BIAS – Why Results Don’t Matter, and Trump Keeps Turning Out the Vote

BIAS – Why Results Don’t Matter, and Trump Keeps Turning Out the Vote

We all like to think the world is a meritocracy, where hard work is important and results matter.

As we watched Mitt Romney, and others, frontally assault Donald Trump this week it was clear they were saying Mr. Trump is not the right person to be President.  They are pointing out his use of bankruptcies to protect his personal wealth, while leaving investors holding the empty bag.  And his flip-flopping on various issues, including how he would deploy military forces.  And his use of misogynistic language against women, while simultaneously referring to most Mexicans and lawbreakers and all Muslims as terrorists, are gross generalities they say are not supported by facts.

Yet, while many sober-minded leaders are denouncing Mr. Trump, it is not clear that it matters. His followers seem to remain passionately loyal, and completely unmoved by any factual representation of their candidate as anything other than a savior for America.  The “Super Saturday” delegate selection resulted in Mr. Trump winning 2 more contests (Louisiana and Kentucky) while coming in second in 2 others (Kansas and Maine.) And  it demonstrated the ongoing pattern of Mr. Trump winning the popular vote in primaries.

Everyone remembers a situation where a very hard working, smart, industrious person did things well for years.  But they weren’t promoted, or even given large pay increases.  Or, worse, they made one mistake and lost their position, or job.

Simultaneously, we all also can  think of at least one, or more, person who simply wasn’t that good, and often didn’t work that hard, but was promoted (often beyond their competency) and given large pay increases.  And every time this person made a mistake it was explained away as a “learning experience” that would make them a better future performer.  They were blessed with continuous upward mobility, and could seemingly do no wrong.

For each of us these experiences seemed unique, and we often tied them to the specific individuals involved – including not only the person at the center of these experiences but their superiors, subordinates and peers. And many people are saying the political rise of Donald Trump is unique to him and the current state of his political party.

But rather than each being unique, these experiences all have something in common. The actual frequency of these experiences belies the notion that they are all unique. Rather, what all of these demonstrate is the implementation of selective bias.  They demonstrate that very often we prefer people because they reinforce our bias, and their past results do not matter.

Bosses who promote incompetency don’t really care about the competency as much as they care that the individual reinforces their inherent Beliefs, Interpretations, Assumptions and Strategies about the world.  There is often a familial, geographic, academic, business relationship, religious or gender trait (or often multiple traits) which reinforces in these bosses that their view of the world is right, and should be promoted.

This may be due to the person being very much similar to the boss.  But, not always.  It just requires that the target be a visible, walking, talking implementation of how they think the world works.  Whether or not the person is successful really does not matter.  If they are different from the boss’s viewpoint, no success will be great enough to have the boss support them.  If they fulfill the boss’s bias then they often can do no wrong.

Donald Trump "wouldn't lose voters"Donald Trump has been leading his candidate competitors not because he was wildly successful.  Rather, he is attracting a larger group of people who identify with him; who share his basic Beliefs, Interpretations of the world, Assumptions about how people behave, and Strategies for how to succeed.  They share his bias, and thus they select him. As Mr. Trump said himself “I could stand in the middle of 5th Avenue and shoot somebody and I wouldn’t lose voters.”

Regardless of the robustness of the American economy and the ongoing growth in jobs creation, they Believe America is in terrible shape, and that almost all media participants are liars.  No matter what the truth is about the value of immigrants on the economy, they Interpret all immigrants as job-stealing bad people that have made their lives worse.  No matter the truth about the spirit of Islam and the goodness of Muslims, they Assume all of them terrorists out to blow up the world.  And they agree with Strategies like stopping immigrants with walls, killing civilian Muslims as collateral damage in a religious war, torturing prisoners of war (possibly to death,) eliminating international trade, and depriving poor people of health care and other services.

Thus, selective bias ties these voters to Mr. Trump with a bind that is not breakable by discussing his performance, or pointing out his failings.  Facts are not relevant.  Their judgement is not based on historical facts, but rather a clear alignment with their bias.  No matter who says Mr. Trump may have lied, or exaggerated, or misinterpreted history that messenger will not be believed.  Because the real results don’t matter.  What matters is reinforcing their bias.

