In the past decade, food has become so cheap and abundant that a gradual trend towards the premium and the obscure has dominated the food-scape.  As a result, prostrating oneself in front of a food trend – whether it is flirting with veganism or vegetarianism, eating local (i.e. the 100-mile diet), eating organic, eating cruelty-free, eating seasonal, has become the favourite pursuit of the elitist and upwardly mobile.

The politics of food, particularly the inter-generational gap between how our grandparents, versus how we view food, is explored in this excellent essay by Mary Eberstadt.  The fictional character, the 30-year-old Jennifer, is representative of urbanites today in her views of food.

Wavering in and out of vegetarianism, Jennifer is adamantly opposed to eating red meat or endangered fish. She is also opposed to industrialized breeding, genetically enhanced fruits and vegetables, and to pesticides and other artificial agents. She tries to minimize her dairy intake, and cooks tofu as much as possible. She also buys “organic” in the belief that it is better both for her and for the animals raised in that way, even though the products are markedly more expensive than those from the local grocery store. Her diet is heavy in all the ways that Betty’s was light: with fresh vegetables and fruits in particular. Jennifer has nothing but ice in her freezer, soymilk and various other items her grandmother wouldn’t have recognized in the refrigerator, and on the counter stands a vegetable juicer she feels she “ought” to use more.

Attaching social norms, moral abstractions, and judgments to this activity:

Jennifer feels that there is a right and wrong about these options that transcends her exercise of choice as a consumer. She does not exactly condemn those who believe otherwise, but she doesn’t understand why they do, either. And she certainly thinks the world would be a better place if more people evaluated their food choices as she does. She even proselytizes on occasion when she can.

But the time of food abundance might soon be over.  That is, if Britain’s 20-year food-security manifesto has anything to say about it.

It warns consumers that an overzealous dedication to buying local – and avoiding imported foods – will have a negative economic impact on often poorer exporting countries if the trend continues. The report also takes aim at an over-reliance on “food miles.” For years, laws have mandated that British-sold products be labelled with indicators of their carbon footprint.

However, continuing to use food miles as a main means of calculating the environmental impact of certain foods is not sustainable in the food regime of the future, according to the report, because transport accounts for so little (9 per cent) of the food chain’s greenhouse-gas emissions.

Perhaps the closest glimpse we had of this scarce future was back in early 2008, when food prices shot up across the board, and led to riots in some parts of the world.

Is that what we are moving towards again?

Seems to make much more sense than the index-chasing, asset-driven investment approach that everyone’s buried their heads in for the past couple of decades.  The concept is not new, and was first introduced to satisfy asset-liability match in large pension plan metrics. Vanguard talks about it (pdf) here in a 2008 paper.  When it comes to your personal pension savings, why not invest according to anticipated liability that is specific to your age, risk tolerance, and expected liability profile?

Scientific America explores why so many of us readily subscribe to conspiracy theories and draw conclusions from questionable patterns.  It turns out we prefer type I over type II errors.

When our ancestors still hunted in the woods, it’s better to assume that rattle came from a poisonous snake and run, than to take your chances and get bitten. As a result, natural selection favoured those that assumed all patterns were real.

In other words, evolution hearted paranoia.

[via Freakonomics]

Yesterday I talked about how the market is far, far from efficient.  Today, I want to point you in the direction of a Wharton interview with Robert Stambaugh and Jeremy Siegel, who discuss the idea of stock volatility in the long run.

In the long run, instead of falling volatility, we are in fact faced with more trend uncertainty that compounds the short-term volatility problem. Uncertainty about the trend itself becomes more important than the actual volatility itself.  More specifically:

That uncertainty about the trend itself becomes more important the further into the future you project investment outcomes. […] to an investor with a long horizon, stocks actually are riskier per period. That is, the rate at which risk grows over the horizon such that it makes the investment riskier over the long run.

The other feature of the stock market that contributes to uncertainty is the fact that at some points in time we think the expected rate of return is higher than at other points in time. In other words, over time the rate of return that you can expect to earn over the short- and intermediate-terms fluctuates. The fact that the expected return fluctuates also adds to uncertainty because we do not know — for example — if expected returns are currently high, which many of us would guess they are. We don’t really know how long they’re going to stay high.

Using global warming as an example of uncertainty a long term horizon is subjected to:

It provides an interesting analogy to this concept because we might be very uncertain about how quickly the Earth is warming, but that uncertainty doesn’t much impact our uncertainty about crop output and economic output next year.  But if we look 50 years down the road, uncertainty about the rate [at which the Earth is warming] has a much bigger impact on our overall uncertainty.

So in the short term, rate of returns fluctuates above or below the mean. But not knowing what a meaningful average might be for a given period, we are unsure of whether to enter or pull out of the market. In the long run, the risks lie with our inability to project and assess long-term risks beyond our control, and those beyond our capacity to foresee and project.

This time around, nobody seemed to have been able to project the combustive mix of cheap credit, excessive leveraging, a loose and hardly independent regulatory environment, an over-reliance on faulty maths models, skewed short-term corporate incentive structures, and government legislation that started with nothing but goodwill.

Many people did foresee an eventual combustion.  But the depth and longevity (thus far) of the slump has surprised even some of the most bearish of economists and analysts.

This is but a glimpse of what long run risks could mean.  When a series of short term macro variables snowball into something bigger and more dynamic than we are able to assess from a distance.

picture source: ladyface

HT to my friend James, for bringing this to my attention today.  In the last hour, the market ran up dramatically, then quickly dropped.

This kind of price movements is hardly an unique occurrence in the world of stock charts, where institutional investors by and large dictate pricing with their gargantuan orders.  The market has been relatively quiet for the whole day, with little data released, nor shocking announcements made.  So either there’s a large investor (or several) out there running up prices, then quickly dumping them.  Alternatively, there’s information or rumours swerving around, privy to a few.

This happens, regularly.

Plus, Joe Nocera is poking holes in the efficient market hypothesis.

Jeremy Grantham from GMO rails:

“The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight. ‘Surely, none of this could be happening in a rational, efficient world,’ they seemed to be thinking. And the absolutely worst part of this belief set was that it led to a chronic underestimation of the dangers of asset bubbles breaking.”

Academia has largely accepted the theory within the vacuum of its constructed economies, with little challenges.

As Mr. Fox describes it, much of the early academic work that led to the efficient market theory was aimed at simply showing that most predictive stock charts were glorified voodoo — just because a pattern had developed didn’t mean it would continue, or even that it had any real meaning. Dissertations were written showing how 20 randomly chosen stocks outperformed actively managed mutual funds. (Hence the phrase “random walk,” to connote the near impossibility of beating the market regularly.) Mr. Thaler, the Chicago behavioralist, says that evidence on this point — “the no free lunch principle,” he calls it — is clear and convincing.

