Syzygeist

Row Row Row Your Boat, Gently...

With uncertainty and complexity abounding, too much information flooding over most of us and the Global Happiness Index (GHI) challenged by much in modern life, it's worth noting that the best advice is often wrapped in a children's story or rhyme, which only endures to be repeated through generations and across cultures because it is quintessentially true. 

Few can beat the little song we used to sing in rounds while on summer holiday before anyone held a hand-held anything to amuse them during those seemingly endless hours in the car. (And kids singing verses together don't squabble.) 

This one has its origins in English nursery rhyme and American minstrel songs and supposedly first appeared in print in the U.S. in 1852.

Row row row 

your boat

gently

down the stream

merrily merrily merrily merrily

life is

but a dream. 

Why should this have become such a repeated mantra for children? Full of advice for getting through life, it has inspired many to reflect on its deeper meanings. As a sailor who has often rowed back and forth between shore and a sailboat, I have had plenty of time to think about it - and enthusiastically sung it many times with my own children when they were small.

Row row row 

Rowing requires both hands, applied equally for the most part (and use your back and legs if you want to bring real strength to the action) and a sense of direction. 

Balance! Don't pull too hard to one side unless you want to turn or you will soon be off course. Steady and rhythmical is almost always better than too much effort expended in bursts. Repetition and self control matter. Practice makes perfect.

Your boat 

Not someone else's. You're in it so you need to take care of it. It's the only one you've got. And it is uniquely yours - in what it's made of and contains and where it's going (or could go).You are on your own in most respects. So care for your boat like no other.

Gently 

Of all the adverbs in the language to appear here, why this one? Think about the way you conduct yourself. How does it feel, and feel to others? Considerate, tender, gradual, refined, of good family - and the word hints etymologically "of the same clan." So row with a sense of belonging among others - congenially.

Down the stream 

Yes, go with the flow, not fighting the current (although this may be necessary sometimes) but using the nature and direction of the stream to help you along. A stream is always moving and never exactly the same in any other place or at any other time.  So keep paying attention to the stream wherever you find yourself in it.

Merrily merrily merrily merrily 

"In a joyous manner" is one definition offered, but also consider that this adverb (any word that describes action) is repeated four times. No other word is given as much space or attention. So attitude matters a lot! And this attitude should live in the world of delight, pleasure, humor and joy.

Life  

Ah, life itself - everything around you that you see, feel, touch, smell, know, imagine, desire, fear, revile or revere...  

is but a dream. 

Images, ideas and emotions that seem to come upon us or that we may conceive spontaneously are all in us. This complex of perceptions are "real" but also "imagined" in the sense that they are the unique images we take from - or bring to - the world. That world is in us too. (Some might say it had its origins in us from birth, or even before that!) 

Is life not as we imagine it to be?

Row row row your boat, gently, down the stream… 

Merrily merrily merrily merrily - life is but a dream... 

Amen.

In Dead Bin Laden's Wake

I do not rejoice in anyone's death but I am glad Bin Laden has met his maker and grateful to those servicemen and women who put themselves in harm's way to carry out our country's military plans. In the case of Al Qaida, a non-state terrorist organization willing to target mostly civilians, a war played outside the rules has provoked responses that have been outside the rules as well. 

Victory may be sweet, but we need to be vigilant that provocation does not cause us to abandon the American principles of law and individual rights that we hold dear. That said, I find my mind filled with questions:

If we went into Afghanistan to pursue Osama and deal Al Qaida a death-blow, is our reason for being there now satisfied (having satisfied it in Pakistan)? That debate has been going on for nearly the last decade, and the NY Times reports that it has surfaced again at the highest levels.

How could the Pakistani authorities not have known of Bin Laden's compound, and its inhabitants? (This question was raised Monday on National Public Radio's Fresh Air interview with Lawrence Wright, author of Pulitzer Prize-winning book, The Looming Tower: Al-Qaeda and the Road of 9/11)  Pakistan has some explaining to do, as do US officials who manage the relationship and provide military and financial aid.