Unfortunately we see this selective bias all too often in business.  Leaders that favor some over others simply because of bias, rather than results.  It has long been a problem which has restricted diversity in the workforce, and inhibited equal pay.  It has long created a caste system for admission to top schools and places of employment.  And because selective bias is so rampant in American business, it is second nature to Mr. Trump.  It is easy for him to say what is on his mind, and expect that lots of people will agree with him.  It’s how he sees the world, it is his bias, and he’s used to having it reinforced by those who wish to work with him.

Whatever happens in this Presidential campaign, as business leaders we can learn from this situation that if we allow selective bias to sway us then we are no longer really paying attention to results.  As leaders which of the following should be important – promoting those who reinforce our beliefs, interpretations, assumptions and strategies, or finding the best people to do the job and rewarding those who really have worked hard for good results?

 

 

The 5 Ways Chairman Lampert Destroyed Sears’ Value

The 5 Ways Chairman Lampert Destroyed Sears’ Value

USAToday alerted investors that when Sears Holdings reports results 2/25/16 they will be horrible.  Revenues down another 8.7% vs. last year. Same store sales down 7.1%. To deal with ongoing losses the company plans to close another 50 stores, and sell another $300million of assets.  For most investors, employees and suppliers this report could easily be confused with many others the last few years, as the story is always the same.  Back in January, 2014 CNBC headlined “Tracking the Slow Death of an Icon” as it listed all the things that went wrong for Sears in 2013 – and they have not changed two years later.  The brand is now so tarnished that Sears Holdings is writing down the value of the Sears name by another $200million – reducing intangible value from the $4B at origination in 2004 to under $2B.

This  has been quite the fall for Sears.  When Chairman Ed Lampert fashioned the deal that had formerly bankrupt Kmart buying Sears in November, 2004 the company was valued at $11billion and 3,500 stores.  Today the company is valued at $1.6billion (a decline of over 85%) and according to Reuters has just under 1,700 stores (a decline of 51%.) According to Bloomberg almost no analysts cover SHLD these days, but one who does (Greg Melich at Evercore ISI) says the company is no longer a viable business, and expects bankruptcy.  Long-term Sears investors have suffered a horrible loss.

When I started business school in 1980 finance Professor Bill Fruhan introduced me to a concept that had never before occurred to me.  Value Destruction.  Through case analysis the good professor taught us that leadership could make decisions that increased company valuation.  Or, they could make decisions that destroyed shareholder value.  As obvious as this seems, at the time I could not imagine CEOs and their teams destroying shareholder value.  It seemed anathema to the entire concept of business education.  Yet, he quickly made it clear how easily misguided leaders could create really bad outcomes that seriously damaged investors.

sears closingAs a case study in bad leadership, Sears under Chairman Lampert offers great lessons in Value Destruction that would serve Professor Fruhan’s teachings well:

1 – Micro-management in lieu of strategy.  Mr. Lampert has been merciless in his tenacity to manage every detail at Sears.  Daily morning phone calls with staff, and ridiculously tight controls that eliminate decision making by anyone other than the top officers.  Additionally, every decision by the officers was questioned again and again.  Explanations took precedent over action as micro-management ate up management’s time, rather than trying to run a successful company.  While store employees and low- to mid-level managers could see competition – both traditional and on-line – eating away at Sears customers and core sales, they were helpless to do anything about it.  Instead they were forced to follow orders given by people completely out of touch with retail trends and customer needs.  Whatever chance Sears and Kmart had to grow the chain against intense competition it was lost by the Chairman’s need to micro-manage.

2 – Manage-by-the-numbers rather than trends.  Mr. Lampert was a finance expert and former analyst turned hedge fund manager and investor.  He truly believed that if he had enough numbers, and he studied them long enough, company success would ensue.  Unfortunately, trends often are not reflected in “the numbers” until it is far, far too late to react. The trend to stores that were cleaner, and more hip with classier goods goes back before Lampert’s era, but he completely missed the trend that drove up sales at Target, H&M and even Kohl’s because he could not see that trend reflected in category sales or cost ratios.  Merchandising – from buying to store layout and shelf positioning – are skills that go beyond numerical analysis but are critical to retail success.  Additionally, the trend to on-line shopping goes back 20 years, but the direct impact on store sales was not obvious until customers had long ago converted.  By focusing on numbers, rather than trends, Sears was constantly reacting rather than being proactive, and thus constantly retreating, cutting stores and cutting product lines.