Addressing market volatility over the 30 years, Grantham says:

“There are incredible aberrations,” he told me over lunch not long ago. “The U.S. housing market in 2007. Japan in the 1980s. Nasdaq. In 2000, growth stocks were three times their fair value. We were quoted in The Economist in 2000 saying that the Nasdaq would drop by 75 percent. In an efficient world, you wouldn’t have that in a lifetime. If the market were truly efficient, it would mean that growth stocks had become permanently more valuable.”

picture source: kaz0085

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Don Coxe is one of the godfathers of commodities investment.  His recent investment letter highlights some market developments over the past half year, and is delivered with some commentaries.

• Interbank lending heading back to normalcy: TED spread had fallen from 110 to 72.
• The Chicago Volatility Index (VIX): high of 86 on October, 48 in mid-March, now at 32.
• Commodities as measured by CRB Index: low of 200 in February, down from 460 last June, now at 232.
• On the surprising performance of copper: not likely to see strong correlation between copper and industrial activity as some would suggest.
• China is stockpiling on industrial metals as a result of low LME prices. Even with copper’s sales surge, copper inventories on the LME has not shrunk. Investors are advised from drawing broad conclusions, instead, watch for decisive recovery of Baltic Dry Index.
• Base metals and steel stocks are the most economically sensitive group, followed by energy and agriculture; precious metals are responsive to fears of dollar or banking collapse, and inflation.
• Agriculture stocks are driven by demand on the ground. The economic slowdown has reduced demand for wheat and feed grains, but it will not to the same level as the fall in metals and oil.
• Skepticism on Obama’s initiatives on Clean Energy: jobs (estimated 4 million) will be created in universities and laboratories, but other than political goodwill, it’s far from certain his investment will provide good returns.
• Long gold, short bond, short the dollar.
• Once economic outlook improves, may boost base metal exposure and return to more exposure to oil refiners.

Some other things that caught my attention today:

• The Dutch becoming “euro-skeptics” (opens to video): I live in the Netherlands, but this is news to me.  The Dutch do not seem  overly political, and are painfully aware of the symbiotic, and highly dependent relationship it has with greater Europe.  The pragmatists are truly concerned over money (and really, that is the one unwavering theme that will always bring the country together), and the populists are throwing the usual immigration, insecurity and border issues around. Not sure why the FT focus is on the Netherlands this time, perhaps there are French and German segments coming up also?

• There are girl soldiers in the world.  Horrifying? But when your mind gets around the bend, it’s hardly surprising. There’s an equal number of girls as well as boys for the picking, so it’s only natural that military factions will take advantage of their youthful ignorance and compliance equally.  It reminds me of this story on Marie Clare years ago on the proliferation of female suicide bomers in Sri Lanka.  More often or not, they are victims of social ostracism and poverty, playthings of larger and more sinister political agendas.

• To lose a companion of many decades and have to walk the earth alone, to lose a son and not see closure in your lifetime, these are stories that will make life at this very moment seem so easy and carefree.  How does one make peace with death?  How will family and friends of the Air France crash victims cope?  Heartfelt condolensces to them all.

picture source: joy55

The New York Times has gone Oprah! Remember last year when she fronted her magazine O with the big “How could I have let myself go” headline? The Times is attempting the same cheap populism with its personal finance focused magazine this past weekend.

One article that stood out and subsequently got a lot of attention was a personal credit crisis “confessional” from one of its own economic reporters.  He has a book to promote, so naturally, the paper is there to serve as the springboard.

Many bloggers have applauded the “insight” and “braveness” of the writer, while heaping a string of other nauseating superlatives to the lengthy excerpt.  I cannot share the same sentiment.

First of all, the irony of an economic reporter having financial difficulties is just screaming for a movie deal, right? Oh wait, the movie had already been made, it was a box office bomb called Confessions of a Shopoholic. Granted, the story in this case is slightly less vapid, but equally inexcusable.

As far back as the early 2000s, Andrews had been reporting on the economy, including alarming signs of predatory lending practices emanating from the housing and mortgage industries.  In June 2004, a mere two months before his purported new chapter in life kicked off with an unaffordable mortgage, Andrews wrote the following gem titled “The ever more graspable, and risky, American dream”. Summarized by the Times in its archive, it says:

Array of mortgages for people with little cash or overstretched budgets has enabled families of modest income to take on debt once beyond their reach to buy homes, spurred by low interest rates and confidence that house prices will continue to rise. Some experts worry that recent first-time buyers will be squeezed by rising interest rates on adjustable-rate mortgages, possibly causing housing prices to wobble in some high-price markets on East and West Coasts.

With access to knowledge and information that an average house-buyer could only dream of, if anyone was aware of the leery waters of borrowing beyond one’s means, it should have been Andrews.  While most might’ve been in the dark on the prevalence and the extent of fraudulence of certain mortgage brokers and their lending practices, this guy had all the information one would ever need to make good decisions.

But he didn’t.

Instead, forgetting lessons learned from all the interviews he conducted and the reporting that followed, he “walked out of the settlement office with my loan papers, I couldn’t shake the sense of having just done something bad . . . but also kind of cool. I had just come up with almost a half-million dollars, and I had barely lifted a finger. It had been so easy and fast. Almost fun.”

It gets worse from here.  Upon discovering he was broke in early 2005, instead of leveraging down his mortgage and settling into a more modest and affordable dwelling, Andrews decided to do what millions of broke Americans resorted to: credit cards. Clearly lacking basic mathematics skills required for rudimentary budgeting, he asked his guileless wife “How the hell could we have run through so much money so quickly?”

The tragicomedy continues with him listing his wife’s frivolous consumption habits.  That, combined with his inability to grasp the financial obligations of supporting 6 children (God bless them) and two households, leaves me dumbfounded.

You must wonder what went through his head as reports on the mortgage industry became more eye-catching. In fact, in 2005, in his own piece on the industry, Andrews quoted a banking commissioner addressing consumer complaints on predatory lending. The commissioner advised, “Today, none of our complaints are about denial of credit. They are all about what happened after the credit was given.” So needless to say, unless the articles were written by someone else, and unless he’s the thick sod that he’s made himself out to be, the much belated alarm must’ve rang by then.

Yet he did nothing.

Even when fortune smiled upon him and gifted his new wife with a $60,000 job, their expenses kept piling up on the credit cards. This shopping list does not sound like everyone who is scared shitless about their financial obligations. It is one utterly out of touch with reality. If you sniff hard enough, you might catch a whiff of, boasting?  I guess in the era of reality-TV, even financial train wrecks carried out by Times prodigies are the stuff of pride. And books.

In the previous December alone, we charged $2,845 on the Chase card for Christmas gifts, food, gasoline, clothing and other expenses. The charges included almost $350 for groceries, $700 in clothes from J. Crew, $179 at GapKids and $700 for airplane tickets for two of Patty’s children to visit their father in Los Angeles. Our balance climbed from $14,118 to $17,135, and in January 2006 we maxed out at our $19,000 credit limit. And there were other expenses on other cards: $1,200 in dental work for Patty’s son Ben; $1,600 to rent a beach house the previous year for us and all the children. Granted, the beach house was an embarrassing mistake. But given that Patty had landed a solid job, it seemed like an indulgence we could work off later.