Is it true of a networked terrorist organization that if we cut off the head, the body will die? History has its share of revolutionary and proto-revolutionary movements that have been effectively crushed by government force. Surveillance, intimidation, imprisonment and the execution of key leaders tend to be effective, but these have tended to be within national boundaries. Both the former Soviet Union and China provide illustrations here, but they are not alone. (Former FBI Director J. Edgar Hoover called the US Black Panther Party of the 1960s-70s "the greatest threat" to internal security and used all the FBI's resources to harass and disrupt them, including the alleged use of assassination.) Chris Hedges, who covered Al Qaida for the NY Times, would suggest this is not one of those cases.

What potentially helpful terrorist-fighting information was found on computer hard drives confiscated from Bin Laden's compound, (and is there any chance it might make it onto Wikileaks)?

What role did Google Earth play in identifying the compound for what it was - a refuge not just for someone important and clandestine but for the Most Wanted Man of The Century? Global surveillance of this kind would seem to be a game-changer all its own. Finding the compound on Google Earth certainly happened quickly just after the news broke.

Does Bin Laden's death make terrorist acts against the US more likely? (If we believed that, would it make us wish Obama had acted otherwise in ordering the strike?)  

Some reports have suggested a connection between information gleaned at Guantanamo and identifying the compound as Bin Laden's. Are we to believe that torture (water-boarding or otherwise) played a role here? If we wanted a justification for torture, maybe some would consider this enough. (I favor observing the Geneva Convention.)

Some of these questions may be answered soon enough. I would like to say that I am confident of our government's account of events in general, but I am not. (Iraq and WMD come to mind). Events surrounding Bin Laden's death, however, will be subjected to as much scrutiny as any events in recent history, if not in all recorded history. The same technology and transparency that enables pervasive government surveillance, also enables relentless citizen inquiry, and I think the important truths here will become known if they are not already. 

As satisfying as Bin Laden's death may be in some respects, I am still hungry for more answers.

"From Crowhurst to Madoff to - Us?"

In the extraordinary book, "The Strange Last Voyage of Donald Crowhurst," a pair of journalists reconstruct the mysterious end to a lone sailor's life at sea. It would appear that Crowhurst, facing terrible embarrassment and shame at having faked a journey around the world, stepped off into the deep to become one with His Maker, at least as he understood Him at the time.

Crowhurst was among the few sailors to join the world's first single-handed round-the-world "Golden Globe" race in 1968, and he mounted it on a multi-hull, which had never been attempted. To say that he was in over his head is to make a bad joke at the expense of someone trapped by ambition, financial pressure, the British penchant for extreme adventure and trying to prove something that perhaps is not worth proving. (It has been said that nothing is more important to the British than to getting through life without being embarrassed.)

 

Crowhurst came to mind as I read Bernard Madoff's recently published confessions to The Financial Times and New York Magazine. What began for Madoff as a temporary solution to investor demands became a permanent problem from which he could not escape. As he got deeper in, he found he could not get out because the numbers would never add up - the Achilles heel of any Ponzi scheme, where yesterday’s investors are paid by those induced to put money in today. Mounting liabilities outstripped his capacity to deliver adequate returns, putting him on a slippery slope to self-destruction.

Crowhurst created a similar dilemma for himself in sneaking ashore in Brazil to make repairs, unbeknownst to the world, and effectively disqualifying himself from the competition. But he kept it secret and lay in the Southern Ocean making prodigious mathematical calculations to convince the world he was still racing. He had embarked on the race to prove his business worth as an inventor and signed contracts that he was ill prepared to meet. 

When the fleet came around the bottom of the globe and headed home, Crowhurst joined them. But he soon realized that his fraud would be revealed and would be ruinous. Despite having a wife and children waiting for him, he apparently stepped overboard rather than to face the music. (His story is also brilliantly documented in the independent film "Deep Water.")

Sadly for Madoff, his elder son Mark could not abide his father's fraud and its tortuous aftermath and hung himself on the anniversary of his father's confession. Madoff now faces life in prison, where he may contemplate the destruction of his own family.