3 – Seeking confirmation rather than disagreement. Mr. Lampert had no time for staff who did not see things his way.  Mr. Lampert wanted his management team to agree with him – to confirm his Beliefs, Interpretations, Assumptions and Strategies — to believe his BIAS.  By seeking managers who would confirm his views, and execute, rather than disagree Mr. Lampert had no one offering alternative data, interpretations, strategies or tactics.  And, as Mr. Lampert’s plans kept faltering it led to a revolving door of managers.  Leaders came and went in a year or two, blamed for failures that originated at the Chairman’s doorstep.  By forcing agreement, rather than disagreement and dialogue, Sears lacked options or alternatives, and the company had no chance of turning around.

4 – Holding assets too long. In 2004 Sears had a LOT of assets.  Many that could likely be redeployed at a gain for shareholders.  Sears had many owned and leased store locations that were highly valuable with real estate prices climbing from then through 2008.  But Mr. Lampert did not spin out that real estate in a REIT, capturing the value for SHLD shareholders while the timing was good.  Instead he held those assets as real estate in general plummeted, and as retail real estate fell even further as more revenue shifted to e-commerce.  By the time he was ready to sell his REIT much of the value was depleted.

Additionally, Sears had great brands in 2004.  DieHard batteries, Craftsman tools, Kenmore appliances and Lands End apparel were just 4 household brands that still had high customer appeal and tremendous value.  Mr. Lampert could have sold those brands to another retailer (such as selling DieHard to WalMart, for example) as their house brands, capturing that value.  Or he could have mass marketd the brand beyond the Sears store to increase sales and value.  Or he could have taken one or more brands on-line as a product leader and “category killer” for ecommerce customers.  But he did not act on those options, and as Sears and Kmart stores faded, so did these brands – which largely no longer have any value.  Had he sold when value was high there were profits to be made for investors.

5 – Hubris – unfailingly believing in oneself regardless the outcomes.  In May, 2012 I wrote that Mr. Lampert was the 2nd worst CEO in America and should fire himself. This was not a comment made in jest.  His initial plans had all panned out very badly, and he had no strategy for a turnaround.  All results, from all programs implemented during his reign as Chairman had ended badly.  Yet, despite these terrible numbers Mr. Lampert refused to recognize he was the wrong person in the wrong job.  While it wasn’t clear if anyone could turn around the problems at Sears at such a late date, it was clear Mr. Lampert was not the person to do it.  If Mr. Lampert had been as self-analytical as he was critical of others he would have long before replaced himself as the leader at Sears.  But hubris would not allow him to do this, he remained blind to his own failings and the terrible outcome of a failed company was pretty much sealed.

From $11B valuation and a $92/share stock price at time of merging KMart and Sears, to a $1.6B valuation and a $15/share stock price.  A loss of $9.4B (that’s BILLION DOLLARS).  That is amazing value destruction. In a world where employees are fired every day for making mistakes that cost $1,000, $100 or even $10 it is a staggering loss created by Mr. Lampert.  At the very least we should learn from his mistakes in order to educate better, value creating leaders.

Governor Walker, A College Degree Really Matters When Being A Leader

Governor Walker, A College Degree Really Matters When Being A Leader

There has been a hullabaloo lately about Wisconsin Governor Walker’s lack of a degreeSome think this is a big deal, while others think almost nobody cares.  In the end, we all should care about the formal education of any of our leaders.  In government, business and elsewhere.

Governor-Walker

In Forbes magazine, 1998, famed management guru Peter Drucker wrote, “Get the assumptions wrong and everything that follows from them is wrong.”  This is really important, because most leaders make most of their decisions based on assumptions.  And many of those assumptions are based on how much, and how broad, that leader’s education.

We all make decisions on beliefs.  It is easy to have incorrect beliefs.  Early doctors believed that infections were due to bad blood, so they used bleeding as a cure-all for many wounds and illnesses.  Untold millions of people died from this practice.  A bad assumption, based on belief rather than formal study (in this case of the circulatory system) proved fatal.

