Blackberry Abbey

2010-10-29T12:10:00.000-07:00

The World Economy: Goodbye Golden Age, Hello Tough and Turbulent Times

Many people are waiting for a promised economic recovery that will never come. They remind me of Samuel Beckett’s famous play Waiting for Godot, where unfortunately Godot never arrives and there is never any explanation provided for why he fails to show up. Theatre audiences around the world have been eagerly expecting Godot for half a century, but regrettably Godot will never arrive.

So it is with fabled “Economic Recovery” so long promised by government leaders around the world. It will never come, at least not in the form expected, or within any reasonable time-line. I will try to provide you a coherent explanation for this, since I lack Beckett’s literary impulse to keep you in suspense.

My thesis is that the year 2000 marked not only the end of a century, but also the end of the Golden Age that started soon after World War Two. Before that, there had been a Catastrophic Era which spanned two world wars and a grim depression.

For the past decade, we have come back to more normal historical patterns. However, this new era seems tough and turbulent compared to the recent Golden Age.

I was born in 1946, shortly after World War Two. I did not realize that my birth timing was nearly perfect. For although we faced significant challenges in the second half of the 20th Century, in retrospect this was unmistakably the most prosperous time period recorded in human history:

• World trade increased more than 10 fold

• Technology and productivity exploded beyond our wildest imagination

• The worldwide standard of living improved immensely: to a level our grandparents could never have imagined

During most of my career, optimism was rewarded. If you bought a house, it could go up as much as 5 - 10 times in value. If you bought and held stock investments, they would equally turn to gold. If you got a good education and worked hard, success seemed highly likely. We all seemed brilliant.

But no more. These golden, easy times have shifted to a far more challenging outlook. Finding or keeping jobs is now difficult in most places around the world. Investments go up and down precipitously without any clear trend.

As best I can calculate, this sea change in the global economy occurred about the year 2000. It wasn’t the Y2K phenomena so many had feared. However in March 2000, the technology bubble burst with a disastrous crash of NASDAQ stocks that has never been reversed. A year and a half later was 9/11, the beginning of the war on terror. This lead to the war in Iraq and later to the war in Afghanistan.

By any reasonable measure, the last 10 years has been a flat decade. Personal income adjusted for tax and inflation has not grown in most countries. Stock markets in the industrialized world are mostly still in the same trading range as they were a decade ago, which is the first decade without substantial gains during my lifetime.

While emerging economies in China, India, and Brazil are faring somewhat better, they do not alter the global picture of stagnation for the past decade, nor can they provide sufficient impetus for worldwide growth ahead.

My view is by no means unique. I read recently that the legendary bond guru Bill Gross believes that investors should face up to a “new normal,” a world of feeble economic growth where returns on stocks and bonds are stubbornly low.

There are also some dire forecasts of imminent global catastrophe, whether due to financial crisis, military conflict, or environmental disaster. While such predictions can never be disproved until retrospectively, I do not share these dark fears. Rather, I see the world bumbling forward along the current general path for an extended period.

So where does this leave us? Life on easy street is gone. There are still many opportunities left however: for careers, for investments, for companies and for governments.

But those opportunities require a new calculus. Budgets and plans based on an approaching global recovery are doomed to failure.

Governments will need to reduce their spending, especially in the United States and in other formerly prosperous nations. Companies will need to avoid debt and speculative endeavours. Individuals will need to return to the frugal habits of their grandparents.

Human history has recorded previous periods of huge growth and also times of widespread war and economic catastrophe. Nevertheless, the times in between have seemed tough and turbulent to the people experiencing them.

Our ancestors adapted to new environments, whether willingly or reluctantly. We face the same necessity. If we embrace this new era optimistically, we will thrive.

2010-06-23T07:49:00.000-07:00

World Economy: Stuck in Low Gear?

In March while driving on the south coast of

Italy

, I encountered some of the most demanding road conditions I have ever seen. I have previously driven in the Swiss Alps and on other tricky mountain roads, but none compare to the danger and thrill of driving on the Amalfi Coast, particularly when you throw in the impatient local drivers. One driver passed me on a single lane road and within five minutes he caused a head-on collision. But with the luck of the Italians, his damage was moderate and no one plunged off the steep cliff.

My little Mercedes rental car had seven gears, so I was able to drive in a low gear. This prevented my car from running away when traveling around blind corners and while going up and down the steep inclines with inadequate guard rails. (Please see my photos in my previous post.)

But low gear is not always fun. It became quite obvious in traveling through southern Europe, that the economy there is also stuck in low gear. The volume of tourists is considerably reduced from a few years ago. Shopkeepers are struggling to get enough business. Everyone complained of jobs lost due to Chinese imported goods.

Regrettably, the situation in Europe economically is not much different from the rest of the world. We are all stuck in a low gear. And trying to drive our economy faster is frustrating governments everywhere.

Because of the large swings in world stock markets, the underlying economy seems hard to track. During good months for the stock market, people get their hopes up for a full recovery. When markets plunge, as they did in May, fears revive about a second recession.

The best indicator to watch worldwide is the growth of jobs in the private sector. In the

USA

, jobs appear to have improved recently, but that is due mainly to temporary government workers hired for doing the next census. When these temporary workers are released in a few months, the situation will reverse.

Unfortunately, not nearly enough jobs are being created for a recovery. Some economists call this a jobless recovery. But without job creation, the term “recovery” is meaningless.

The situation is marginally better in the developing world of China, India, and

Brazil

. But not good enough to revive the whole world economy. Those who think a recovery in

China

can restart the global economy are dreaming. The transfer of too many manufacturing jobs to

China

is one of the global imbalances that must be rectified.

So what is the outlook? Another big financial collapse? A recovery next year? I suspect that next year we will still be stuck in low gear. There is a danger of going back into reverse like what happened two years ago, but I don’t expect that.

Another possibility is more stimulus to try to get the economy moving faster, which President Obama wants. But he is nearly alone in believing that deficit spending would help. I support the majority of world leaders who believe that deficits must be cut to avoid a bigger collapse in a few years.

So why can’t someone fix the economy? Why can’t we create lots of new jobs? The answers to these questions are complex.

The time period most of us remember best is the last 50 years, when the economy grew at unusual speed up until 2008. That was due to broad improvements in technology, relative global peace, and constantly growing world trade. Those conditions will not be repeated soon.

The best thing is for individuals, families, companies and governments to realize that we will likely be stuck in low gear for the foreseeable future, likely for another 5 – 10 years. We are far better off than people were in previous centuries, but we shouldn’t expect more from the economy—rather we need learn how to make do with less.

Individuals will still be able to find careers. Some companies will grow and succeed. However, for most people and for their governments, this will be a very challenging time.

2010-06-16T10:50:00.000-07:00

2010-02-11T11:28:00.000-08:00

American and World Financial Crisis Continues

During the past three years years of writing this blog, I have been a prophet of doom about the American (and World) financial situation. (See my post "A Hard Rain's A-Gonna Fall" in March 2007 and many subsequent posts). I keep hoping that my observations are based on poor digestion and I will be proven wrong by a huge economic recovery; alas, that is not happening.

Although stock markets and commodity prices have recovered considerably from their lows in 2008 and 2009, the fundamental ills of the economy have not been solved. Personal income and employment have not recovered at all. Trade deficits remain immense. Unprecedented government spending has lessened the feeling of impending doom, but I wonder how much has actually been improved by the trillions spent.

See this week's article by Niall Ferguson A Greek Crisis is Coming to America. My wife and I will traveling to Greece and several other Mediterranean countries in March. Already there are widespread strikes due to severe government spending cutbacks. I knew this situation when I planned our trip. However, to avoid all economic crisis zones, we would need to stay at home.

I wish I had some brilliant insights to offer of how to avoid this continuing storm. On a mass scale, the die is already cast. Governments will reap the consequences of deficit spending in the near future.

For individuals, we can protect ourselves to some extent by embracing the values of our ancestors who nearly always lived in precarious times. We need to spend less than we earn and to become even more frugal. We need to focus on our jobs, however humble, and scramble to earn enough to live. We need to look after our neighbors and the least fortunate people in our communities. We must abandon hope that governments can rescue us; they seem unable to even look after themselves.

I don't think this crisis will last indefinitely, but it will stay longer than most of us have patience to endure. My hope is that we will relearn what our grandparents knew.

For Christmas I gave my wife the book From Dawn to Decadence by Jacques Barzun. His title could well be the epitaph of our Western Civilization, unless we reinvigorate our approach to life, money and work.

However, at heart I remain a stubborn optimist. I believe humanity has the metal to survive even worse storms as we demonstrated during the great wars in the first half of the 20th Century. We will need to change our ways.

2009-11-16T08:31:00.000-08:00

American Deficits Questioned By Lenders

All is not well for the American financial house. Although retail sales are rising, corporate profits rebounding, and the stock market enjoying a more than 30% recovery, there are other statistics which give cause for serious concern. For instance, the US Dollar has fallen 15 - 20% against the Yen, Euro and the Canadian Dollar although their central banks tried to stop the alarming fall of the Dollar.

More clear evidence of this is the dramatic 50% rise in gold during the past year, which overshadows the 30% rise of the S & P 500. Governments and banks around the world have lost their faith in the American Dollar. What is more, it is becoming increasingly difficult for America to finance its multi-trillion deficits. Although the budget deficit is merely a trillion dollars, the amounts poured into the financial system by the Federal Reserve to bail out big banks, investment firms and other corporations is closer to $10 Trillion. The amount is so immense that the global system may be unwilling to finance the American Government for borrowing. China is the largest lender, but it speaks for most other creditors. See the following N Y Times article on November 14.

