THE ENTERPRISE--YOU SEE WHAT YOU ALREADY BELIEVE AND "YOU ARE WHAT YOU READ"—CAVEAT LECTOR
A WONDERFUL UPRISING
The Massachusetts Senatorial special election showed the American people at their best--standing up and voting their beliefs that Washington is getting it wrong. Scott Brown's victory sent shock waves through the Democrats who control Congress, and offered a hopeful wakeup call to their opponents whether they are Independents, Tea Party-ites or "regular Republicans." The message: get together on an agenda you can all get behind and lets take back control of our country. It almost appears as if this incident and the uprising it portends has gotten the attention of president Obama. At least he is making some conciliatory statements moving to a more centrist talk. That doesn't mean he'll act or govern that way. Time will tell.
AN INSPIRING EXPERIENCE
While meeting a friend at the Fort Myers, FL airport, I had an inspiring experience. As we sat at the Chili's having a drink and a late dinner, twenty people walked by in a group. Twelve of them were carrying large American flags. All were dressed showing support for the US Military—shirts, patches (many) vests, caps, etc. They were welcoming home a returning serviceman, whose mother and his expectant (of a baby, not just his arrival) wife were there too. He was coming from Germany, but had recently ended his tour in Iraq--and coming home "in one piece" —no major wounds, injuries, etc. Too often, in our busy world, we forget the thousands of service people, many of them very young, but some who were not young at all, on duty and/or fighting, in harm's way, in foreign lands. As one Marine said, "Semper Fi."
I say God Bless America and thank you to those who serve to preserve our liberty (and that of people in many other countries).
LET'S GET ON WITH THE PRIMARY TOPIC
Matthew Kelly, someone I respect and frequently quote says, "You are what you read. Show me the books you have read or are reading and I'll tell you what kind of person you are." Scary, huh? Impressive, too. As an author of (too many) books and articles, the rest of this edition just flowed out of my perception of books and articles and the veracity and accuracy thereof. Forewarned is forearmed.
POINT NUMBER ONE: WE VERY OFTEN SEE WHAT WE ALREADY BELIEVE INSTEAD OF BELIEVING WHAT WE SEE (OR HEAR).
John Mauldin's weekly newsletter is a source of great information. Recently, John wrote a section that was a classic in it's appropriateness, given the current polarization of political ideas, media positions, etc. However, this information is true no matter what the field of endeavor.
Prisoners of Our Preconceptions (an Excerpt from John Mauldin's Frontline Weekly Newsletter© http://www.frontlinethoughts.com/learnmore
[MY NOTE: John points out earlier in his newsletter that this material is from James Montier's Little Book of Behavioral Investing]
"For instance, a group of people were asked to read randomly selected studies on the deterrent efficacy of the death sentence (and criticisms of those studies). Subjects were also asked to rate the studies in terms of the impact they had had on their views on capital punishment and deterrence. Half of the people were pro-death penalty and half were anti-death penalty.
"Those who started with a pro-death sentence stance thought the studies that supported capital punishment were well argued, sound and important. They also thought that the studies that argued against the death penalty were all deeply flawed. Those who held the opposite point of view at the outset reached exactly the opposite conclusion.
"As the psychologists concluded: ‘Asked for their final attitudes relative to the experiment's start, proponents reported they were more in favor of capital punishment, whereas opponents reported that they were less in favor of capital punishment.' In effect each participant's views polarized, becoming much more extreme than before the experiment.
"In another study of biased assimilation (accepting all evidence as supporting your case) participants were told a soldier at Abu Ghraib prison was charged with torturing prisoners. He wanted the right to subpoena senior administration officials. He claimed he'd been informed that the administration had suspended the Geneva Convention.
"The psychologists gave different people different amounts of evidence supporting the soldier's claims. For some, the evidence was minimal; for others, it was overwhelming. Unfortunately the amount of evidence was essentially irrelevant in assessing people's behavior. For 84% of the time, it was possible to predict whether people believed the evidence was sufficient to subpoena Donald Rumsfeld based on just three things:
1. The extent to which they liked Republicans
2. The extent to which they liked the US military
3. The extent to which they liked human rights groups like Amnesty International.
"Adding the evidence into the equation allowed the researchers to increase the prediction accuracy from 84% to 85%. Time and time again, psychologists have found that confidence and biased assimilation perform a strange tango. It appears the more sure people were that they have the correct view, the more they distorted new evidence to suit their existing preference, which in turns made them even more confident!"
"We'll pluck significance from the least consequential happenstance if it suits us and happily ignore the most flagrantly obvious symmetry between separate aspects of our lives if it threatens some cherished prejudice or cozily comforting belief; we are blindest to precisely whatever might be most illuminating," wrote Ian Banks, of the protagonist in the science fiction novel Transition I am currently reading.
POINT NUMBER TWO: I AGREE,"WE ARE WHAT WE READ"... BUT HOW DO WE KNOW WHEN IT'S VALID, TRUE, ETC.?
THERE IS LITTLE QUALITY ASSURANCE IN PUBLISHING, LESS NOW (WITH BLOGS, ETC.)
For 15 years I have been writing--books, articles, blogs, newsletters, etc. Some of what I wrote was pretty good (how can I be objective?); some was OK, and other parts were either obvious, trite or just plain wrong. Now I did not know of the flaws when I wrote the material--at least not consciously--but then few or no "editors" were watching for them either. I had a regular editor for one 5 year period, and he would "call me" on questionable premises/conclusions, trite observations, and general sloppy work. Three (our of eight) of my books had editorial review--a couple of them really good editorial help (The Power of Partnerships, The Complexity Crisis) and one had a terrible editor because she simply didn't get the central points the books was describing (The Shape Shifters).
EVEN MY FAVORITE "REPUTABLE PUBLICATIONS" HAVE SPOTTY RECORDS.