Madoff's rationalizations for his behavior present a strange mix of blaming the victims and fingering the investment world for its greed and intellectual dishonesty - greed in seeking outsized gains, however they may be generated, and dishonesty in pretending returns like Madoff's could be legitimately produced year after year.  We now know that many professional investors smelled a rat in Madoff and for some time had refused to entrust funds to him. Other sophisticated investors/institutions - Carl Shapiro, Jeffry Picower, JP Morgan and HSBC, to name a few - poured money in. The SEC had ample reason to see a problem, since Madoff was reported to be involved in a Ponzi scheme of some kind, but the SEC brass either did not see it or chose not to intervene. That no one from the SEC went to jail for appalling failure in oversight is reason to wonder what kind of "financial regulatory reform" will actually work on Wall Street.

Both Crowhurst and Madoff faced inevitable music because Crowhurst's trimaran Teignmouth Electron had to come to shore eventually and Madoff had to deliver billions in returns even as the market collapsed. Something had to give and lives would be sacrificed in the balance. 

With such inevitable reckoning in mind, one has to wonder if the mounting debt crises in Europe and the US - which Madoff calls "a government Ponzi scheme" - is soon to sink its share of ships. Portugal, Ireland and Spain cannot be bailed out indefinitely without the bills coming due, as interest payments outstrip their ability to earn their way out. And the US leadership's current answer to our fiscal problem is to raise the debt ceiling - again.

We have seen the enemy, and it is - us?

The Quake That Shakes Us All

I was asked to be on a 6 a.m. call this week to London that was cancelled because the European corporate client suddenly had to deal with Japan, its understandable workplace instability amid spreading fears of meltdown and contagion. I had not expected either the call or a related major meeting in Europe to be cancelled, but I was not surprised, given current volatilities around the world.

How prepared are people for the bigger reverberations of major events, and how to deal with them intelligently, of which the first step might be anticipation and planning?

I confess I have not yet read Kenneth Posner’s book, Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility, although I think it advisable for anyone who applies scenario thinking and other basic risk-management techniques to the rising uncertainties of our time. Posner's attempt, according to reviews, is to mix quantifiable and computer calculation with human instinct, experience and intuition. A worthy goal worth thinking about, and actually trying to do.

(Number me among those readers who attempted Nassim Taleb's The Black Swan and put it down before the end, partly because at a certain point before page 300 I thought I grasped the thesis well enough and because, frankly, Taleb is a writer who does not know why he would use one word if he could use 20. Of those, more than half will be about Taleb's superior view of uncertainty, about which he appears to be uncertain not at all.)

As a longtime scenario practitioner, I have an aversion to certainties of all kinds, partly because it is always the unexpected that changes the way we think and subsequently must behave. Humans must live and work in a constant tension between confidence about what they think they know and flexibility in the face of incomplete information, and sheer ignorance. But how to identify what you do not know well enough and should consider?

Enter Japan's earthquake and unfolding disaster. Were quakes of this kind uncertain? No, they were inevitable (and still are.) Were those plants "safe?" No, they never were, located on the geological "Ring of Fire" that promises serious quakes from here to eternity.

The quake's timing, however, was uncertain, and also the extremity of its effects. We must now all reconsider whether:

- A nuclear cloud will get into the atmosphere and increase cancer risks everywhere

- Anti-nuclear movements will extend globally as the world comprehends that it potentially shares in every other country's nuclear risks

- Nuclear plants should continue to answer the world's energy appetite, given what we now know, and know that we know

- Recalculation of insurance liabilities will render nuclear energy just too costly

- Makers of potassium iodide pills are suddenly a valuable stock investment (Or are you too late?)

I mean this last only partly facetiously. It says something about positive pricing effects in negative macro conditions.

Vital lessons may be taken from Japan's experience - which, pray, does not continue to multiple meltdowns and swathes of dead areas of Japan from nuclear contamination. One lesson might be in the approach that executives and managers take to major "uncertainties" that are likely to unfold at some level and at some point reasonably soon. Don't we know what some of them are?