China’s Role as Lender Alters Obama’s Visit
By HELENE COOPER, MICHAEL WINES and DAVID E. SANGER

"When President Obama visits China for the first time on Sunday, he will, in many ways, be assuming the role of profligate spender coming to pay his respects to his banker.

"That stark fact — China is the largest foreign lender to the United States — has changed the core of the relationship between the United States and the only country with a reasonable chance of challenging its status as the world’s sole superpower.

"The result: unlike his immediate predecessors, who publicly pushed and prodded China to follow the Western model and become more open politically and economically, Mr. Obama will be spending less time exhorting Beijing and more time reassuring it.

"In a July meeting, Chinese officials asked their American counterparts detailed questions about the health care legislation making its way through Congress. The president’s budget director, Peter R. Orszag, answered most of their questions. But the Chinese were not particularly interested in the public option or universal care for all Americans.

“They wanted to know, in painstaking detail, how the health care plan would affect the deficit,” one participant in the conversation recalled. Chinese officials expect that they will help finance whatever Congress and the White House settle on, mostly through buying Treasury debt, and like any banker, they wanted evidence that the United States had a plan to pay them back."

I have great sympathy for the American Government in its attempts to deal with the financial crisis, which had looked like a looming depression. Unfortunately however, there are very real limits in trying to buy a recovery through fiscal and monetary stimulus. I have mentioned this theme in several past blogs.

I hope America doesn't turn this financial challenge into a political drama of hurling blame at opponents. Everyone has helped to create this problem: government, banks, corporations and individuals, both rich and poor. Everyone needs to work together to rebuild the American economy. I believe the Obama administration is finally realizing the magnitude of the problem. They should be given support, at least until the 2012 election.

I wonder if a moderate depression would have been any worse than the likely prospect of stagflation (no growth, but with inflation) for a number of years ahead.

2009-11-16T07:15:00.000-08:00

2009-09-16T13:38:00.000-07:00

The Misuse of Government Economic Statistics

I have long argued that official statistics distort our true economic situation and cannot be relied upon to see where we are headed. This Harper's article by Kevin P. Phillips supports my viewpoint eloquently. Here are a few excerpts:

"..since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economy are measured. The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed.

"..the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

"The corruption has tainted the very measures that most shape public perception of the economy—the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity."

2009-09-08T07:38:00.000-07:00

World Economy? Tough, but Normal: Reducing Expectations following the Artificial Wealth boom.

The economy is emerging from a severe downturn that may have been a small depression in much of the world. By “depression” I mean the 10% or greater decline in the real economy, not the governments’ distorted estimates of GDP decline.

In the past 18 months, world stock markets declined by 40% to 50%. Retail sales fell by more than 10% in the worst months compared to the prior year. World trade was down considerably more than 10%. Unemployment has soared and jobs are hard to find.

However the G20 nations, led by America and the UK, are conducting the most dramatic economic rescue operation ever seen. They are spending staggering sums to re-inflate sagging consumer demand. Stock markets are recovering some of their giant losses. Oil and other commodity prices, which fell considerably during the financial crisis, are now climbing back quickly.

We are left with two questions. Is this dramatic effort worth the trillions of dollars borrowed by governments? Will this bold rescue hold up for long?

I give world governments’ full credit for this rescue effort, since a big depression would be catastrophic. However, government debt is increasing by colossal proportions. This will inevitably lead to higher taxes and inflation.

We may already be starting a new inflationary trend (seen in commodity and stock prices) that will be hard to contain. That is why the price of gold has risen 30% and may rise further. Gold is a barometer of inflation.

Listening to some news reports and internet discussions, it would be easy to conclude that we live in abnormally difficult times. However the economy is actually close to normal, and decidedly better than the historic economy experienced by our parents and grandparents.

It is folly to think that the height of an economic boom is a long term norm that can be permanently maintained by government policies. Government should not try to interfere with the normal up and down cycles of the economy. In fact the Federal Reserve’s overreaching ambition to achieve such an optimal economy is what led to our recent financial collapse.

I am 62 years old and my parents were born before 1910. From my memories and from theirs, I realize how much better off we are now than people who lived fifty or a hundred years ago. Back then, most people in America, Europe and worldwide lived in wretched poverty by today’s standards.

The media gets transfixed by whether the economy grew or declined this year. We get agitated when our house value or retirement funds go up or down 20%. But really, our economy is quite good enough for any person willing to work hard and to save money. The economic world is challenging, as it always has been, but not exceptionally so.

A serious student of history would acknowledge that we live in one of the most fortunate times in human history. For one thing, our military conflicts are minor compared to the world wars that occurred during the past 100 years. Rarely in history have we been able to travel around the world so easily and safely. Our current “wars” rate no more than a 1 or 2 on the Richter scale of historical conflicts.

Despite continuing challenges for the American government and American financial system, the rest of the world’s economy is gradually getting back close to normal. The real challenge is getting past the unrealistic expectations produced by the artificial economic boom we enjoyed so much five years ago.

After the historic 9/11 events involving the destruction of the World Trade Towers in New York, the American Federal Reserve Bank over-reacted. They brought interest rates down far too low to counter fears of a major recession. Other central banks followed suit. As a result of the lowest interest rates ever, there was global boom in real estate and stock markets that created artificial wealth* for most investors and home owners. This financial euphoria led predictably to a grim correction in 2008.

This crisis was most acute for American banks, investment firms and real estate. For a while the world was terrified by the American crisis, but eventually they realized that the rest of the world was not as seriously affected. Once the liquidity crisis was past, Asian economies resumed their growth and Europe is also recovering.

America is left with both bigger challenges and greater resources than most nations. Unfortunately, the American mood seems sour. Everyone, rich or poor, feels especially deprived and unfairly treated. People are unwilling to accept that you can no longer enjoy high wages while living on inexpensive goods produced by cheap labour.

This is a time for discipline, for hard work and for financial prudence, and helping your community. Those who work hard and save 10% or more of their earnings can look forward to a reasonable future. Those who wait for a better economy or government job creation to rescue them will be frustrated.

The Obama government is disappointing nearly everyone – which is actually a sign of good government. Difficult choices need to be made that require sacrifices by all. The American financial system needs to be reformed. The American medical system is poor compared to other leading nations; hopefully a few steps can be taken towards universal coverage and to bring down the costs. But no one will be satisfied soon – health care will take years if not decades to fix completely.

So, turn off the news reports. Go outside for a walk. Call someone you love. Fix a good meal. This is a time for renewed hope. This is a time to build a good future for yourself and for those you love. The economy won’t get much better than this.

** For more insight on the artificial wealth created earlier this decade, please read this article.

2009-08-03T22:19:00.000-07:00

US Unemployment High and still Growing

Bloomberg Finance News had an illuminating article today on the dire unemployment situation:

"This glass still looks half-empty to me...and this isn't even the real picture. It's been estimated that the real unemployment rate in the U.S. is closer to 20%. These estimates include “underutilized” workers in the U.S. (i.e., those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking). Prior to the early 1990's, this was the method of calculation. Now the government manipulates the number in order to suit its political aims..."

Read article

2009-07-13T10:12:00.000-07:00

2009-06-17T08:18:00.000-07:00

The Highway to Financial Success

There are many potential ways to get to most destinations, but usually just one reliable major highway. Side roads and unmapped paths are interesting, but these rarely help to reach your goals better and faster.

During my successful career in banking and as a corporate executive, I met a bunch of people who achieved amazing financial success. Many became millionaires. Others created fortunes of $10 million, $100 million, $1 billion, and one man I know is worth over $5 billion.

But even the much larger number of people who never made big fortunes nonetheless became happy and successful if they followed the highway to financial success that I describe below. But first a brief detour.
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Millions of people last month bought tickets for the Lotto 6/49 Jackpot in Canada which had a grand prize of $49,851,871. While the lucky winners in Alberta obviously did well on their investment, the other 99.9% lost money and will continue losing money as long as they gamble. In British Columbia where I live, the Government lottery system pays out 27.5% of it revenues in prizes. That means if you had bought every single ticket, you would have lost 72.5% of your money. Regrettably, you would you would also likely have lost money if you purchased stocks or real estate during the past five years.

What many people fail to realize is that more than 95% of wealth is created in your own job or in your self-owned business. The stock market has indeed created many multi-millionaires; regrettably, most of these are the brokers, investment bankers and other professionals who sell investments to the general public. Only a very few investors make big dollars by investing – the rest of us live perpetually on hopes of winning in the investment lottery, but rarely collecting on a big win.

The same is true of the real estate industry; the fortunes created there are mostly for real estate professionals. Obviously, in times of rapid asset inflation such as we experienced in the past decade, a few lucky people got in on the inflation bubble early on and sold out before it burst. But those people are statistically few in number. In the recent downturn, many people including some of my smartest friends and relatives lost fortunes in real estate – it is a very risky business, particularly when you use borrowed money.

Forty years ago I analyzed the performance of the stock portfolios held by a number of successful business people, all whom had made significant money in their own businesses. Shockingly, almost none gained as much in their stock investments as if they had just held bank deposits. Over half of these successful business people actually lost money on their financial investments.