I've been interviewed by Fortune, Business Week and Forbes--the "big three" (in circulation) of business magazines, and also by Fast Company, Entrepreneur, and Inc. whose size occupies a lower tier. Fortune did a superb job of fact checking and verifying that what the interview contained was right--and relevant. Business Week and Forbes did nothing--nada, zip. Fast Company (thanks to the writer/editor of the piece) also did an excellent job. Guess which publications had the most accurate and authoritative content, and which ones you should beware of their accuracy. I no longer get BW & Forbes for that reason. I still read Fortune and Fast Company.
THE WALL STREET JOURNAL'S LATEST MISADVENTURES--A CAUTIONARY SET OF INCIDENTS
I read the WSJ a lot. It has a huge amount of great content. It, too, falls prey to its insatiable hunger for content. More is not necessarily better! Think about putting out a newspaper of that size, six days a week, covering that range of topics (which is expanding, too). What a big job. But that is no excuse for taking questionable material as presenting it as valuable reporting. A notable WSJ misadventure is its "head fake" at a Sports section. Ok, I guess it is better than nothing, so if the WSJ is the only paper one reads, it offers a little sports content--but darn little--and of spotty value.
WHEN THE WSJ PRESENTS "AUTHORITATIVE BUSINESS CONTENT" THAT ISN'T
The Monday, Nov. 30 WSJ had a supplement that is rapidly becoming a treasure trove of misinformation or useless information: The title is Business Insight over THE JOURNAL REPORT section and it is done in collaboration with MIT Sloan Management Review. The article under 'COMPENSATION" is by Henry Mintzberg, a brilliant, irascible and outspoken professor at McGill University in Toronto, CANADA. The title "No M Executive Bonuses" is vintage Mintzberg. He methodically takes apart the motivational elements of variable executive compensation, especially bonuses. He aptly describes how they can misdirect a manager, and misguide a leader. While he is a bit extreme, it offers good food for thought. What Mintzberg fails to do, is consistent with most academics: HE OFFERS NO VIABLE SOLUTION/ALTERNATIVE, NOR A PATH ON HOW TO PROCEED TO ONE WITHOUT CREATING CHAOS IN MOTIVATION VIA COMPENSATION. But at least he gets the brain going with a lot of good points to consider.
WHEN THE WSJ PRESENTS "BIG NAME TRASH"
McKinsey is the biggest of the big names in brainy consulting (along with fees that match). Lots of smart people work there--I know because I have met some of them. However, McKinsey-ites (names withheld to protect them) created one of the most obvious, trite and useless pieces of reading in the paper this week. Under the heading INNOVATION, the piece is titled "The Path to Developing Successful New Products" and says it contains findings of a study of more than 300 employees at 28 companies across North America. I'll save you the time and pain of reading it: the central three findings are "Keep it Focused," "Nurture a Project Culture," and "Talk to the Customer." DUH! In it's striving to publish these special feature sections, it reaches out to sources of dubious quality. Some are excellent; others, like the ones I cite here--are NOT.
STATING THE OBVIOUS WITH GUSTO
The article contains such insightful gems as "Top performers also focused more intensely than low performers on staffing projects with the right people." Hello? Another one: "The top-performing companies... also nurtured a strong project culture by making product development a priority." The really profound one: "The teams with a clear understanding of project requirements appeared better able to make trade-offs between product performance and things like cost, time to market and project risk." (My emphasis added.) In fairness, the authors were an engagement manager (shame on him), an associate principal, and a graduate student. My issue is that a highly regarded publication like the WSJ would allocate 40 column inches to this kind of obvious tripe. In all likelihood the grad student wrote it and thought the findings were a revelation. Anyone with experience would yawn and say, "OK so what else is new?"
WHERE ARE THE EDITORS?
The same section contained another "tan box inset" of almost the same length on "Outsourcing Innovation." It was authored by three Ph. D.'s in marketing. Academics are a long standing treasure trove of hindsight. Some of it is useful. Much of it is not. This article measured innovation by the number of patents produced, and how many subsequent patents were built upon them. Someone needs to share with them some of the brilliant work of an academic (no deceased) who "got it," Theodore Levitt. He clearly differentiated innovation as doing more than just finding (and patenting) neat ideas. Innovation involves the successful commercialization and/or practical use of those creative ideas. The penultimate finding of this lengthy article was that companies who outsourced innovation ended up with generic products--why? Because the contractors to whom the innovation was outsourced sold their ideas to multiple clients. Isn't that a common and well-known risk of any outsourcing? If you can buy it, so can I--so what is your advantage?
WHO READS BUSINESS BOOKS ANY MORE?
I've had several questions (actually more than several) about what my next book was going to cover. My question in return was: What business person has the time and takes the time to actually read a business book these days? I can't get more than about 50 pp. into them and I see where it is headed, jump to the last chapter to see where it ends up and I'm done with it. Exception: gifted writers like Malcolm Gladwell capture me and hang onto me for the whole book. But then he's not a "business expert" is he? He's a journalist. If Tom Friedman would make his books 1/3 shorter, I'd finish his. He's very talented and interesting, but he just goes on too long.
MINI-BOOKS AND "WHITE PAPERS" ARE FAR MORE EFFECTIVE
Two inescapable conclusions (from my perspective, at least) are who I'll end this edition.
---First: The term "caveat emptor" (loose translation: let the buyer beware) applies to written material as much or more so, so it should be "caveat lector"—let the reader beware. Test every source from which you read for accuracy and that there is some measure of quality assurance.
---Second: I'd like to test my premise that a well written mini-book of 36-48 pp. or a "white paper of 12-24 pp. on a topic is preferable to a full sized 200pp. book to the vast majority of business readers.
--Third: Remember that "you are what you read", but quality assurance is often absent...and then "you tend to believe what you already believe and discount dissenting voices."
FEEDBACK PLEASE?
Apple's new iPad adds to the profusion of "reading devices." What format do you prefer for your information needs? New E-book readers like Kindle? Books--paperback or hardcover (larger, heavier, more costly, but with bigger print and a heftier feel)? Mini-books? White Papers? Blogs? Articles--lengthy or short ones? Magazines or newspapers? Newsletters or blogs? Do you like annotations that tell you where the source material came from? Do you prefer to read from traditional print (paper) or on-line? In what ways do those preferences vary? Finally, how do you choose and do you try to "fact check" what you read?
