in movies and TV shows. We will see it in fashion. People will want to reflect and reminisce about the past as they struggle in the present.

My thoughts for Our President, Barack Obama

2008-11-10T11:58:00.000-08:00

While I have posted on what I think the country must do to succeed (see below..."8 points"), I would like to continue with a humble open letter to our President, who is facing a very difficult environment. But he is the leader who can indeed make the right things happen for all of us.

So what should President Obama do? Perhaps two recent articles provide a little guidance. The first was in Businessweek by Michael Porter:

http://www.businessweek.com/magazine/content/08_45/b4107038217112.htm

In it, he outlines what has made America successful. The second piece appeared in the Wall Street Journal. It is an editorial by Henry Olsen published yesterday called "What would Reagan do?" In it, the key theme was "focus on freedom."

httphttp://online.wsj.com/article/SB122637470965416637.html://

Both Porter and Olsen have as a foundational element this theme of freedom. Let's reflect and explore upon where our great nation must go to continue to be great. What makes us unique? Clearly freedom is a foundational element.

To summarise what I saw in Porter's article, he feels the keys to our past and future success are:

Free enterprise: I believe in the entrepreneur. My father was one, and I guess for the time being, I am one too. The spirit of owning property -- real and intellectual -- and being able to make the most of it for yourself, your family and society, is at the bedrock of the Federalist Papers, and our Constitution. Being able to see opportunities outside of government, to solve problems via commerce, has been the driving force of creativity and employment for the USA. How do we make it possible for more people to create jobs for themselves and for others? How do we truly empower the people most engaged in this election; many of whom feel disenfranchised?

Innovation: while this is closely linked to start-ups, it is not exclusively the domain of them. The government, mostly through the military, drives tremendous amounts of research & development. The airbag, anti-lock brakes, Google Maps, all came from our government. I am far from an advocate of bigger government (I believe George Bush and Congress have wasted trillions in the past eight years). My question is, "can we find ways to make available more of the R&D to the private sector, perhaps through the SBA, to get more people working on new business development in energy, technology, education and transportation?"

Higher Education: we have the most robust university and college system in the world. Students and professors desire to attend and teach here. But the "feeder system" is in duress. We must find a new model to fund and insure excellence for all students in public education. We must also find ways to share best practices from the private, Christian and Catholic schools. My experience with private schools is that the teachers are not "in it for the money." With a mother, aunt, brother all in the teaching profession, I see that a true love for teaching is at the heart of their professional choice. How can we use technology and collaboration to provide more resources and support across the entire national system?

Free markets for capital -- human, physical, financial and intellectual: We have demonstrated the ability to change faster than any other nation in history. We have restructured industries (agriculture, steel) and must do so again (autos, healthcare). We renew and restore as we innovate and grow. The key is efficient allocation of resources for optimal growth and prosperity. This means a focus upon productivity in all areas of commerce. Yes, change can be painful, but trying to avoid it just prolongs what will ultimately be much worse. Having the right programs in place to transition is key. Do we have any role models? Yes, we do. We should study how South Korea moved from ship building to autos in the 1980s.

Decentralized governance of the economy: Porter argues that our nation has succeeded because we have not tried a "one size fits all" approach from Washington. Born from our federalist origins, the states and regions of the US have consistently addressed the unique problems they face on local basis. I have seen what good policies provide for urban renewal in Philadelphia (preparing for 1976 bicentennial celebration) and in Cleveland. I have seen what poor policies do as well in Detroit. Everyone should be familiar with what is going on in Nashville and Tennessee. That city has very progressive, pro-business tax and policies in place and it is exploding with jobs and growth.

Acceptance of failure; learn and move on: No one likes to fail, but moving quickly beyond mistakes and getting it right the next time is a hallmark of American industry. I remember Alan Gilmour, Vice Chairman at Ford Motor Company, saying that a good strategy was being a fast follower. Ironically, some feel that this is not true to the American spirit, but that is far from the truth. Indeed, let people pioneer, but we must have those ready to pick up the pieces from any failures, and be the ones to learn and get it right the next time. Look at Apple. They did not invent the MP3 player. But they followed and got it right.

While I have laid out some suggestions above in response to Porter's plans. Let me be so bold as to suggest to our President-elect, what should we do now? My suggestions come from a profound belief in freedom of opportunity, but also a gentle hand to insure that equality is not reduced to "survival of the fittest."

