The Dow Jones: Celebrating 10 years at 10,000!
Past returns are no indicator of future success. This one sentiment is the rationale for future-focused thinking, especially for countries and companies that have achieved prosperity and greatness. The cleverness of our forebears will not guarantee future returns, financial, cultural, social or otherwise.
Which brings me to a discuss of the stock market of the future. The Dow Jones just celebrated ten years hovering around 10,000. Some doomsday types are predicting a potential fall to 1,000, some are more sanguine, and the world’s pension funds appear to expecting a long boom.
Back in 2008, when everything was up for debate, I remember the violent reaction many Americans had to the notion that the stock market might not rebound. I recall floating this idea back when the banks fell over, and I people acted as if I had insulted their mother, slapped Santa Claus, and kicked a puppy. Of course the Dow will come back. Don’t you know that since the Great Depression it has always been a good investment? This means it will be a good investment in the future. To suggest otherwise is a mix of ignorance and intentional blasphemy.
2010 marks an important anniversary – the Dow Jones Industrial Average has remained at 10,000 for ten full years. If you only take the last ten years, your savings account was a better investment than stocks. You could make money trading stocks, but it is increasingly clear that the only people doing this effectively have football field-sized computers for high-frequency trading and a phalanx of astrophysicists providing the mathematical formulas.
What will stocks do in the future? That’s not really the issue here. Start by accepting the notion that past returns are no guarantee of future performance. And then, keep thinking.
Major signs of dissolution of the global finance system
by Eric Garland
Collectively, we have desperately wanted to ignore the larger implications of what people falsely call the “Crisis of 2008” or the “Banking Crisis” or even less correctly, the “Subprime Crisis.” The implications are too big, so it’s better not to pay attention, soothing ourselves with discussions of “green shoots” and chipper news reports that “the American consumer is BACK, baby!” The last thing our news media wants to do is continue the study of what happened, what it really means, and what’s next. This is a shame, as we are guessing that there is much in the way of “crisis” to come.
Here at Competitive Futures, we absolutely recommend studying disruptive events with the goal of creating strategies for the survival of YOUR company. Over and over again, we say a crisis for some is not necessarily a crisis for you, if you plan ahead. S
o when we predict major disruption, it’s not that we want to gather up a few bottles of tequila, some old records, good friends, and just wait for “the end.” Quite on the contrary, we think that it’s time for action, no matter how disruptive the news may be.
So then, just some of the news:
- Japan, the world’s second largest economy, may begin missing payments on its bonds, rendering it functionally bankrupt.
- Los Angeles, the second largest city in the United States, the tax base of which includes media, defense contracting, and major shipping, is nearly out of cash. It’s bond rating has been reduced by Moody’s to Aa3, a medium-grade risk investment.
- Greece has been saved by preferential loans of thirty billion Euros from fifteen of the EU member states. Nobody, however, is discussing what happened, why it happened, or how to keep it from happening again.
The pattern emerging here is that we have major early warning signals that the current “crisis” is part of a much larger reorganization of society and economics. Whereas last time we focused on the debt shenanigans of private companies (AIG, Wells Fargo, Bear Stearns, Lehman, et al.) this time the focus is on nation-states themselves. This isn’t about stocks, from which people expect some risks, but government bonds, which are supposed to be the dullest part of anybody’s portfolio next to shoelace futures or large stockpiles of sugar packets.
Nobody is talking about how much of a rupture this could be, which is no surprise given how little people wanted to discuss the last “crisis.” Before, this was presented as a crisis of economy – “The economy has taken a bad turn; we will bail out the private actors and things will return to normal. Oh yeah, and regulate some stuff…maybe, so that this doesn’t happen again. Not that we knew what happened.”
Now, with the bankruptcy of major cities and states and entire countries, we have a crisis of the global system. Nation-states are attempting the regulate financial actors that are orders of magnitude larger than the agencies that purport to have legal control over them. It doesn’t really work, but when push comes to shove, the people accept the sovereignty of their elected governments to print currency, engage a stimulus, or create new regulatory regimes. The inverse is not true for nation-states. Once nations have failed, our final unit of geopolitical analysis is finally gone. If Japan defaults, they can’t really send out Mizuho Financial to negotiate on their behalf or print a stimulus. The Yomiuri Shimbun isn’t really the official spokesperson for the nation – their foreign ministry is. And after all, it’s the government that backs the currency the businesses use, not the other way around.
You might imagine, after being caught flat-footed in 2008, that our managerial culture would be more sensitive to these emerging patterns and their potential implications.
Some will pay attention, and those people can position themselves for success. Will that be you?