In business, for thousands of years most sailors had no education about the curvature of the earth and its rotation the sun, thus they believed the world was flat and refused to sail further out to sea than the ability to keep their eyes on a shoreline.  This limited trade, and delayed expansion into new markets.

Or, more recently, Steve Ballmer assumed that anyone using a smartphone would want a keyboard – because Blackberry dominated the market and had a keyboard.  Thus he laughed at the iPhone launch.  Oops.  His assumption, and belief about the user experience, caused Microsoft to delay its entry into mobile markets and smartphones several years.  Even though he had not studied smartphone user needs.  Now Apple has half the smartphone market, while Blackberry and Microsoft each have less than 5%.

There are countless examples of bad decisions made when people use the wrong assumptions. At this time in Oklahoma, Texas and Colorado politicians are voting to refuse upgrading history education because the new curriculum is unacceptable to them.  Their assumptions about America’s history are so strong that any factual evidence which might change those assumptions is so threatening that these politicians would prefer students be taught a fictitious history.

Our assumptions are built early in life.  All through childhood our parents, aunts, uncles, religious leaders, mentors and teachers fill us with information.  We process this information and build layers of assumptions.  These assumptions help us to make decisions by allowing us to react based upon what we believe, rather than having to scurry around and do a research project every time a decision is required.  Thus, the older we become the deeper these assumptions lie – and the more we rely on them as we undertake less and less education. As we age we decide based upon our beliefs, and less based upon any observable facts.  Actually, we’ll often choose to ignore facts which indicate our assumptions and beliefs might be wrong (we call this a bias in others, and common sense when we do it ourselves.)

The more education you have, the more you can build assumptions that are likely to align with reality.  It is no accident that the U.S. military uses education as a basis for promotions – rather than battlefield heroics.  To move up requires officers go to war college and learn about history, politics, leadership and battles going back to long before the birth of Jesus.  Good knowledge helps officers to be smarter about how to prepare for battle, organize for battle, conduct warfare, lead troops, treat a vanquished enemy and talk to the politicians for whom they work. Just look at the degrees amongst our military’s Colonels and General Officers and you find a plethora of masters and doctorate degrees. Education has long proven to be a superior warfare skill – especially when the enemy is operating on belief, guts and fight.

There are many accomplished people lacking degrees.  But we should note they were successful very narrowly, and frequently in business.  Steve Jobs, Bill Gates and Mark Zuckerberg are clearly high IQ people.  But their success was based on founding a business at a time of technological revolution, and then building that business with zealousness.  And the luck of being in the right place at the right time with a new piece of technology.  They were/are not asked to be widely acclaimed in a broad spectrum of capabilities such as diplomacy, historical accuracy, legal limitations, cultural differences, the arts, scientific advances in multiple fields, warfare tactics, etc.  They were not asked to develop a turnaround plan for a bankrupt auto manufacturer at the height of the Great Recession.  For all their great wealth creation, they would not be what were once called “Renaissance men.”

When Governor Walker attacks the educated, and labels them as “elites,” it should be noted that their backgrounds often mean they have more points of view to evaluate, and are more considered about the various risks which are being created by taking any specific action.  Many Harvard or Columbia MBAs could never be entrepreneurs because they see the many reasons a business would likely fail, and thus they are reticent to commit.  Yet, that same wider knowledge allows them to be more thoughtful when evaluating the options and making decisions regarding opening new plants, negotiating with unions, expanding distribution and financing options.

Further, while it is true that you can be smart and not have a degree, the number of those who have degrees yet lack intelligence is a much, much smaller number.  If one is to err in picking those you want to have advise you, or represent you, the degree(s) is not a bad first step toward identifying who is likely to provide the best insight and offer the most help.

Further, there is nothing about a degree which limits one’s ability to fight.  Look at Senator Cruz from Texas. Senator Cruz’s politics seem to be somewhat aligned with Governor Walker’s, and he is widely acknowledged as a serious fighter, yet he boasts an  undergraduate degree from Princeton as well as graduating from Harvard Law School.  An educational background anyone would label as “elitist” and remarkably similar to President Obama’s – whose background Governor Walker has thoroughly maligned.