I have seen this pattern repeated many times again in the past three decades, in both good economic times as well as in recessions – ordinary investors rarely do well in financial investments. Certainly not well enough to risk so much of their money and time betting on the stock market!

I understand the counter arguments offered by those who use the Dow Jones index, the S & P, or other stock indexes to show high financial returns historically. But those indexes are badly flawed. Worse still, most investors do not buy these stock indexes. If they buy mutual funds, up to half of their gains go to the sales commissions and investment management fees, particularly if they hold the mutual funds less than 5 years. Few people realize how much of their investment income goes back in fees and hidden charges to the financial industry and how little gain remains to reward investors.

There is a sound investment strategy for people who have already made their wealth to earn 6 – 8% returns in the long run, but few people ever create their original wealth through their investments alone. Even Warren Buffet made most of his original money by handling investments for other people who paid him handsomely for doing such a good job.

So back to my main conclusion: virtually all wealth is originally created in your own job or in your self-owned business. Investing your hard-earned wealth wisely is a different challenge.

I will have more to say later about how to build a successful career or start your own business. But for now, please remember that the highway to financial success starts with your own job; nowhere else. Whatever you can do to build up technical skills in an area where you have a keen interest will facilitate your longer term career advancement.

Highways are very long – it can take decades to build up a great career and to reap the financial success arising from this endeavor. Pick a career direction and stick to it for the long term. There will be obstacles and detours ahead, but keep building around your core knowledge, interests and strengths. People who change career direction frequently almost never succeed financially.

Even humble careers based on trades and very basic services can ultimately lead to surprising satisfaction and success. Most people who start successful businesses do it with knowledge gained while working for someone else.

So get on the career highway and keep on this highway until you reach your desired destination. But please enjoy every mile (or kilometer) of the journey, because enthusiasm is hugely important to your success.

Bon voyage!

2009-04-19T23:14:00.000-07:00

2009-04-19T17:11:00.000-07:00

Inflation is Looming on America’s Horizon

Martin Feldstein, one of Harvard's preeminent economists, has confirmed what my blogs have been saying for the past year. This is worth reading! Click here

2009-04-06T03:35:00.000-07:00

More Bad News -- American Deficit Reaching Astronomical Proportions

Some of my friends (in jest) accuse me of unfounded optimism. But I find so much daily evidence that I wonder why nobody has sent me a bottle of the intoxicating beverage that is propelling the stock market to a rebound. The market logic assumes Obama is fixing America, so that the export engines in China and India can roar forward later this year to supply the wonderful American consumer. Global growth is just around the corner. Or is it?

My concerns are echoed by Clive Crook of the Financial Times. Read his latest prognostication for a 10% or higher American fiscal deficit. That plus alarming monetary expansion spells "INFLATION" ahead.

That comes on top of a permanent trillion dollar American trade deficit from oil imports. But why let a few missing trillions spoil a good party? Go buy stock!

2009-03-28T02:41:00.000-07:00

The Downturn is Far from Over!

One more time we are hearing that this sharp downturn has reached a bottom and now is the chance to buy - a house, a car, or especially some stocks or mutual funds.

There is some evidence that the economy is not headed for a complete collapse. There are even some monthly indicators that show upward movement.

No one can say for sure when the bottom will be reached in the stock market, but for my money the answer is not yet.

For the economy as a whole -- in terms of employment, consumer spending and GDP, I think the bottom is many months away, or perhaps even a few years away. My guess is that the economic news in the coming months will have far more negative items than real grounds for encouragement.

It is not surprising that governments around the world are trying their best to halt this slide. However, the methods being used in Washington may add fuel to the financial fire. Look out for inflation in the coming years, due to colossal deficits and extreme monetary stimulation. Buy gold or gold stocks to hedge against likely inflation next year.

I still believe we are headed for a small depression, that is a 10% or greater fall in GDP. It might even get worse than that.

The new trade barriers that are rising worldwide will surely dampen any global recovery. Few people realize how much global prosperity in the past fifty years has depended on free movement of people, money and products. If free trade dies, the world will become much poorer.

Fasten your seat belts for a prolonged bumpy ride!

2009-03-03T04:15:00.000-08:00

From an article on History and Depression by Richard Cohen in the Washington Post

A depression, if it amounts to that, is not just an economic crisis. It's a historical mugging. Those of us who have been accustomed to exercising control over our lives are about to undergo an awfully frightening experience. This will hit the young particularly hard. If you asked almost any of them over the past 20 years or so why they did not read a newspaper or, really, care about the news at all, the answer was that news was irrelevant to their lives. It did not matter to them what was happening in Washington or London or even Baghdad.

An older generation still had a residual appreciation for the linkage of things -- how an event there could affect an event here and a job would disappear or a war erupt. It mattered because history mattered. One had the feeling that what with wars and famines, disease and ruthless economic cycles, one could never really control one's own life.

But generations that followed came to feel that they had mastered history and that it was, like polio, no longer a threat. The great exception in my lifetime was the Vietnam War and its suffocating draft. Rage was the result. The campuses exploded.

The rage that is coming will change the politics of our time. Barack Obama will either figure out how to channel it, as Franklin D. Roosevelt did, or he will be flattened by it, as Lyndon Johnson was. Obama's challenge might even be greater than FDR's. The people of the 1920s and '30s were tough, hard. They did not expect all that much from life, and they had learned to expect next to nothing from government.

Click here to read the entire article.

2009-02-10T12:16:00.000-08:00

Don’t Buy It!

I retired a few years ago from a career as an international banker and corporate executive. In my economic blogs I have for two years been predicting a momentous global downturn, long before any official sources admitted such a possibility. (They are still partly in denial.)

Now I would offer this advice: Don’t Buy It. That is also my word to myself in these treacherous times.

Whether you are looking at taking a bargain cruise, buying a new TV, another car, a house, or making a financial investment, don’t buy it unless you really need it and can clearly afford it without borrowing. I am not buying much these days except groceries and small things I truly need.

It is not our obligation to rescue the American economy or the world economy. Our obligation is to manage our individual and household budgets prudently.

Many economists are telling us to spend more to get the economy going, but that will only put us further into debt, which is the root of our problem.

We are in an economic hurricane that is still gaining strength. There have been several premature announcements of a recovery in the stock market or housing market, but don’t buy this theory just yet. Obviously I wish this storm would be over soon, but I see no signs whatsoever that it is lessening.

In fact, this feels to me like a full scale depression in the making. I am not suggesting a 1930’s drop in GDP of 40%, although that might be possible; but I do expect a GDP drop of 10 – 20%, which would qualify as a real depression by any measure.

So let me suggest a more prudent way of looking at our predicament. What if the government is in fact virtually powerless to stop this incoming tsunami wave?

Franklin Roosevelt tried mightily for nearly a decade to stop the last depression without much success, although he was arguably the greatest president of the 20^th century. Today many economists and government officials have become perfect “Monday morning quarterbacks” who seem to believe that if they had been in charge, the 1930’s Depression could have been avoided or quickly repaired. Don’t buy those pretentious claims; they are unfounded and misleading, even if well motivated.

Various political leaders are claiming their unique expertise about what should be done to fix this mess, but in fact none of them saw this meltdown coming and they have no basis for claiming such profound understanding.

You should instead respect any leaders who admit honestly that they don’t know how bad it will get, or precisely how to avoid it. Our government should be concerned primarily with offering help to those who are hardest hit. Trying to stop the tsunami in its tracks is patent nonsense.

So where does this leave you and me? Hopefully not waiting for someone else to rescue us. That is our job: to rescue ourselves. And rescue does not mean getting back on top of the house of cards that has tumbled down around us. It means bravely starting over from where we have landed.

If you do the math, you quickly realize that the proposed $800 billion American stimulus package divided among a population of 300 million is less than $3,000 per person. How can that provide $40,000 jobs, or rescue $100,000 mortgages in default, plus pay for a new health care system, alternative energy research, and a host of other benefits that we desire? The expenditure per person to do all of that would be astronomical—many trillions. It just isn’t possible.

But the trillion dollar American government deficit will surely contribute to growing inflation and send the price of gold still further up. So if you are going to buy anything, buy gold, because the dollar is becoming worth less and less.

We have a choice. We can sit in a heap and cry about how desperate the economy is becoming or look at history and realize that we are still incredibly lucky. The economist Jeffrey Sachs has estimated that we are ten times better off than our ancestors were in 1750. We are even far better off than our grandparents. They faced war and depression and survived. We can too.

Our principle source of hope is in what we can do for ourselves and for those around us. This must happen at every level, with every person, company, family, community and at every level of government. We need to find entirely new ways to contribute to this stark new economy, whether in paid or voluntary work.

With a “can do” attitude, extreme frugality, and an enterprising spirit, we have every chance to survive and to rebuild our lives.

2008-12-19T21:36:00.000-08:00

2008-12-19T17:55:00.000-08:00

2008-12-19T06:47:00.000-08:00

Wanting the Downturn to be Over

Like all of you, I want this downturn to end soon. Everyone who owns property or investments for retirement has seen their net worth plunge this year.

Many people are saying we are at the bottom and that now is a good time to invest again. I hope they are right, but I am not sure yet.

