July 2002 Newsletter
Reflections on our time
Got insomnia? Read this.
Major Influences on the Equity Market
- Corporate Scandal
Part I: What’s it all about?
Don’t shoot the messenger!!
I don’t want to minimize the significance of the revelations of corporate accounting and management issues. They are the worst I’ve seen in my 25 years in business. They are very serious and often criminal. Jail time is on the way for some, perhaps many. But, honestly, how many of us can even remember the scandals of the 1970’s and 1980’s? Our financial, legal and legislative processes deal with these fairly swiftly. And the markets tend to move past this kind of issue quickly.
Of course, we are in an election year. Few other issues have the populist appeal, with which political advantage can be sought. After all, it is hard to have a partisan battle over terrorism and the ultimately larger issues of global conflict and ideology. So, the corporate scandals are the preferred currency of the election and we are being stirred to a frenzy of anger, by politicians of both parties and by the ever-accommodating media.
Of course anger is natural, but we all do bear some responsibility for the climate that fostered the extremes that are now being revealed. Neither business leaders, nor politicians live in a vacuum. Our society and culture permits and encourages excess when it is positive and excoriates it when it is negative. We all wanted the high returns and none of us want the losses. And none of us should or will tolerate fraud and deception.
This whole issue smacks of the scene in Casablanca, when Captain Renault (Claude Reins) comes into Rick’s Café Americain and feigns shock to see gambling going on! Of course, the background reality in Casablanca and the deeper issue today is not gambling…Rick’s kind or the Wall Street kind. The real issue in Casablanca and today and the deeper forces to which the markets are adjusting is WAR.
The scandals will pass and we will have a cleaner, more responsible market, a more reliable accounting system and a more arms length consulting and investment banking process. However painful, this is the way we improve and devise better ways of managing the ongoing dynamic of human enterprise.
In my opinion, all this obscures the worldwide shift in awareness, expectation and behavior that has been created by the acknowledgement and experience of global terrorism, potentially dedicated to mass destruction.
To more fully understand this, we have to go back a few decades. The world was in great tension from the early part of the 20th century, including devastating wars, world wide and more regional. The dominant powers, aligned by conflicting ideologies, competed for advantage, finally settling into a “cold war” with periodic real and deadly regional conflicts.
Negative tension and stress bind up energy and direct it to defensive modes on all levels. Anyone still remember crouching under your desk in elementary school during air raid drills simulating atomic bomb attacks? Don’t face the windows!
It finally became clear that one ideological model was significantly more productive and enduring: democratic capitalism. We can debate the virtues and vices of this model, but it is now the major influence on virtually all global economic enterprise. Even its former arch foes, Russia and China, have adapted and adopted it.
The resolution of this competition was a great event in human history. The “end of the cold war” was seen as the entrée to a new world of cooperation, interdependence, increasing prosperity, security and peace. The “peace dividend” was hailed and eagerly anticipated. And we got it.
The “peace dividend” was not a check from Washington. It was the unleashing of a huge amount of creative, technological and entrepreneurial energy, formerly bound up in the defensive stress of one kind or another during the previous 80 years of ongoing threat and conflict. To the surprise of many, the financial markets and the promise of global prosperity paved the path to global peace.
Despite the war with Iraq in 1990, from 1989 until 9/11/01 we lived in a world moving ahead, growing more secure and free. Governments of developed countries were spending less and less of GDP on defense and more and more on trade and technology. Travel and communications were creating what was hoped to be a real global community, interdependent and prosperous. Whether actual nor not, it was the expectation. Optimism ruled.
During the 1980s, when the financial markets did well, we were told it could not last. We were reminded that the rates of return were too far above the mean and that we would have to have a time of underperformance to “regress to the mean.” Yet, into the 1990’s returns accelerated, until it almost seems that economic laws, especially the relationship between risk and reward, were suspended and we were in a new zone. By the time we shrugged off Y2K, it seemed we could have high returns with low risk.
Yin becomes yang and yang becomes yin. Now we are being asked to believe we are in a time of low, if any, returns and huge risk. We are told we must have a long period of under performing markets to redress the excesses of the bull market bubble. The tendency to extrapolate from the moment, a prime tool of the financial press, is a kind of sleight of hand that allows the mirror of deception to distract us and miss the more significant issue of a planet reorienting its resources, personal, institutional, economic and governmental, toward a period of ongoing uncertainty and apparent increasing risk.
