Month: March 2019

Stock market boom doesn’t float everyone’s boat

Posted on by j.giglio

Forgetting history is an American pastime. The current bull market that ranks among the great rallies in stock market history began 10 years ago this month, just about the time when Lady Gaga’s “Poker Face” was the number one song in America.

The stock market party has been going on for a decade, but many Americans have not been invited. The Standard & Poor’s 500 index has soared over 300 percent since March 2009, but the gains are heavily concentrated among the richest families.

The richest families are far more likely to own stocks than are middle- or working-class families. Eighty-nine percent of families with incomes over $100,000 have at least some money in the market, compared with just 21 percent of households earning $30,000 or less, according to a Gallup survey.

Overall, 62 percent of families owned stocks before 2008. That number has fallen to 54 percent, the Gallup poll found. The psychological and financial damage inflicted by the 2008 financial crisis and the subsequent Great Recession continue to weigh heavily on the average American, just as memories of the Great Depression influenced financial habits for decades.

In March 2008, the Financial Meltdown, Financial Apocalypse, Financial Collapse – call it what you will – began, with the feds arranging a shotgun marriage between Bear Stearns and JPMorgan Chase. In March 2008, Bear Stearns, the smallest of the five major Wall Street investment banks, was unable to fund its operations and was bleeding cash, having lost the confidence of the market. The feds were faced with a choice between letting the company fail or taking extraordinary steps to rescue it. They choose the latter.

Bear Stearns was sold to the JPMorgan Chase, with the Federal Reserve providing $29 billion as an inducement to the acquiring bank. Bear Stearns may have ceased to exist as an independent firm, but it continued to haunt the financial world like Marley’s Ghost for months thereafter. Its collapse signaled the real start of the financial crisis. Bear’s demise started a banking liquidity crisis in which financial institutions became unwilling to lend to each other, and credit markets seized up.

A growing number of formerly solid financial institutions were turned into basket cases. After their years of kindergarten management games, shooting up on short-term borrowings, ample use of leverage fueled by low interest rates, and binging on risky trades blew up in their faces. Freezing their lending to businesses and individuals alike caused vast portion of the nation’s business activity to grind to a halt, leading to the Great Recession.

The Financial Meltdown of 2008 was one of the most critical events in American history, a biblical-style plague tanked the stock market by nearly 60 percent in the fall of 2008, killing off other financial and credit markets in the process. Banks and firms either vanished into bankruptcy or had to be rescued by taxpayers. The financial system nearly collapsed, triggering an economic crisis.

The deepest recession in decades wiped out some $11 trillion of wealth and vaporized more than eight million American jobs by September 2009. It froze up the nation’s vast financial credit system, leaving many firms without enough cash to operate. It forced the Federal government to spend $2.8 trillion and commit another $8.2 trillion in taxpayer funds to bail out crippled corporations like General Motors, Chrysler, Citigroup, AIG and a host of other too-big-to-fail private institutions.

In addition to their jobs, it cost millions of Americans their homes, life savings, and hopes for a decent retirement. These Americans were in no position to invest in stocks and benefit from the subsequent run-up in the stock market. By contrast, the wealthy have gotten even richer.

This was a cataclysm far worse than any natural disaster the nation has experienced, and its ripples continue to be felt today.

Originally Published: March 29, 2019.

All strategy is relative

Posted on by j.giglio

The word strategy has undergone much inflation in recent years. There is no strategy deficit; today, everyone is a strategist. The word is employed promiscuously as a value-enhancing qualifier: a strategy for tax preparation, for breastfeeding, for losing weight. The word has been drained of meaning.

In the business world, books about strategy are legion. For instance, airport bookshops, as any regular traveler knows, are replete with books on successful business strategies that make extravagant promises. The road to strategy is paved with platitudes in these popular books: Think outside the Box, Break Down Siloes, Move the Needle, Paradigm Shift, Low Hanging Fruit, and Aim High, so if you miss you won’t shoot your foot off.

When reading books on business strategy that offer prescriptions for managers, often one comes away with the uneasy sense that each author has defined the term in self-serving ways to support whatever management shtick he or she happens to be promoting, creating a strategic straightjacket, if not a cottage industry, with thoughts that don’t extend much beyond the drabbest clichés.

In this context, strategy may seem like nothing more than an impressive label pasted on an author’s pet idea to boost sales of his or her book. As the late Peter Drucker, a widely noted management consultant, educator, and prolific author once commented, “I have been saying for many years that we are using the word ‘guru’ because ‘charlatan’ is too long to fit in a headline.”

Put simply, strategy is aligning means with ends, and the trick is getting the proportions right. The alignment, like beauty, is in the eyes of the beholder. The question that haunts every strategy is “how”. How do you get from means to ends? It is always the how before the who and why. Strategy happens in the space between means and ends. It is the relationship that unfolds at the intersection of the two.

Consider an example from the wide world of sports: regardless of the quality of its players, no National Football League team can hope to reach the Super Bowl without an effective strategy to guide its performance. The ability to develop and implement a strategy is the secret to success for such coaching icons such as Bill Walsh, Tom Landry, Vince Lombardi and of course, Bill Belichick.

They all understood the importance of beginning each season with a strategy that incorporates everything knowable at the time about the performance potential of their own players and how best to exploit these resources, plus the potential of opposing players and how best to defuse it. Not to be overlooked is that the competition gets a vote. And all this knowledge is written down (along with accompanying tables and diagrams) in thick playbooks.

But they also understood that no pre-season strategy is ever carved in stone. It must be continually revised in response to the inevitability of events that can never be anticipated—like injuries to key players and to those on opposing teams, the unexpected emergence of star rookies and the mystical ability of battered old pros to somehow pull it together one more time as the season unfolds.

To quote the justly criticized former Secretary of Defense Donald Rumsfeld: “stuff happens”. No meaningful National Football League strategy ever has a half-life of more than a week or so. Top coaches know this. They even welcome it because of the fresh opportunities it can bring.

The dirty little secret they understand is that you don’t have to get your strategy perfectly right, as long as it’s not so far wrong you cannot put it right quickly. If the competition has a poor strategy, your strategy only has to be less poor. Strategy is a relative venture.

Finally, it is always useful to remember Damon Runyon’s advice: “Maybe the race isn’t always to the swift. Or the battle to the strong. But that’s still the way to bet.”

Originally Published: March 16, 2019