With the stock market down about 50% worldwide, this ought to be the bottom, compared to previous recessions. However, I wonder if we might not see a a second stage of this sell off in the next 3 - 6 months. I have no crystal ball to predict next year's headlines, but if they are as grim as what we have seen in recent months, it could mean more bad news for the markets. Furthermore, governments have reduced interest rates to virtually zero and maximized monetary and fiscal measures. If this huge amount of stimulus fails to break the downward pattern, we could be facing a long economic winter.

But even if my pessimism proves wrong about the stock markets, that would not automatically mean that that the broader economy will turn around quickly. On the contrary, I expect unemployment to rise for several years. I expect retail sales and manufacturing activity to decline for 1 - 2 years, if not more.

Obviously, I hope my gloomy assessment proves to be wrong. But many years ago I learned the error of assuming what I want to happen will be what actually occurs. My favorite sports teams and politicians win occasionally, but lose more often. I find it helpful to retain dispassionate objectivity even when I am sick and tired of watching disasters unfold.

So I am not buying into a recovery yet.

2008-11-20T07:42:00.000-08:00

Obama’s One-Time Opportunity: to Restructure the American Economy

With worldwide equity markets down by 40 – 50%, it seems virtually certain that we are already falling into a depression. Hopefully it will be far smaller than the Great Depression of the 1930’s where the economic contraction was 40%. But a 10% or a 20% contraction of GDP is a realistic scenario in this dire situation. Already in March the Gallup Poll found 60% of Americans said a Depression is likely; today I suspect most Americans would admit we are already there.

President Obama is right to offer hope for the long term and to show compassion to those most injured by this storm. However, unless he tells Americans soon how terrible the economy is already, he will certainly get blamed for the inevitable continuing catastrophe. The American people can handle a candid assessment and will sacrifice to make the changes needed for an eventual recovery. But minimizing the challenge now will soon shift the blame to Obama, who didn’t create this regrettable state of affairs.

It is customary for a new CEO when taking over the management of a company in distress to clean house and to lower short-term expectations. This involves examining the books and disclosing hidden losses. It allows a more realistic set of goals to be pursued without useless baggage from the past, which should be thrown overboard.

The plunging financial markets have signaled severe economic deficiencies. Some people naively believe that our main challenge is how to restore the stock market and the housing market back to their former levels. But the precipitous stock market decline is due to a very sick American economy, not just an isolated problem in the financial sector.

What we are witnessing is not only the failure of some of the largest American banks and corporations, but also the financial disintegration of the government. Conventional wisdom says that the government must use every fiscal and monetary measure available to restore confidence and to increase consumer spending to help avoid world recession. But I see it differently.

Let me explain why. My international banking career has trained me in credit assessment of both corporations and of national governments. What has become abundantly clear to me throughout my 35 year financial career is that size alone is insufficient to protect any bank, any corporation, or even an entire nation from financial collapse.

So restoring economic growth alone will not restore our fortunes. In fact, too rapid growth – in house construction, in stock prices and in energy consumption – has caused the present problem. The US (and world) economy is entering into a time of intense contraction. This is a necessary antidote to the haphazard growth.

By every normal measurement, the US government’s financial health is poor and deteriorating rapidly. Let me put some numbers to this by comparing the United States and China, which are respectively the most profligate and most disciplined major economies in our world.

Although China’s economy is half our size, it has been growing 6 times faster. That rapid growth comes from having a three times higher national investment and savings rate.

China consumes 6.93 million barrels of oil per day, compared to America’s 20.8 million barrels of oil per day, despite having a four times greater population. That is the main reason that China enjoys a $300 billion trade surplus compared to our $900 billion trade deficit. It is also the reason we are the largest debtor nation and they are our largest creditor.

Consequently, our national debt is $14 trillion, 34 times as great as China’s debt. What is more, China’s treasury holds $1.5 trillion in gold and foreign currencies, while we have only $71 billion. Our financial cupboard is bare!

Putting the United States on a path to recovery of its financial health is an immense undertaking, but let me sketch out the top priorities.

Guard the federal treasury against quick depletion. The titanic struggle to regain economic health will take years, if not a full decade. Every dollar of government resources is precious and should be used frugally. The government doesn’t have an endless well of financial resources.
Reduce energy consumption drastically
Balance imports and exports
Reduce foreign borrowing
Increase domestic savings and investment
Discourage debt-based consumer spending
Reduce military spending

These priorities would help restore America to an economic superpower once again. Here are a few specific suggestions:

1) Introduce gas tax measures to reduce energy consumption by half. While we should improve domestic oil production and develop new energy sources, these alone will never offset enormous energy imports. Why not follow Europe and most of the world by taxing energy much more? Their energy conservation plan has been proven highly effective for decades. Japan consumes 38% less oil per capita and Germany uses 53% less than Americans. That gives them an enormous economic advantage.

I suggest raising retail gasoline prices to the level of the rest of the world. Higher taxes should also apply to industrial energy consumption. This is a bitter pill, but the only alternative is continuous financial decline until this oil-import haemorrhage stops. The lessening oil consumption will do immense good for the environment. The tax revenue from this program could fund further tax cuts or new social programs.

2) Avoid huge bailouts to GM and other bankrupt companies. GM (together with GMAC LLC) has total liabilities of over $200 billion against $5 billion of operating cash flow during its best recent year, before the massive losses began. Even if GM recovered miraculously to its previous earnings in 2005, it has $150 billion more in debt than its cash flow could ever service. GM needs rescue, but after it goes though the bankruptcy courts. Why should the Federal Treasury shoulder an unnecessary further $200 billion for GM alone, which will only result in extraordinary gains for shareholders and creditors?

The current request by the three large automakers is disingenuous, to say the least. GM alone is losing $5 billion per month. Once the government steps in, the market will expect a continuous financial lifeline, which is in fact an implicit government guarantee. This would ultimately cost several hundreds of billions in the long term, like with Freddie Mac and Fannie Mae.

Airlines have demonstrated repeatedly that the bankruptcy mechanism rarely grounds planes permanently. They provide for an orderly restructuring. GM and the other car companies should be drastically restructured before tax payers help out. The priority of keeping a vigorous American car industry is worthwhile, but not at such a high cost.

3) Reduce consumer debt costs, particularly among the poorest citizens. Historically, American states restricted interest rates to 6%, 10% or 12%, but gradually this was raised to over 30%, and now there is no limit whatsoever on consumer interest rates and other excessive fees for debt. Why not limit consumer interest rates to 15% or 20% by federal law? This would discourage the spiraling growth of credit card debt and other consumer debt, which cripples low wage earners.

4) Provide much larger incentives for saving & investment. The United States has had the lowest personal savings rate among major nations for decades. Recently the savings rate has been about zero, when personal borrowing is netted against savings. Most of the leading economies apart from the USA have had high savings rates: Japan, China, Germany, and most of Europe. This is what pays for industrial investment.

2008-11-20T07:35:00.000-08:00

Repairing the Damage — After the Global Firestorm

(This blog was previously published at The Huffington Post on October 30, 2008)

My father often told me the story of going into Tessmer’s General Store in Hartville, Ohio one day in1929, when he was 23 years old. Old Mr. Tessmer looked up at him from reading the financial pages of the newspaper and said: “Young man, you don’t understand yet what this stock market collapse means. But next year you will understand it.”

The jury is still out on how big the current financial firestorm will become. Is it a prelude to a deep recession? Is it the onslaught of an actual depression? With the unpredictable swings in the stock market, some people think that a recovery may already be starting.

I don’t have a crystal ball, even though I anticipated this crisis in various blog posts . On March 8, 2007, I wrote:

“Sooner or later, we will see fierce worldwide economic storms that make the Indonesian Tsunami and Hurricane Katrina seem like small local incidents. At some point in the coming years or decades, stock markets will likely plunge around the world in dismaying amounts. Potentially we could see 20%, 40% or even 60% of equity values wiped out in a very short time.”

I became increasingly apprehensive that soaring market exuberance would give way to severe financial disintegration. Opinions vary whether this was an inevitable long cycle wave as opposed to just poor management by government combined with new heights of corporate greed, or perhaps both.

It started out seemingly as an American crisis, but the infection is now truly global. The 35% drop in American stock prices is not as severe as the plunge in Europe and Asia. Foreign currencies have taken a battering not seen in 70 years. We are beyond doubt in global financial chaos.

Global commodity markets have participated in this pandemonium. After a market run-up larger than any seen in 50 years, we are now seeing a colossal commodity slump. Energy, metals, agricultural products, building and industrial supplies are now in massive oversupply.

What started in the financial sector has broadened quickly to most other industries, particularly automotive. Early indicators show consumers are dramatically curtailing purchases of nonessentials.

We are in a tailspin of historic proportions which cannot be sorted out with a few global meetings of world leaders. Regrettably, Humpty Dumpty cannot be put back together again by “all the king’s horses and all the king’s men”.

Hopefully, we will elect President Obama, not President McCain. But even Obama will not be able to fix this mess any time soon. Perhaps Joe Biden was politically naïve in acknowledging an inevitable crisis of confidence – but I for one agree with every word he said. People like me who supported Obama from the beginning will have our faith severely tested. Franklin D. Roosevelt was perhaps the greatest President of the 20^th Century, but he was unable to fully fix the economy in the 1930’s, even though anyone else would have surely done worse. And like Roosevelt, Obama is bringing hope and vision when these are in short supply.