As much as a U.S. Treasury-market collapse, Middle East (Libya, Saudi-Bahrain) disruptions, oil prices above $120/bbl, rapid global inflation, European financial meltdown and China disruptions are known to be real and proximate possibilities, many corporate and public policy leaders have not really taken the time to think these through. 

Scenario thinking continues to be an invaluable tool in the risk-manager's toolbox because it allows for the unthinkable to be more easily thought and for the unspeakable to be spoken in ways that may be heard and acted upon in time. Examples are many of risks that were contemplated with scenarios and where subsequent actions saved millions or produced strategic options that were acted on profitably. Lives might well be saved as well.

Maybe Japan's quake has shaken the rest of the world enough to reconsider how prepared we are, and are not, on some of these fronts. "What if?" remains a powerful question for managing future risk, but only if you really ask it - the right way with the right people around you - and think it through.

Then you must act.

 

Afghanistan: Engaged? Enraged?

Do you know why the US has troops fighting in Afghanistan? Do you support it?

At a recent weekend ski reunion in Nevada I asked this of some high school era classmates, (Phillips Academy, 1966), a relatively well informed and learned professional group, mixing law, public policy and private enterprise in almost equal measure.
I have found that many people, however well educated and apparently informed, do not know the official rationale for our being in Afghanistan. But polls suggest that opposition to the war hit 63% in December, 2010, as US (and other) soldiers continue to sacrifice themselves there and civilian casualties mount. With at least 919,967 people killed in Afghanistan and Iraq since the U.S. and coalition attacks, based on lowest credible estimates, the war should rightfully loom as a major campaign issue in 2012.

About 10 of us had gathered in our former classmate's house and soon became engaged, if not enraged, by the topic, which recalled for us another conflict. Some of us had brothers who fought in Vietnam. Some of us did not have to serve because of the lottery then, or served because of it. 

Most of us had come to see Vietnam as unjustified, as well as unsuccessful. (One of our classmates had written "Loon," a recent first-person account of a high-loss battle in Vietnam and its grim legacy.)

Some of us now fervently believe the US should bring back the draft (perhaps as universal 2-year national service) so that our wars are not fought only by those who volunteer. One advocated the idea on the grounds that if everyone in the country had equal skin in the war game, the country might be more fairly and fully engaged in determining what wars we fight. 

Everyone seemed to agree that this would be good for the country. No one in the room seemed to believe that current leadership would be willing to broach the topic of the draft, or even of withdrawing, before the elections.

One of my classmates served in Congress and now, as an energy attorney, frequents the corridors of Washington and travels the world. He is the member of our group who predictably will have read the most relevant recent book on a topic and have the most informed and thoughtful view.
He cited the recent "Our Vietnam," by AJ Langguth, and reported some disturbing history compiled from original sources. According to Langguth, Kennedy never believed that the war against the North Vietnamese could be won. And he did not believe the "domino theory" that the fall of Vietnam would mean the loss of Asia to communism. He believed he simply could not afford politically to get the US out before the 1964 election because the Republicans would roast him.
By then, Lyndon Johnson, who as Vice President had tried to convince Kennedy to exit the war as un-winnable, found himself similarly trapped by a war that had escalated beyond the point of practical or political withdrawal. (Kissinger would later be instrumental in negotiating a pause in which the US finally could come out.)
This renewed sense of Vietnam history, where domestic politics interfered with common sense, provoked a number of reactions to the current situation. 