We expect our leaders to be widely read, and keenly aware of the complexities of life.  We want our attorney’s to have law degrees and pass the bar exam.  We want our physicians to have medical degrees and pass the Boards.  Increasingly we want our business leaders to have MBAs.  We understand that education informs our minds, and helps us develop assumptions for making good decisions.  We should not belittle this, nor be accepting of someone who implies that lacking a formal education is meaningless.

Why Everyone Knows TV is Dying, Yet Marketing Leaders Over-spend on TV

Why Everyone Knows TV is Dying, Yet Marketing Leaders Over-spend on TV

The trend toward the death of broadcast TV as we’ve known it keeps moving forward.  This trend may not happen as fast as the death of desktop computers, but it is a lot faster than glacier melting.

This television season (through October) Magna Global has reported that even the oldest viewers (the TV Generation 55-64) watched 3% less TV.  Those 35-54 watched 5% less.  Gen Xers (25-34) watched 8% less, and Millenials (18-24) watched a whopping 14% less TV.  Live sports viewing is not even able to maintain its TV audience, with NFL viewership across all networks down 10-19%.

Everyone knows what is happening.  People are turning to downloaded entertainment, mostly on their mobile devices.  With a trend this obvious, you’d think everyone in the media/TV and consumer goods industries would be rethinking strategy and retooling for a new future.

But, you would be wrong.  Because despite the obviousness of the trend, emotional ties to hoping the old business sticks around are stronger than logic when it comes to forecasting.

screen shot 2013-01-31 at 10.42.21 am

CBS predicted at the beginning of 2014 TV ad revenue would grow 4%.  Oops.  Now CBS’s lead forecaster is admitting he was way off, and adjusted revenues were down 1% for the year.  But, despite the trend in viewer behavior and ad expenditures in 2014, he now predicts a growth of 2% for 2015.

That, my young friends, is how “hockey stick” forecasts are created.  A lot of old assumptions, combined with a willingness to hope trends will be delayed, and you can ignore real data while promising people that the future will indeed look like the past – even when it defies common sense.

To compensate for fewer ads the networks have raised prices on all ads.  But how long can that continue?  This requires a really committed buyer (read more about CMO weaknesses below) who simply refuses to acknowledge the market has shifted and the dollars need to shift with it.  That cannot last forever.

Meanwhile, us old folks can remember the days when Nielsen ratings determined what was programmed on TV, as well as what advertisers paid.  Nielsen had a lock on measuring TV audience viewing, and wielded tremendous power in the media and CPG world.

But now AC Nielsen is struggling to remain relevant.  With TV viewership down, time shifting of shows common and streaming growing like the proverbial weed Nielsen has no idea what entertainment the public watches.  They don’t know what, nor when, nor where.  Unwilling to move quickly to develop tools for catching all the second screen viewing, Nielsen has no plan for telling advertisers what the market really looks like – and the company looks to become a victim of changing markets.

Which then takes us to looking at those folks who actually buy ads that drive media companies.  The Chief Marketing Officers (CMOs) of CPG companies.  Surely these titans of industry are on top of these trends, and rapidly shifting their spending to catch the viewers with the most ads placed for the lowest cost.

You would wish.

Unfortunately, because these senior executives are in the oldest age groups, they are a victim of their own behavior.  They still watch TV, so assume others must as well.  If there is cyber-data saying they are wrong, well they simply discount that data.  The Nielsen’s aren’t accurate, but these execs still watch the ratings “because it’s the best info we have” – a blatant untruth by the way.  But Nielsen does conveniently reinforce their built in assumptions, and their hope that they won’t have to change their media spend plans any time soon.

Further, very few of these CMOs actually use social media.  The vast majority watch their children, grandchildren and young employees use mobile devices constantly – and they bemoan all the activity on YouTube, Facebook, Instagram and Twitter – or for the most part even Linked-in.  But they don’t actually USE these products.  They don’t post information.  They don’t set up and follow channels.  They don’t connect with people, share information, exchange photos or tell stories on social media. Truthfully, they ignore these trends in their own lives.  Which leaves them woefully inept at figuring out how to change their company marketing so it can be more relevant.