OK, THERE YOU HAVE IT. A BUNCH OF VIEWPOINTS AND SOME QUESTIONS FOR READERS TO ANSWER. WHADDAYA THINK?
Best, John
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PS NOTE: If the appropriate level of annotation and editorial (scientific) checking had been required for the "consensus conclusions" on global warming, it would have been laughed out of town--there was little or nothing credible--and what there was, had been "doctored" to support the conclusions desired, not the accurate ones. The so called "scientists" who concluded were not even specialists in the field. They came from other fields of scientific study, far removed from climatology and its effects. Thus the furor over the recent discovery of emails asking people if they had or could delete all sorts of "incriminating" emails regarding this ruse.
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MORE JOHN MAULDIN...YOU CAN SUBSCRIBE TO IT--FREE (NOT MANY THINGS THIS GOOD ARE FREE ANY MORE.http://www.frontlinethoughts.com/learnmore
Another Excerpt from John Mauldin's Frontline Weekly Newsletter© of Jan. 8, 2010
"....Those who are invested in the idea of a "V"-shaped recovery became excited over the jobs report last month. Unemployment rose by only 11,000 jobs, if you did not look at the underlying numbers or ignored the household survey. And the consumer confidence surveys have begun to rise. The Index of Leading Economic Indicators has now risen for six months in a row. Productivity is up. And surveys indicate that consumer spending is up. GDP growth in the fourth quarter looks to be in the 3%-plus range. All reasons to be bullish, if you are looking for a reason to be bullish. If you don't examine the underlying data, you can feel good. The problem is that when we look deeper into the data than just the headlines, there are concerns.
For instance, take the contention that consumer spending is rising. I called Philippa Dunne at The Liscio Report. They survey the various states about taxes, among other things. "Sales taxes are not up and the current survey we are doing is pretty bad." She used the word "horrified" when commenting on some of the respondees' replies at the various state tax offices. Further, today we find that credit card lending dropped $17 billion last month, the largest drop in history. And this was during Christmas!
Savings are up. Credit is down. Where did the rise in consumer spending come from? Remember, these are mostly surveys and/or comparisons with a disastrous 2008. And they compare same-store sales for chains like Best Buy, which no longer competes with the bankrupt Circuit City, or for chains that closed stores, forcing buyers to the remaining stores. The key to watch is sales taxes. When they are rising, consumer spending is rising. Consumer confidence is rising, but from truly awful levels. The levels are still well below any level in previous recessions and certainly do not indicate a robust economic rebound.
A challenged consumer confidence survey is not surprising, given the fact that roughly 8% of the working population is getting some form of unemployment assisance. One in eight children in this country is living on food stamps. By the way, the total number of people on unemployment is about 300,000 worse than most media accounts report. The Extended (and Emergency) unemployment claims for those out of work more than 26 weeks are not seasonally adjusted. To get the total number of people on unemployment insurance of all kinds, you have to add the non-seasonally adjusted number of continuing claims, which is currently about 300,000 higher than the seasonal adjustment. Here is a chart from Philippa, at www.theliscioreport.com.
She explained, "For the week ended 12/19, 10.42 million Americans were receiving unemployment benefits, With 5.44 million Extended claims (week ended 12/19) and 4.98 million Continuing claims.
"But NSA jobless claims show a far different story. The advance number of actual initial claims under state programs, unadjusted, totaled 645,571 in the week ending Jan. 2, an increase of 88,000 from the previous week. There were 731,958 Initial claims in the comparable week in 2009... The advance unadjusted number for persons claiming UI benefits in state programs totaled 5,479,110, an increase of 388,729 from the preceding week. A year earlier, the rate was 4.0 percent and the volume was 5,317,388. "So the actual, the real benefits paid (Initial, Continuing, and EUC claims) hit another record of 11.268 million." (source: The Big Picture)
Today's employment report was just terrible. The headline said we lost 85,000 jobs. That is from the establishment survey, where they call up larger businesses and ask them about their employment. They also do a household survey, where they survey about 400,000 households. That report reveals a much worse situation.
Last month, single women who are heads of households saw their unemployment ranks rise by a massive 127,000. The number of employed men fell by 214,000. The total number of unemployed in the survey rose by an enormous 589,000. Those classified as not in the work force (due to the fact that they did not look for jobs) rose by 843,000! That now means that in 2009 3.5 million people were dropped from the potential labor force count because they were discouraged.
If you add those to the 15.3 million who are unemployed, you get a much higher unemployment number than 10%. Getting that exact number is tricky, because if you are back in school (as some of my friends are) you are not looking for a job but are going to want one soon. And if the economy does rebound and jobs start to become available, then it is likely a large number of the discouraged 3.5 million will start looking for jobs and therefore be listed in the work force. Ironically, a recovering economy could see the unemployment number rise. During the recovery, it will be important to look at the total number of employed and not just at the unemployment rate.
Sidebar: As noted above, a large number of people were dropped from the official labor force. What that means is that even though the number of employed people fell, the unemployment rate did not. It will be interesting to see if a lot of those people just decided that December was not a good time to be looking, spent time with families, or decided it was too cold to get out. How many will start looking as we get into the new year? We could see a rise in the unemployment rate next month if a large number do look for work.
Look at the chart below from my friend Greg Weldon. (It just hit my inbox.) It shows the percentage of people who are participating in the work force. ( www.weldononline.com) It is sadly dropping, which means that incomes to families are dropping. The number of people I know who are looking for work or are struggling increases each week. It truly saddens me.
The Statistical Recovery
So why, if the employment picture looks so bad, are we getting positive GDP numbers? I coined the term "Statistical Recovery" last summer to describe an economy where the statistics are positive but it certainly doesn't "feel" like a recovery. So, how is it that we see a rise in the statistics?
