Syzygeist

The Zone of Expectation

At the encouragement of a key client with whom I have been actively working for the last two years, I am starting the New Year with a fresh blog. Count me among those who fear there are too many blogs out there. We are information over-rich and over-run, and short on time. Could we please have one simple insight once in a while that actually helps?

Don't count on one here. But I am emboldened by a recent exercise undertaken just before Christmas with a crowd of Morgan Stanley-Asia executives who are variously still with the institution, or not, since they last worked together there in 2004. A scenario look into the near-term future produced what for me was - is - a real insight.

The topic that drew us together - and an interesting framework of uncertainty that we employed - was the dynamic between China and the US. These have been the two fierce pedalers (not to be confused with peddlers) of the global macroeconomic bicycle. 

That the bicycle nearly fell over in 07-08 was a function of the faltering dynamic - the US economy, fueled by consumer credit, buys low-cost-labor Chinese manufactured goods, and the Chinese accept dollar-denominated assets in return. And the global financial world turns.

With the value of financial assets suddenly plunging, and the dollar weaker, and credit shut off to US small businesses (the growth engine of the US economy), everything had to pause, and the bicycle began to tremble. That it did not fall over (yet, some would say) was credit to government liquefaction - governments print money and pump it into the economy fast.

Morgan Stanley Asia Chairman Steve Roach was on Bloomberg television moments ago to warn that the worst may be far from over - that the governments that pumped money in should begin to suck it out - now - to avert another dreaded bubble, and the bursting that necessarily follows. (Roach had been invited to our convocation at the Asia Society, but he had been unable to attend. Still he sent stern warnings about an over-stimulated Chinese economy and troubles to come.)

The insight that came to me during the session was an echo of history. In a Japan 1997 Morgan Stanley scenario exercise, a roomful of similar Japanese and Asia market experts proclaimed two key uncertainties: whether the Japanese economy would recover or decline, and whether Japan's governmental institutions would instigate meaningful reforms (or remain mired in bad practices.)

The scenario technique produced its own "zone of expectation" from the collective insight. This zone suggested that, as one participant put it, "there is no plausible upside for 3-5 years." Based on that view, Morgan Stanley ducked a proposed acquisition of Yamaichi Securities (the one that cost Merrill Lynch $1.2 billion in losses) and stayed highly profitable in the next three years in largely merchant banking activities. It paid off richly not only to see how things might not get much better but to commit to that view and behave accordingly, which Morgan Stanley Japan did under the leadership of Thierry Porte at the time.

At the Asia Society, the group discovered a similar "zone of expectation" for the global economy. Given the issues facing China and the US, the zone that emerged was implicitly negative, suggesting that for the next 1-3 years both economies might struggle and their relations might be corrosive if not combative.

Ignore this zone at your own risk.

This is just one scenario, of course. But I found myself thinking that I (and others) should take seriously the collective intelligence and intuition gathered in the room - representing about 1.5 centuries of recent financial market/Asia experience. Consider that the group might have seen clearly, if through a glass darkly, that the negatives for now outweigh the positives.

So what? Be cautious about the "Asia rescue" story that is being told, and "recovery is here" proclamations. The scenario treatment can bring to bear enormous collective insight in ways that top-down organizations, individual "experts" and off-the-shelf consulting approaches do not. So my opening salvo in 2010 is - "recovery buyer" beware.

Let's call Cox a coward as well as incompetent

I am late reacting so I will keep it brief. Given the magnitude and duration of the Madoff fraud, the SEC has to be culpable of gross misfeasance. They had plenty of reason to investigate and they didn't. If this were China, Christopher Cox would be executed or sent to a very unpleasant faraway jail for a very long time. If this were Japan, he would have resigned and, if a man of honor, might have eviscerated himself to set things right. But this is the United States at the end of a long bull run, so Cox just goes on television to announce that he is "terribly disappointed." Hey thanks, Chris, that should be fine.