Governments around the world need to provide emergency relief – to their financial institutions, to major industries, and to their poorest citizens. But the well of government resources is not infinite. Essentially, government can only provide credit or subsidy, whether to home owners or to businesses and financial institutions. These require government borrowing, which will ultimately be offset by either increased taxes, or by resurgent inflation; neither is desirable.

There is no magic cure for a situation that was built up by many years of bad decisions by most of us. Consumers took on too much debt to finance homes and cars. Companies paid extravagant bonuses for very short term growth, which should have been retained as equity for future development. Governments opened the monetary and fiscal floodgates in foolish spending that did not address the most important needs like healthcare, energy conservation, and industrial restructuring.

So now, many people are on the ropes. Seniors about to retire have lost up to half of their retirement funds. More and more people are losing jobs, whether white collar or blue collar, so they will be unable to service their debt loads.

Digging ourselves out of this deep crater will require our combined efforts at every level: by individuals, families, companies, schools, and governments.

I wish I knew how much longer the stock market gyrations will last; perhaps another few weeks or for several more months? But I expect that in the aftermath of the financial storm, the needed economic restructuring and full recovery will take quite a long while.

2008-10-08T07:50:00.000-07:00

What Lies Ahead: Recession or Depression?

There is an old aphorism that when your friend loses their job, it is a Recession but when you lose your job, it is a Depression.

In fact, the term “Depression” has almost gone out of use now, except for referring to a psychological state, or, in historical reference to the “Great Depression” of the 1930’s.

Prior to 1929, there were a number of “depressions”, but since the Great Depression, we don’t even use this “D” word anymore. In fact our governments and economists have mostly avoided the word “recession” as well. However, now everyone concedes that we are experiencing a full-blown global recession, at minimum.

But might we be plunging into something worse than a recession?

Since the 1930’s governments have used three methods to contain economic downturns:

· Fiscal stimulus based on the theory developed by John Maynard Keynes, a British aristocrat-economist who advocated major government intervention to manage recessions and depressions. He recommended tax cuts and/or more deficit spending to give consumers the ability to spend and thus to restore a general sense of confidence in the economy.

· Monetary stimulus which also was strongly advocated by Lord Keynes, but later considerably refined by University of Chicago economist Milton Friedman, who greatly influenced the development of Macroeconomics. Milton Friedman argued that monetary growth needs to carefully pace productivity growth and consumer demand, or else inflation becomes rampant, since excessive expansion of the money supply is inherently inflationary. His theories enabled developing world countries suffering from hyperinflation to stabilize their currency and to achieve balanced growth. Now Friedman’s officially enshrined concepts guide the European Central Bank in setting their monetary targets.

· Managing consumer and market psychology. This is the favourite technique of all modern governments. I would love to attribute this populace control method to Machiavelli, but there is considerable evidence that spin control was already well understood thousands of years ago by Chinese and Roman emperors.

If I were an academic, I would love to write a book on the thesis that American governments since the 1980’s have been trying to stamp out recessions permanently, but regrettably without success.

Instead, they have created an unhealthy economy where excessive monetary and fiscal stimulus produced unnaturally high growth of the housing and stock markets. This paved the way for the current global financial meltdown. (This ill advised policy was more fully described in my blogs last January and February.)

We are now likely plunging into a global depression. Time will tell if it will become a great depression on the scale of the 1930’s, rather than like the more ordinary-sized depressions of the 19^th Century.

From my experience as a banker and CFO, I doubt that the global capital markets and financial institutions can be fully repaired in less than three to five years. Meanwhile, companies will have little access to either credit or to new capital. Industrial production will soon suffer drastically, as is already evident with automobile sales declining for lack of credit.

This crisis has now become much, much more than a “subprime mortgage” problem, although that may have been the trigger. Banks are starting to fail worldwide and central banks are desperately offering billions in fresh credit (printing money) to stave off a complete financial shutdown. So fasten your seat belts. This may be the mother of all bumpy rides.

Far too little has being written about this impending depression in the mainstream press, but I suggest reading an article published October 5, 2008 by Tony Jackson, in the Financial Times of London “Parallels with 1929 highlight need for radical thinking” (http://www.ft.com/)

But don’t panic. Our ancestors lived through worse crises successfully many times. We currently enjoy a standard of living unparalleled in world history. If necessary, many of us could cut our expenditures by a quarter, which is probably what we will need to do for several years. Communities and families need to work together to alleviate suffering for those hit the hardest.

We must find ways to restructure our economy on a more reasonable basis. The recessions that were avoided during the past few decades by excessive government intervention would have made industrial and financial restructuring more gradual. However, now we need to do it aggressively, depending on massive government guarantees. Our challenge is to put our financial and business structures back together right.

2008-08-13T06:32:00.000-07:00

On Money and Wealth

In this time of economic challenge it is worthwhile to reflect on the difference between money and wealth.

Many people have been shocked by the financial and housing crisis; some of us may have lost part of our net worth (or retirement savings) measured in money. But we may not necessarily be losing much of our true wealth.

In working with millions of dollars during my financial career, I have been astonished that people rarely think seriously about what money truly is, even though they work so hard to get it.

Money simply measures how much we owe to others and/or how much other people owe us in terms of future goods and services.

If you study money in ancient times, you will find that started out being any commodity with which you could barter – such as salt, or grain or gold.

Later, kings began to mint coins made of gold, silver and other metals, which they used to standardize the values in trade transactions.

In our modern era, we have abandoned the “Gold Standard”. Governments now print money as they believe it is needed for their economy. Money is created at central banks, like the US Federal Reserve Bank, or the Bank of England.

In essence, money has evolved to becoming a series of accounting entries between central banks, commercial banks, corporations and individuals, which are utilized for the expansion of credit.

Regrettably, with this new flexibility to create money, governments have created money too quickly, which is why gold has risen dramatically in price.

Monetary expansion originally brought us rapidly rising stock markets and much higher prices for houses, but now we are discovering that our savings are being devalued by increasing inflation.

Furthermore, the world monetary system has become destabilized, which is why global stock markets have dropped so much in 2008.

What does all this mean to you or me?

Money as a scorecard is neither stable nor entirely accurate. Despite having lots of money, we may not feel rich. We might even suffer from anxiety or depression.

Wealth, on the other hand, is defined as having abundance or plenty. (An example which illustrates the meaning: “She brings a wealth of experience to the project”).

Wealth includes having plenty of both material and non-material resources. To be wealthy, is to have plenty of what you truly need.

Many of the greatest things in life cost us little, such as music, books, walking in beautiful places, conversations with friends, etc.

Wealth includes having a healthy body and mind together with emotional stability.

Wealth consists especially in having strong relationships: in marriage, family, community, and at work. These relationships are vital. No matter how rich we may be in money, without these we are poor.

Once while traveling on a corporate jet, I was struck by the realization that if I should lose my high-paying job and all my net worth, it would not be so tragic, if I still had my wife and children. But if I should lose all my family and my friends, I would be heart-broken. That is my real bottom line.

When I made some money through taking a company public, I was glad about my good fortune. But it did not make me noticeably happier than I had been in previous years, which I found surprising.

I have watched people accumulate large sums of money, but I have rarely seen it bring happiness. Some of the richest people that I know are sad and lonely.

Does this mean that money doesn’t matter? Of course not! All of us need money every day, like food and water.

Beyond a reasonable amount to meet our basic needs, having lots of money doesn’t usually bring great happiness. However, if we use it to benefit those around us, it can help to improve everyone’s wealth. Philanthropy is the only way of gaining true satisfaction from a big bank account.

We can enjoy wealth in both good and in bad economic times. Our monetary net worth will always fluctuate, sometimes wildly. But our true wealth will remain stable if we are working towards the right objectives.

Money is just a means to an end, not an ultimate goal in itself. Having this perspective is immensely comforting when times get tough.

2008-07-12T21:48:00.000-07:00

2008-07-01T08:57:00.000-07:00

More Economic and Investment Woes Ahead

The last 6 months have been appalling for global stock markets and, furthermore, tragic for ordinary people who work and shop for their basic supplies.

I see no room for optimism about the economy, particularly in the United States. The worst economic news is likely still to come.

What commenced as a stock market and housing market correction in the USA now is intensifying into an enormous financial storm, which will likely spread globally.

Most of the fundamental factors remain as I have described them in my blog posts during the past 2 years. This severe financial crisis is the result of a decade of expansive fiscal and monetary policy, which tried to forestall necessary economic adjustments; now we face a gigantic day of reckoning.

Inflation is finally getting some attention, but it is now too late for a quick cure for this pernicious cancer. American monetary policy has been lax for several decades, so a little tightening now will yield very little result. We will get used to “stagflation”, which is economic stagnation combined with inflation.

Global demand for energy and basic materials will outstrip the supply for a while longer, so the litany of high gas prices, rising inflation and disappearing jobs will continue for a long time

I have no favourite investments to recommend in this kind of economic environment. Keeping your money in cash is discouraging, because the value of money is falling due to significant inflation, far more inflation than governments admit.

Governments report statistics for “inflation adjusted for energy, food and other abnormalities”, which means they exclude the things that are costing us more, in order to report a smaller inflation number. Any shopper knows that inflation is worse than reported.

Bonds are not a good investment now since interest rates will soon have to rise, so the prices of bonds will likely fall. Stocks are still dangerous in my view despite having fallen considerably in the past 6 months. So fasten your seatbelts.