One former classmate active on Capitol Hill characterized many Democrats as believing "Afghanistan is an outrage." He wondered aloud if Obama, who promised withdrawal by July 2011, can survive in 2012.
"When you read how the Mideast revolutions are happening, how accelerated everything is, I find it hard to believe that Obama is going to skate through," he said.
As a few of us wondered aloud at the apparent lack of anti-war activism compared to Vietnam's protests, our energy lawyer quoted a recent conversation with author James Fallows on the topic, who said:

"You never know on a given day whether you should be living a normal life or doing something about the most important issue of our time."
Perhaps our war in Afghanistan is not "the most important issue of our time," but it must rank pretty high. How many have US soldiers have died there? The quoted statistics are:  4,683 in Iraq and Afghanistan combined, since "Operation Enduring Freedom" began on Oct. 7, 2001, and "Operation Iraqi Freedom" began on March 20, 2003. Of the total US deaths, 3,708 were reportedly due to hostile fire, and the remainder due to non-hostile actions (such as accident, suicide, or illness).
Perhaps the military deaths are the most important thing, though they do not embrace the thousands severely wounded or mentally affected for life. Officially, 30,490 U.S. service members have been wounded due to combat actions in Iraq and 2,309 in Afghanistan (32,799 total). (Source: Rod Powers, About.com) The civilian death statistics already mentioned are highly disturbing.
If you want the official rationale, you will find it here:
US President Barack Obama, declared on Dec. 1, 2009: “I am convinced that our security is at stake in Afghanistan and Pakistan. This is the epicenter of the violent extremism practiced by al Qaeda. It is from here that we were attacked on 9/11....It is important to recall why America and our allies were compelled to fight a war in Afghanistan in the first place. We did not ask for this fight. On September 11, 2001, 19 men hijacked four airplanes and used them to murder nearly 3000 people.”
In his press conference on military action in Afghanistan and Pakistan, Obama called the region a base for "Al Qaeda and its extremist allies" from which they train terrorists and launch attacks, now "the most dangerous place in the world for the American people" and "an international terrorist challenge of the highest order." An additional 17,000 US troops would be committed immediately, and training of Afghanis would be increased.

Addressing Al Qaeda, Obama said flatly: "We will defeat you." 

One might question if the US is suppressing or defeating terrorism as much as it is stimulating it, as some have suggested, by causing hundreds of thousands of civilian casualties in countries with which we are not at war. And can Al Qaeda and the Taliban be defeated militarily on their home turf?
Our discussion was inconclusive, although the sense of the room was that this issue may be bigger than current debate and lack of open protest suggests.
Is Afghanistan an echo of Vietnam, misguided and un-winnable, and now a tool of US domestic politics?  

Will Obama sustain the hostilities until after the election in 2012, as much as it is supported on the right and opposed on the left? 

Does he believe he has any choice?
Do you?

Have you written your Congressman lately?

These Authorities Have to Go

Libya's Gadhafi struggles to hold on to power the only way that dictators of force can hold on, which is with more force. Just how brutal he will continue to be, and how effective, is still to be determined.
How far will this go, and to what effect? 