See NY Times on Cox/Madoff

A Case for Vision, Fearlessly

I have been working for months with a top level executive who has been redefining his strategic challenge in the context of the last 10 years on Wall Street - what he feels he has and has not achieved. He wanted to reset the bar for himself and the organization he heads, personally, professionally and globally. And he has set out to do so in a visionary way.
Now he must convince the organization above and below him that this is the way to go - at least for the next four years.
 Along comes the most extreme crisis in financial markets in his lifetime - a perfect storm of collapsing asset values, weakened balance sheet and challenged business models. How should he handle this confluence - of ambition for the organization, and himself - with conditions that incite fear amid uncertainty, as well as greed amid perceived scarcity? If the pie is to shrink - as it surely must in the near term - how is he to get other leaders in the organization to step up and work together more productively and collaboratively than they ever have? If REAL change - a transformation and restructuring partly demanded by adverse markets - must be their response, how can they define and deliver this optimally?
Presumably this challenge faces many leaders in many organizations in 2008, not just on Wall Street. Let's assume we know we must restructure in the face of collapsing budgets. How to do that in a way that does not sell out the future for the present, nor backslide to old or timeworn practices that must be replaced by new ways of operating?
This requires clear intention, conviction about the path forward, and commitment to follow it.
We have evidence that short-term thinking amid profitable times has too often failed to build foundation for the future. What about short-term thinking in UNprofitable times? Won't that produce even worse results for the medium to longer term? The danger is that companies will fight to survive to see tomorrow, only to discover on the day after they have either eaten their seed corn or failed to plant for the next harvest, whether in human resources or technical capability or investing in markets for the more distant future.
These challenges can be addressed by conducting the right strategic conversations at the right levels of the organization - top down, bottom up and side to side. Executives and managers must:

• Clarify strategic intention (often scenarios help here, provided a vision has been set);

• Define the sacred (profitability is only one index);

• Understand the commitment (experience and talent are just two dimensions of required organizational capability); and,

• Act to be, where leadership by example is a sine qua non.

I find myself working hard with my client to identify and address the many dimensions of the challenge, some transparent and some opaque. In the perfect storm you must determine what is the next right thing to do, and then you must do it right. Much of this is in the content of your plan and how you communicate it. You must make sure your vessel is ready to go the distance, and your crew with it. This means you have thought about the risks, the range of uncertainty, and the actions that ensure the present AND the future. Failing to acknowledge the darkest possible scenario now - a real depression? - would be foolish. But in such times of stress strategic advantage is to be gained by thinking fearlessly about the future and bringing along the people in your organization needed to help create it.

The New Era of Imagination

I stood in the voting line in Harlem at 118th Street and Malcolm X Boulevard on Tuesday morning and watched a small boy react to his mother's disappearance into the polling booth. She had just asked the poll-watcher's help because, she explained, "I've never voted before." The boy looked apprehensive as the curtain closed behind her and I encouraged him to follow her in.
"You'll be glad you did," I said. "This is history being made today. You'll never forget this."
He looked at me with the expression a child often has when he doesn't know what to make of a stranger. Beside me an older woman looked across at the boy, who might have been six years old, and added, "Not only that - this means maybe someday you can be President."
Around me the sound of murmurs rose in assent. It occurred to me that I had not been so surrounded by African Americans since attending a church service in Arizona a few years ago, and this felt a bit like that church to me, with an unspoken prayer in the air. The convocation of voters in Harlem was unprecedented, as several had told me. They had never seen such lines of voters here, ever.
So now we know how it came out: the "unthinkable" for some, but much dreamed of and hoped for by many others, punctuated at the end by President-elect Obama's reiteration of his battle cry, and a reminder and encouragement to any who would listen and respond:
"Yes, you can."
As he repeated it at the end of his post-balloting speech on Tuesday night, I felt chills to think what it might mean if taken up in all its implications around the world.
"Yes, you can."
As a young college graduate I worked with delinquent and disadvantaged youth in Massachusetts and once heard a social worker say "a young person cannot aspire to a future they can't imagine." I believed it then and now. Obama's imprecation made me think about all the aspiration that might be liberated in the world by his election. What if every young person - whether of color or not - who grew up under a sense of oppression by caste or class or race, could now imagine...  "Yes, I can."
What might they aspire to do?
Well, the answer must be: whatever the question suggests to you and however it touches your desire and will. The new US president has appeared as living proof that he could, a man of 47 whose father was Kenyan and mother American, and who as a youth was fatherless, and footloose, but was aided by the love of good people, and propelled by the earnest application of his mind and heart and the purposeful determination to succeed.
What if we could multiply all those young people, everywhere, by newly imagined possibility and the levels of aspiration it will conjure up? What might then be possible? And what more might be possible if the US reclaimed its moral leadership in a world desperate to make the most of every individual's talents and efforts.
I keep thinking about this, with a sense of hope, and I asked the question over lunch to a fellow banker, who also sees America's place in the world, and the world itself, shifted momentously by this election.
"What might be possible?" He smiled at the question.
"More than twice what you're thinking," he said. "Whatever it is."