Let's get ready for the inevitable fragmentation which will follow the present state of consolidation. I have seen in my lifetime a consistent pattern WITHIN industries of consolidation then fragmentation. Look at airlines (mergers then start-ups, then mergers). Look at retail (start-ups then acquisitions, then spin offs). How can positive growth policies help people take advantage of new opportunities? As people "hunker down," can we not encourage small businesses in local communities. By getting stores back into the neighborhoods -- urban, rural and suburban -- we can increase law & order, education, and job stability. Why would we not wish to link our agricultural policy with the creation of retail neighborhood groceries?

Trade agreements should not be tied to buying armaments. They should be tied to infrastructure investment. If they are loans, so be it, but if they are grants, then pay as the projects are accomplished. Many have lost faith in global trade, and this faith should be restored, but it will only be done by showing that our investments are yielding prosperity and stability abroad. We need strong markets for our exports, and viable trading partners for more than just commodities.

Universities should be asked to use their endowments to promote research and development. And these projects should be used to create new businesses via Venture Capital and SBA support.

Let's take Americorps, our National Service Corps, to another level. Remember, it was created by George H.W. Bush and strengthened under Bill Clinton. let's re-invigorate our Peace Corps with a specific commitment to a four year college education at the end of 2 years' service. Let's get a commitment from the best endowed universities to jointly fund this program, as sponsors of both the Peace Corps and Americorps. We have the national health services corps already. What is our plan to get people involved in fixing healthcare? I would suggest young people should be part of the solution.

Let's get Social Security right! Let's make the tough call and move towards a Defined Contribution Plan rather than a Defined Benefit Plan for all pensions -- public and private. Let's set minimums and maximums. Let's put the funds into inflation-adjusted government bonds (TIPS). Social Security should be an incentivized savings plan for both unemployment and retirement. We should seriously look at revising our unemployment p0licies as we take on Social Security.

Let's get serious about protecting intellectual property. The key for the 21st century is in authentication, validation and commercialization of software/hardware relationships. This is where some of the billions in university endowments should go. I believe both private and government R&D is making progress, but standardization in this technology could unleash billions of dollars of profit and investment if we can get a secure and stable platform.

Separate public education funding from property taxes. It is a guarantee that poor areas do poorly. I also think a new alliance between private and public schools should be fostered to align excellent curriculum and professional development for teachers.

Those are my initial thoughts. More to come. The underlying support for these are freedom: freedom of speech, of thought, of property ownership, of assembly, and yes, of opportunity.

Why I love the Lex Column

2008-11-07T11:33:00.000-08:00

For the past 20 years, I have told anyone who will indulge me, that if they could only read one thing each day, that one thing should be the Lex Column in the Financial Times of London.

Why do I love the Lex?

It uses case studies to teach

It is not afraid to use an advanced technical and financial lexicon.

It makes me feel smart

It has a sense of humor

Let's look at each in turn. First it goes without saying that case studies, when done well, are very effective tools of instruction. Granted, Lex keeps the words to a minimum, but everything that is written is tied to a company, industry or goverment. The Lex column rarely invokes theory without a specific example. While it is true that the majority of comments are negative, I would argue that Lex uses the concept of criticism in its true Latin intent; "kritikos" means "able to make judgments." Yes, the English use tends to have an overtone of "faultfinder," but Lex always discusses what SHOULD be done. It is able to make a judgement and provide guidance.

Second, for those of you who studied business, and certainly all you MBAs and Finance types, the Lex is not afraid to apply the concepts of EBITDA, Discounted Cash Flows, Current, Quick and Debt/Equity Ratios, and Interest Coverage, in nearly every column. But they frequently take a step back to remind readers as to the definitions of these concepts. They explain how they calculate them, and how they should be used. They also regularly review common financial and business measurements and discuss their relevance (Basil II comes to mind). Last, but not least, they also discuss less robust rules of thumb for evaluation.

Third, and yes, this may be repeating the fact that the majority of the Lex is "taking the piss out of someone" (to coin an English expression), but when I read about how poorly others are doing, it makes me feel smart. I think, "no matter how tough I have it, or how difficult things are for me, it certainly seems much worse for that company's management team." I also feel like I am exercising my brain by thinking deeply about issues around the globe. The Lex will have both micro and macro-economic issues discussed daily. And when I don't know what they are talking about, I tend to dig deeper to learn more about an issue.