Now, to what really grates me in this whole dumbness. For a dual-income family pulling in just under $200,000 a year; with high, but predictable financial obligations to his previous family, budgeting is hardly rocket science.  Should he had found himself in the hole due to unexpected medical emergencies or other crapshoot that life dumped on him, that’s a different story.

But in this case, we have a member of the media elite who was more informed about the mortgage industry and its fraudulent lending practices than 99% of the population.  Yet despite his privileged position, he fell prey to the same wishful self-delusion and narcissism as the rest of the country.

And now he’s selling a book that chronicles his fall from financial grace, possibly to prevent foreclosure on the home he’s squatting on.  The writing is buffoonish and gratuitous, and I am not sure what emotions he is trying to elicit from his readers. Disgust? Sympathy? It’s one thing to have been financially irresponsible, it’s another to write a book in an attempt to capitalize and justify those actions.

At this point, you might stop me and say, wait, this financial responsibility stuff is hard.  The guy just wanted to get married, and have the life he wanted.  Yes, and I just want to wake up with Bill Gates’ bank account balance.  It’s high time that everyone realizes that we need to stick to the life that we can have (read: afford), not the life that we wish we could have (read: borrow).

One last thing.  Why is the Times tolerating such populist me-too sentiments? Is this an attempt to make its readers feel good about their shambled finances? Is this ritual of public atonement meant for the big guy to say to the small people: it’s ok you got shit-faced with debts, even our best and brightest succumbed to those temptations?  That’s like a personal trainer getting fat along with his clients to make them feel better when they fail to lose weight.

Sometimes you can be inspirational, sometimes you can be a crowd pleaser.  There are times when you can be both.  This is not one of them.

And one wonders why the Times is in trouble.

picture source: loosa23

Water is perhaps the most scarce resource on earth.  Yes, there is water everywhere.  But most of the water is not drinkable, not accessible, nor is the resource evenly distributed.  It’s not unlike the oil situation, where a small percentage of the earth holds the majority of crude.  But unlike oil, water is not replaceable.

So how bad is it?

A study by the University of New Hampshire shows that some 41% of the world population live in river basins under “water stress” – meaning the region is subjected to frequent shortages.

The most readily consumer able source of water, the freshwater variety, occupy less than 1% of the earth surface, yet it plays vital roles in agriculture, industrial productions, and our domestic lives.  Over 70% of water is used for agriculture, making population increase a squeeze on all aspects of our natural environment, particularly water.

The need and the necessity of water

On top of basic agricultural needs, the rise of a genuinely more affluent class in the developing worlds are consuming more meat.  As we know, animals require much more water to raise than its caloric equivalent in grains.  Additionally, industrialization and mass urbanization have placed unprecedented strains on infrastructure. Thus, the accessibility of clean water has been compromised by rapid growth in many parts of the world.

High pollution and habitat degradation makes clean water increasingly inaccessible to the poorer regions. Many demographers, geologists and political scientists have attributed the root of war and violence in conflict regions to the lack of resources, particularly water availability.

Businesses stepping in

If there’s demand, then the market will find a way to meet the need.  And it is hardly difficult to point to the existing challenging global eco-system, draughts and the ensuing human devastation to see some potentially lucrative opportunities. The explosion of bottled-water businesses is only the start.  Up and down the water security chain, from bottling rights, purification and treatment, to distribution of the product, the water business is big.

So far, GE has bought up numerous water filtration companies, and have seen success in distributing water purification systems that produce clean water from sewage. Dow Chemical’s water solution unit has also seen substantial success by licensing its variety of technologies. A small company named Water Health International, that seeks to deliver clean water to the poors, has attracted the likes of Dow’s venture fund, Johnson&Johnson, and the Acumen Fund.

Ethical issues

Of course, ethical issues will arise out of the question: Is water a basic human rights?  Officially, the UN forum designates access to safe drinking water a “basic human need”, but not a “human right”.  A number of advocacy groups are working to overturn the verdict, and prevent “price gouging of the poor by for-profit entities”.

Local conflicts over the private manipulation of resources is still a worry.  Bottle water companies, private municipal providers, shipping companies, and pipeline companies may eventually join force to move water in bulk.

Investment opportunities

Given the vital importance of water, and the potential for unscrupulous business dealings around it, it’s perhaps no surprise that water utility related companies are highly regulated in the US and elsewhere. But plans of industry-wide consolidation, particularly in the water purification sector, are still vibrant.  Holding on to those dreams, investment ideas are not exactly scarce.  A number of support companies, ranging from copper pipe and valve maker, to flow-control products maker, to developers of ocean-water desalinization plants and water distribution systems, can be looked at.  If stocks are not your thing – and it should not be most people’s thing, try limited exposure to water-based funds for more diversification.

picture source: abela

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A couple of days ago, a fellow blogger commented on this rather unfortunate Fortune article on his blog.  It is interesting for several reasons.

First, the ideas are cookie-cutter and stale.  Us Gen Yers had been told (to a certain extent) that we were on the cusp of a great demographic shift, where baby boomers’ impending departure would wreak havoc on corporate health.  True, some of us were led to believe that our contribution would be valued at a premium, which would in turn translate into lots of choices and result in us hopping through the corporate environment at break-neck speed.  In reality? Highly unlikely.  The smart ones among us always knew that good jobs are competitive, and supply almost always outstrip demand, especially at the bottom rung. But the media kept up the propaganda – to what end, I don’t know.  Every once in a while, articles like this appear.

Second, the timing is totally off.  Because of economic realities, many boomers simply can’t afford to retire.  More and more Gen Yers find themselves in a much more competitive environment than they were led to believe.  Now everybody is learning to make do with less and to compromise.  Exactly who is out pandering to those misunderstood geniuses, I’m not sure.

The somewhat hilarious prescriptions thrown around by the Fortune writer, and the kick my blogger friend got out of it, reminds me of a book I heard about recently.  In this book, the authors address the various social and consumerist constructions of the Gen Y generation.  I took some notes, here’s a broad overview of the ideas.

School: the obsession with feeling good at all cost

According to the book, the ME culture evolved over several decades, but found its decisive start within the school system.  The baby boomer generation struck out, rejected authority and tried to find its own path.  In their children, they instituted and obsessed over instilling self-esteem.  Subsequently, various forms of formal, or informal self-esteem programs were introduced in school.  They generally aim to make children feel good about themselves at all times and at all cost, with messages like: you are special, you are unique, you are fine just the way you are.

This relentless focus on the self led to some friction as children of those baby-boomers moved through the school system.  In one instance, red pen were deemed too harsh a colour to mark mistakes, so lavender was used instead.  Participation trophies in sports were introduced.

Over time, various institutions have had to deal with this cohort and adjust to its various demands.  In universities, some professors are now faced with complaints when handing out marks: some children and their parents simply would not accept bad ones. In this case, education is viewed as a business transaction, and entitlement rears its ugly head: students are customers of a product, and universities are there to provide it.  Therefore, they feel entitled to walk away with a degree, and a degree with hounours at that.