Assuming a bright future – pensions drag down General Motors
by Eric Garland
One of our more accurate predictions at the end of 2008 was the soon-to-be-discovered catastrophe of unfunded pensions. As 2010 develops, we see that many of the current hotspots in the ill-defined “financial crisis” are tied to this one issue of having overvalued the future at the expense of the present.
California is sitting on around $500 billion (!) in liability. The state of Illinois is short $78 billion for it’s pensions. Now, here comes The New General Motors, still losing billions after a taxpayer bailout. The Government Accountability Office has recently released a report about how pensions will likely drag the ailing manufacturer down starting in 2012 or so. (h/t to Megan McArdle at The Atlantic for quality analysis here – also, the comments section is a stitch)
What happens in 2012? The bulk of the Boomers start cashing in those defined-benefit pension plans, heading to the doctor’s more often, and generally turning 65 at the rate of 7000 per day. Aren’t forecasts useful? This is why we call it a megatrend – it will impact car companies, state governments, universities, national governments, baseball teams, travel agencies – everybody.
Nothing is more dangerous than a business decision based entirely on, “sunny, bright scenarios of fantastic success at 8% returns for all of our investors, forever!”
Local currencies in distressed towns
by Eric Garland
Between the Greeks staying in the European monetary union, or Detroiters keeping their dry cleaners and doggie-daycares afloat, there is a considerable amount of talk about the role of currency. The crux of the European issue is that the Portuguese and Greek economies are so different from the French and German ones, it is difficult to keep one currency with the same rules and assumptions in play. The fringe actors are no longer able to keep up the facade required for membership in the club.
We are seeing a microcosm of this in local towns in America, and the issue comes down to the ability to maintain a central currency. We note with interest an uptick in stories about local currencies not seen since the banking meltdown of 2008 and 2009.
Last year, two Detroit tavern owners were sitting at the bar, sampling their beverages and bemoaning the local economy — no one in the city had cash, and when they did, they spent it in the suburbs. Then the pair hit on a solution: Print their own money.
It is, after all, perfectly legal for anyone to issue currency, as long as it doesn’t look too much like a U.S. dollar. Thus was born the Detroit cheer, a local scrip accepted by a handful of city businesses, including a pizzeria, an electrician and a doggy day care center.
But why would people go to such trouble? Money is money, right?
When the Treasury prints billions to bail out banks and automakers, people look for alternatives. These folks may look nutty now, goes the quip, but wait till the dollar goes the way of the Argentine peso. Then you’ll be exchanging a wheelbarrow of cash for a bay buck, local currency boosters say.
What could this mean in terms of business strategies? One of the most likely implications would be a return to local distributors, those able to deal best with the local market and even local currencies. Compare this to the recent trend of market consolidation in a variety of industries. It just doesn’t match.
First Greece and Portugal, but they are on the outskirts of civilization. First Detroit and Western North Carolina, but those places aren’t prime time.
Next…California? Spain? Iceland? New York State?
Gregor Macdonald on the future of energy, economics, and society
by Eric Garland
For those of you who know Gregor MacDonald, you know you’re in for a treat with this podcast- a full hour of some of Gregor’s latest forecasts on energy, economics and society, insights you simply won’t get anywhere else.
For those of you who haven’t discovered Gregor yet, he is one of the top energy analysts in the world, and in our minds, one of the top analysts of anything, period.
This podcast covers sweeping ground:
- Why we’re at peak automobiles
- The end of cheap oil
- Coal’s role in the development of the world economy
- The return to human capital and small towns
- Why waterways are the future
- Our current period of “late phase economic decadence
- Why PAKISTAN holds the key to the Copenhagen Protocol
Crazier still, we could have spend ANOTHER hour talking to him and still not exhausted him of insight.
Enjoy.
Volcker: Keep banks small
Quite interesting development: Paul Volcker is recommending that we break banks up into smaller, more secure pieces to reform the financial sector.
Very reasonable analysis, but it’s pretty rare in these days when the media praises every merger and acquisition as a way to improve customer reach, innovation, fresh breath, and more.
Bernanke’s angry about AIG, not ready to look into the future
I don’t think the government will show us the future of the economy, and maybe that’s just fine:
Mr. Bernanke defended the latest government injections into AIG — putting the total commitment at more than $170 billion — and said the actions would help stabilize the firm and carry out spinoffs and sales of noncore units.
“We don’t know for sure what the future will bring. We don’t know how the financial system will evolve or how the economy will evolve. But I do think that this does give us the best chance both to achieve financial stability and as well to ultimately recover most or all of the investments that the public has made in AIG,” he said.