First, year-over-year comparisons are looking better, since 2008 was horrific. Second, inventory levels are about as low as they will go. In the way GDP is figured, a reduction in inventory reduces GDP. That was a negative figure for most of this recession. Simply because inventories not falling any more, it is easier to get a positive GDP.
Second, as I have written, there are one-time benefits for GDP from the federal stimulus. Roughly 90% of the 2.2% growth in GDP in the third quarter was attributable to the stimulus, and we will see a similar affect in the 4th-quarter numbers and at least through the first half of next year. A reduction in imports is also a positive for GDP. Ee are buying less "stuff" from abroad, so that helps statistically.
Martin Feldstein, one of the great economists of our time, was quoted last week as saying that the recession is not over. Indeed, it you look at past recessions, it is not all that unusual (8 out of 11 times) for there to be positive GDP quarters in the midst of an ongoing recession.
The Great Experiment
So this is the backdrop as we look into the future. Unemployment is rising and is likely to remain stubbornly high (over 10%) for some time, except for the few months this coming summer when the Labor Department will hire hundreds of thousands of temporary census workers. The savings rate is rising, and consumer spending is at the very least challenged. The stimulus starts to drop sharply in the latter half of the year. States, counties, and cities are short about $260 billion and will either have to cut services (and thus jobs) or increase taxes. Housing is likely to get weaker, as there are large numbers of defaults coming because of mortgage-rate resets this year and next (more on that in a few weeks). Valuations on stocks are in the high range, and do not portend well for long-term returns.
Further - and this is the most important item to me - Congress is likely to allow the Bush tax cuts to expire and to add insult to injury with some form of large tax increase for heath care. Between the local, state, and federal tax increases, we could see a massive increase in taxes of perhaps $500 billion in a $13-trillion economy, or about 4% of GDP.
Think about that for a moment. It is likely we will begin 2011 with close to 10% unemployment, if not higher. Christina Romer's work shows that tax cuts have a three-times benefit to GDP. Tax increases presumably have a similar negative effect. (Ms. Romer, by the way, is President Obama's Chairwoman of the Council of Economic Advisors. This is not a partisan idea.)
This is the great experiment to which we are going to be subjected. There are those who agree with Art Laffer and company that tax cuts are a positive for the economy (that would include your humble analyst). And there are those who contend that the economy did just fine in the Clinton years before the Bush tax cuts and that we will do just as well if we take them away. And further, taxing the rich a little more is not really going to change their behavior.
My contention is that if such a tax increase is enacted all at once, the economy will at a minimum dip back into a nasty recession. If I am wrong, then I will have to abandon one of my long-cherished beliefs. I will have to stop arguing that tax cuts are as important as I think. Right now, when I read the data and studies, they confirm my tax-cutting bias. But I have to be willing to change my mind if The Great Experiment proves me wrong.
But if you think unemployment is high now, you will really not like what happens if we dip back into recession. It could go a lot higher. They are truly risking a great deal if they decide to pursue this experiment.
Thus, I am faced with a great deal of uncertainty as I look into the future with my forecasts - and we will get into the bulk of the actual forecasts next week. I almost titled this letter "The Year of Waiting," because there are so many important developments we are waiting on. Will they actually raise taxes in such a soft economy, or will cooler heads prevail and the increases be postponed, or at least phased in over 4-5 years? What will the health-care bill look like? There are so many things that could significantly change any predictions.
As I have written for years, the stock market drops an average of over 40% during a recession. If we go into a recession in 2011, it is highly unlikely that there will be an exception to the bear market rule. But this market seemingly wants to go higher. Smart people like my partner Steve Blumenthal argue with me that the technicals say we could go a lot higher in the short term. And he may very well be (and probably is) right.
This is a trader's market. It is not time to buy and hold large indexes or high-beta stocks and expect to be made whole over the next ten years. Hope is not a strategy. But waiting for the "shoe to drop" is frustrating, I know. However, that is the situation we find ourselves in.
We will go into this next week, but the current environment is quite different than 1982, when the last bull market started. Rates were falling; they are now likely to rise over time. Taxes were going down. Valuations were at historical lows, not high and rising. Inflation was coming down. And on and on. The current environment is not one in which bull markets are born.
Whither the Fed?
The futures market is pricing in rate hikes from the Fed beginning this fall. I highly doubt a politicized Fed will hike rates with unemployment over 10%, ahead of a November election. We are going to have a very easy monetary policy for longer than most observers think.
The Fed has painted itself into a very tough corner. Raising rates in a high-unemployment environment is risky. Bernanke knows what happened in 1937 and does not want a repeat. But by keeping rates too low for too long, they risk an asset bubble or two. And the federal fiscal deficit of over $1.5 trillion is not making their situation any easier.
The Fed has announced it is ending many of their various and sundry programs in the first quarter. They have essentially been the mortgage market. What will happen to rates? I think that is one of the reasons why Geithner has essentially lifted any limit on explicit guarantees for Fannie and Freddie. It will be seen as higher-paying government debt. It will also cost you, Mr. and Ms. Taxpayer, hundreds of billions in increased deficits, as they are telling those entities to eat the losses from large numbers of loan modifications. This is outrageous on so many levels. Congress should at least have to approve this.
It's getting close to my eight pages, so let me end by saying that, as we face the next crisis - and we will (there is always another crisis) - we will find we have not fixed the causes of the last one. We still have banks too big to fail, we have not put the credit default swaps on an exchange, we have not reinstated Glass-Steagall, Barney Frank's bill (which was not the one that came out of committee) now makes it exceedingly more difficult to short stocks, we keep in power the same people who missed the problems the last time, and the list of bad policies bought (typo intended) to you by bank lobbyists grows ever longer. If the current bill looks like it was written by the bank lobby, that's because it was. But it means we will have to face the same problems all over again. But that is another story for another day. Next week we look at the dollar and other currencies, gold, commodities, bonds, emerging markets, and more.