The trend is obvious.  The answer, equally so.  Any modern marketer should be an avid user of social media.  Most network heads and media leaders are farther removed from social media than the Pope! They don’t constantly download entertainment, and exchanging with others on all the platforms.  They can’t manage the use of these channels when they don’t have a clue how they work, or how other people use them, or understand why they are actually really valuable tools.

Are you using these modern tools? Are you actually living, breathing, participating in the trends?  Or are you, like these outdated execs, biding your time wasting money on old programs while you look forward to retirement?  And likely killing your company.

When trends emerge it is imperative we become part of that trend.  You can’t simply observe it, because your biases will lead you to hope the trend reverts as you continue doing more of the same.  A leader has to adopt the trend as a leader, be a practicing participant, and learn how that trend will make a substantial difference in the business.  And then apply some vision to remain relevant and successful.

President Obama’s Miracle Market – How Wall Street Was So Wrong in 2013

President Obama’s Miracle Market – How Wall Street Was So Wrong in 2013

The S&P 500 had a great 2013.  Up 29.7% – its best performance since 1997.  The Dow Jones Industrial Average (DJIA) ended the year up 26.5% – its best performance since 1995.  And this happened as economic growth lowered the unemployment rate to 6.7% in December – the lowest rate in 5 years.  And overall real estate had double-digit price gains, lowering significantly the number of underwater mortgages.

But if we go back to the beginning of 2013, most Wall Street forecasters were predicting a very different outcome.  Long suffering bear Harry Dent predicted a stock crash in 2013 that would last through 2014, and ongoing cratering in real estate values.  And bear Gina Martin Adams of Wells Fargo Securities predicted a market decline in 2013, a forecast she clung to and fully supported, despite a rising market, when predicting an imminent crash in September. Morgan Stanley’s Adam Parker also predicted a flat market, as did UBS analyst Jonathan Golub.

How could professionals who are paid so much money, have so many resources and the backing of such outstanding large and qualified institutions be so wrong?

An over-reliance on quantitative analysis, combined with using the wrong assumptions.

The conventional approach to Wall Street forecasting is to use computers to amass enormously complex spreadsheets combining reams of numbers.  Computer models are built with thousands of inputs, and tens of millions of data points. Eventually the analysts start to believe that the sheer size of the models gives them validity.  In the analytical equivalent of “mine is bigger than yours” the forecasters rely on their model’s complexity and sheer size to self-validate their output and forecasts.

In the end these analysts come up with specific forecast numbers for interest rates, earnings, momentum indicators and multiples (price/earnings being key.)  Their faith that the economy and market can be reduced to numbers on spreadsheets leads them to similar faith in their forecasts.

But, numbers are often the route to failure.  In the late 1990s a team of Wall Street traders and Nobel economists became convinced their ability to model the economy and markets gave them a distinct investing advantage.  They raised $1billion and formed Long Term Capital (LTC) to invest using their complex models.  Things worked well for 3 years, and faith in their models grew as they kept investing greater amounts.

But then in 1998 downdrafts in Asian and Russian markets led to a domino impact which cost Long Term Capital $4.6B in losses in just 4 months.  LTC lost every dime it ever raised, or made.  But worse, the losses were so staggering that LTC’s failure threatened the viability of America’s financial system.  The banks, and economy, were saved only after the Federal Reserve led a bailout financed by 14 of the leading financial institutions of the time.

Incorrect assumptions played a major part in how Wall Street missed the market prediction for 2013.  All models are based on assumptions.  And, as Peter Drucker famously said, “if you get the assumptions wrong everything you do thereafter will be wrong as well” — regardless how complex and vast the models.

Conventional wisdom held that conservative economic policies underpin market growth, and the more liberal Democratic fiscal policies combined with a liberal federal reserve monetary program would bode poorly for investors and the economy in 2013.  These deeply held assumptions were, of course, reinforced by a slew of conservative commentators that supported the notion that America was on the brink of runaway inflation and economic collapse.  The BIAS (Beliefs, Interpretations, Assumptions and Strategies) of the forecasters found reinforcement almost daily from the rhetoric on CNBC, Bloomberg, Fox News and other programs widely watched by business people from Wall Street to Main Street.