The road to hell is often paved with good intentions.  Child psychologists now recognize that instead of instilling self-confidence and self-esteem in children, this generational focus on feeling good has created quite the problematic outcome.  The languages and tools used throughout the school system has created an environment where competition is eliminated or downplayed, criticisms are removed when deemed too harsh, children are protected from failures, and as a rule, any kind of output – meaningful or not, is lavished with praise.  In hindsight, this created us: a generation hooked on constant validation and affirmation, perhaps with an unrealistic sense of our own strengths and shortcomings.

The extent to whether the above analysis is in fact accurate, is questionable.  The teachers and lecturers I encountered during my school years were for the most part, fair, constructive, and honest.  But I have noticed the emergence in a brand of bland, neutral and non-critical teachers into the classroom. With various changes taking place in the education system, and more teachers seeing themselves not as teachers but facilitators, what can we expect from the next generation?

The market feeds the beast: unique, customized, and controlled by you

Marketing shifted its focus when it comes to psychological selling.  In the past, the advertising world used to sell based on aspirations.   The marketing message then was: you are not good enough unless you buy our products.  Since nobody will ever be “good enough”, one is left to buy in perpetuity.

That message lost its lustre a while ago.  The message that sells now is something quite different.  Marketers tap into our sense of entailment , our vanity, our need to feel good, and our need for “self-expression” and self-validation through the idea of: you are important, you are unique, you are great the way you are. Now all you need is a product that we have to express your uniqueness.

If we think of some of the most successful products and services to emerge in the past decade, what comes to mind? Facebook, Youtube, IPod, Starbucks.  What do they have in common?  They all capture our need to exert and broadcast our presence, our importance, and our uniqueness to the world.

The trend that pander to the idea of self-expression and self-importance developed when the current Gen Yers were still in their tweens – the term has only been in existence for under two decades.  It was back then marketers first tasted the success of marketing to kids that had their own brand of shampoo.  Since then, that market had been segmented and targeted as one that has the power to make or break products.  I know a little about that.  I still remember the Tomagochi craze and the hand I had played in that hype with my baby alien.

Since then, our generation had not been without this constant bombardment of “uniqueness” marketing.  Marketers are also astute to introduce a sense of “control” back to the consumers: you know better than us, so tell us how and what you want.  Starbucks sells to that – customized coffee experience; burger and sandwich places want to sell you “your” burger or sandwich; cultish spiritual books sell on that – The Secret is to conform the world to your divine force; new condos targeting young urban yuppies – customize your living space by checking a few boxes.

Of course, the true irony of the situation is: the more we buy into the message of customization, the more we are essentially the same.  No matter what colour of IPod we choose, how obscure our coffee order is, or what kind of boxes we tick off when it comes to picking our condo tile or flooring colours, we are buying into the same message of uniqueness.

Arguably one of the most consistently powerful and seductive marketing pitch of our time is one that centres around the idea of: you deserve it.  The L’Oreal commercial and Oprah alike appeal to their audiences this way.  There’s nothing wrong with leading the best life that we can have.  But after years of the same self-congratulatory refrain, we have internalized the idea that luxury is for the masses and not only the rich.  In doing so, we have become accustomed to living the life we want, or “deserve”, rather than the life we can afford.  That sense of entitlement has us hooked on swiping those credit cards.  In one way or another, those self-affirmation and feel-good principles seeded during our school years, carefully nurtured by teachers, parents and marketers alike, came to fruition.

Now, the workplace

The problem gets a little more interesting when my generation enters the workforce.  The old guards are not used to tell us how valuable we are, or hold our hands for constant validation or feedback, or have the patience to listen to our unidirectional broadcast.

All the arguments given above is predicated on the idea that we are indeed a cohort, and this kind of attitude is prevalent in our generation.  In many cases, family influences can trump socialization.  Even so, I have to say that whether I like it or not, my generation probably embodies more Me-ness than generations past.  Whether these are attributable to our age and brashness, or some wider social forces, I cannot be certain.

But the ego-massaging activities the marketing community readily offers is beginning to seem more cynical than clever to me.  If they are indeed fostering a generation that is both insecure and vain, unable to cope with failure and assess ourselves critically and realistically, then perhaps we are better off without them.

Bloggers Unite declared today Unite for Hunger and Hope day.  I’m sure many posts are going up to get you to donate, to sign some kind of petition for debt relief, or in the least, just to care.  Do you care? And with so many problems plaguing our lives, and the world in general, should you care?  It’s not a rhetorical question.  I am not sure I can overcome apathy.

To say that one doesn’t care about world hunger or poverty, is like saying one doesn’t care about the environment or basic tenements of human rights.  But the images of starving children, whether they are of of the skeletal child brides variety out of India, or children with extended bellies with flies around their faces out of Africa, never really resonated with me.

There are two reasons for this.

Studies have shown that anti-smoking campaigns in schools largely fail if the program is overly reliant on the shocking the test subjects into giving up. If overly graphic images are shown – of black lungs, or the inside of a sufferer of throat cancer, students become so repulsed by the imageries, that they become detached from the message altogether.  Similarly, when I see those pitiful pictures of hungry children, their plight seems so fundamentally wretched, my sympathies and emotional triggers are overwhelmed, and I block out the situation altogether.

Secondly, I have come to realize that images of humanitarian crises are constructed by professionals with an agenda.  This is not to imply that journalists and photographers that take those pictures have malicious intentions.  But it is important to know that behind every still and live image, there are a team of people actively managing our responses.  The media create a range of identities so selective and arbitrary – us versus them, victim versus saviour, they effectively create a disaster when they decide to recognize it.

I recognize when there is a food crisis, famine is seen as a lack of progress that results in the deaths of the innocent.  I see that famine images are powerful, as they recall the pre-modern existence that most of us in industrialized society have overcome.  I have seen enough to confidently say those images feature more women and children.  The setups are always the same: they are usually barely clothed, staring passively into the lens, flies fluttering around their faces.  If you want to get more technical, I can also tell you that those pictures are always taken from a high angle with no eye contact, so as to reinforce viewer’s sense of power compared with the victims’ apathy and hopelessness.

But I cannot accept the depiction of those people as passive victims needing our pity.  It is patronizing, both to those that struggle to survive, and to the intelligence of us on the other side of the screen. And I am repulsed by the ego-tripping call-to-actions offer by exchanging my weekly latte allowance for someone’s future.  By depicting hunger, famine, and poverty as humanitarian crisis, they are creating a shroud that hide the political, economic, and social crisis for what they are.  It is simplistic, it is reductive, and it is not the solution.  “I” am more than a cheque book.  And “they” are more than victims of endless disasters.

Yet for decades on end, the west has interacted with Africa (arguably the continent undergoing the most desperate struggle with meaningful development) based on pity.  You might say, help is help, what difference does it make?  It matters greatly.

There’s a saying: Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.  In that case, the west has been feeding Africa (and barely at that), for a long time: culturally, politically, and economically.

