“In the future everything will be personal, mobile and virtual.” That is what Carly Fiorina – the former CEO of HP – proclaimed at one of the annual shareholders meeting, shortly before her departure. Of course, she referred to the electronic devices that HP is known for. But the meaning of that prediction transcends the applications in their industry. It is more a reflection of a different set of values characterizing the new society.
The emphasis on the virtual characteristic is underscored by scientific data provided by psychology studies. Researchers discovered that humans react to a stimulus not according to its impact on our senses but based on the interpretation of that impulse by our brains. Hence, it is the perception of a phenomenon - not necessarily the reality of it - that triggers the reaction. So as long as the brains believe something as being true, whether that is a pure illusion or a reflection of what actually happened becomes irrelevant.
Marketers were first to understand and apply these findings, in perfecting their message to exploit perception formation independent of the intrinsic attributes of a product. Now, the financial wizards are taking over this production, and embellish the portfolio of investment vehicles with concepts that are increasingly difficult to measure and progressively disconnected from the investor. By creating products that are farther removed from the true value of their underlying assets, the banks make everybody think that wealth could be accomplished just by transacting money from one fund into another. The more people believe that, the greater the intensity of the exchange activity and the higher the stock markets will grow.
The advancements of the computer industry just fuel the ability of the virtual world to overtake the reality. Almost everything around us could be simulated and manipulated to the point that is harder and harder to distinguish between real and fake, tangible and intangible, substance and image. We have become the slaves of a lifestyle that creates in our brains a mental picture full of illusions. Gambling, guessing, mimicking and faking are the terms describing the navigation tools in the new virtual universe.
The casino created by the betting system that the financial markets are based on, pollute our society with the false illusion that everybody can get rich through gambling. What is purposely hidden from the uneducated participants in this process is that any system based on speculation is a zero-sum game. In order for some to gain, there are others who are loosing an equal combined amount; and the bigger the gain for few, the more losers at the opposite end.
It is true, the sophistication of the financial instruments, these days, require intelligence and imagination for their creation and very good traders for their commercialization. But in the end, so does the traffic of narcotics from third-world countries, or the planning of satanic terrorist attacks. None of these activities are condoned by the society at large, nor supported by responsible governments. So why would financial speculation deserve a different treatment?
An entire generation of baby boomers – and I am one of them - worked and studied most of their life with the belief that at the center of the societal progress is the real economy – the one that creates value for consumers (material, psychological, spiritual, educational). It is hard for them to understand or accept the increasing power of the transactional and speculative economy in the universe of our collective need.
The source of global advancement and prosperity cannot be the simple mechanism of buying and selling virtual products, especially when the perception of their value is motivated by greed, irrationality and ignorance. Once this euphoric wave will fade out, the countries promoting it will end up without a real economy, and they will be ruined by the inability to handle domestically the true means of generating goods and services that are, indeed, needed by the consuming population – food on the table, cars on the street, education in the class room. In the end, the bread winner in any family is someone who contributes through a physical or mental effort to the creation of value to the benefit of the society. Countries that don’t lose site of this will be the real winners in the future.
Sunday, December 27, 2009
Sunday, November 22, 2009
The Disease of the Manufacturing Industry – an insider’s perspective
To a large extent the manufacturing sector inherited the consequences of a self inflicted disease. The outsourcing trend that started in early 1980, initially intended to help reduce cost, provided only a short lived advantage. The commercial sector (distributors and retailers) has become a lot more powerful in promoting cheap products to increase volume of consumption, and in the process setting in the minds of the buyers (individual consumers or institutional buyers) a new low in the value perception. DVD players sold at Wal-Mart for $39 is a relevant example.
Now, that even China becomes more expensive than in the past (the combination of labour cost going up, taxation, currency exchange etc.) the manufacturers are stuck with lower prices (consumers that were willing to pay $100 for an item produced in Canada before, got used to paying only $50 for the same item produced in China), and is impossible to recover from that position. Under such price pressure, any attempt to make the same product here is cost prohibitive. Who prospered in the process? The commercial sector is exploiting these circumstances to the demise of the manufacturers.
The constant decline of the manufacturing sector (frozen wages, high unemployment, stripped down benefits, uncertainty of the future) has definitely discouraged an entire generation of young people coming to the industry. The new high school graduates would rather work in any service sector, than enrolling into an apprenticeship program, or starting a manufacturing job. The work force is aging and the scarcity of new resources is concerning.