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"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." —Thomas Jefferson
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John L. Mariotti, President & CEO, The Enterprise Group, Phone 614-840-0959 http://www.mariotti.net http://mariotti.blogs.com/my_weblog/
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A WONDERFUL UPRISING
The Massachusetts Senatorial special election showed the American people at their best--standing up and voting their beliefs that Washington is getting it wrong. Scott Brown's victory sent shock waves through the Democrats who control Congress, and offered a hopeful wakeup call to their opponents whether they are Independents, Tea Party-ites or "regular Republicans." The message: get together on an agenda you can all get behind and lets take back control of our country. It almost appears as if this incident and the uprising it portends has gotten the attention of president Obama. At least he is making some conciliatory statements moving to a more centrist talk. That doesn't mean he'll act or govern that way. Time will tell.
AN INSPIRING EXPERIENCE
While meeting a friend at the Fort Myers, FL airport, I had an inspiring experience. As we sat at the Chili's having a drink and a late dinner, twenty people walked by in a group. Twelve of them were carrying large American flags. All were dressed showing support for the US Military—shirts, patches (many) vests, caps, etc. They were welcoming home a returning serviceman, whose mother and his expectant (of a baby, not just his arrival) wife were there too. He was coming from Germany, but had recently ended his tour in Iraq--and coming home "in one piece" —no major wounds, injuries, etc. Too often, in our busy world, we forget the thousands of service people, many of them very young, but some who were not young at all, on duty and/or fighting, in harm's way, in foreign lands. As one Marine said, "Semper Fi."
I say God Bless America and thank you to those who serve to preserve our liberty (and that of people in many other countries).
LET'S GET ON WITH THE PRIMARY TOPIC
Matthew Kelly, someone I respect and frequently quote says, "You are what you read. Show me the books you have read or are reading and I'll tell you what kind of person you are." Scary, huh? Impressive, too. As an author of (too many) books and articles, the rest of this edition just flowed out of my perception of books and articles and the veracity and accuracy thereof. Forewarned is forearmed.
POINT NUMBER ONE: WE VERY OFTEN SEE WHAT WE ALREADY BELIEVE INSTEAD OF BELIEVING WHAT WE SEE (OR HEAR).
John Mauldin's weekly newsletter is a source of great information. Recently, John wrote a section that was a classic in it's appropriateness, given the current polarization of political ideas, media positions, etc. However, this information is true no matter what the field of endeavor.
Prisoners of Our Preconceptions (an Excerpt from John Mauldin's Frontline Weekly Newsletter© http://www.frontlinethoughts.com/learnmore
[MY NOTE: John points out earlier in his newsletter that this material is from James Montier's Little Book of Behavioral Investing]
"For instance, a group of people were asked to read randomly selected studies on the deterrent efficacy of the death sentence (and criticisms of those studies). Subjects were also asked to rate the studies in terms of the impact they had had on their views on capital punishment and deterrence. Half of the people were pro-death penalty and half were anti-death penalty.
"Those who started with a pro-death sentence stance thought the studies that supported capital punishment were well argued, sound and important. They also thought that the studies that argued against the death penalty were all deeply flawed. Those who held the opposite point of view at the outset reached exactly the opposite conclusion.
"As the psychologists concluded: ‘Asked for their final attitudes relative to the experiment's start, proponents reported they were more in favor of capital punishment, whereas opponents reported that they were less in favor of capital punishment.' In effect each participant's views polarized, becoming much more extreme than before the experiment.
"In another study of biased assimilation (accepting all evidence as supporting your case) participants were told a soldier at Abu Ghraib prison was charged with torturing prisoners. He wanted the right to subpoena senior administration officials. He claimed he'd been informed that the administration had suspended the Geneva Convention.
"The psychologists gave different people different amounts of evidence supporting the soldier's claims. For some, the evidence was minimal; for others, it was overwhelming. Unfortunately the amount of evidence was essentially irrelevant in assessing people's behavior. For 84% of the time, it was possible to predict whether people believed the evidence was sufficient to subpoena Donald Rumsfeld based on just three things:
1. The extent to which they liked Republicans
2. The extent to which they liked the US military
3. The extent to which they liked human rights groups like Amnesty International.
"Adding the evidence into the equation allowed the researchers to increase the prediction accuracy from 84% to 85%. Time and time again, psychologists have found that confidence and biased assimilation perform a strange tango. It appears the more sure people were that they have the correct view, the more they distorted new evidence to suit their existing preference, which in turns made them even more confident!"
"We'll pluck significance from the least consequential happenstance if it suits us and happily ignore the most flagrantly obvious symmetry between separate aspects of our lives if it threatens some cherished prejudice or cozily comforting belief; we are blindest to precisely whatever might be most illuminating," wrote Ian Banks, of the protagonist in the science fiction novel Transition I am currently reading.
POINT NUMBER TWO: I AGREE,"WE ARE WHAT WE READ"... BUT HOW DO WE KNOW WHEN IT'S VALID, TRUE, ETC.?
THERE IS LITTLE QUALITY ASSURANCE IN PUBLISHING, LESS NOW (WITH BLOGS, ETC.)
For 15 years I have been writing--books, articles, blogs, newsletters, etc. Some of what I wrote was pretty good (how can I be objective?); some was OK, and other parts were either obvious, trite or just plain wrong. Now I did not know of the flaws when I wrote the material--at least not consciously--but then few or no "editors" were watching for them either. I had a regular editor for one 5 year period, and he would "call me" on questionable premises/conclusions, trite observations, and general sloppy work. Three (our of eight) of my books had editorial review--a couple of them really good editorial help (The Power of Partnerships, The Complexity Crisis) and one had a terrible editor because she simply didn't get the central points the books was describing (The Shape Shifters).
EVEN MY FAVORITE "REPUTABLE PUBLICATIONS" HAVE SPOTTY RECORDS.