The only real and lasting solution to our economic woes will be an ultimate return to economic prudence: by workers, by consumers, by banks, and by governments. We need to stop living on credit cards, bank loans, and government printing of money. We need to save before we spend.

Individuals and companies must return to solid work on good products and services which people can afford. The American economy in particular must face up to living in the real world.

Voters and politicians look for quick solutions and for scapegoats, but there are none available. High energy prices are not due to nasty speculators but rather due to our profligate consumption of disappearing resources.

(“Profligate” means utterly and shamelessly immoral or dissipated; thoroughly dissolute; recklessly prodigal or extravagant.)

No amount of new drilling for oil or new energy technology will enable us to maintain the consumption level we want. We must get used to high gas prices and airlines reducing their routes and charging us far more to fly.

We can, we must, and we will adjust to this harsh new economic reality. We could live on much lower consumption, as our families did successfully in previous generations.

Our choice is whether to reduce our spending quickly and voluntarily now, or to complain loudly, hoping vainly that the government can rescue us. The government does not have the resources to do this, regardless of the promises made during election campaigns.

Outside of the United States, conditions are not quite as dire yet. Canada is still doing OK. That is because the Canadian Government has maintained balanced budgets for a decade and now is enjoying the surplus from increased energy revenues. But most countries are doing worse.

Economies in Asia are still growing somewhat, but watching their biggest markets contract. The Chinese equity market has experienced a dramatic and much needed correction. There is considerable debate whether the rapidly developing countries will be able to escape the worst of the economic storm. Who knows?

Life can still be good in these reduced circumstances. This is a time to return to fiscal prudence and to enjoy the things which don’t cost much money – like friendship, family, nature, music, books and much more.

2008-07-01T08:45:00.000-07:00

2008-06-20T07:40:00.000-07:00

What is Good Communication?

I have always been fascinated by communication, whether in writing, public speaking, or conversation.

I was asked recently to teach a group of intelligent young bankers from Shanghai about communication in an English language business environment.

English is not their first language and so they make obvious mistakes in our language. I fully sympathize, since I understand perhaps a hundred words in Chinese. My daughter Jenny got her University major in Chinese and has gone to China for further language training, but still considers her skills quite inadequate, compared to native Chinese speakers.

So my teaching challenge was not to improve the English skills of my Chinese friends, which would have taken far too long. This was also unnecessary, since their command of English is already quite good for someone working in Asia. So I focused instead on what makes good communication, apart from expert language skills.

I thought of good and bad communicators I have known: for instance, there was Charlie, a Harvard graduate with a PhD. in economics who had an astounding vocabulary, but unfortunately was still a poor communicator. Then I remembered various immigrants and poorly educated business people who nonetheless became highly effective communicators despite their inadequate English.

After reflection, it became obvious that communication depends on something more fundamental than just language skills. Good communication requires a certain attitude, a willingness to share our inner thoughts and emotions, and to reveal who we truly are beneath our external appearance.

I wrote a previous blog on June 28, 2007 on Social Skills and Relationship Skills, which touched on some of these issues. I said building good relationships – whether in business or in our personal lives – does not depend primarily on charm and dazzling conversation, but rather on integrity, sincerity, empathic listening, and consciously nurturing important relationships.

Communication needs risk-taking, vulnerability, and passion. It requires reaching out to a person, or a whole group, to develop a closer relationship of trust.

Communication should normally be enjoyable to both the speaker and to the listeners. Humour and stories help this.

Good communication requires careful choice of the words we use and also attention to the response that we are receiving. It must be interactive, not a one-sided monologue. We should be brief and concise.

Communication becomes alive when we act out our thoughts and feelings in a spontaneous natural fashion. A formal speaking style inhibits this.

Communicating to a larger audience requires reflection and preparation so that we can get our points across without wasting time. A speech or essay needs a central thesis which is clearly stated with supporting facts, arguments and illustration. These should lead the audience to a reasonable, yet important conclusion. Making things plain, simple and understandable enables success.

Speech and conversation involve our whole person, especially face and eyes. Looking at our audience and trying to interpret their response is essential.

Body posture is also influential. Erect, confident posture inspires a positive reaction. Defensive posture and not looking at our audience detract immeasurably from our message.

I am still struggling with how to communicate better, especially in writing, where live interaction with readers is difficult. Some of you send brief notes with encouragement, criticism or questions, but mostly I write in sort of a vacuum. Meeting with people in person is more satisfying.

However, writing is the best way to communicate important ideas across both space and time. Despite the constant struggle, it is my most creative endeavour.

2008-06-20T07:37:00.000-07:00

2008-05-05T05:40:00.000-07:00

Business Success should be measured by friendships made and community established

As a young man of 30, I was selected over several older candidates to start up a commercial banking office in Vancouver for ABN AMRO. Although I had enjoyed a good career up to that point, I was struck by this enormous opportunity to build something completely new. What would it look like? What should be the main goal for this new office?

I finally decided that my paramount goal was to build up a business where all employees had the potential to enjoy and fulfill themselves on the job – to build a real workplace community.

My office did become a great place to work and it was also highly successful by any financial measure. It became the largest and most influential foreign bank office of its kind in Western Canada. What I discovered was that happy employees gave their customers superior service, which enabled the office to grow and become profitable.

I was thrilled that many of the employees told me this office was their best workplace ever during their entire career. Many of these employees still meet together to remember the good years we enjoyed as a big happy family (with a few normal squabbles, of course).

I later worked with some of the people from that ABN AMRO office in my other executive assignments. There are several colleagues with whom I have worked with repeatedly over 2 or 3 decades, due to lasting we friendships formed. And after 3 years of retirement, I still correspond frequently with friends that I worked with.

I wish I could say that my business career was an unbroken success story from start to finish – but I would be lying. Few careers really go that way. We all face tumultuous waves of challenge. Economic downturns, organizational chaos within big companies, unhealthy politics, and wrong-headed bosses make survival in any career hazardous, even when your own performance is superior. It is like being a great sailor on a small boat on a stormy ocean. Sometimes just getting home alive is a big accomplishment.

Fortunes of companies depend on countless factors, many of which are beyond management control. However in my experience, the best guarantee for organizational success comes when management is totally dedicated to the interest of all their staff; when it becomes a real community in the work place, a big happy family.

Two of the best run businesses in Western Canada – an airline and a bank – use this formula. All employees are shareholders and receive significant rewards when their organization succeeds. The Canadian Western Bank has had the highest stock price growth for the past 5 years of any bank in North America. The airline – WestJet is a pleasure to fly with as well as decidedly successful financially in a time when making any profit whatsoever seems difficult for the airline industry.

So is working for growth and profit wrong? Absolutely not! Both goals are essential for any company to survive and succeed. But if they are the only objectives, I believe the business will have a lower chance of success and it won’t become a friendly workplace.

Both human values and financial values are immeasurably significant in business. But when these values conflict, I always value people more than money. Business choices which put finances ahead of people rarely succeed in the longer run. But seemingly few companies have embraced this vision yet.

2008-03-22T04:42:00.000-07:00

2008-03-02T11:23:00.001-08:00

Gambling, Speculation and High Risk Investments

Here are two quick stories of people I knew well.

“Jim” (not his real name) was a close friend of our family. He was a very bright young man from a well-off family. Jim was sharp, persuasive and passionate. Unfortunately, his life didn’t work out for him at all.

Jim missed out on opportunities that should have worked for him. Then he found what seemed to be an easier way. His college instructor introduced Jim to a sure-fire mathematical system to win big money at gambling.

Before long, Jim had lent his new friend all of his money for their mutual gambling experiments. Soon, he had also used up all of his credit cards. He borrowed heavily from his friends, giving every reason but the true one. As he lost the trust of his friends, Jim sank deeper into debt and depression. Getting lucky at the gambling table seemed the only solution to him. Finally, after borrowing money from loan sharks, who beat him up, Jim chose to kill himself with a drug overdose, at the age of 22.

Second story: another young man I know well (“Sam”) inherited lots of money. Sam had an Ivy League college degree. He had several fine cars and spent his money freely. One day, Sam discovered the excitement of day trading. Although he told wonderful stories about his success, he lost everything when the NASDAQ high-tech market collapsed in early 2000. To his surprise, when Sam was broke, he couldn’t even find work at minimum wages because he lacked any recent job history.

What these two tragic young men shared was a mistaken belief that there is a quick, easy way to get rich. Jim and Sam sincerely believed that because they were quite intelligent, they would have the skill (and luck) to make it big outside the mundane world of hard work and patience.

They are not alone. When I watch people gamble away their hard-earned money in risky investments, I cringe. I feel sick in my stomach. It is like watching an approaching collision from a distance, with no way to stop the inevitable wreck.

This kind of irrational behaviour is not confined to the young and inexperienced. I have known many senior citizens, successful business people, and intelligent professionals behaving in a similar fashion and losing their money ever so quickly. Many have done it by simply following the advice of their stock broker or investment adviser.

