Harvard Business Publishing

Black Swans. (See the book of the same name)

Essentially, trying to "read" a market that is inherently unstable and where shocking things can and do happen, even if they are incredibly rare -- is a tricky business and we humans are not programmed to think about it in the right way.

The metaphor from the book is a turkey is born, and for 1000 days it is fed and taken care of by man. This turkey has no reason to think that anything is ever going to change. The 1001st day is Thanskgiving, the man is a farmer and needless to say, the Turkey all of a suddenly feels quite differently.

Before one can look at the economy and make any sort of prediction, you have to drill down to the core value system of the market.

Back in 88 the baby boomers were at the height of their power - willing to take risks and make the "headlines" in their decision making. The money is still with them, but they are now retiring, and are much more conservative with their cash.

GenX's are holding the boat afloat while they wait for GenY's to take over. It's not that they want to miss out on the promotions, it's just that they were never considered, thus they are also acting conservatively. They also don't know if they'll have a job.

GenY's just don't have the capital to fix the economy, and are more eager to make debt in these times. High interest rates vs a new Mustang? Rather, it's Mustang vs Viper.

The link to the PDF preview of your book is not functioning.
Ed

I took particular note of your comment about GM. You don't get those kind of paybacks in Vegas, but no one will bite? Why not?

From The New York Times
Siphoning G.M.’s Future
By ROGER LOWENSTEIN

(Excerpts)

"But none of G.M.’s management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed General Motors of its financial flexibility and, ultimately, of its cash.

General Motors established its pension in the “treaty of Detroit,” the five-year contract that it signed with the United Automobile Workers in 1950 that also provided health insurance and other benefits for the company’s workers. Walter Reuther, the union’s captain, would have preferred that the government provide pensions and health care to all citizens. He urged the automakers to “go down to Washington and fight with us” for federal benefits.

In the ’90s, the consequences of maintaining a corporate welfare state became too obvious to ignore. In that decade, General Motors poured tens of billions of dollars into its pension fund — an irretrievable loss of opportunity. What else might G.M. have accomplished with that money? It could have designed new cars or researched alternative fuels. Or it could have acquired half of Toyota — a company that the stock market now values at close to $150 billion.

G.M. acknowledged in its most recent annual report that from 1993 to 2007 it spent $103 billion “to fund legacy pensions and retiree health care — an average of about $7 billion a year — a dramatic competitive and cash-flow disadvantage.” During those 15 years, G.M. paid only $13 billion or so in shareholder dividends. The company has been sending far more money to its retirees than to its owners.

After falling $20 billion behind on its pension earlier this decade, G.M. doggedly put money into its plan to catch up. It has also agreed to invest more than $30 billion in a fund to cover future health-care expenses. But these efforts have starved its business.

The sorry decline of General Motors has proved Reuther right: the government is the better provider of social insurance. Let industry worry about selling products."

And It's just not General Motors who will be affected.

"Unhappily, however, the fate of many public-sector pension plans is even worse than G.M.’s. Responding to the same temptation to offload expenses into the future, public employers have committed to trillions of dollars in future liabilities. In New Jersey, a huge pension liability has created a budgetary nightmare for the state. The city of Vallejo, Calif., burdened by police pensions, recently filed for bankruptcy."

We may make it through the wall street bailout, and possibly survive the coming credit card crisis, only to get undone by the promises made by short sighted managers and their union counterparts decades agao.

And we are going down the pathe again with the idea that the Employee Free choice Act will somehow "restore the Middle Class".

From whose deeps pockets?

Michael VanDervort
http://humanracehorses.blogspot.com

Crazy thought,

money ain't worth what it used to be. I think the GM examples demonstrates this. Not in the sense of inflation, but something more systemic.

Once upon a time, to create huge value, you needed enormous amounts of capital. Railroads, manufacturing, and so on.

Google now has a market cap orders of magnitudes greater than GM. Probably similar cash on hand (if not less). And the amount of capital required to start and scale it up is essentially zero by comparison. So, what's capital to do? Chase ever more intricate and ultimately frivolous instruments of wealth creation, rather than being required for genuine wealth creation.

The industrial revolution saw the transformation of capital from land to money. Are we seeing a similar transformation of the idea of capital from money? And what to?

"Sometimes being smarter than everyone else actually costs you money." This was a very insightful point Bill. Superb.

Bill,

Here are my thoughts for each item:

1) and 4). We entered this path, digital world, so many years ago. Once we entered the path we all knew this day will come. When did we start journey ? The easier question with the same answer is "When did you order your last type writer ?" :)

3) What about liabilities in GM's books ?

2) 17 out of 18. That's pretty good!