It is not clear to me how nation-states will be able to justify allowing banks to merge to the size of AIG in the future. Companies of that size are so big, the government appears powerless to stop them, and yet that same government ends up responsible for keeping them solvent in the face of disastrous business decisions:
“AIG exploited a huge gap in the regulatory system. There was no oversight of the financial-products division. This was a hedge fund, basically, that was attached to a large and stable insurance company, made huge numbers of irresponsible bets, took huge losses. There was no regulatory oversight because there was a gap in the system.”
This isn’t a moralistic forecast, but a practical one – what smart country would allow this situation to be repeated in the next 50 years? What investor would risk his capital in the same manner? We won’t have to wait for some government to outlaw this behavior; capitalists will take the lead by being more skeptical about investments.
More importantly: Bernanke claims he has no idea what the future will bring. That’s OK – it’s our job anyhow.
The future is NOT in more bank lending
by Eric Garland
I studiously avoid day-to-day politics into the discussion of strategic trends, but in this moment of critical government decision it is unavoidable.
Listening to President Obama’s speech before a joint session of Congress, I tried to imagine the impact of the trillions in deficit spending on the global economy. America’s recapitalization of banks, according to the President, is to stabilize the economic system but also to get banks lending again.
The concern is that if we do not re-start lending in this country, our recovery will be choked off before it even begins.
You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll.
But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. With so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or to each other. When there is no lending, families can’t afford to buy homes or cars. So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.
That is why this administration is moving swiftly and aggressively to break this destructive cycle, restore confidence, and re-start lending.
I have placed several graphics on this blog about the trillions of dollars in debt that have been created through this culture of debt in the past twenty years. This crisis is due largely to that culture. Surely, rolling lines of credit are necessary to running most businesses. There are fluctuations in cash flow that require a certain percentage of your annual revenue to be offered to you in credit to keep things functioning.
That’s not what has been going on. We’ve financed trillions of dollars of GDP through rampant debt. Note the difference between real GDP and economic activity financed through leverage:
This culture has destroyed the Anglo-American banking system. Many corporate mergers have been made possible only through billions in available debt. Education prices shot well ahead of wages due to availability of private student loans. Housing is crushing the middle class now that the bubble has burst – a bubble that would have been impossible without a reckless culture of debt.
If we are to recover, the culture must change. According to Mish, who should be one of your favorite economic bloggers:
With all due respect Mr. President, you and Congress want to force banks to lend when banks (by not lending) are acting responsibly for the first time in a decade. Mr, President can you please tell us who banks are supposed to lend to? Do we need any more Home Depots? Pizza Huts? Strip malls? Nail salons? Auto dealerships? What Mr. President? What? And why should banks be lending when unemployment is rising and lending risks right along with it?
Note that he mentions retail, also at an all-time high bubble, and which also will come down.
I’m in a mood to make short-term predictions about management: The future is in growing your business from organic growth, recapitalizing cash from operations. It will not be from exuberant bank lending policies, or this malaise will last an extra five years.
Obama tests Keynesian economics in 2009 – new hotness, or old and busted?
by Eric Garland
I thoroughly enjoyed the NPR segment yesterday entitled “Obama tests Keynes” in which a couple of young guys dig into the often-bewildering rhetoric of the economic stimulus package. Funny, relevant, and worth a listen.
It’s important that in this case it’s young journalists taking a fresh approach to the economic arguments of Baby Boomers. I don’t think the Boomers at the head of our institutions often recognize that the political ideologies discussed were born long before we arrived on the scene, and often have no connection to reality for Gen X & Y. The snarkiness between taxcutters and economic stimulators often generates as much deep-seated passion as comments about “Hanoi Jane” Fonda – it’s a reference to a fight that started well before our births, and may need minutes of explanation to even make sense.
Case in point: the radio program deals primarily with the multi-decade conflict between Keynesians, who believe that well-timed government spending can save flagging economies, and market fundamentalists who belief that the entire economy can be managed through tax cuts and manipulation of the interest rate. The Keynesians protest, “government spending led to winning World War II and got us out of the Depression!” Market fundamentalists tend to argue that the slump of the 1970s proved that it’s not a cure-all – and that only deregulation, tax cuts, and Greenspan’s masterful operation of the interest rates saved us from big government stagnation.
The radio program concludes by saying that after all the discussion about this once-in-a-lifetime event, the Obama plan is basically pure Keynesian economics. After this, we’ll be able to see once and for all if it works or if we were imagining it the 1940s. The exciting bit is, this may be the first verifiable test of classical economics!
This kind of thing makes me insane.
