Five "Funny" Things on the Way to the Market
In the last 10+ days we experienced four major changes in the way the world works that haven't
gotten the attention they deserve. Though all of them made the front page of the WSJ with long, in-depth and excellent articles. And several other places as well. So let me try and point them out as a prelude to follow-on detailed discussions but first ask a key question - how do you boil a frog ? Surely everybody's heard that joke by now but the sad part is my first time was over two decades ago by a speaker talking about changes in the world and business. Guess what - they all happened by and large, nobody payed any attention and everybody was "surprised" when the tipping points were crossed. Just as they've been surprised by the economic data and market disruptions of the last few months. We'll probably get the same reaction from our review and discussion of those four things but once more into the breech, dear readers. Our friend at Non-Sequiter pretty well captures it though.
Just in case you missed it here are the four things and an appropriate headline (we'll put up more
detailed excerpts in our readfests so don't take notes). And it's not as funny, so may not hit home as hard and be dismissed as too intellectual but the chart at right is a repeat from an earlier post on business strategy. And it deserves another looksee because it provides a pretty good blueprint and checklist of the big picture you ought to be a little aware of. Especially with all these deep structural changes. Remember those frogs !
1. Market Collapse - over St. Paddy's weekend the Fed avoided a major collapse of the credit markets which would have taken out the underpinnings on all markets and perhaps the economy as a whole.
- Has the Fed redeemed itself? The central bank's cunning after-hours plan to sell Bear Stearns to JPMorgan may have prevented the collapse of the financial system and total economic ruin.
2. Structural Changes - the Fed's actions were unprecedented since the Great Depression because for the first time they extended lending to non-bank and non-regulated financial institutions, the "shadow-banking system", that now occupies the role that only commercial banks had before in creating credit and allocating capital.
- Ten Days That Changed Capitalism The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse
3. Regulatory Changes - these financial institutions have proven beyond doubt that they require adult supervision and as a result a four decade+ national debate over the extent of regulation will complete a course reversal begun by the tech bust and Enron, et.al. Even a Republican administration as well as the key policy-makers at the Fed envision closer supervision and regulation.
- Paulson Calls for Broad Look at Financial Regulations The crash of Wall Street's once mighty Bear Stearns underscores the need to bring investment houses under the kind of federal oversight that has long been given to commercial banks, Treasury Secretary Henry Paulson said Wednesday.
4. Long-term Investment Performance - with the downturns we've basically experienced a
"lost decade" of low to non-existent stock/investment returns where too much money was chasing too few good opportunities and then leveraged up to the point of insanity. Underneath that rather deep structural fact/change is the even deeper one that the US economy has matured and no longer offers major new engines to drive returns, economic growth or jobs.
- Stocks Tarnished By 'Lost Decade' -- U.S. Shares in Longest Funk Since 1970s. The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm...
5. Finance Industry - the Finance industry as whole has had at least the last two decades of product and business model innovation proven to be unworkable and unproductive. As a result it will be facing a huge re-thinking in its' business models, strategies, products and operations. Especially in its' compensations, controls and management systems.
- End of Wall Street as we know it Financial firms have relied on a highly flawed business model for years. The time has come to fix it. The standards that rule most businesses - avoiding excessive leverage, reining in rampant pay and the massive dilution that goes with it - didn't apply to Wall Street.
Comments
Boiling the frog as an apt metaphor. Yet, there are a reasonable number of people, yourself included, who saw developments and reasoned probable outcomes.
I'm intrigued by why these people were essentially viewed as Cassandras. To what extent did rising wealth, especially in the finance community, cloud judgment and hide the fact that sustainable value was not being created?
There was and is, in my view, an essential clash of fundamental social and economic trends (e.g., performance of education compared to economic growth) that needs to be dealt with. How can a country tout its opportunities when one-third of its high school students do not graduate?
Perhaps there is a case to be made that the market does not always work to resolve the fundamental issues of a society. If the market cannot be trusted, then can the government be trusted to serve in its stead? Not without a great deal of reformation I would say.
Perhaps the socio-economic system has simply become too complex to be managed and dramatic shifts to simpler systems are necessary.
At the heart of all this lies the person, not only in the form of leaders, but also in the form of followers. Perhaps we are not producing the quality (an ambiguous adjective) people essential for required transformation.
Posted by: James Drogan | March 29, 2008 06:39 AM
Marvelous comment. Thanks - helpful, insightful and constructive.
Taking all your points as given I'm not sure that it's so much a matter of complexity exceeding grasp as knowledge, skills and political will needing to step up to the challenge.
These are hard problems and, unfortunately, we learn by doing, pay painful prices and get better as we go along. Of course surviving the experience takes some doing on occasion. Consider the 20thC the largest open-air socio-economic experiment in history as we tested all the "ologies" for workability, performance and alignment with human nature. The price was hundreds of millions and much wasted treasure which is opportunity to do something good in disguise.
Now we're facing the challenge to figure out how to make a market-oriented capitalism work better. This latest round of regulatory reform is, IMHO, a major step forward.
Posted by: dblwyo | March 29, 2008 08:28 AM