Vote Obama

It occurs to me that it may be hard for me to reach anyone "undecided" in this campaign - at least among my friends, voluntary readers and business associates. This brief blog, however, is intended for them, wherever and however this may find them.
I do not personally find it a close call between Obama and McCain, for a host of reasons. And as a child (politically) of the 60s I am reminded of my feelings about JFK, and his leadership style. One candidate for me is, as JFK was, the candidate of hope, aspiration - spirit, if you will, that encourages me to believe that better, not worse, will be around the corner if we choose him. And certainly America in my lifetime has not previously had greater need for the best leadership it can get from its political process.
I will borrow a few phrases and ideas from the Economist (Nov. 1-7), which reached the same conclusion, apparently for some of the same reasons.
We follow from an administration "whose war on terror has left America less feared by its enemies and less admired by its friends." And the state of America's reputation in the world now means the new leader's challenges are  "not just a matter of handling the rise of India and China, drawing them into global efforts, such as curbs on climate change; it means reselling economic and political freedom to a world that too quickly associates American capitalism with Lehman Brothers and American justice with Guantanamo Bay."
I belief Obama has demonstrated a greater capacity for doing that than McCain, by a wide margin. I also believe, after living in the United States on both coasts, working as a journalist and in business from the Central San Joaquin Valley to Wall Street, and abroad, and after months of campaign-watching, that this is election is, as a business colleague of mine (and a native of the Middle East) observed, "America's referendum on racism."
I don't believe that if Obama were white we would hear some of the arguments raised - "elite?" "aloof?" inexperienced?" - about a man who was head of the Harvard Law Review and early on committed himself to social and economic change, eventually waging such an astonishingly effective campaign that has, as the Economist notes, "out-thought, out organized and out fought the two mightiest machines in American politics - the Clintons and the conservative right."
So for me the choice is clear, on many counts. I have reason - and every hope - to believe that Obama may win on Tuesday. But I would not want to think I had failed to raise my voice in his favor in the waning hours, if only to reach one or two people who might be persuaded that this is the right thing to do in 2008 - for America and the rest of the world.

Unofficial Poll

Okay, you decide whether the following story is an indicator of the outcome of the 2008 Presidential race:

In Providence Rhode Island on Monday I asked a room of 60 CEOs - many of them in the media and telecom business - whether they believed the outcome of this presidential election would matter. We had been talking about the nature of global and macro uncertainty. These days provoke a lot of worry about how bad things might get. So how should good corporate leaders react? After all, the Dow had been down almost 580 points before recovering a couple of hundred points higher. And this on top of an 877-point decline last week.

Show of hands? Yes. The outcome of this election matters. Unanimous.

Then I asked for another show of hands - without suggesting support for one candidate or another. 

How many in the room thought McCain/Palin would win? 

Not a single hand raised. This caused a ripple of bemused or perhaps nervous laughter.

Then someone called out, "How many are going to vote for McCain?" and the questioner himself raised his hand, looking around for support.  About a fifth of those in the room raised their hands, several of them tentatively.

Is this an official poll? No. A focus group? Well, perhaps, if you wanted to focus on CEO opinion in the media. (Do we think such a distinguished crowd would tip toward Democrats? I would think - hmm, not necessarily at that level of the enterprise.)

I realized that I was not prepared for the outcome of my impromptu poll. This unanimous result fell into the category of "the unthinkable," which had been one of the discussion topics. With so many unthinkable things happening in the world (Freddie and Fannie taken over, Bear Stearns gone, Lehman gone, WaMu gone, Merrill absorbed, AIG saved), what others might business leaders need to take into account in their planning?