I've been interviewed by Fortune, Business Week and Forbes--the "big three" (in circulation) of business magazines, and also by Fast Company, Entrepreneur, and Inc. whose size occupies a lower tier. Fortune did a superb job of fact checking and verifying that what the interview contained was right--and relevant. Business Week and Forbes did nothing--nada, zip. Fast Company (thanks to the writer/editor of the piece) also did an excellent job. Guess which publications had the most accurate and authoritative content, and which ones you should beware of their accuracy. I no longer get BW & Forbes for that reason. I still read Fortune and Fast Company.
THE WALL STREET JOURNAL'S LATEST MISADVENTURES--A CAUTIONARY SET OF INCIDENTS
I read the WSJ a lot. It has a huge amount of great content. It, too, falls prey to its insatiable hunger for content. More is not necessarily better! Think about putting out a newspaper of that size, six days a week, covering that range of topics (which is expanding, too). What a big job. But that is no excuse for taking questionable material as presenting it as valuable reporting. A notable WSJ misadventure is its "head fake" at a Sports section. Ok, I guess it is better than nothing, so if the WSJ is the only paper one reads, it offers a little sports content--but darn little--and of spotty value.
WHEN THE WSJ PRESENTS "AUTHORITATIVE BUSINESS CONTENT" THAT ISN'T
The Monday, Nov. 30 WSJ had a supplement that is rapidly becoming a treasure trove of misinformation or useless information: The title is Business Insight over THE JOURNAL REPORT section and it is done in collaboration with MIT Sloan Management Review. The article under 'COMPENSATION" is by Henry Mintzberg, a brilliant, irascible and outspoken professor at McGill University in Toronto, CANADA. The title "No M Executive Bonuses" is vintage Mintzberg. He methodically takes apart the motivational elements of variable executive compensation, especially bonuses. He aptly describes how they can misdirect a manager, and misguide a leader. While he is a bit extreme, it offers good food for thought. What Mintzberg fails to do, is consistent with most academics: HE OFFERS NO VIABLE SOLUTION/ALTERNATIVE, NOR A PATH ON HOW TO PROCEED TO ONE WITHOUT CREATING CHAOS IN MOTIVATION VIA COMPENSATION. But at least he gets the brain going with a lot of good points to consider.
WHEN THE WSJ PRESENTS "BIG NAME TRASH"
McKinsey is the biggest of the big names in brainy consulting (along with fees that match). Lots of smart people work there--I know because I have met some of them. However, McKinsey-ites (names withheld to protect them) created one of the most obvious, trite and useless pieces of reading in the paper this week. Under the heading INNOVATION, the piece is titled "The Path to Developing Successful New Products" and says it contains findings of a study of more than 300 employees at 28 companies across North America. I'll save you the time and pain of reading it: the central three findings are "Keep it Focused," "Nurture a Project Culture," and "Talk to the Customer." DUH! In it's striving to publish these special feature sections, it reaches out to sources of dubious quality. Some are excellent; others, like the ones I cite here--are NOT.
STATING THE OBVIOUS WITH GUSTO
The article contains such insightful gems as "Top performers also focused more intensely than low performers on staffing projects with the right people." Hello? Another one: "The top-performing companies... also nurtured a strong project culture by making product development a priority." The really profound one: "The teams with a clear understanding of project requirements appeared better able to make trade-offs between product performance and things like cost, time to market and project risk." (My emphasis added.) In fairness, the authors were an engagement manager (shame on him), an associate principal, and a graduate student. My issue is that a highly regarded publication like the WSJ would allocate 40 column inches to this kind of obvious tripe. In all likelihood the grad student wrote it and thought the findings were a revelation. Anyone with experience would yawn and say, "OK so what else is new?"
WHERE ARE THE EDITORS?
The same section contained another "tan box inset" of almost the same length on "Outsourcing Innovation." It was authored by three Ph. D.'s in marketing. Academics are a long standing treasure trove of hindsight. Some of it is useful. Much of it is not. This article measured innovation by the number of patents produced, and how many subsequent patents were built upon them. Someone needs to share with them some of the brilliant work of an academic (no deceased) who "got it," Theodore Levitt. He clearly differentiated innovation as doing more than just finding (and patenting) neat ideas. Innovation involves the successful commercialization and/or practical use of those creative ideas. The penultimate finding of this lengthy article was that companies who outsourced innovation ended up with generic products--why? Because the contractors to whom the innovation was outsourced sold their ideas to multiple clients. Isn't that a common and well-known risk of any outsourcing? If you can buy it, so can I--so what is your advantage?
WHO READS BUSINESS BOOKS ANY MORE?
I've had several questions (actually more than several) about what my next book was going to cover. My question in return was: What business person has the time and takes the time to actually read a business book these days? I can't get more than about 50 pp. into them and I see where it is headed, jump to the last chapter to see where it ends up and I'm done with it. Exception: gifted writers like Malcolm Gladwell capture me and hang onto me for the whole book. But then he's not a "business expert" is he? He's a journalist. If Tom Friedman would make his books 1/3 shorter, I'd finish his. He's very talented and interesting, but he just goes on too long.
MINI-BOOKS AND "WHITE PAPERS" ARE FAR MORE EFFECTIVE
Two inescapable conclusions (from my perspective, at least) are who I'll end this edition.
---First: The term "caveat emptor" (loose translation: let the buyer beware) applies to written material as much or more so, so it should be "caveat lector"—let the reader beware. Test every source from which you read for accuracy and that there is some measure of quality assurance.
---Second: I'd like to test my premise that a well written mini-book of 36-48 pp. or a "white paper of 12-24 pp. on a topic is preferable to a full sized 200pp. book to the vast majority of business readers.
--Third: Remember that "you are what you read", but quality assurance is often absent...and then "you tend to believe what you already believe and discount dissenting voices."
FEEDBACK PLEASE?
Apple's new iPad adds to the profusion of "reading devices." What format do you prefer for your information needs? New E-book readers like Kindle? Books--paperback or hardcover (larger, heavier, more costly, but with bigger print and a heftier feel)? Mini-books? White Papers? Blogs? Articles--lengthy or short ones? Magazines or newspapers? Newsletters or blogs? Do you like annotations that tell you where the source material came from? Do you prefer to read from traditional print (paper) or on-line? In what ways do those preferences vary? Finally, how do you choose and do you try to "fact check" what you read?