Fourth, Lex is funny. It is a classic educated English humor, but for me, it works. They start many of their articles with a turn of phrase. They frequently cite literature and history to establish a context and reference, and most of the time, it is not flattering. Granted, it is not a belly laugh funny, but at a minimum, Lex makes me smirk if not smile.

Hope I've convinced you!

Evidence that Social Publishing is Next

2008-11-07T11:25:00.000-08:00

Check out a very enlightening article on Financial Times online:

http://http://www.ft.com/cms/s/0/ee324904-a940-11dd-a19a-000077b07658.html?nclick_check=1

The quick summary is that young people -- 11 to 29 -- are using technology, both at work and at school, in very unique ways versus their older brothers and sisters, let alone parents.

Employers are finding, according to an Accenture Survey, that younger workers are not using email systems. They are relying upon social networks, instant messaging and blogs.

What is next? Check out my entries below on Social Publishing. I predict that universities and businesses will increasingly use WIKI platforms for communication and collaboration. Here we go!

What the 2008 Election Means to Me

2008-11-04T10:42:00.000-08:00

I remember seeing Barack Obama speak at the 2004 Democratic National Convention. I was impressed. I also recall seeing him again in 2006, and can proudly say that on my birthday, professed a belief that he would be a bona fide candidate for the U.S. Presidency. My brother did not agree with me, and I respect his opinion as a teacher of civics, political science and history. As it turns out, I was right.

For the past eight years, I have been very disappointed in George W. Bush. I thought he would be a consensus builder, maybe even a healer, after the eight years of bickering during the Clinton Administration. I must admit that I was very bothered by the scandals (Monica, Jennifer, etc.) because I believe in the honor of the Presidency and that beyond what any single administration can do, it must represent the ideals of our society. I was also bothered, however, by the viciousness of the politics during Clinton's two terms. I have to believe in hindsight that this was caused by the zealots of the Reagan Revolution. When people feel vindicated and triumphant, as the Reagan generation did, then they act like conquerors, not leaders. When Clinton beat a weary George H.W. Bush, I think these same extreme elements decided they would fight rather than try to govern. For them, the revolution had not completed all of its objectives. Unfortunately for all of us, they did not understand that the nation did not want them to complete them all.

Back to G.W.B, I did support the declaration of war against Afghanistan, and I did not support the declaration of war against Iraq. It is not because I supported Hussein. It was because it had nothing to do with the War on Terror. The next logical move would have been Pakistan. I should mention that one of my two Masters degrees is in foreign affairs, and that I am a student of Robert Tucker's. Hence, I view national security and international affairs in a very realpolitik and tort fashion. I would also like to state that I did not support Dubya's economic policies. I believe that we have been grossly lax on our monetary policy. Too much cash seeks increasingly risky returns. Well, clearly I was right.

I recall seeing Senator Paul Tsongas, while he was speaking at Kenyon College in 1982. He said that politics was like a sail boat with a huge ballast. If it goes too far to one side, then it begins to right itself in the opposite direction. He argued that it tended to over shoot at times, but that was also healthy as the nation explored issues and policies and practices to remain a healthy democracy. I share this because after eight years of George Bush, excessive government spending, tax cuts and two wars, we should expect for the ship to tilt the other way.

So what do I hope for this Presidential election? I believe Barack Obama will be our 44th President, and I hope that he leads this country in a new direction. What I hope he avoids is overseeing a conquerors march into Washington. I hope he avoids the Democrat's turn to be like the Reaganites. What I hope he does do is help the nation restore civility and a common sense of destiny. When I read his two books, I saw a man that seriously considers the perspective of others and then carefully finds a creative and lasting solution. This is what we need in Washington and the world. We need to address education, employment, energy in a holistic way. We need to promote family and faith, without losing our inclusive and diverse heritage. We need to be proud of our technology and industry without seeing them as zero sum games where the spoils must be divided before they are earned.

This is what the election means to me. The chance to have a leader and government which thinks deeply and not dogmatically about our nation and will in turn, lead us to success in addressing opportunities and challenges alike.