The manufacturing sector used to be the most solid contributor to the real economy – 3.8 multiplier of economic activity. Logic infers that such dominant power would confer its players privileges and protections aligned with their participation in the value creation process. Yet, these days, the speculators and manipulators are doing much better. People and organizations acting either as enablers (government, legal firms), connectors and advisors (consulting practices, agencies) or support providers (banks, IT) are currently representing societal activities that are more attractive and better rewarded than the companies actually producing or making available the goods or services the consumers need.
An entire infrastructure has been developed to support the manufacturing industry during its glory. Many of those sub-products - services, agencies or governmental departments – were dependent on the underlying domestic activity. However, with the globalization movement, all of these resources got exposure to international markets, and changed their business models to accommodate transactions across borders and continents. Now, that most of the manufacturing moved overseas, these service organizations are doing just fine independently of where the goods are produced – banks are lending money globally, logistic companies are moving product regardless of their point of origin, consultants learned to speak multiple languages and retailers are happy to sell higher margin goods at more affordable prices to the consumers.
It seems that the new arrangement no longer needs the local manufacturing economy that helped creating the system – for every person loosing a job in manufacturing, there will be almost four other people doing just fine. What is less often realized is that this approach is only short-lived. Soon enough the middle class employed in the manufacturing sector of the past will completely lose its purchasing power and, in spite of all the offshore goods being brought here and made available at cheaper prices, there will be much fewer interested or affording buyers.
The decline and struggles of the manufacturing industry is the elephant in the room. Everybody talks about it but it looks that the ones talking lauder are not insiders. There is an army of consultants, agents, and ‘concerned people” that are more interested in the process of fixing than on the result. It may sound cynical but a sick patient is more valuable to a revenue thirsty hospital than a healthy person…
Should the government do something about it? If we are really conscious of the fact that the manufacturing industry is at the core of our ability to prosper as a society, the answer is yes. It should regulate, subsidize and support its main contributor to the point that the sector regains its attractiveness for new, smart people, and keeps the existing ones happy. It may not be a popular thing with the elites, but a necessary measure in order to ensure the viability of our economy, the prosperity of our country and the sustainability of our society.
Now, that even China becomes more expensive than in the past (the combination of labour cost going up, taxation, currency exchange etc.) the manufacturers are stuck with lower prices (consumers that were willing to pay $100 for an item produced in Canada before, got used to paying only $50 for the same item produced in China), and is impossible to recover from that position. Under such price pressure, any attempt to make the same product here is cost prohibitive. Who prospered in the process? The commercial sector is exploiting these circumstances to the demise of the manufacturers.
The constant decline of the manufacturing sector (frozen wages, high unemployment, stripped down benefits, uncertainty of the future) has definitely discouraged an entire generation of young people coming to the industry. The new high school graduates would rather work in any service sector, than enrolling into an apprenticeship program, or starting a manufacturing job. The work force is aging and the scarcity of new resources is concerning.
The manufacturing sector used to be the most solid contributor to the real economy – 3.8 multiplier of economic activity. Logic infers that such dominant power would confer its players privileges and protections aligned with their participation in the value creation process. Yet, these days, the speculators and manipulators are doing much better. People and organizations acting either as enablers (government, legal firms), connectors and advisors (consulting practices, agencies) or support providers (banks, IT) are currently representing societal activities that are more attractive and better rewarded than the companies actually producing or making available the goods or services the consumers need.
An entire infrastructure has been developed to support the manufacturing industry during its glory. Many of those sub-products - services, agencies or governmental departments – were dependent on the underlying domestic activity. However, with the globalization movement, all of these resources got exposure to international markets, and changed their business models to accommodate transactions across borders and continents. Now, that most of the manufacturing moved overseas, these service organizations are doing just fine independently of where the goods are produced – banks are lending money globally, logistic companies are moving product regardless of their point of origin, consultants learned to speak multiple languages and retailers are happy to sell higher margin goods at more affordable prices to the consumers.
It seems that the new arrangement no longer needs the local manufacturing economy that helped creating the system – for every person loosing a job in manufacturing, there will be almost four other people doing just fine. What is less often realized is that this approach is only short-lived. Soon enough the middle class employed in the manufacturing sector of the past will completely lose its purchasing power and, in spite of all the offshore goods being brought here and made available at cheaper prices, there will be much fewer interested or affording buyers.
The decline and struggles of the manufacturing industry is the elephant in the room. Everybody talks about it but it looks that the ones talking lauder are not insiders. There is an army of consultants, agents, and ‘concerned people” that are more interested in the process of fixing than on the result. It may sound cynical but a sick patient is more valuable to a revenue thirsty hospital than a healthy person…
Should the government do something about it? If we are really conscious of the fact that the manufacturing industry is at the core of our ability to prosper as a society, the answer is yes. It should regulate, subsidize and support its main contributor to the point that the sector regains its attractiveness for new, smart people, and keeps the existing ones happy. It may not be a popular thing with the elites, but a necessary measure in order to ensure the viability of our economy, the prosperity of our country and the sustainability of our society.