OK, THERE YOU HAVE IT. A BUNCH OF VIEWPOINTS AND SOME QUESTIONS FOR READERS TO ANSWER. WHADDAYA THINK?
Best, John
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PS NOTE: If the appropriate level of annotation and editorial (scientific) checking had been required for the "consensus conclusions" on global warming, it would have been laughed out of town--there was little or nothing credible--and what there was, had been "doctored" to support the conclusions desired, not the accurate ones. The so called "scientists" who concluded were not even specialists in the field. They came from other fields of scientific study, far removed from climatology and its effects. Thus the furor over the recent discovery of emails asking people if they had or could delete all sorts of "incriminating" emails regarding this ruse.
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MORE JOHN MAULDIN...YOU CAN SUBSCRIBE TO IT--FREE (NOT MANY THINGS THIS GOOD ARE FREE ANY MORE.http://www.frontlinethoughts.com/learnmore
Another Excerpt from John Mauldin's Frontline Weekly Newsletter© of Jan. 8, 2010
"....Those who are invested in the idea of a "V"-shaped recovery became excited over the jobs report last month. Unemployment rose by only 11,000 jobs, if you did not look at the underlying numbers or ignored the household survey. And the consumer confidence surveys have begun to rise. The Index of Leading Economic Indicators has now risen for six months in a row. Productivity is up. And surveys indicate that consumer spending is up. GDP growth in the fourth quarter looks to be in the 3%-plus range. All reasons to be bullish, if you are looking for a reason to be bullish. If you don't examine the underlying data, you can feel good. The problem is that when we look deeper into the data than just the headlines, there are concerns.
For instance, take the contention that consumer spending is rising. I called Philippa Dunne at The Liscio Report. They survey the various states about taxes, among other things. "Sales taxes are not up and the current survey we are doing is pretty bad." She used the word "horrified" when commenting on some of the respondees' replies at the various state tax offices. Further, today we find that credit card lending dropped $17 billion last month, the largest drop in history. And this was during Christmas!
Savings are up. Credit is down. Where did the rise in consumer spending come from? Remember, these are mostly surveys and/or comparisons with a disastrous 2008. And they compare same-store sales for chains like Best Buy, which no longer competes with the bankrupt Circuit City, or for chains that closed stores, forcing buyers to the remaining stores. The key to watch is sales taxes. When they are rising, consumer spending is rising. Consumer confidence is rising, but from truly awful levels. The levels are still well below any level in previous recessions and certainly do not indicate a robust economic rebound.
A challenged consumer confidence survey is not surprising, given the fact that roughly 8% of the working population is getting some form of unemployment assisance. One in eight children in this country is living on food stamps. By the way, the total number of people on unemployment is about 300,000 worse than most media accounts report. The Extended (and Emergency) unemployment claims for those out of work more than 26 weeks are not seasonally adjusted. To get the total number of people on unemployment insurance of all kinds, you have to add the non-seasonally adjusted number of continuing claims, which is currently about 300,000 higher than the seasonal adjustment. Here is a chart from Philippa, at www.theliscioreport.com.
She explained, "For the week ended 12/19, 10.42 million Americans were receiving unemployment benefits, With 5.44 million Extended claims (week ended 12/19) and 4.98 million Continuing claims.
"But NSA jobless claims show a far different story. The advance number of actual initial claims under state programs, unadjusted, totaled 645,571 in the week ending Jan. 2, an increase of 88,000 from the previous week. There were 731,958 Initial claims in the comparable week in 2009... The advance unadjusted number for persons claiming UI benefits in state programs totaled 5,479,110, an increase of 388,729 from the preceding week. A year earlier, the rate was 4.0 percent and the volume was 5,317,388. "So the actual, the real benefits paid (Initial, Continuing, and EUC claims) hit another record of 11.268 million." (source: The Big Picture)
Today's employment report was just terrible. The headline said we lost 85,000 jobs. That is from the establishment survey, where they call up larger businesses and ask them about their employment. They also do a household survey, where they survey about 400,000 households. That report reveals a much worse situation.
Last month, single women who are heads of households saw their unemployment ranks rise by a massive 127,000. The number of employed men fell by 214,000. The total number of unemployed in the survey rose by an enormous 589,000. Those classified as not in the work force (due to the fact that they did not look for jobs) rose by 843,000! That now means that in 2009 3.5 million people were dropped from the potential labor force count because they were discouraged.
If you add those to the 15.3 million who are unemployed, you get a much higher unemployment number than 10%. Getting that exact number is tricky, because if you are back in school (as some of my friends are) you are not looking for a job but are going to want one soon. And if the economy does rebound and jobs start to become available, then it is likely a large number of the discouraged 3.5 million will start looking for jobs and therefore be listed in the work force. Ironically, a recovering economy could see the unemployment number rise. During the recovery, it will be important to look at the total number of employed and not just at the unemployment rate.
Sidebar: As noted above, a large number of people were dropped from the official labor force. What that means is that even though the number of employed people fell, the unemployment rate did not. It will be interesting to see if a lot of those people just decided that December was not a good time to be looking, spent time with families, or decided it was too cold to get out. How many will start looking as we get into the new year? We could see a rise in the unemployment rate next month if a large number do look for work.
Look at the chart below from my friend Greg Weldon. (It just hit my inbox.) It shows the percentage of people who are participating in the work force. ( www.weldononline.com) It is sadly dropping, which means that incomes to families are dropping. The number of people I know who are looking for work or are struggling increases each week. It truly saddens me.
The Statistical Recovery
So why, if the employment picture looks so bad, are we getting positive GDP numbers? I coined the term "Statistical Recovery" last summer to describe an economy where the statistics are positive but it certainly doesn't "feel" like a recovery. So, how is it that we see a rise in the statistics?