Interestingly, when Obama was re-elected in 2012 a not-so-well-known investment firm in Columbus, OH – far from Wall Street – took an alternative look at the data when forecasting 2013.  Polaris Financial Partners took a deep dive into the history of how markets perform when led by traditional conservative vs. liberal policies and reached the startling conclusion that Obama’s programs, including the Affordable Care Act, would actually spur investment, market growth, jobs and real estate!  They had forecast a double digit increase in all major averages for 2012 and extended that same double digit forecast into 2013 – far more optimistic than anyone on Wall Street.

CEO Bob Deitrick and partner Steven Morgan concluded that the millenium’s first decade had been lost. Despite Republican leadership, the eqity markets were, at best, sideways.  There were fewer people actually working in 2008 than in 2000; a net decrease in jobs.  After a near-collapse in the banking system, due to deregulated computer-model based trading in complex derivatives, real estate and equity prices had collapsed.

“Fourteen years of stock market gains were wiped out in 17 months from October, 2007 to March, 2009” lamented Deitrick.

Polaris Partners concluded the situation was eerily similar to the 1920s at the end of Hoover’s administration.  A situation which was eventually resolved via Keynesian policies of increased fiscal spending while interest rates were low, and federal reserve intervention to both expand the money supply and increase the velocity of money under Republican Fed chief Marriner Eccles and Democratic President Franklin Roosevelt.

While most people conventionally think that tax cuts led to economic growth during the Reagan administration, Polaris Financial turned that assumption upside down and put the biggest positive economic impact on the roll-back of tax cuts a year after being pushed by Reagan and passing Congress.  Their analysis of the 1980 recovery focused on higher defense and infrastructure  spending (fiscal policy,) a massive increase in debt (the largest peacetime debt increase ever) coupled with a more balanced tax code post-TEFRA.

Thus, eschewing complex econometric models, elaborately detailed spreadsheets of earnings and rolling momentum indicators, Polaris Financial focused instead on identifying the assumptions they believeed would most likely drive the economy and markets in 2013.  They focused on the continuation of Chairman Bernanke’s easy monetary policy, and long-term fiscal policies designed to funnel money into investments which would incent job creation and GDP growth leading to an improvement in house values, and consumer spending, while keeping interest rates at historically low levels.  All of which would bode extremely well for thriving equity markets.

The vitriol has been high amongst those who support, and those who oppose, the economic policies of Obama’s administration since 2008. But vitriol does not support, nor replace, good forecasting.  Too often forecasters predict what they want to happen, what they hope will happen, based upon their view of history, their traing and background, and their embedded assumptions.  They believe in the certainty of long-held assumptions, and forecast from that base.

But as Polaris Financial pointed out, in beating every major Wall Street firm over the last 2 years, good forecasting relies on looking carefully at historical outcomes, and understanding the context in which those results happened. Rather than relying on an interpretation of the outcome,they looked instead at the facts and the situation; the actions and the outcomes in its context.  In an economy, everything is relative to the context.  There are no absolute programs that are universally the right thing to do.  Every policy action, and every monetary action, is dependent upon initial conditions as well as the action itself.

Too few forecasters take into account both the context as well as the action.  And far too few do enough analysis of assumptions, preferring instead to rely on reams of numerical analysis which may, or may not, relate to the current situation.  And are often linked to assumptions underlying the model’s construction – assumptions which could be out of date or simply wrong.

The folks at Polaris Financial Partners remain optimistic about the economy and markets for the next two years.  They point out that unemployment has dropped faster under Obama, and from a much higher level, than during the Reagan administration.  They see the Affordable Care Act opening more flexibility for health care, creating a rise in entrepreneurship and innovation (especially biotechnology) that will spur economic growth.  Deitrick and Morgan see tax programs, and rising minimum wage trends, working toward better income balancing, and greater monetary velocity aiding GDP growth.  Their projection is for improving real estate values, jobs growth, and minimal inflation leading to higher indexes – such as 20,000 on the DJIA and 2150 on the S&P.

Bob Deitrick co-authored, with Lew Goldfarb, “Bulls, Bears and the Ballot Box” in 2012 analyzing Presidential economic policies, Federal Reserve policies and stock market performance.