Saturday, August 15, 2009
“Meltdown” lessons – from Paul Mason’s book
What really triggered the US and global crisis of late 2008, resulting in a deep recession in 2009, was a series of events that reshaped the financial environment around the turn of the century.
As Alan Greenspan once said, the US economy was resilient enough to overcome the burst of the IT bubble in 2000, the terrorist act of 9/11 2001, the flattening of the real estate market in 2005. But, when the greed of the financial community reached stratospheric levels, the economy was unprepared to sustain a vicious attack with WMD-s, as one of the most illustrious investors - Warren Buffett - called the derivatives (futures, options, swaps) and the other SIV-s (structured investment vehicles) like CDO (collateral debt obligations), PBS (paper backed securities) and alike. Here is the context in which the formation of the storm clouds took place:
1. In 2000, just before Bill Clinton’s departure from the White House, he was presented by the republican dominated congress with a deregulation act (Commodity Futures Modernization Act), meant to unleash the financial industry from important checks and balances that were put in effect by Franklin Delano Roosevelt in order to prevent a repeat of the disastrous depression of 1929 – 1933.
2. The provision in that legislation of clauses mandating banks to lend money to subprime categories of clients (poor, black and latino communities), has become the center of the tornado that ripped apart the foundation of the mortgage industry. In the hindsight, it is rather ironic that this specific requirement has been inserted at the bargaining table, as a reflection of Clinton’s populist attempt to helping the middle class.
3. The deregulated environment allowed banks to operate as insurance companies – employing sophisticated statistical models for spreading the risk among a group of investors unaware of the exposure - and insurance companies to cross the line into risky investments, all in the name of “growing revenues”. With Henry Paulson’s help, in 2004 the leverage ratio allowable for the banks has been increased to 40/1 from 12/1, so that they could multiply their profits by just taking higher risks with somebody else’s money.
4. The evolution of the computer technology, as well as the spread of interconnectivity on a global scale has put unprecedented power into the hands of the banks and traders, setting a huge information gap between what they knew, compared to what was available to the seller or buyer in a transaction, thus allowing them to manipulate both ends.
All the above conditions created the framework for a perfect financial storm. Over less than a decade – between 1999 and 2008 - the parallel universe of transactional (speculative) economy has created a false perception of rapidly growing value (inflated house market and stock valuations, a flood of IPO-s for companies without revenue, irrational promises for gains without effort based on all kinds of Ponzi schemes, etc.), way beyond what the real economy had reflected.
In 2007 the global GDP amounted to about $63 trillion. The total amount of the transacted value reached $593 trillion – almost ten times bigger. No wonder that, at some point, a major correction needed to happen. Once again, the financial wizards knew this better than any of us. Consequently, they took massive advantage of the de-regulated conditions – through their hedge funds arms – by betting on the stock market downturn. When this thing happened, while most investors lost a substantial amount of money, the very few in the financial elite of Goldman and Co. made a fortune.
As Alan Greenspan once said, the US economy was resilient enough to overcome the burst of the IT bubble in 2000, the terrorist act of 9/11 2001, the flattening of the real estate market in 2005. But, when the greed of the financial community reached stratospheric levels, the economy was unprepared to sustain a vicious attack with WMD-s, as one of the most illustrious investors - Warren Buffett - called the derivatives (futures, options, swaps) and the other SIV-s (structured investment vehicles) like CDO (collateral debt obligations), PBS (paper backed securities) and alike. Here is the context in which the formation of the storm clouds took place:
1. In 2000, just before Bill Clinton’s departure from the White House, he was presented by the republican dominated congress with a deregulation act (Commodity Futures Modernization Act), meant to unleash the financial industry from important checks and balances that were put in effect by Franklin Delano Roosevelt in order to prevent a repeat of the disastrous depression of 1929 – 1933.
2. The provision in that legislation of clauses mandating banks to lend money to subprime categories of clients (poor, black and latino communities), has become the center of the tornado that ripped apart the foundation of the mortgage industry. In the hindsight, it is rather ironic that this specific requirement has been inserted at the bargaining table, as a reflection of Clinton’s populist attempt to helping the middle class.
3. The deregulated environment allowed banks to operate as insurance companies – employing sophisticated statistical models for spreading the risk among a group of investors unaware of the exposure - and insurance companies to cross the line into risky investments, all in the name of “growing revenues”. With Henry Paulson’s help, in 2004 the leverage ratio allowable for the banks has been increased to 40/1 from 12/1, so that they could multiply their profits by just taking higher risks with somebody else’s money.