Their answers included terrorism on US soil, capital shortages, and internal strife in the US economy akin to that of the 1930s, when people pulled up stakes en masse and left California, to cite one example.

But closer at hand?

A landslide victory for Obama. That's what the "poll" said.

Rome is Burning

With conflagration in markets, global credit frozen, open dysfunction in Congress, unemployment rising and fear driving most asset prices lower, I am moved to speak up (after a long silence) by the fact that Congress now wants – as part of the bill they haven’t passed - to increase FDIC insurance coverage from $100,000 to $250,000 for retail depositors, an apparent attempt to allay panic and curry favor. (My 28-year-old daughter, a WaMu customer who doubts her deposits are really safe despite the takeover by JP Morgan, said last night she intends to withdraw her funds today and open a new account at JP Chase. This may be a bullish sign for Chase in the long run, but it’s also a small piece of a larger bank run. Expect more to come.)
Congress’ move to increase insurance is understandable, reflecting their desire to “Do something now!” to make the general public feel better about the credit crisis and its potential (impending?) impact on their bank accounts.  If people wonder, “Hey, what have they done for me lately?” this might give some comfort.
But does it reflect an appropriate grip on reality and a sense of priorities? The FDIC at the end of the second quarter increased the number of problem banks on its watch list from 90 to 117. Others have predicted that over the next few years as many as 400 banks with assets of over $300 billion will fail. Against these potential losses the FDIC has only $45.2 billion in its insurance fund now against total insured deposits of $4.5 trillion.*
Making an adjustment in FDIC insurance to reflect inflation since 1980 seems to ignore the underfunding problem by multiplying it by 2.5. Is this comforting?
Everyone seems to be grappling with different pieces of the problem. Yesterday we drove to West Virginia for a meeting hosted by the Arlington Institute in which Dr. David Martin, chairman of M-CAM and a fellow at the University of Virginia, held forth in a 2-hour disquisition on the state of the markets and the near term future.  Life ain’t gonna be like it used to be, according to Dr. Martin, who foresees:

-A 30 percent decline in the value of the dollar by December.

-Moves by China to stop purchasing US debt and shift its support toward the Euro. Martin also sees China as the only economy in history that can – and he believes will -  turn inward to build its economy because it has attracted the capital and technology to do it.

In Dr. Martin’s view of the world, the US brand of consumer and finance capitalism is finished. We went too far believing in currency and consumerism and now have sold ourselves out into insurmountable debt, and transferred key technology to China that has effectively hollowed out our competitive capacities. Increasing the insurance the government says it will pay for lost deposits does not alter the underlying reality – a deficit-driven government struggling to pump liquidity into failing markets and boost confidence when the US economy itself has lost its competitive edge, and its official paper is under threat.
Are bank deposits safe – and is an insurance increase the answer? I listened this week to a former Wall Street insider rejoice in having sold his entire Morgan Stanley stock portfolio before the share price dropped below $42 (it’s was trading at $23 on September 30th), and explain why a mix of 80 percent Treasuries and the balance in JP Morgan and Bank of America stock makes sense to him as a defensive portfolio with real upside. This reflects an underlying belief  - common in the US - that our currency will continue to dominate, the world will always be willing to buy our debt, and we will always have a few banks that really are too big to fail.
This former Wall Street executive would not have been encouraged by Dr. Martin’s arguments. Martin says US Treasuries are in deep trouble – not a safe haven as widely believed – in part because China faces a stark choice – either to build its internal economy as fast as possible now to meet the needs of 170 to 230 million perpetually single males coming of age, or to continue to buy more US Treasuries to help the US economy recover (and keep our consumer society liquefied).
Martin believes the Chinese will take care of their own and leave the US economy in the lurch, which would mean, among other things, many more bank failures.
Is the answer to increase deposit insurance? Or is there a bigger picture to consider? Martin believes that Chinese moving “off the dollar” will mean trouble for Singapore, Malaysia and heighten tensions in a region rife with Muslims who have no affection for the US. To hear him telling it, increasing deposit insurance for the FDIC at a time like this amounts to fiddling while Rome burns. 

