Today the Dow Jones Industrial Average dropped over 500 points (read article here) despite the U.S. Federal Reserve pumping $70B into the system – the most since terror attacks on 9/11/01 shut down the markets for a week (read article here). That’s down more than 4% in one day. From recent highs back in October, 2007 at over 14,000, the average is now down 16% (see chart here). But as I listen to people talk about the stock market, and read the analysts, I’m reminded of the fellow who jumped off a 50 story building. As he passed a balcony on the 38th floor he hollered, “so far, so good.”
People seem remarkably unaffected. Like the fellow falling to earth, they seem willing to look up from where they came, rather than forward to what almost surely lies ahead. Rationalization is the norm, as they expect old Success Formulas to work just fine. They have become accustomed to big drops in the Dow, yet it has always found a way to come back – so that will happen this time, won’t it? Sure we have banks going broke, but in the 1980s we had a failure of the Savings & Loan industry and that didn’t stop a rising market – did it? We also had the failure of some big hedge funds that rocked Wall Street, but it only had a short-duration impact, right? And when the Asian currencies all fell out of bed it scared a lot of people, but the markets recovered, so even though the American currency is at an all time low won’t things get back to normal with currencies again this time? Won’t the market recover? If you look backward, the Dow has always recovered. So can’t we just ignore this as a short-term problem?
To succeed looking backward requires the future look like the past. But things don’t look like the past. We’ve seen the failure of two very large brokerage institutions (Bear Sterns and Lehman Brothers) and the forced takeover of another (Merrill Lynch). The underwriters of most of America’s mortgages, Freddie Mac and Fannie Mae, have been taken over by the government to try and keep the real estate market from further collapse. And the heads of America’s government have already said the government cannot afford to take over many other institutions – if any – and that’s why they decided to let Lehman Brothers file bankruptcy.
General Motors (chart here), not long ago America’s #1 employer, is worth about half what it was in January and trading at its lowest value in 50 years as it asks for a government bail-out to get through the next 2 years (read article here). EDS was once the world’s premier Information Technology company, and now it’s a division of H-P after nearly failing. H-P (chart here) announced it will cut 24,600 IT jobs from EDS (read article here). We know many of those jobs are going away, and the rest to India or another country we used to disparage as “third world” as if it was lesser than the USA. But now these countries have become more competitive at everything from manufacturing to IT services. Even the small tool company known as “Vise-Grip” decided to move its plier manufacturing to China and close its plant in Nebraska (read article here.)
The world has changed. Markets have shifted. Banking is now international – not just national. Manufacturing, and even keeping the internet viable, is now managed globally – with almost no organization remaining strictly a U.S. company. The world is becoming Flat – to rip off the title of a popular book by Thomas Friedman (see book here). This isn’t the world in 1978, or 1988 or 1998. In 2008, the U.S. dollar is at record lows, employment gains over the last decade are at record lows, the transfer of wealth out of the USA to buy everything from oil to computers to children’s toys is at record highs. The U.S. deficit is at record highs, with no signal how it will be paid off coming from either political party. War costs continue to escalate, driving up the deficit further, while tax receipts fall from a weakening economy. Meanwhile the U.S. population is aging, and the federal pension program (social security) is without sufficient funds to maintain retirees. And corporate pension failures are at record highs. As the costs of health care continue skyrocketing, the percentage of people who are insured, thus can afford health care, is at record lows – causing unfunded emergency room care costs to bring many hospitals in American cities to the brink of failure (read article here.)
Yet, a rash of pundits will tell you not to panic. It’s too late. Better to do nothing; to wait. (read article here). Perhaps, like the fellow who jumped and is now at the 25th floor, it is late to panic. But by golly folks had better do something! It’s time to look forward, and see that an unpleasant future is coming at you pretty hard and fast. It took more than a decade for the DJIA to recover from the collapse in 1929 – and over 25% of those who wanted to work could not find work for several years. That isn’t the kind of future many folks want to look forward to. If you depend on a 401K or your mutual fund nest egg to make your future mortgage payment – you better start thinking hard about whether you want to keep that in equities. Coming out of the Great Depression Will Rogers said “it’s more the return of my money than the return on my money I worry about.” How much of a hit are you, or your pension fund manager, going to take?
The Phoenix Principle is all about understanding competition and being able to come out on top. And the first step in survival is to have a clear view of likely future scenarios. Not just the rosy ones that extend past success – but also those that portend a more difficult future. Preparing for scenarios that could include changes which could wipe you out is one of the key characteristics of those who survive long term. And a close second is being very aware, honest and clear about competitors. We may wish them away, but what we know is that growing competitors get stronger and do better – and today those who live and work in other countries are showing the ability to out-compete the USA on many fronts (note my recent blog pointing out that China will overtake the USA as the #1 manufacturing country in 2009!) Until you are able to be honest about future scenarios, and all the competitors who are reaching out for their own growth, you are not planning effectively for the future, and that puts you at great risk.
It would behoove readers to get very honest about what the future might be for the U.S. economy. And to honestly understand what competitors are doing. There are analysts who say the market could drop another 40% – or even more. In Japan the Nikkei Index peaked in the early 1990s and has still never recovered to those highs. Japanese real estate values plummeted, and Japan has been in a near state of recession going on 2 decades. The world has changed. Globalization has happened. Those who road the old Success Formulas too far, who Extended too far, are going out of business overnight (actually – over the weekends). Just look at what’s been wiped out in the last few months at the world’s largest brokerages and banks. It will take more than hard work and “belt tightening” for the DJIA to recover.
Are you preparing – or are you saying “So Far, So Good.” It’s easy to ignore a fact and hide inside an old Success Formula. It’s easy to accept existing Lock-ins and say “there’s nothing I can do.” But that’s what the folks in failed organizations all say they did. They waited, and waited, and then it was over. They didn’t come out into the sunshine, but rather their organizations went away. They smashed hard into the ground they did not prepare for. It’s time to start preparing. Be honest about future scenarios, and honest about competitors. Be coldly honest, without sentimentality for the past. Then don’t be fearful about taking action. It’s sure that’s how the competitors are behaving.