The debate over the economy is still fully on between the recovery and double-dip camps, but the spreading uncertainty from Libya to Saudi Arabia may favor the latter. Chinese economist Andy Xie points to Mideast (37% of the world's oil production) instability and potential gas price increases to infer that stagflation may be just around the corner. He notes that the oil shock of 1973  triggered a market crash and laid the foundation for stagflation thereafter. OECD countries now have leverage levels that are 50% too high, and must come down, he observes. That is deflationary on its own. Meanwhile, the US continues to flood the world with dollars, which is inflationary.
What is important here is the degree of uncertainty in the system. The Libyan crisis will have its own effects in that country, and has roiled Saudi Arabia, whose leadership has just announced new levels of largesse to keep the population in line.
But what is really going on here globally?
Authority the world over is being questioned and challenged in new ways - faster, more broadly and deeply - in a new era of communication. In the mid-1990's, we postulated that the Internet would act as a universal solvent to erode authority structures of all kinds, from the top down, bottom up, inside out, and so forth. Power would shift to the "end-user." This was long before Google made answers available to most questions or Twitter allowed differing versions of the truth - as well as lies and distortions - to spread at the speed of light, 140 characters per Tweet.
We now know quickly - as can anyone anywhere who wants to ask - that the Greek government has to meet a major hospital deficit in a hospital that has 42 gardeners but no garden. We know American public safety officers bulk up their hours in their final years so they can retire on pensions of 100 percent or more. We know that Democratic state senators fled Wisconsin in order to dodge their responsibilities to address budget deficits, apparently believing in the power and efficacy of denial. Technology guru Mary Meeker has just published a report to suggest that America Inc. is functionally bankrupt on the costs of Medicare and Medicaid. These two entitlements were approved largely by and for Baby Boomers with apparent disregard for intergenerational fairness, let along practicality.
It's all coming home to roost, all over the world. It has to.
The point here is that "the authorities" have made a mess in many places, not limited to Libya. Gadhafi & Co. did not bother to build infrastructure with its oil billions, leaving a poor and uneducated populace now with a void to fill, when/if Gadhafi falls. (See here the first CNN footage in Benghazi, where Gadhafi has already been pushed out.) His is not the only regime to abuse power and abrogate the responsibilities of leadership. So his is not the only regime to sow the seeds of crisis, which cannot and will not be avoided.
The question now is, what will we do? Violence in the streets is the only choice for those who have no other choice. The US mess hopefully will be addressed by those who stay in the room and try to fix the problems with real solutions. But Wisconsin is not the only state where protesters have picked up the vibe from Middle East and staged long and persistent demonstrations against failed leaders. And material support - in the form of pizza for Wisconsin protesters - is pouring in from Egypt, Turkey, and around the world.
Authority that underestmates this unprecedented connectivity, both in how it connects and educates people, is learning fast that a new model is forcing its way forward, outward and down. It is not contained or slowing, only expanding literally at the speed of light. How does your "official future" fair against the potential for stagflation and continuing global unrest?

How "New" this year?

I do not like to bring this up on the dawning of the New Year (it's barely Jan. 5 here in Brooklyn) but a serious challenge for 2009 will be our willingness to think the unthinkable in realistic and creative terms, and act on our convictions despite all the uncertainties. No one is suggesting this will be easy.
I woke a little before 3 a.m. thinking about a client who did not call me back last year after I led a session with a roomful of his clients. They were mostly CEOs in the information industry in whose companies his firm holds significant private equity stakes. I had been retained to stimulate them to "think the unthinkable" about their businesses for a couple of hours before their "real" meeting began.
It was early October in '08. The "unthinkables" were mounting: AIG's bailout, Wachovia, Lehman gone bust, Bear Stearns, Fannie Mae, Freddie Mac, to name a few, with WaMu then the largest US bank failure ever. Reserve Primary had "broken the buck" and people were beginning to wonder, as investors pulled $130 billion from US money markets in two days, well, where is a "safe" place to store cash?
Still, interest rates had not yet dropped nearly to zero and Bernie Madoff was not yet a worldwide household name. I can't detail the precise totals of new currency printed by the US government since the crisis began to unfold, but please note: it took two centuries for US monetary base to grow to $800 billion and in the last three months it has nearly doubled to $1.5 trillion - an implied annual expansion rate of 300%. This fact alone sets in motion its own new set of uncertainties.
These musings led me to recall another meeting in the spring of 2006, in which a convocation of  managing directors from one of the Top Five global financial institutions wrestled for two days with two major uncertainties likely to influence their business – would the US-China dynamic as the primary engine of global growth remain positive and healthy, or decline in serious ways? Would the US capital markets model (political, economic, regulatory) remain dominant in globalization, or come under attack, and perhaps decline seriously? A cursory look at the matrix implied here quickly revealed the dreaded "lower left quadrant" scenario, where a deteriorating global growth dynamic would converge with slippage of US influence in the world. What might happen to them in that world?
(Sound familiar?)