-Eric Best

_{*See Roger Cass’s most current report No More BRICS in the Wall- When the Gods of the Market Tumbled at http://bestpartners.cc/pdfs/partners/roger_cass/3Q2008.pdf}

In Memoriam - Gerard Fairtlough

With great personal sadness, I pass on the news that author, thinker, scientist and enlightened executive Gerard Fairtlough died unexpectedly on Saturday in London, of an apparent heart attack while he was out walking. 

Originally trained as a biochemist, he was CEO of Shell Chemicals (where he first met Napier Collyns and Peter Schwartz, later founders of Global Business Network. GBN would call on Gerard as one of their "remarkable people" to help others think about the future, and their own roles in it.   

As GBN describes in its internal communication today: "Gerard left Shell to help the UK government invigorate the business environment for science and technology and then went on to practice what he preached by founding and leading Celltech, one of the UK's first major biotech companies.  That experience gave Gerard the opportunity to innovate in organizational design, management, and learning, as described in his first book,  Creative Compartments. In recent years he has continued to explore organizational and societal developments (e.g., his most recent book, The Three Ways fo Getting Things Done). He also started his own venture capital fund and, more recently, a publishing company, Triarchy Press, specializing in books on how organizations work - and can work better for all concerned - while making the world better in the process."

Gerard was for me, as he was for many, a mentor and friend and someone who improved my thinking and my view of life just by listening as he did, and asking the thoughtfully penetrating questions that seemed to come so naturally to him. I found his books to be uniquely helpful, and commend them to others out of respect for their content, and the man who gave them life. Many of us shall miss Gerard deeply, a measure of the mark he made while he was here.

Signal Amid the Noise

As the Attorney General confirmation process continues, Democrats in Congress pushed the nominee to say whether he believes "waterboarding," a relatively old torture dating back to the Spanish Inquisition, is illegal under the Constitution. Described as a "very exquisite torture" by Senator John McCain, who was himself tortured as a POW in Vietnam, it has been used by the US government on suspected Al Qaeda members, (and the Japanese were prosecuted after WWII for using it against Americans). The nominee, federal judge Michael Mukasey, professed not to know what waterboarding is and was quoted saying, "I don't know what's involved in the technique," adding, "If waterboarding is torture, torture is not constitutional."
Anyone conversant with the controversy - should agents of the US be allowed to torture suspects? - should know by now that waterboarding is simulated drowning, quite well represented in one of the recent Bourne movie dramas, as well as in the history of intelligence techniques. A White House spokesman suggested Judge Mukasey would not know what the technique was until he could read classified documents, which would not be possible until he was confirmed.
Is anyone hearing a signal in the noise here, about the kind of government the US is developing? The nominee does not know what we are talking about? Perhaps he would need to experience it himself to understand it well enough to form an opinion. His evasive response is a disturbing signal about the nature of transparency we might expect under his authority were he to be confirmed. 

Rule of Law

I did not arouse the national protest I imagined when I called for a citizen demonstration at noon on Columbus Day. This did not surprise me, for two reasons. Blogs are far less read and effective than bloggers like to believe, and I was asking for something rather large - for people who abhor torture and believe in the democratic rule of law to go outside and bang on a pot with a spoon or otherwise make noise to signal a call for the resignation of the Bush Administration.

Why? Because of disclosure that the administration and its Attorney General believed they had authority outside the law to torture terrorists as they see fit, contrary to law, the Geneva convention and Congressional rule.

Now Yale University Professor Jed Rubenfeld has eloquently pointed out why Judge Michael Mukasey, newly nominated by President Bush to be the next AG, and who just testified in Congress, should not be confirmed. Judge Mukasey testified that he believes the President can act outside of federal law "to defend the country."

Profesor Rubenfeld says Mukasey should either retract this statement or be denied the position by Congress.

I agree, and so would now like to invite those who believe, as Prof. Rubenfeld does, that the rule of law applying to everyone, including the President, lies at the very heart of the Constitution. The president has no supreme authority to do anything outside the law. For those of us who witnessed the decine and fall of President Richard Nixon, for abuse of executive privilege and flagrant disregard of federal law, this is an obvious point, and one the Congress must assert and defend.

Never mind the pot and pan this time. Just make your convictions felt. Is that so much to ask of a fellow citizen? Your Congressperson is just an email away.