Culturally and politically, Africa had been indoctrinated with European Enlightenment principles and their prescribed political paths.  Most had little relevance for the indigenous African tribal configurations.  To name the countless problems with this approach will take a long time, but the incompatibilities and manifestations of these are apparent: civil unrest, ethnic cleansing, violence, corruption, lawlessness, lack of independent civil society organizations.  They lead to one thing: economic stagnation.  Surely, development studies and developmental economics deal with a number of regions in the world.  But the greatest concentration and the basket cases are in always found in Africa.

Should we just throw our hands up and decide not to care? How do we find another way to relate to this kind of poverty, not through its perpetual state of victimhood, fund-raising and debt-relief themed parties, but something more, dignified?

Here’s an idea. Instead of trying to incite pity, why not facilitate understanding? Like many people, I have not gone to sub-Saharan Africa, but my idea of Africa has been largely shaped through these distorted pictures. So, enough of those manipulative imageries and selectively hyped “humanitarian crisis” for ratings, and enough of those superficial celebrity-endorsed, publicity-seeking displays of global solidarity.  What we need is understanding.  It is complex, it’s involved, it’s probably frustrating to produce and equally frustrating to read or watch.  You want me to care?  Give me genuine, and give me the bigger picture.

picture source: *nummerni

Investing is hard for professionals, and even harder for amateur investors.  Especially when success is not measured in a cumulative manner – a dozen years of good work can be undone by a bad quarter.

I have written about the many difficulties of achieving consistent good performance: from minding the myriad of intersecting forces in order to stay above the water, the skills needed to balance long-term investment principles with technical knowledge, to blocking out noises that only confuse investors.  On top of all that, it also serves to see the big picture, particularly forces related to social and demographic shifts.  There is a lot to take in – which would explain why so many of us delegate the task to other people.

Yet for all those financial advice we consume from both paid and free sources: advisors, newspaper columns, personal finance and investment magazines, business TV programs and water-cooler conversations, most small investors find themselves unprepared and worse yet, unprotected from the financial storm that swept through much of the world in the past half year.  After coming across Jeffrey Goldberg’s recent article, I am more convinced than ever that it is next to impossible for a small investor to make it in the stock market.

The small fish gets Jiffy Lube advice

Most of us have assets less than, say, $10 million.  And that’s about the threshold that determines whether one gets the attention of a top-flight money manager, or a print-out from a cookie-cutter computer program.

In the article, Goldberg highlights the pressure to provide conventional advice.

Advisers only recommend what’s conventionally palatable. They tend to say 60 percent stocks, 40 percent bonds, and they’re not likely to move away from that, no matter how extreme valuations are. They’re not likely to move away from it when the market is really high, or really low. A big part of the problem is that there isn’t a perfect answer to any of this. No one can tell you how to allocate your assets 100 percent of the time. The average investor is not getting Warren Buffett to look at his portfolio; he’s getting a printout from a computer model.

Knowing the average investors’ aversion to risk, but feeding on their hopes for ever-higher returns, an investment advisor cannot be blamed for holding up the mutual funds and stock market charts that always “trend” up and to the right.  And not wanting to miss out the double digit returns from merely parking one’s money in an investment account, most investors hand over their assets and turn on their “buy and hold” mode.

Timing matters a lot

In fact, much of the personal finance field spews out more or less the same bland and conformist conventions.  Some of the advice has proven to be sound and timeless, but many are much too general.

For example, if one marches into an investment advisor’s office today and ask for advice on dealing with a much lighter portfolio, one is most likely to be told to extend her “investment time horizon”.  This obviously doesn’t work for someone ready to cash out of his 401K after a lifetime of work and savings, or parents counting on the market to pay for their children’s impending education.  And the investment industry is hypocritical for attempting to dispense advice as though we are starting from zero, and not the minus fifty percent that many of us are finding ourselves in.

On that note, I think it’s good to stress that a singular commitment to the traditional buy-and-hold strategy, without taking into account the issue of market entry and exit timings, will get investors into trouble.  The market moves cyclically, and in the long run, it usually moves up.  Unless you’re in Japan, of course, where the market has sunk to 1983 levels.  But in most cases, let’s suppose the rightward and upward trajectory holds.

But if and when someone is caught in the peak and trough of an economic cycle, where their financial surplus and obligations are in fact more fitting for something of the reverse, then a blind faith in the long-term wisdom of the market will either have you enter the market when it’s already overbought, or cash out at a time when the market is oversold.  To mitigate such risks, financial planning needs to incorporate not only market movements, but whether volatility and riskiness of staying in the market is commensurate with one’s changing financial needs.

Customer of many, friend of none

A small investor doesn’t have a lot of friends.  At least not many that actually have their interests at heart.  The wealthy are taken care of by “wealth management” businesses that “gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don’t lose it all at once.”

The everyday investors must sift through the many personal finance columns, magazines and questionable business television programs for some sensible advice.  And those media outlets are only too happy to occupy the vacuum left by institutional and hedge fund managers.

Run-of-the-mill advice are for the uninitiated and get pretty old fairly soon.  But once investors decide to become more actively involved in self-education, he is bound get confused very soon.  Contradictory advice abound: gold or dollar, inflation or deflation, recovery or bear market rally?

The various models and theories used to price assets, measure progress and project the future are just that, models and theories.  There are people behind the scene performing stress tests, incorporating more variables, performing tweaks and adjustments all the time.  The interconnected economies complicate matters, political interests and politically dominant corporations complicate matters, unexpected behavioural shifts complicate matters, and sociological and demographic shifts complicate matters.  The market is influenced by so many unknowns, even economists can best provide outlook and analysis based on what they know.

Curiously enough, economics is also one area of academia that opened up its laboratory to the masses.  Very few of us will ever get to witness a medical procedure, or participate in a chemistry research project.  But almost all of us are involved in an ongoing social and economic experiment that is spearheaded by the stock market.  And through either voluntary or induced participation, we are required to live with a level of uncertainty not commonly known to some parts of the world.

Perhaps some of us will elect to step out and stay out of the market after this wild ride comes to an end.  Because finding someone competent enough to advice you is very hard when you are a small investor.  And finding advice on a piece-meal basis is even more dangerous, because to be selectively informed is worse than being uninformed.  In Bill Gross’ opinion, “The system is rigged.  It’s difficult for the average investor to even conceptualized what we’re talking about.” But if you insist on finding good returns from the market, then you should at least “find someone who isn’t overpromising or overcharging.”

picture source: ~Cypisek666

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Don Coxe is an investment strategist. But unlike most investment strategists that flaunt degrees in mathematics or quantum physics, Coxe is a curious historian. At 73, his curiosity has yet to wane, and his quarterly newsletter Basic Points has followed him from his old employer BMO to his new investment advisory business.

He makes investment a fun pursuit, not only of numbers, but of knowledge. In his own word, he studies history to “compare popular views about economics, finance, geopolitics with evidence of what has happened in various eras.” And making money is merely a financially rewarding byproduct of that pursuit.

In his March edition of Basic Points, Coxe drew my attention to a few points rarely discussed by investment advisors and analysts in the mainstream. Let’s see what they are.