First, year-over-year comparisons are looking better, since 2008 was horrific. Second, inventory levels are about as low as they will go. In the way GDP is figured, a reduction in inventory reduces GDP. That was a negative figure for most of this recession. Simply because inventories not falling any more, it is easier to get a positive GDP.
Second, as I have written, there are one-time benefits for GDP from the federal stimulus. Roughly 90% of the 2.2% growth in GDP in the third quarter was attributable to the stimulus, and we will see a similar affect in the 4th-quarter numbers and at least through the first half of next year. A reduction in imports is also a positive for GDP. Ee are buying less "stuff" from abroad, so that helps statistically.
Martin Feldstein, one of the great economists of our time, was quoted last week as saying that the recession is not over. Indeed, it you look at past recessions, it is not all that unusual (8 out of 11 times) for there to be positive GDP quarters in the midst of an ongoing recession.
The Great Experiment
So this is the backdrop as we look into the future. Unemployment is rising and is likely to remain stubbornly high (over 10%) for some time, except for the few months this coming summer when the Labor Department will hire hundreds of thousands of temporary census workers. The savings rate is rising, and consumer spending is at the very least challenged. The stimulus starts to drop sharply in the latter half of the year. States, counties, and cities are short about $260 billion and will either have to cut services (and thus jobs) or increase taxes. Housing is likely to get weaker, as there are large numbers of defaults coming because of mortgage-rate resets this year and next (more on that in a few weeks). Valuations on stocks are in the high range, and do not portend well for long-term returns.
Further - and this is the most important item to me - Congress is likely to allow the Bush tax cuts to expire and to add insult to injury with some form of large tax increase for heath care. Between the local, state, and federal tax increases, we could see a massive increase in taxes of perhaps $500 billion in a $13-trillion economy, or about 4% of GDP.
Think about that for a moment. It is likely we will begin 2011 with close to 10% unemployment, if not higher. Christina Romer's work shows that tax cuts have a three-times benefit to GDP. Tax increases presumably have a similar negative effect. (Ms. Romer, by the way, is President Obama's Chairwoman of the Council of Economic Advisors. This is not a partisan idea.)
This is the great experiment to which we are going to be subjected. There are those who agree with Art Laffer and company that tax cuts are a positive for the economy (that would include your humble analyst). And there are those who contend that the economy did just fine in the Clinton years before the Bush tax cuts and that we will do just as well if we take them away. And further, taxing the rich a little more is not really going to change their behavior.
My contention is that if such a tax increase is enacted all at once, the economy will at a minimum dip back into a nasty recession. If I am wrong, then I will have to abandon one of my long-cherished beliefs. I will have to stop arguing that tax cuts are as important as I think. Right now, when I read the data and studies, they confirm my tax-cutting bias. But I have to be willing to change my mind if The Great Experiment proves me wrong.
But if you think unemployment is high now, you will really not like what happens if we dip back into recession. It could go a lot higher. They are truly risking a great deal if they decide to pursue this experiment.
Thus, I am faced with a great deal of uncertainty as I look into the future with my forecasts - and we will get into the bulk of the actual forecasts next week. I almost titled this letter "The Year of Waiting," because there are so many important developments we are waiting on. Will they actually raise taxes in such a soft economy, or will cooler heads prevail and the increases be postponed, or at least phased in over 4-5 years? What will the health-care bill look like? There are so many things that could significantly change any predictions.
As I have written for years, the stock market drops an average of over 40% during a recession. If we go into a recession in 2011, it is highly unlikely that there will be an exception to the bear market rule. But this market seemingly wants to go higher. Smart people like my partner Steve Blumenthal argue with me that the technicals say we could go a lot higher in the short term. And he may very well be (and probably is) right.
This is a trader's market. It is not time to buy and hold large indexes or high-beta stocks and expect to be made whole over the next ten years. Hope is not a strategy. But waiting for the "shoe to drop" is frustrating, I know. However, that is the situation we find ourselves in.
We will go into this next week, but the current environment is quite different than 1982, when the last bull market started. Rates were falling; they are now likely to rise over time. Taxes were going down. Valuations were at historical lows, not high and rising. Inflation was coming down. And on and on. The current environment is not one in which bull markets are born.
Whither the Fed?
The futures market is pricing in rate hikes from the Fed beginning this fall. I highly doubt a politicized Fed will hike rates with unemployment over 10%, ahead of a November election. We are going to have a very easy monetary policy for longer than most observers think.
The Fed has painted itself into a very tough corner. Raising rates in a high-unemployment environment is risky. Bernanke knows what happened in 1937 and does not want a repeat. But by keeping rates too low for too long, they risk an asset bubble or two. And the federal fiscal deficit of over $1.5 trillion is not making their situation any easier.
The Fed has announced it is ending many of their various and sundry programs in the first quarter. They have essentially been the mortgage market. What will happen to rates? I think that is one of the reasons why Geithner has essentially lifted any limit on explicit guarantees for Fannie and Freddie. It will be seen as higher-paying government debt. It will also cost you, Mr. and Ms. Taxpayer, hundreds of billions in increased deficits, as they are telling those entities to eat the losses from large numbers of loan modifications. This is outrageous on so many levels. Congress should at least have to approve this.
It's getting close to my eight pages, so let me end by saying that, as we face the next crisis - and we will (there is always another crisis) - we will find we have not fixed the causes of the last one. We still have banks too big to fail, we have not put the credit default swaps on an exchange, we have not reinstated Glass-Steagall, Barney Frank's bill (which was not the one that came out of committee) now makes it exceedingly more difficult to short stocks, we keep in power the same people who missed the problems the last time, and the list of bad policies bought (typo intended) to you by bank lobbyists grows ever longer. If the current bill looks like it was written by the bank lobby, that's because it was. But it means we will have to face the same problems all over again. But that is another story for another day. Next week we look at the dollar and other currencies, gold, commodities, bonds, emerging markets, and more.
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"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." —Thomas Jefferson
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John L. Mariotti, President & CEO, The Enterprise Group, Phone 614-840-0959 http://www.mariotti.net http://mariotti.blogs.com/my_weblog/
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