Defensive decisions are sometimes large, as in the deployment of military resources and budget decisions in Washington. Some are large, bur relatively invisible, such as the effect of the “Patriot Act” passed by Congress, which now requires major new paperwork, examination and compliance by all financial institutions. The requirements we must now meet add a large new burden on all our administrative functions and extract energy from many other functions and raise the cost of business. Multiply this by millions of daily administrative activities and you can realize how this one requirement lowers productivity and drains energy from the system. Think about all the energy, money, time and anxiety expended by business to protect their people, their physical assets, their data systems and multiply that by the amount of anxiety experienced by each of us in our daily lives and the changes we make everyday to live in a world that is no longer reliable.
The reality of war is affecting the whole picture or the future. For now we have shifted from a world of increasing peace and prosperity to a world of risk and economic anxiety. We now live in a different world and it takes a great expenditure of energy that was otherwise more creative, productive and optimistic. Our fear of terrorism and war is now being directed to the decline in the financial markets. They feed each other and it is not a healthy cycle to remain in very long.
PART II: We only grow against resistance. Or, the brighter the light, the deeper the shadow
The power of the (collective) mind.
Where you put your attention is where your reality manifests. This dynamic of consciousness is a cardinal principal of all disciplines of meditation and creative visualization. It is also the fundamental force behind one of the most famous statements of history: “The only thing we have to fear is fear itself.”
This statement, made by Franklin Roosevelt at his 1933 inaugural address, was penned I am told, by his speechwriter, Napoleon Hill. For those who don’t recognize Napoleon Hill’s name, he was the author of many books. Among his works is the famous Think and Grow Rich, a classic in the field popularizing the power of our minds to affect our experience and our understanding of reality and our potential.
FDR made this statement to the nation (and the world) as a way of addressing a collective sense of despair coming out of the economic depression of the time and to remind us all that we are capable of great achievement and can summon the collective will to overcome adversity.
To achieve great things, we must redirect our attention from our fear to our solutions. This is true individually and collectively. Confidence in the future and faith in our capacity to master life circumstances is essential to achievement. We may be subject to circumstances, but we do not have to be victims of circumstances. We have the capacity to affect circumstances. Anyone who doubts this need only read Viktor Frankl’s intense book, Man’s Search for Meaning.
So, what we say TO ourselves ABOUT ourselves is a crucial element in determining our future. In our culture, what is the most dominant medium of our collective “self talk?” Television. Television is the most intense national and global mode of “bio-feedback” we have invented. And what are we telling ourselves these days? An assessment of the “news” and financial press reveals a drumbeat of negativity and anxiety.
You have heard me say, many times, a dominant intention behind mass communication is to gain and keep our attention. “Ratings” equal advertising equals revenue equals profit. The mass market can only be tapped by pandering to lower common denominators.
I have no quarrel with profit. In fact, I understand profit to be an expression of the application of human creative endeavor to the inherent synergy of imagination, creativity and physical, emotional, intellectual and spiritual labor. I accept private enterprise capitalism, within a context of democracy, as the best (but by no means final) mode we humans have so far devised to promote freedom and create wealth. We cannot give away or share what we don’t have.
However, the combination of pursuing profit for its own sake and its political equivalent, power, for its own sake, has been shown throughout history to tend to corruption, exploitation and oppression. To elevate and liberate, we must choose profit and power with purpose. The more noble the purpose, the more prosperity and freedom. The capacity for mass communication has created a magnification of the risks of self-serving pursuits beyond what was imaginable even 100 years ago. Only a freely chosen self-discipline can offset this tendency and elevate the same capacities to the security and liberation of mankind.
Remember, the path of least resistance is always downhill. It takes desire and dedication to choose the higher, uphill, road. This is true individually and collectively.
We have all been careening from one “crisis” to another since late in 1999. We had Y2k worries, “dot com” bombs, presidential election battles, tech, economic and market meltdowns, shattered trust in world peace and increasing feelings of vulnerability from 9/11, and now Wall Street betrayal. OK, “Uncle!”
But, this is only half the story.
We also live in a world that acknowledges its interdependence, the desire of billions of people to live a better life with a higher standard of living, better nutrition, health care and freedom. No one with anything to lose, including former adversaries, wants to foster decline and conflict. The second tallest building in the world is in China. Do you think they want to see it destroyed? We are on the verge of huge discoveries in health care, material sciences, communications and energy.
Where we put our attention is where our reality manifests. To focus on the creative, positive future and move toward it with confidence, does not require that we deny the problems of the present. We must not repress the truth of the present, but redirect it and elevate it to a higher value. Confidence in the future reveals a purpose around which to organize our effort. Confidence releases the creative energy to triumph over adversity. We are problem solvers and I believe we will solve the ones of our time and prepare the future for others to continue the journey. Previous generations did it and so will we.