Lack of sunspot activities and possible crop failures

Most of us are aware that the earth has been warming up in the last couple of centuries. The rise of environmentalism makes sure of that, and Gore’s Inconvenient Truth enforces that belief. As humans, we are no doubt responsible for the unprecedented level of pollution and degradation to our natural habitats. But the feverish pitch of the environmentalists has become dogmatic in recent years, and any dissent over either methodology or the validity of data that supports their belief is deemed treasonous.

As much as environmental awareness is a more than commendable cause, the sensationalism and the selectivity over the type of news and data that make it to the front page has been astounding. Bloopers are swept into the background, and wildly pessimistic and sensationalistic pieces inject more fear and exaggerated claims into mainstream conversations. We are all for a better living environment, but no end justifies the means if facts and truths are misrepresented in the process. The public will turn their backs on the cause, no matter how noble it may be.

But back to the issue on hand for now. With all of that hoopla, you would think that a cooling earth would bring a sigh of relief to the world. But no. According to climatologists, the patterns of the sunspots have been: ten years of sunspot activity, a year of rest, and then a new cycle. The last cycle ended in 2006, and there was little activity in 2007. The troubling thing is that they didn’t appear in 2008, or in 2009 so far. This means that we are experiencing the longest sunspot drought in more than two centuries. Scientists are expecting the sun to resume maximum activity anytime now. But then again, they have been holding their breath with little avail for the past year.

So what does this mean for investors? Coxe thinks if sunspot inactivity continues, we are headed for another year of crop failures and agricultural disaster. He suggests we “watch the websites that update the sunspot story. If the spots don’t return by mid-June, then there might well be great rallies in the grains. Buy the fertilizer, seed and farm equipment stocks.”

And as the unapologetic historian, he leaves us with a requisite tale.

Scotland suffered six straight crop failures during the 1690s because of late Springs and early frosts. Some historians believe this was the major reason why the Scots gave up their dreams of independence and joined England. There were skating parties on the Thames each winter. Polar ice caps expanded dramatically.

Cooling demographics

I have written before on the importance of demographics and the role it played in the ongoing US property bubble. Demographics also played a part in preventing the much anticipated Japanese economic recovery from taking place in the last decade, as well as stopping the Europeans short from writing a large stimulus check.

Don Coxe’s analysis further affirms my belief that many OECD countries face similar challenges to Japan in the coming years. In his opinion, rising standard of living and property prices took place on the back of a population boom. When this came to a sudden halt in the 70s, residential real estate is a reliable long-term asset class no more.

When the overwhelming majority of families in the OECD collectively and simultaneously chose to cease reproducing themselves in the early 1970s, and stuck to that resolution, they repealed the most basic of long-term investment concepts. Demographers and social scientists can debate the reasons behind this momentous behaviour shift – or even whether it is a good thing. We merely note the obvious, that financial prognosticators have no: people changed 35 years ago – apparently permanently – and the world changed – apparently permanently.

What began during the early 1970s was an OECD-wide collapse in the fertility rate from roughly 2.4-2.5 babies per female to 1.4 babies. Since 2.1 is required to maintain population levels, the three decades of fertility below 1.6 have, slowly but inexorably, transformed population profiles – and the housing markets.

He also goes on to spell out the corruption that went on at Fannie and Freddie that could not have existed without full backing and co-operation of the government, particularly the Democrats. Bottom line? Political leadership is as much to blame as the corporate fat cats they have been hanging out to dry the past year.

The government’s relentless pursuit of property ownership expansion ignored the basic supply and demand equation in the market place. None of the reckless lenders in the housing market noticed the reason for debasing lending criteria to expand the supply of qualified homebuyers was the dwindling number of qualified homebuyers.

While the Congress was busy enabling lenders to sign unaffordable mortgages over to poor Latinos and African-Americans, it heavy-handedly restricted the supply of working-visas and green cards to more productive, better-educated, willing and able receivers of properties. The result? The people that could have purchased and sustained a rising housing market were denied access, where those that could not afford to service the mortgages were burdened with incomprehensibly termed debts.

picture source: ~MichaelBills

When it comes to investing, the general public has been steadily moving away from the old adages that called for set allocation between the (perceived) safe bonds/cash and the (supposedly) more risky stocks. Nowadays, we have all become heavy investors in the stock market, whether it’s outright ownership or group purchasing through our work-sponsored pension plans.

Last week, I talked about the importance of market timing, particularly when it comes to market entrance or exit points. When we choose to enter or exit have the largest impact on overall portfolio return, much more than the year-on-year growth, diversification, asset allocation and all the detailed balancing and fine-tuning. Today, I want to continue the thought on market timing, and address the issue of long-term riskiness of stock market investment.

We have been conditioned to believe that in the long run, the market goes up consistently. Certainly, there are occasional dips, but many of us have probably heard of the success stories achieved by market-illiterate pensioners that retired comfortably by holding steadfastly to their basket of stocks for decades. Does this much-embraced truism still ring true in face of such market carnage? In addition to my guest post at GenX, here are more thoughts on what we can learn from the market bust.

Imperfections of diversification

One of the major cornerstones of modern portfolio theories is the benefit of diversification. Most of the time it worked. This time it didn’t, at least when applied to the stock market. There are many reasons why it didn’t. But unless you’re an octogenarian and a historian with a succinct understanding of the intertwined global financial and consumer market, and foresaw the implication of mass de-leveraging and forced liquidation, and allocated a substantial portion of your portfolio in non-stock investments, you probably didn’t benefit from diversification this time around.

In fact, long-term, buy-and-hold, value investor guru Warren Buffet, had gradually shaved his 73.5% stock holding in his portfolio in 1995, to just 25% in June, 2008. Because even he didn’t believe that diversification offered him any protection when the overall market was massively over-valued.

That’s not to say that diversification doesn’t work. It does, but only to a certain degree. Slicing and dicing stocks into ever so minute classes, series and geographic reach has not offered most investors the protection they sought.

Long-term riskiness of stock returns

A new study came out just over a month ago that attempted to poke holes in current statistical methods applied in measuring volatility. Traditionally, statistics have shown that market returns over long periods have been consistent. Thus, good returns have been followed by subpar ones, and the reversion to the mean usually paints a picture that points upward in the long run.

Applying the new and unorthodox methodology, the statisticians have found that forces other than mean reversion affect long-term returns. In one instance, the researchers claim that uncertainty about market fluctuations increases with the holding period, because uncertainty is more difficult to quantify in the long-run.

As summarized by Mark Hubert, one of the best examples of uncertainty in the long run is the case of global warming. Its impact over the next year is most likely next to nothing, but should the horizon be expanded to the next few decades, possible effects may range from “negligible to catastrophic.” Applying the Bayesian statistical model, where new information is continually incorporated into the formula to update probabilities, the researchers estimated that stock market returns over a 30-year horizon is almost one and a half times more volatile than returns over a 1-year horizon.