Here we are, heading straight into the meaty part of the 21st century, experiencing an economic emergency that could only be created by a combination of today’s special mix of globalization, Internet, post-hegemonic power vacuum, unchecked assumptions, and 6.8 billion people at an unprecedented moment in history. And the only topics our elites can discuss is:
“So should we spend a lot of money on credit or fool around with the interest rate?”
Every day, people wake up and turn on the television or radio or Web site of their choice and begin worrying about a select group of numbers that are forced at them daily. We hear these measures so often, people are mistaking them for important or relevant.
- The Dow Jones Industrial Average – a collective of large-cap equities, and the prices that Wall Street gamblers are willing to pay that day to take part in their eventual earnings
- Housing starts – the number of new suburban homes under construction, with the assumption that all human housing should eventually stretch to the planet Mars
- Consumer spending – The amount people spend on Guitar Hero and couches and other goods for their new suburban homes
- Interest rates – The rate at which money can be borrowed from banks to the Federal Reserve, to other banks, to people, through credit, through…oh cripes I have a master’s degree and still don’t really get it. Suffice it to say that the interest rate policy appears as logical as Aztec shamanism, and about as transparent as the election of the Pope
- Stimulus packages – The amount of fake money spent on real things, supposedly to be paid – with interest! – by future generations, who will repay this through all the fantastic, super-paying jobs that are right around the corner…so…uh…just let us retire in peace, um, and keep paying your taxes…
We follow these things excessively, and to the untrained eye, they don’t seem to be leading to better management of the world economy. In fact, the world has been managed exclusively through these kinds of measures, and our policymakers are stuck arguing on the radio about whether KEYNES got us out of the GREAT DEPRESSION using these numbers.
GUYS – CAN WE TALK ABOUT THE NEW STUFF HAPPENING?
U.S. manufacturing now resides in China. Our kids are in debt. The Internet is making new companies possible and other companies obsolete. Science and technology is rolling onward. This is probably just another phase of Kondratieff cycles or Schumpeterian creative destruction. We’re looking at a huge change of management between the Boomers and Gen X. The Boomers are going to start going to the doctor a LOT and will crush the private healthcare system. Mass media is about to go extinct. Europe is out of kids, while the average age of Iran in 24.
Now, how is it that the argument can still be down to deficit spending versus interest rate policy?
Here’s some new measure to try out on the TeeVee, just to inject a bit of new debate into the public sphere:
- The Gig Rate: Measure the percentage of people who just graduated with expensive student loans and got a job that pays for rent, food, and debt repayment
- The Grandma/Doctor Ratio: Percentage of grandmothers able to get to their doctors appointments as scheduled, not left at home, letting their prescriptions go out of date, because they can’t get transportation
- The Ebay Entrepreneur Stat: Number of cash flow-positive home-based jobs created through Internet technologies, allowing people to make money and still raise their kids
- The Youth Diabetes Drop: Number of young people diagnosed with Type II diabetes mellitus able to reverse their disease through diet and exercise, thus saving society billions in the long-run
- The Volunteer Volume: Number of people financially secure enough in their lives to donate time to a local charity, improving their communities at no cost to taxpayers
- The Revitalization Rate: Dollars generated through the repair of our natural and built environments, from wetland and waterways to city centers and school districts, creating economic prosperity while giving future generations even more opportunity
I don’t care if you use these – invent your own. Find a way of discussing economic prosperity in a way that doesn’t use these same, tired, busted statistics.
It’s time to leave John Maynard Keynes where he was: a Cambridge elitist who bounced around the London dinner party circuit, hating the working class and delivering all kinds of new, interesting ideas just for shock value. I think he’d be sorely disappointed in us if he thought that in 2009 we hadn’t moved past him, despite having gone to the moon, defeating communism, and inventing about 1000 new world changing technologies.
KEEP THINKING.
Earthquake: General Electric no longer providing quarterly guidance
by Eric Garland
Amazing news that General Electric will no longer provide quarterly earnings guidance.
This is not just a decision by a public company to change its relationship to Wall Street, but a sign of a much bigger change in industry itself. It’s not just that people are going to take the longer view out of some appreciation of foresight or sudden development of wisdom, but out of respect for the massive changes currently facing global commerce.
About Eric Garland
Eric is one of the world's pre-eminent thoughtleaders in forecasting and strategy. He helps leaders of business and government make critical decisions about their futures.Connect with us
Read Future Inc.
Learn
a time-tested, profitable method of discovering business opportunities in the future with Eric Garland's groundbreaking Future Inc: How Businesses Can Anticipate and Profit from What's Next, available at Amazon and fine independent booksellers.