Let me suggest a few rules to avoid tragic investment losses:

Any investment that sounds quick and easy is likely to fail quickly.
If someone parades impressive credentials or uses complex arguments in trying to sell you an investment, avoid it like the plague. I once invested a in a high tech company because its very distinguished chairman persuaded me that the company had enormous potential, even though I didn’t really understand his business. Within a month, the company was bankrupt.
Don’t ever put all or most of your eggs in one basket. Spread out your investments into many parts, so that if one of them fails, you won’t suffer a catastrophe. Stock market indexes and mutual funds provide more diversification of risk than any individual stocks.
Don’t expect to make large returns. Warren Buffett, perhaps the greatest American investor, warns against looking for returns greater than 6% to 8%. You may sometimes get lucky with a sound investment when the market is strong and make 15 – 20% on your whole portfolio for a year or two. But those instances will be offset in the longer run by investments that lose money in a bad economy, like the one unfolding at this moment. Long term investment returns rarely average above 10% for even the best people in the investment business.
Avoid start-up companies, companies that are claiming a quick turn around, and/or innovative technical concepts which you don’t fully understand. At most, I would put a fraction of 1% of my money in that kind of situation, even if it sounded absolutely wonderful. Statistics don’t favor these kinds of investments.
Avoid any investment which claims there are no risks involved. Even US Government bonds and bank deposits have some risk. Most investments have far greater risks; if you can’t see what these risks might be, you don’t understand them yet.
Avoid any investments proposals made through the internet, from ads coming in the mail, or by telephone solicitation. They are hard to check out thoroughly.
Also, avoid investments recommended to you by your friends. It is too tough to remain objective.
All investments, whether in stocks, commodities and bonds can sometimes go down sharply. I have never met anyone yet, even a billionaire, who doesn’t lose money on some of their investment picks. They are lying if they tell you otherwise.
Keep most of your money in the bank or in government bonds unless you can afford to take big losses. In the current economy, some of the world’s largest companies are seeing declines of their stocks of 10%, 20% or even 30% within a few months time period. If you believe that you can always tell the good stocks from the bad ones, I would like to recommend psychiatric help for you!

Gambling is a vice to be avoided, especially gambling with your precious savings on stock market or other investments. Investment is a humbling and risky business. To have long term success you will need to spread out your investments among very well proven assets. Trying to get rich quick is a path to financial disaster. Sound investing is mostly dull.

Postscript

My gloomy outlook on the world economy and financial markets (as expressed in my blogs during the past 18 months) is proving out to be correct. For what it is worth, I believe we are at least one or two years away from the bottom of this massive downturn. Beware!

2008-02-20T04:18:00.000-08:00

Fed to the Rescue?

Before today, I had never heard of Professor Nouriel Roubini of New York University’s Stern School of Business, who is reported in the story below from the Financial Times. But readers of my blogs over the past few years will have noticed my similar views about the degenerating American economy. And I have previously mentioned the Financial Times of London, available online at http://www.ft.com/world. This paper, together with The Economist and others, have provided more objective reporting than is available in the mainstream American financial press.

One of my readers has pointed out the sharply declining non-borrowed reserves at the Federal Reserve system. I should warn you that I am a generalist in in economic matters, not a specialist on the banking system. But I have long been aware of the developing credit crunch, which is the result of countless bad loans, as mentioned in my blog of January 21 about the Big Time Debt Crisis.

Very briefly, I want to clarify that I agree that the Fed and the American Government must do whatever is needed to prevent widespread bank failures. However, going beyond that in vainly trying to stave off the necessary contraction of the stock market and housing prices would ultimately lead to a worse outcome (as I pointed out on February 4, 2008).

The banking system and the overall economy need a return to disciplined management, not perpetual bail-outs. The time for adolescent behaviour is past. The government and financial system must grow up and take the necessary medicine. This will not be pleasant, but the alternative is unthinkable. We need a return to sanity and sober economic principles. No government should stand in the way of necessary economic corrections. They provide cleansing for the whole system.

2008-02-20T04:14:00.000-08:00

America’s economy risks mother of all meltdowns

By Martin Wolf

Published: February 19 2008 18:21 | Last updated: February 19 2008 18:21

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.” Alan Greenspan, The Age of Turbulence.

That used to be Mr Greenspan’s view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a true bear. My favourite one is Nouriel Roubini of New York University’s Stern School of Business, founder of RGE monitor.

Recently, Professor Roubini’s scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is “a rising probability of a ‘catastrophic’ financial and economic outcome”**. The characteristics of this scenario are, he argues: “A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe.”

Prof Roubini is even fonder of lists than I am. Here are his 12 – yes, 12 – steps to financial disaster.

Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.

Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had “reckless or toxic features”, argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks’ ability to offer credit.

Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The “credit crunch” would then spread from mortgages to a wide range of consumer credit.

Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.

Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.

Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a “fat tail” of companies has low profitability and heavy debt. Such defaults would spread losses in “credit default swaps”, which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.

Step nine would be a meltdown in the “shadow financial system”. Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.

Step 12 would be “a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices”.

These, then, are 12 steps to meltdown. In all, argues Prof Roubini: “Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe.” This, he suggests, is the “nightmare scenario” keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.

Is this kind of scenario at least plausible? It is. Furthermore, we can be confident that it would, if it came to pass, end all stories about “decoupling”. If it lasts six quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late.

Can the Fed head this danger off? In a subsequent piece, Prof Roubini gives eight reasons why it cannot***. (He really loves lists!) These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis.

The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce.

The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable.

*A Coming Recession in the US Economy? July 17 2006, www.rgemonitor.com; **The Rising Risk of a Systemic Financial Meltdown, February 5 2008; ***Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not, February 8 2008

martin.wolf@ft.com

2008-02-04T11:15:00.000-08:00

Stop the Press: More Fiscal and Monetary Stimulus won’t fix the ailing American Economy

The traditional response to financial problems by Latin American, African and other third world countries has often been to print more and more money on their printing presses, which then unleashed enormous inflation and devalued their currencies. University of Chicago economist Milton Friedman gained worldwide acclaim by proclaiming that central banks must carefully control the growth of money in every country, or else the economy will suffer and stagnate. The Government of Chile imported his theories and gradually transformed their ailing economy into the most successful economy in South America; other countries later followed this proven model.

Surprisingly now however, the Government of the United States is behaving like a 3rd world country in choosing high monetary growth plus record fiscal deficits, desperately hoping to avoid a looming inflation. I believe these policies are a recipe for disaster.

Imagine a patient who goes to his doctor and says: “I want you to keep me healthy and to make me feel good all of the time. The way I know that I am healthy is by always feeling good. So never let me feel bad.”

The doctor obliges this unreasonable patient and at every visit prescribes more and more pills, but ultimately the patient becomes chronically ill. The patient has also stopped feeling good, a long time ago.

The doctor is the American government (Dr. Bush and Dr. Bernanke) and the patient is the American population who elects their government. The pills are fiscal and monetary stimulus.

This is not a perfect metaphor, but it comes close to the actual situation. The doctor has erroneously come to believe that with increasing doses of pharmaceuticals, no patient should ever get unhealthy or need to feel bad. So the doctor has prescribed these magic pills in ever increasing doses; regrettably, the patient is now looking and feeling just awful.

These expansive economic policies are not entirely new. They started gradually under Doctors Clinton and Greenspan at the beginning of the 1990’s. Since then, America’s trade (or current account) deficit went from a balanced position to an annual deficit of $850 Billion. The American federal deficit widened to over $400 Billion, partly to pay for the Iraq war.

A lot has been written on this distressing topic, particularly in one of my favourite economic newspapers, The Financial Times (http://www.ft.com/home/us). Regrettably, the American press is strangely silent about this potential economic nightmare.

Presidential candidates left and right are rushing to join the Stimulus Parade. The exception is Ron Paul, a little noticed Republican candidate, who seems to better understand this evolving economic crisis.

The real issue is no longer how to avoid a major recession in America – that recession regrettably is already inevitable, and it will be a worse one due to these ignorant doctors. The American population had been lulled into a comatose complacency by the previously escalating stock market and huge increases in house prices, which had made Americans feel rich; that false contentment has now given way to fear as housing prices and stock markets are falling.

Meanwhile, inflation has gained momentum and this unchecked rise of inflation will bedevil the US Government and US Federal Reserve years to come. We should pity the winner of the 2008 election, because he or she may get the worst economy since the one President Roosevelt inherited after the 1932 election.

But how does this all relate to the Big Debt Crisis? Very simply, when so much new money was created during the past 5 years at very low interest rates, lenders felt pressured to find a home, any home, for this ocean of excess liquidity. Credit standards were thrown out the window (e.g. subprime loans), since loans against houses were thought to be always collectible, even if the borrower was unable to pay. Now these bad loans are defaulting in catastrophic amounts and the entire financial system is in deepening danger.

Unfortunately, official government statistics are so distorted (please see my blog of June 9, 2007) that it will take a long while to unravel what has actually happened to the American economy. But at a minimum, the mighty American Dollar has been permanently devalued and de-throned as the world’s leading currency. America is now the world’s largest debtor nation, when a few decades back it was the world’s foremost lender.

Lowering interest rates and decreasing taxes will not stop this economic freefall for more than a brief time. The “doctors” are just printing more money and devaluing their currency still further. A far better course would be to take the painful medicine of an economic correction bravely and then to return to more disciplined economic practices.

Sound economic management would involve strictly controlling monetary growth, as has been done in Europe and elsewhere. It would mean encouraging higher personal saving for Americans, who have long had the lowest savings rate among industrial nations. It would also mean reigning in federal deficits. Balanced budgets these days are only political slogans; government projections always show the deficit disappearing in 5 – 10 years, but every year in fact the deficit continues to worsen.

