Thursday, January 26, 2012

Remembering Maggie-nomics

Mrs Thatcher has been in the news lately, because of the Meryl Streep movie. I’m looking forward to seeing it. She is polarising opinion once again, just like the 1980’s.

As did most twenty somethings at the time, I used to loathe Maggie. The way she seemed to be completely indifferent to condemning people to unemployment I found repellent then, and still does now.

Yet now I am older, I can see things are rarely so simple, and there were things to admire about Maggie. As a woman leader, she did a lot for female emancipation. And here are three other ways I admire her.

First, she challenged the establishment. Just like now, there was a consensus at the time, with the civil service running the show and little difference between the political parties. She refused to accept that, and challenged the orthodoxy of the day. Many of her solutions were poor, but she had the guts to rattle things about. We do not have enough courageous politicians, which is why people become apathetic about politics and sometimes look to extremes. Ed Miliband could take note. So could almost all leaders of the EU.

Second, she made clear decisions. I remember the week of the Falklands crisis in 1982, it was the week of my job interviews at Shell and other things in my personal life, and it all played out against this dramatic backdrop of the nation going to war. Maggie may have mismanaged the lead up to the crisis, but once Argentina invaded, there were only two choices. These were to accept the new situation, or fight without compromise. Maggie chose to fight, and did not flinch in the weeks that followed. Most politicians and advisors would have tried to triangulate, to compromise, keep options open, fudge things between the two choices. They would have failed. There are times when a firm choice is the only way. I’m not saying I defend the UK occupation of the islands, which seems to me like a historical anomaly. But I admire that choice.

Similarly, she showed the same decisiveness when taking on the miners. Again, most politicians would have wavered. She saw it through for better or worse.

My last admiration is of something she said when she first came to power, and which was widely scorned. She compared the UK economy to a grocery shop, saying that over time expenditure had to match income. Simple, homely economics, and at the time everyone thought she was naïve, including me. But perhaps instead she was brilliant.

We are in the middle of a global economic crisis. There are many excuses, explanations, accusations and solutions banded about, but possibly at its heart it comes down to Maggie’s grocery and to debt.

Debt can be marvellous, actually one of the most important engines to progress. It is a sort of multiplier, something which can speed things up, a sort of double or quits option which gives benefits when plans are good. Nearly all of us use debt, most notably when we take out a mortgage. We are taking a reasonable gamble with our future, believing that the asset value and our future earnings will enable us to achieve a triple benefit – to enjoy progress quicker in the form of a nicer place to live, to be able to eventually clear the debt, and potentially also to secure profit from the appreciating asset. Companies do the same thing all the time. It is the engine of a sound economy.

But the key word is reasonable. As an individual or a household, we have to assess the odds on our gamble. Will our income really rise? Will we able to afford the interest even in bad times? In short, do we have a credible plan to repay our debt, a plan which takes account likely negative contingencies?

If an individual or family overstretches, it ends up in the hell of negative equity and shot credit ratings, from whence there seems no escape, only loan sharks feeding off your carcass. If a firm overstretches, the shareholders eventually notice and lose confidence and bankruptcy beckons.

We can blame the banks. I love blaming banks. They are so greedy and stupid. It is shameless to lure less numerate people into the hell of debt, yet that seems to be their business model. I blogged before about the American bank that refused most Shell customers a credit card because their credit risk was not high enough. Evil. But still as individuals and families we get greedy and foolish too, and have to take our share of fault. For companies there is even less excuse.

But what about countries? The same basic logic applies. Use debt, but only for a value creating reason and with a credible plan to pay it back.

A credible plan comes in many forms. Maybe there is a demographic dividend coming to the nation, with a higher share of working age people expected. Maybe there are smart reforms, in education, or infrastructure, or employment law in the pipeline. Maybe there are natural resources to exploit. Or a competitiveness agenda.