Buy and hold

It’s time to look at whether the buy-and-hold idea applies for most people. I recently stumbled on an article by Henry Bloget that both opened my eyes, and confirmed my suspicions in the following: Market timing and the longevity of one’s investment horizon matter much more than they are given credits for. Since I can hardly put it any more eloquently than Mr Bloget, I am quoting his 2004 article. If you have some time, the entire series of articles are well worth a read.

In the financial markets, the “long term” is long. Over the past 200 years, U.S. stocks have, on average, returned approximately 10 percent a year (about 7 percent, after adjusting for inflation). For many of those 200 years, however, stocks have returned nothing—or worse. The fallow periods, moreover, have not just lasted months or years. They have lasted decades. In a 2001 Fortune article, Buffett observed that the 20th century encompassed three major bull markets in which the Dow jumped more than 11,000 points and three major stagnant markets in which the Dow lost 292 points. The three bull markets, in aggregate, lasted 44 years; the three bear markets 56 years. For more than half of the century, in other words, stock performance stank.

The most recent market cycle spanned 34 years, from 1966-2000. The bull phase, the one we all remember, lasted 18 years (1982-2000), and it took the Dow from just over 800 to just under 12,000. The bear phase—the one almost no one remembers—lasted 16 years (1966-1982—16 years!), and it took the Dow down nearly 20 percent. Lest this tempt you to rush out and buy bonds, average bond returns from 1966-1981 were worse than those on stocks (bonds can be dangerous when inflation is rising, a fact worth remembering now).

Essentially, the message here is that markets cycle swings are much longer, and sometimes, steeper, than we are led to believe. Therefore, if you pluck your money down in the stock market, be prepared for long and sometimes breathtakingly volatile returns. Ultimately, most of us do not have this kind of time horizon when it comes to our money. Many needs arise that range from getting married to having children, from buying property to dealing with unexpected health issues. And given the uncertainty of the market to move consistently upward in the medium-term, its actual liquidity is in fact much lower than commonly perceived. Therefore, the stock market might not be the appropriate default deposit for our hard-earned money.

picture source: ~Srboraa

This might seem like a pretty out of the character subject for me to discuss, since I write about sensible, non-hype, and long-term investing principles. Those would be exceedingly prudent and timely given the market onslaught. If you are at all familiar with general investing terms, then you would most likely associate technical analysis with the image of someone hunched over multiple LCD screens, fixated by indecipherable charts and graphs in a range of neon colours, and occasionally yell “Buy!” or “Sell!” with a touch of craziness into the phone. Needless to say, your average value investor would not approve of this behaviour. In fact, Warren Buffet famously dismissed technical analysis and quipped, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.” So far not great, then why am I talking about it?

But first, what is technical analysis and why the bad rep?

It all depends on what you believe in.

Belief numero uno: Efficient market

At the crust of the matter, technical analysis is deemed the opposite of fundamental analysis. Where fundamental analysis make buy or sell decisions based on intrinsic value of a stock compared to market valuation; technical analysis disregards intrinsic value (since it assumes the market is efficient enough) of the stock, and focuses purely on supply and demand in the market.

In modern finance, this rests in something called the efficient market hypothesis (EMH). Most economists believe in a weak version of EMH, which is to say that the market does a pretty ok job when it comes to incorporating public information into the stock prices. But it’s not perfect, since insider information may still exist. On the other hand, technical analysts assume the market is perfect in incorporating valuation related information as well as market psychology into the stock price, or at least accurate enough for its purpose. The rest of the market movements are determined by more immediate demand and supply, as well as market psychology.

Belief numero dos: History tends to repeat itself

Fundamental analysts do not believe historical trading patterns serve any purpose in stock evaluation. The technical analyst on the other hand, believes that investors behave in rather predictable ways. Market psychology is believed to contribute to the repetitive nature of price movements, and technical analysts expect market participants to react in a consistent manner over similar market stimuli.

Belief numero tres: Trends

Chartists love trends, and a collection of rather imaginative terms have been created to describe them. Technicians frequently talk about moving averages, lines of support and resistance, channels, and many other obscure formations. They believe that as a result of behavioural consistency, prices also move up or down following trends. And once a trend has been established, future price movements tend to move in the same direction.

Then what’s with the bad rep?

All these will most definitely make Benjamin Graham turn in his graves. What would grate him more, you think, that these analysts 1) disregard intrinsic values and trust the mob? Or 2), their over-reliance on past trends and data? Granted, technical analysis is mainly used by traders who do not claim to be investors. And as to looking at past data, Peter Lynch said, “Charts are great for predicting the past.” Warren Buffet was equally unforgiving, he said, “If past history was all there was to the game, the richest people would be librarians.”

That’s just as well, since empirical evidence is largely inconclusive when it comes to either confirming or refuting the validity of such practice. Much of the gains made by technical analysis are eaten away by high transaction costs. But it’s important to bear in mind that there is sound technical analysis and badly practiced technical analysis, just as there are sound investing principles and bad investing ideas masqueraded as good ones.

The issue of timing – technical analysis’ redeeming feature

Most investors are given more or less the same advice: diversify, have a long-time horizon, be fearful when others are greedy and be greedy when others are fearful, etc. We are thus fixated on the idea of asset allocation based on one’s perceived risk tolerance. And this tolerance is based on your age, financial obligations, investment horizons and overall comfort level with market movements. Nowhere do most advisors talk about the importance of timing.

I’m not talking about market timing in the context of one’s attempt to bottom-fish or sell at the peak. Consistently doing so is next to impossible, with or without the help of either fundamental or technical analysis. What I’m talking about is this: most people who are told to buy and hold are not advised on the issue of entry or more importantly, exit timing.

Charts and statistics are always portrayed in a way to tell the story of a market that in the long run, has nowhere to go but up. That is all and well, but should your investment exit point comes in the middle of a market correction, or worse, a structural recession such as what we have now, what are you going to do? Are you going to push back your retirement by ten years until the market picks up its upward trajectory again, or tell your kids that they need to hold off college for a few years until the glitch in your investment portfolio corrects itself? In the long run, the market will move up. But in the long run, we are also all dead.

The important thing to consider here is that when we choose to enter or exit the market, because those two acts can have significant impact on our overall portfolio return. In that department, fundamental analysis does not provide enough information. Even if a business possesses an impeccable set of financial statements and favourable long-term prospects, it cannot fight the overall depressed (or euphoric) market sentiment. When you decide against entering the market because you’re pessimistic on broader market sentiments: on some level, that was a call made compliments of technical analysis.

Various accounting scandals of the past decade, as well as the widely publicized abuses of special purpose vehicles (SPVs) also provide another legitimate use of technical analysis. Fundamental analysis is performed based on financial statements and qualified opinions provided by firms and their accountants. If this information is inaccurate, or worse, fraudulent, then what good is fundamental analysis? In the Satyam case, technical analysis signaled selling pressures before evidence of accounting fraud eventually surfaced. In the least, would it not make sense to use technical analysis as a way to aid and affirm your conclusion drawn from fundamental analysis?