4. The evolution of the computer technology, as well as the spread of interconnectivity on a global scale has put unprecedented power into the hands of the banks and traders, setting a huge information gap between what they knew, compared to what was available to the seller or buyer in a transaction, thus allowing them to manipulate both ends.
All the above conditions created the framework for a perfect financial storm. Over less than a decade – between 1999 and 2008 - the parallel universe of transactional (speculative) economy has created a false perception of rapidly growing value (inflated house market and stock valuations, a flood of IPO-s for companies without revenue, irrational promises for gains without effort based on all kinds of Ponzi schemes, etc.), way beyond what the real economy had reflected.
In 2007 the global GDP amounted to about $63 trillion. The total amount of the transacted value reached $593 trillion – almost ten times bigger. No wonder that, at some point, a major correction needed to happen. Once again, the financial wizards knew this better than any of us. Consequently, they took massive advantage of the de-regulated conditions – through their hedge funds arms – by betting on the stock market downturn. When this thing happened, while most investors lost a substantial amount of money, the very few in the financial elite of Goldman and Co. made a fortune.
Tuesday, March 17, 2009
Leadership vs. Management
The emphasis, these days, on Leadership is so pregnant that many promoters of the concept (mainly consultants ready to offer advice) forget about the importance of Management skills as the foundation of leadership. Sometimes they go as far as minimizing the role of management in the effort to make the case for leadership. I beg to see things in a more traditional light, as I can hardly imagine a sustainably successful leader without great managerial qualities.
After many years of studying, practicing and teaching management and leadership I came to the realization that true leadership (Level five in Jim Collins' book “Good to Great”) represents rather an evolutionary stage than a distinct human capability.
A good Manager with imagination, initiative, charisma and ability to communicate and inspire could make a great leader. As a matter of fact these qualities are so much interrelated that it is impossible to set them in any order of importance.
It would be much more difficult for a charismatic person, with wild imagination, initiating something new every day, and able to talk a good story out of any topics to be regarded as great leader, in absence of good managerial skills. Take management skills out of the personal qualities portfolio and you will end up with a good talker without credibility, form without substance, dreams detached from reality, a funny but sure way of losing money, or with a convoluted series of loose ends.
Any common sense perspective on the subject must take into account the ability to define current reality and future state, to create an environment that enables performance, and to execute the action plan as some of the most relevant traits of a leader. To be recognized for great leadership no one could be only a promoter of ideas. He/She needs to lead people. And if nothing else, the ability to direct, coach, support and hold others accountable – in other words to manage - constitutes the core ingredient of a sound leader.
I agree with the need for strong leadership at the helm of any organization. But the effort to grow future leaders must start with building a good managerial foundation. Once this is accomplished, we are 80% there. The other 20% is not less important, but is trickier. Where the natural talent is available, it might only need a nice polish. However, in absence of the innate aptitudes (intuition, creativity, sensitivity, etc.) it may take a lot more effort and some may never get it.
When people say true leaders are 90% born and 10% made, this is what they are referring to.
After many years of studying, practicing and teaching management and leadership I came to the realization that true leadership (Level five in Jim Collins' book “Good to Great”) represents rather an evolutionary stage than a distinct human capability.
A good Manager with imagination, initiative, charisma and ability to communicate and inspire could make a great leader. As a matter of fact these qualities are so much interrelated that it is impossible to set them in any order of importance.
It would be much more difficult for a charismatic person, with wild imagination, initiating something new every day, and able to talk a good story out of any topics to be regarded as great leader, in absence of good managerial skills. Take management skills out of the personal qualities portfolio and you will end up with a good talker without credibility, form without substance, dreams detached from reality, a funny but sure way of losing money, or with a convoluted series of loose ends.
Any common sense perspective on the subject must take into account the ability to define current reality and future state, to create an environment that enables performance, and to execute the action plan as some of the most relevant traits of a leader. To be recognized for great leadership no one could be only a promoter of ideas. He/She needs to lead people. And if nothing else, the ability to direct, coach, support and hold others accountable – in other words to manage - constitutes the core ingredient of a sound leader.
I agree with the need for strong leadership at the helm of any organization. But the effort to grow future leaders must start with building a good managerial foundation. Once this is accomplished, we are 80% there. The other 20% is not less important, but is trickier. Where the natural talent is available, it might only need a nice polish. However, in absence of the innate aptitudes (intuition, creativity, sensitivity, etc.) it may take a lot more effort and some may never get it.
When people say true leaders are 90% born and 10% made, this is what they are referring to.
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