Now look at the USA and Europe. No credible plan is in place. In fact, most trends make things worse. Yet the French have not run a balanced budget for seventeen years. The Italians let debt mount while competitiveness is only worsened by Zimbabwe and Haiti. The Americans have political gridlock. Nearly all these nations, except Germany, run a trade deficit year after year after year. No one really invests in education or infrastructure, only increasingly in pensions. It was pensions that killed Detroit and other corporate giants – it will slowly strangle our rich countries too.

The crisis should have been no surprise. We can, and should, blame the banks, but not only the banks. The whole system has got too far out of balance, with no credible plan to rebalance it.

Indeed, current plans make it worse. Austerity might balance the budget within a country for a while, but it will only make competitiveness weaker. Within the euro, devaluation is off the table.

What can be done? Well, we could reverse logic and look at countries running a habitual surplus. Trade, unlike personal debt, is a zero sum game. The post-war consensus (with largely fixed exchange rates, note) only started breaking down when Japan and then the Arab starts started building up structural surpluses, condemning the rest to structural deficits. Now the same thing is happening with China. At least the Chinese are ploughing their surpluses back in, though the West are fighting it, and even with that move the music has to stop sometime. It may seem a paradox, but structural surpluses in the end condemn us to instability.

Revaluation can help, and the Chinese would do well to let that happen. If this were individuals or companies, taxation policy would provide an equaliser – maybe surplus countries should pay some sort of levy to the IMF? Currently, countries are not even subject to any competition law – OPEC would never be permitted if the players were companies not states. In the end, this is one more argument against countries – if we were able to take a global approach, transfers and taxes could balance things out.

But, today, the only thing on the table is austerity. That will not work. By a strange irony, austerity was Maggie’s remedy too. She understood about the peril of debt with no plan, from her grocery analogy. She escaped, but that was less to do with austerity and more to do with the windfall of North Sea oil. Even so, some Maggie style challenging of the flawed establishment would be valuable today around the corridors of the G20.

Thursday, January 12, 2012

The Tides of Life

Even though I am celebrating ignorance, I can still try to learn things. I was always amazed how in Scandinavia people built their homes right to the water’s edge. There is plenty of severe weather there, especially facing the Norwegian sea, so how could this be safe? And why was there so little tide?

Wikipedia helped a bit. I was a good read, but overall the conclusion is somehow that the tide varies because it does. I can understand how enclosed bodies of water like the Mediterranean or the Baltic have less tides than the oceans. But the other factors are a bit of a mystery, with the moon playing a role as well as something with the lovely name of bathymetry, which had me making mental models of splashing bath water.

Tides are just one of nature’s beautiful cycles. This is a twelve and a half hour cycle. There are of course daily cycles and monthly cycles. Annual cycles give us the wonder of seasons. It is often tempting for those of us who suffer winters to dream of perpetual summer, but the most common complaint of those who have moved is to miss seasons. I love the screensaver showing the daylight around the world, it is somehow peaceful and reminiscent of higher powers.

I can see why. Witnessing light in the sky after five last Sunday was compounded by a hint of a sunrise at eight on Tuesday, both signalling the slow return of daylight to our Northern clime, and giving a similar lift to my mood. Change signals renewal, and renewal is opportunity.

Most religions and beliefs make use of cycles. Most religions suggest a day for praying once per week and have an annual calendar. Whether superstition or not, the enduring practices are most likely the ones that work, that help people live their lives over many generations, so we should not discard them lightly. Feng Shui and the Aztecs are full of beliefs about long cycles. One day we might understand more about their value.

So, much of natural life follows the beautiful sine curve we witness in light each day and each year. Yet we tend to ignore the abundant messages for our business and personal lives. True, most things are complex and influenced by multiple sine curves of different height and length. But the old maxims that was goes up must come down, or what goes around comes around, are more true than we realise.

There was a lovely new item this week. Someone had found a connection between skyscrapers being built and economic crashes. For me it is a nice example of people’s folly over cycles. When are skyscrapers commissioned? When people believe good times will go on forever, when they make economic justifications on assumptions of extrapolating volume and margin trends. In the cycle, they are commissioned on the way up, opened at the top, and often seen as folly soon after as the cycle goes into reverse.