For the average investor, none of this really matters, because the average investor should not be so heavily invested into the stock market as to become severely affected by adverse market conditions. But I know that’s not the case. Decades of bull markets have made stock market investment as ubiquitous as Starbucks, so everyone’s a shareholder now. So if you plan to dive into the shark pool at some point in the future (if you’re already invested then be prepared to park it for a while), of course, perform all due diligence. Invest in what you know and understand, or invest with someone that can do that for you. As the last cautionary step, check with technicians on when to enter before you find yourself neck deep in a sinking market. Knowing your exit timeline, it would also pay to watch the market carefully. If you ask a technical analyst, a persistent downward trend may very well take away all your years of hard-wrought gains.

Hindsight is always 20/20. Here’s to another tool that may help investors with some sorely lacking foresight.

If you like this article, please spread the word and tell your friends about it, I would love to hear what you think! For more discussion and ideas on the market, please subscribe to my RSS feed.

picture source: ~sarcasticmalfunction

The human mind cannot grasp the causes of phenomena in the aggregate. But the need to find these causes is inherent in man’s soul. And the human intellect, without investigating the multiplicity and complexity of the conditions of phenomena, any one of which taken separately may seem to be the cause, snatches at the first, the most intelligible approximation to a cause, and says: “This is the cause!”

Leo Tolstoy, War and Peace [via The Big Picture]

The populist pitch-forking movement has duly commenced, and fingers are pointed in all directions. In a classic case of pot calling the kettle black, all the players are now seizing populist rage to divert attention from itself. The momentum must be maintained, should the public calm down and re-assess, everyone is culpable.

Government

The whole debacle surrounding the AIG bonus is ridiculous. The government passed the legislation with the inserted lines that allowed for bonuses in the first place. Even if Chris Dodd is the culprit, surely it only serves to highlights the incompetence and indifference of the system. If what he’s saying is true (that the administration made him do it), then it shows complicity. This indignant outrage shown by politicians from both sides is nothing but political grandstanding to placate mass anger. Better this mess is channeled towards the evil executives than at the government, right?

The de-regulation of US financial system started with Clinton, and continued with the Bush administration. Policies from ten years ago directly contributed to the California black-out (Enron), and the current mortgage crisis. Without the government’s collusion in both banking deregulation and predatory lending practices, corporate greed would’ve had little opportunity to spread.

It doesn’t take much digging to see the hypocrisy of politicians now railing against exorbitant executive compensation or incompetence. For the most part, those very politicians were responsible for the rise in reckless risk-taking behaviour of those financial Einsteins. Members of the public are beginning to see the thinly-guised witch hunt as a way to deflect blame and secure public support. This kind of shameless and ingratiating behaviour from publicly-elected officials is insulting and condescending: because it pushes accountability away from itself, and props up effigies of greedy corporate executives for the public to burn.

Regulators

It’s hard to see how the phrase “financial innovation” could return with any kind of goodwill. Driven by his “Ayn Randian passion for regulatory minimalism”, and fearing lack of competitiveness that regulation weighed on said “financial innovation”, Greenspan opened the Pandora’s box.

In the aftermaths of banking collapses and Ponzi schemes, the SEC can hardly deny its failure in oversight. In one embarrassing expose after another, SEC is blasted for its inept and financial illiterate handling of warnings, its cozy relationship with the very bankers it was charged to regulate, and became a puppet that was captive to the powerful industry.  So the court can put the likes of Madoff away and the public can demonize the banking executives all they might, but the SEC deserves just as much wrath as its former wards.

Media

No matter how the broadcast media plays it, it will always run one of two risks. One is setting high journalistic standard, cover the news it deems worthy, works to inform, to investigate, and to inspire. It then runs the risk of appearing out of touch with the public. In the US, where news is de-centralized and competition is fierce, fear of low ratings has sent most networks to the latter approach. This now dominant reporting technique sensationalizes. Reporters claim that this will resonate better with its viewers, which more often than not, send all the networks racing towards the lowest denominator. For an outsider, coverage of highway chases, celebrity mishaps and other juicy scandals does nothing but dumb down its audience.

The broadcast media then commit a severe error in omission. By catering to the public’s guilty indulgences in vices and gossip, the media has missed its calling. So while the excessive liquidity and sub-prime crisis was brewing under the surface a few years back, we heard little serious discussion on the economy and its sustainability. Remember, those were the popular stories of 2007 and 2006.

And then there is the business reporting media that cannot decide which side they are on. The conflict of interest is glaring. Do they exist as mouth piece to the CEOs and analysts invited on the show with a scripted message, or do they exist to slice and dice data in order to inform its viewers? Considering the party footing the network bills, and the ongoing gamesmanship that nobody bothered to call out, are they not just as responsible for failing to do their jobs? Since the Cramer versus Stewart showdown, CNBC and its bretherens have been largely silent on accusations lashed upon it, and instead threw themsleves whole-hearted into the chorus of public fury. Are they silent in their atonement, or merely evading public scrutiny?

Education

Capitalism is a beautiful thing, especially the version taught in business school. It’s competitive but fair, rational and deterministic, and most of all, it’s supposed to be a force for good.

Needless to say, in the past few months, the public has begun to uncover the darker side of capitalism, especially when infused with greed and corruption. Educational institutions are not immune to public probe. Deans of business school across the US are admitting to “widespread failure of leadership”. Its decline in global reputation, along with questionable US economic prospects, has led to a drop in international student enrollment in American MBA programs.

By acts of omission, b-schools nursed a culture that inflated egos, placed a premium on performance at the expense of balance, instilled a reverence for mathematical models (in finance) or salesmanship (in marketing). It also funneled an acceptance of the status-quo corporate hierarchy. My post on some of the shortfalls of business school was picked up by Shafeen Charnia in his discussion of leadership. He says:

In both teaching and the corporate world, experience can give you the confidence to be adept in front of a room, but it doesn’t ensure leadership. It seems that one is taught how to use authority versus leadership. We all know that authority is about power. And power (and its abuse) are why we still and likely always will need workers’ rights laws and unions. It is also why some students don’t get to learn.

The Public

It would be unfair and naïve to not place a fair portion of the blame on ourselves. Granted, when times were good, it was hard to work up the will to ask tough questions. But there were signs, as well as a sizable and vocal group that voiced their concerns over the mortgage market, the banking system, and the economy as a whole.

If nothing else, this recession will force the general public to become more discerning citizens. Whatever trust that existed between the people and the government, its regulatory bodies, its hawking media, will be rigorously tested.

Greed is ingrained in our nature. Many organizational psychologists recognize this indisputable character of businesses and its executives, and work very hard to find a way to align corporate interests with consumer interests. End of the day, it is my belief that only consumers and investors can force and enforce corporate responsibility and accountability. In a society where technology is the barometer for transparency, businesses are finding it increasingly difficult to hide behind carefully orchestrated PR campaigns. Authenticity is not just a buzzword anymore, because the public is becoming more astute. If we can somehow translate our need for transparency and accountability towards a system that either rewards or punishes a business for its corporate behaviour, perhaps then we will no longer rely solely on the government and its regulators to safeguard our investments.

picture source: theakker3