The MDs quickly evidenced antipathy for the matrix and the process of thinking through its implications, perhaps because their business model – and their livelihoods – would become quite unpleasant (if not untenable) in at least two of the scenarios implied (particularly the one that has in fact developed, in which numbers of them have lost their jobs.) This is not surprising in one sense, since the most unthinkable circumstances are often those in which we won't do very well.  In psychology this is often referred to as denial.
What I watched unfold among these bankers when faced with this particular scenario framework was a two-step cognitive process.  The first step involved an intense interrogation of the "rightness" of the framework. Were these really the key macro uncertainties?  Once the framework had been explored and discussed, the second step involved painful deliberations about whether this thinking process, if pursued, could possibly suggest prudent actions.  While the discussion was eventually allowed to proceed, general resistance managed to preserve the bubble of group think. Whatever else might be true, they were not willing to take these possibilities seriously.   This particular crowd of leaders could not, or would not, look down into the dark possibilities that were clearly latent in the world system. I left the meeting thinking about reasons to short their stock, which has fallen about 65% since that day – one of the truly valuable investment insights never expressed openly (til now) and not acted upon. (Was I, too, in denial?)
Since then, several different versions of these scenarios have been broadly used by various practitioners to encourage executives to think "outside the box" of their own official futures in 2008-10. Not all are equally capable or willing to take this on, useful as it may be.

I am trying to get at something here, which came up again in a very recent meeting with a group of bankers from another top-tier institution, charged with expanding capital markets businesses. The most senior and outspoken member of the group asserted that the firm had excellent plans in place that "just needed execution!" I asked politely whether it was more important to prosecute those plans or - given how different the world had become in recent months - try to figure out what in their operations had to be radically different? What did they need to stop doing, or start doing, that would amount to real change in behavior? This question provoked uncomfortable silence, but several of the people at the table nodded in a way that suggested they might proceed down this path if enough of them dared to do it.  
In any engagement of this kind, we may struggle to find exactly the right set of uncertainties, but I do not see how most businesses can proceed in 2009 without aggressively addressing this question: Given that things have become so different from what we imagined, and unprecedented in ways likely to become more so - don't we need to radically rethink the assumptions under which we have been operating? Now?
This is the challenge many of us face in this New Year. "New" arrives with a capital N in more ways than anyone bargained for. It demands more new thinking – and new acting – than in any recent times past. I suspect that many people remain unprepared for the efforts involved, but the refusal to think about radical change is almost certainly not the answer.  The best we can do is to begin.

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.

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}

Risk

Someone asked me recently, “How do you think about risk?”

Risk appetite and risk-taking are key elements in anyone's self-realization, or a company’s capacity to realize plans and objectives.   As in the case of an individual who may not know the extent of his or her own fear, the same is true of the enterprise.   It (the enterprise) may not know what it's afraid of.  Or it may not know that it's actually acting in fear.

I have seen this in corporations where someone took an initiative or made an investment that failed, was punished, and that knowledge cowed the future behavior of the enterprise because the story became known and people were afraid to suffer a similar fate. This has a high cost because the unwillingness to take risk is, in another form, the inability to learn.

When asked the question: How should I think about the future?  Well, ask something about intention.  What is it you want to accomplish?  Where do you think you are going? What's the destination - whether near, medium or far - and which of these should govern?  What's at risk?  How much personal or professional risk are you willing to take?  What are you willing to put “at risk?” Reputation? Status? Income? What resources can you bring to bear? 

You might also want to ask, what's the weather likely to be?  That's a scenario question at heart, part of informing the intuition where the future cannot be fully known or predicted.  That's not all of it. There are also the questions of what will the markets let you do?  What will your board let you do? 

In terms of The Captain’s Challenge, you have to know what you are willing to do with your ship, not just in terms of your intention but its capacities, human and otherwise. But the admiralty may have a view. And the ocean may be unkind, in all its indifference to your preferred outcome.

There's a lot of talk these days of “risk-adjusted returns,” which implies that people know enough to define returns in “risk-adjusted” terms.   If you chase that argument far enough up-stream, I think you find yourself with a model that claims to provide “the answer.” I am skeptical that models can “know” some of these answers, because I question whether they exist. Somebody with a proprietary trading model might be able to tell me that under certain circumstances, an outcome is predictable.  I think Nassim Taleb (author of The Black Swan) might say, "Yeah, it works until it doesn't."