Not everything follows cycles, but it is smart in most cases to assume it, especially when something has an established history of cycles, such as national economies. Nigel Lawson and Gordon Brown both came to regret claims of abolishing economic cycles.

Look at the classic growth picture of a company, and you see a truncated cycle. Growth, slow then rapid then slow then negative. In theory a firm could go all the way to the bottom again before turning back to grow. In practice it gets taken over or goes bankrupt, so we rarely see the full sine curve in all its beauty. Cycles affect nearly everything – even Tesco today signalled it might be at the top of its long upward cycle.

The basic reason why cycles affect most things in economics is that there are usually countervailing forces. At the top, prices are too high and competition erodes margins. At the bottom there is spare capacity and opportunity for the smart. That is the root cause of many natural cycles too.

What is so lamentable is how bad most firms and governments are at spotting cycles. True, many sine curves overlap, and usually there are true trends (or cycles with longer frequencies) playing out alongside cyclical things. But we somehow miss the likelihood of cycles, despite ample evidence. And the result is empty skyscrapers.

An example helps to show why. At Shell I often had to analyse the plans of different countries, and recommend who should get extra capital and who should be cut back. I tried to fight it, but invariably the tendency was to shower riches on the successful and starve the failing. Usually that just meant silly skyscrapers and lazy management for those at the top of a cycle, and lost opportunities at the bottom. Most acquisitions were by overvalued firms of similar overvalued competitors, and divestments were of undervalued assets ready for a cyclical upturn. Smart investors, usually smaller, have taken advantage of this for years.

We did not always get it wrong. Once I was on a small project team trying to buy up tiny oil companies. We developed a little policy, which was to avoid companies with fountains in the yard, or similar monuments to vanity. You wouldn’t think this was much of a strategy, but it worked. And the reason is that the monuments tended to signal someone overreaching at the top of a cycle.

As a manager, there are simple things to do to help. First, try to differentiate between a trend and a cycle. Not easy, but history offers clues, as do analysis of real fundamentals such as Porters Five Forces and demographics. If in doubt, assume a cycle rather than a trend. Then, if you are on the cyclical upswing, tone down your investment assumptions, remember to harvest profits, and look hard at costs. In the downswing, do what you have to do to survive, make sure you have learned lessons and not making things worse, but look for cheap opportunities and signs of a cycle turn.

These same messages apply to all of us in our personal lives. How often do you have a day, or a month, or a year when everything seems to go right? Or wrong? Good news seems to come in waves, and so does bad. Maybe it is just random, but I believe there are natural cycles at work here too, even though you won’t get me signing up to astrology.

So what to do if things are going right? The same things. Don’t assume it will go on forever. Harvest, in the form of celebration and saving. And watch your behaviour – I am always at my nastiest and most intolerant when times are good.

And if things keep going wrong? Survive – stop what has to be stopped. Stop actions that make things worse – for example a bad diet or behaviour. But keep trying with the smart things, believing that the corner will be turned eventually. You’ll be surprised, it will. Keep planting, and some of those seeds will start bearing fruit. Maybe soon.

Of course, if you think things are going badly and nearly always have, you might have an expectation problem. Counting blessings is always a good thing.

So then, the beautiful cycles in nature may have other messages to help us. And the wisdom of elders and experience, whether in a religion or what seems just a superstition, might carry more value than we give it credit for.

Tuesday, January 3, 2012

Celebrating Ignorance

Many experiences over the holidays have opened my eyes once more to just how ignorant I am, indeed how ignorant we all are.

First, I am in the middle of reading a very long book called Shantaram. Thanks to Helen for the recommendation. Every so often you read something from a world totally different from the one people like us inhabit, and this is one such book. Set in the 1980’s in Mumbai, the author somehow finds himself among the slum dwellers and Mafiosi of the city, and describes vividly how life was in that place. My guess is that it hasn’t changed a lot.

Whereas Slumdog Millionaire invited us to a Mumbai as true as global audiences readily permit, this tale is Mumbai in the raw. How a country of a billion, a city of 20 million, or a slum of 25,000 somehow manage to make things happen is totally gripping. Furthermore, the book has more than its share of thought-provoking philosophy.

So here am I, smug in my cocoon, thinking I know how things work or could work better in the world, and even feeling a bit comfortable in my compass of values, and along comes this book to remind me how little I know. Thank you, Gregory Roberts, I am in awe. And then, consider this. Roberts is an educated Australian, and he surely tells his story from that cultural standpoint. Imagine, what we could learn and discover from an Indian perspective on the same tale. Perhaps in future we will be able to, so fast is modern technology changing our world.

Then the Economist Christmas issue offered its usual revelations, showing again how complex and diverse the world is, how history has shaped it, and how little I know about it.

Then I saw the film about the start of Facebook, the Social Network. I recommend this. While the story offers little in the way of suspense, or action, or visual content, the makers created something quite gripping and thought provoking. Even with artistic license, it is stunning to see how some very ordinary people managed to shape the world (and transform their own lives) with some very ordinary content. What potential we all have! What might open up for us all next? How we all struggle amid such ignorance!

Then the Economist added in some spice, in its first 2012 issue, with a wonderful discussion of new economic theories. It is clear that no-one really understands Economics, which makes it such a fascinating subject. Neo-chartalists, market monetarists, and an Austrian school have all developed separate theories which almost start from first principles. As far as I could gather, if one is right the other two are very wrong, yet each seemed vaguely credible, at least within a crucible of a single economy. Which is why I do think my own idea of removing countries is at least theoretically interesting, as removing that constraint could make any of the three more powerful.

These are just four examples. I don’t even want to start to try to understand the Higgs Boson. I’m constantly in awe of how the human body works, or the systems that make up our climate. The depths inside our brains are still almost completely unknown, but I am sure that within my lifetime, God willing, we’ll have made immense progress in fields like depression or empathy.

So my brain has been spinning, but spinning happily, as I ponder resolutions for 2012. I listened a homily on New Year’s Day which tackled the same subject. It started from the very sound position of counting our blessings. That is always wise. Then he suggested resolving small changes in our lives to make it slightly easier to count blessings, whether that be an hour of silence per week or some other way of finding more peace.

I’ll try this. And in my hour of peaceful silence, one of things I’ll remember to celebrate is ignorance. My ignorance, and the ignorance of humanity. I still love the theory of Oakeshott (see earlier blog), whereby our life philosophy should start from the concept that we know almost nothing, that in a short while we’ll know massively more than we do today, yet that will still be almost nothing. How true that feels, and how helpful. For example, follows of this philosophy are always alert to mistakes, always look to experiment and try to avoid closing off subjects.

Celebrating ignorance does not come easy in our society. Our parents pretend they know everything to us. At school we try to display what we know, not what we don’t. In business and politics it is the same: who easily confesses that they don’t know an answer? Certainly, it would not be a good way to be adopted as the Republican challenger to Barack Obama in 2012! We are taught to be a bit ashamed of our ignorance, to try to cover it up.

But I resolve to celebrate ignorance. That way I need not be ashamed, only curious. That way it will be easier to avoid worrying about things over which I have no control. That way I can become better at asking, at listening and at learning. I can wonder happily at the potential of mankind rather than become miserable at its manifest failings today. We will do our best, after all, and our best can be magnificent. This way I can find more peace.

Celebrating ignorance does not mean seeking it, quite the opposite. We can thirst for knowledge and improvement, and delight in the journey, knowing full well we can only scrape at the surface of our ignorance.

There is even a spiritual component to celebrating ignorance. I find it hard to conceive of a God who is all-knowing, looking down upon us as a sort of master-controller. But I can readily admit the converse – that humanity is breathtakingly ignorant, wondering in a sea of fate with precious little control. That is a good starting point for spirituality, I find, humble, and accepting of what fate throws at us.

So, at the start of 2012, I raise a glass for ignorance. Will you join me? My best wishes for 2012 whatever resolution you choose. May your journey on the sea of fate be a fruitful one.