Finally, the international trade balance really matters a lot. It is not good enough to blame this problem on lower wage counties like China and Mexico. Advanced nations have always needed to compete with poorer nations. America should stop whining and start producing goods and services that the world wants to buy.

There is much more to be said about sound management of an economy, but these are some of the core points. These structural changes could take up to a decade to accomplish. But unlike excessive monetary and fiscal stimulus, they would eventually produce a healthy economy.

(Note to readers outside of the USA: while the American recession will affect the whole world, it will not be nearly as intense in Canada, Europe and other soundly managed economies. But we should wish America well, since we will share some of its pain.)

2008-01-21T07:18:00.000-08:00

Big Time Debt Crisis

The financial crisis that swept across America in 2007, and has now worsened in January 2008, seems very confusing. How could these subprime mortgage loans result in such a complete rout of the global stock markets and now also a looming American recession?

I have a special perspective on this financial situation, since my career included 25 years in banking. This emerging crisis began long ago and is the culmination of decades of bad choices by the financial community, particularly in America. The obsessive desire for short term gains to justify inordinate bonuses for CEO’s (and their supporting management) has finally brought us to a Day of Reckoning.

My post-graduate degree was from the “School of Hard Knocks” – on Wall Street in New York. I remember clearly my arrival to this new world. I had just graduated from Harvard University, where there were student demonstrations against the Vietnam War, idealistic concerns about poverty in America, and growing worries about the morality of the American government. Arriving at Wall Street in 1970, my angle of observation abruptly changed.

A crusty old banker gave us new management recruits a hypothetical challenge: we needed to bring in some new loans to increase the revenues at our bank in order to justify our salary. We needed to choose between lending to an unsuccessful businessman of good character, or else lending to a successful businessman who was totally unscrupulous.

It didn’t take long for our banking class to discern the “right answer”. Obviously, we could not get repayment on our loan by lending to an unsuccessful businessman, so damn the moral scruples and make the loan to the immoral client. (In my later banking career, I found out that both choices were equally bad.)

This vignette illustrates how little morality has ever counted on Wall Street. The only commandment they seemed to follow was Thou shalt not get caught! Virtually everyone worked exclusively for advantage to themselves, at the expense of everyone else. If there was a profit to made, that was sufficient justification for almost any conduct.

Despite this moral blind spot, Wall Street was an outstanding place to learn all about finance. People came from every continent to participate in this exciting marketplace. The New York technical expertise was unrivaled. In those days, it was truly the world’s financial Mecca.

However, there was one cloud in this brilliant sky in the 1970’s. It came from making large loans to poor nations (seemingly at a good profit.) I asked my bosses the innocent question of how these poor borrowing countries would ever be able to repay such giant loans. The executives retorted: “these loans will be refinanced, since a sovereign state can not possibly declare bankruptcy”. As it later turned out, my naive skepticism was prescient. When these loans eventually came due, there was indeed no refinancing available. This was the start of the Third World Debt Crisis, which lasted for decades, but which was small compared to the current financial problems.

In such a short space, I must oversimplify the current subprime situation to its central points. The engineers of these subprime loans correctly observed that mortgage loans have been remarkably solid historically in both good times and bad. Furthermore, the houses used as collateral have steadily risen in value, decade after decade. So why not offer these loans to a larger population including those without any credit history, since they would pay a premium rate to offset slightly higher anticipated loan losses?

What was left out of the equation was that the advent of vast sums of new mortgage credit would drive housing prices up sharply, until the housing bubble finally burst. That is what has now transpired. Many borrowers in America find they have mortgages which are bigger than the reduced value of their houses. Many of these people were already financially stretched when they applied for the subprime mortgages. So now the borrowers either walk away from their debt, or else their bankers call the mortgage loans, because the loans have gone into default.

There were other elements to this subprime situation, such as artificially low initial mortgage payments, which then rose sharply after a few years. But the central point is that these loans violated all reasonable credit standards. With the collapse of the housing market, the collateral is now inadequate as well.

Beyond subprime mortgages, creative financial engineering has created many other shaky financial debt structures, which are also collapsing like dominoes now. In aggregate, these additional classes of debt are bigger than the subprime loans. The largest financial institutions in America, and elsewhere, are facing the most severe crisis in confidence since the 1930’s. They are trying to raise new equity from foreign investors to stave off disaster. Who knows where this will all end.

(For those who read my blogs regularly, you may remember that I have been suggesting that a major correction is imminent in a number of my blogs last year, particularly the one entitled “A Hard Rain is A-Gonna Fall” on March 8, 2007)

But this is just half of the story of the Debt Crisis. The American Government had a major role in creating the conditions which brought this crisis about, so they deserve equal blame. I will explain that macro situation in a subsequent blog.

2007-11-05T07:28:00.000-08:00

All about Work and All about Money – (An Introduction)

Some of you know that I have been planning for a while to write a book (or two) about work and money. I want to write about how to work well, so that we can become happier and more fulfilled in our work. I want to tell about how to get enough money to live well, and how to save and invest it wisely.

Not everyone will want to read my books, but there not many people who lack interest in work and money. You may rightly ask if there is anything more to be said after so many books have already been written on these subjects. My answer is that many people do not succeed in terms of enjoying their work, even if they earn plenty of money and rise to positions of importance. Few people know enough about their work and money to use it to full advantage in their own life, and also in their family and community. Some people even suspect that money is mostly evil and that work is essentially organized to frustrate you (which is an understandable viewpoint).

You might also ask about my qualifications to write about these big subjects. I could mention a Harvard degree; years spent working in big banks and on Wall Street in New York, in Frankfurt, Germany, in Vancouver, Canada, and elsewhere. Furthermore, I have managed during my career to earn lots of money and to rise through the ranks to become a chief financial officer, a chief operating officer, and a chief executive officer of two public companies in Canada. I have been responsible at various times for managing groups of employees ranging from a dozen, 500 and up to 15,000 people reporting to me, directly or indirectly.

But my biggest qualification to write on these topics comes from a lifetime of survival in the school of hard knocks. Hopefully, by reading what I have experienced, you might avoid some difficulties and achieve your goals and ambitions more quickly.

These books will contain occasional anecdotes about the pinnacles of finance and corporate life but they will be more about the every-day work that most of us do. Right now, in my retirement, my work is gardening, managing a construction project, and cooking meals for those who live here or visit us. My career also began at simple level: working on a farm, and in carpentry, masonry and other basic jobs. In many ways, the most important aspects of our jobs are similar, whatever our job and function.

In the world of work and money we all experience failures, big and small. In recent years I have spent some time helping street people, the homeless, and chronically unemployed people. There seems to be very little I can do for them compared to their enormous needs. But if they had perhaps known the right things about work and money early in their lives, I believe some of these unfortunate people might have avoided extreme poverty and wrenching disappointments.

I am trying to write for a large cross section of people in various types of jobs, those with little or lots of money. The issues and questions are similar, whether we work on a high-up level or in a more “ordinary job”.

Until I get ready to publish my books, there will be no tight outline of the topics – sorry for the disorganization! If you want to correspond with me, please write an email to paul.wagler@gmail.com. I would appreciate your comments, questions and feedback!

Meanwhile, enjoy your work and save some money!

2007-10-24T10:19:00.000-07:00

2007-09-22T16:52:00.000-07:00

2007-09-22T16:46:00.000-07:00

Building Yourself a New House

I have dreamed since childhood – as you may have also – of building a house of my own design. It would incorporate everything I could imagine wanting in a house and it would reflect my unique personality.

Like most childhood dreams, this one got delayed many decades until my wife and I retired. Then, feeling well-off, we embarked on this dream. We hired an inspired architect, gave him our long wish list and eventually got back some exquisite drawings. We didn’t take much time to reflect on these architectural plans since we had planned a 3 week vacation to Egypt and Israel.

When we got back, the new house was just getting started. The first difficulty was digging out the basement. We live at the bottom of a mountain. It turned out that a few feet below the surface of our hillside lay impenetrable bedrock which had to be blasted out. Since there is only one qualified blaster working on the Sunshine Coast of British Columbia, we waited quite a while to start the excavation. We watched endless truckloads of rock and dirt getting hauled away, since our large house also had a large terrace to excavate.

The next surprise was finding out that our house would feature a number of concrete pillars, which looked like small copies of the stone pillars we had seen during our Middle Eastern trip. Being unable to fully comprehend architectural drawings, this important detail had escaped us in our hurry to leave for our vacation. Although the concrete itself was not expensive, the intricate construction of these lovely pillars added considerable expense and delayed the project for several months.

Once the concrete was all poured for the foundation, we finally realized just how big this new house would actually be. Friends joked that it looked like a small shopping mall or perhaps Taj McWagler. Although partly delighted by this immense and lovely edifice, I felt a sharp pain on my right hip where I keep my wallet. The house was far more expensive than we had planned. It does contain a swimming pool, hot tub, spacious bedrooms, a soaring great-room and a perfect kitchen, but the price has reduced our retirement nest egg.

I tell you all these details not only for a laugh at my expense, but because I found that many other people have gone through a similar experience.

So if you ever get tempted to build The Perfect Nest, here are a few pointers:

Even if you are financially savvy, it will likely cost a lot more than you think (particularly if it is custom designed by an architect.) You could avoid both the agony and the ecstasy by using a standard design where you can change only a few of the design details.
Building a house usually takes much longer than you think to finish.
Every new wish you incorporate will add substantially to the total price.
There are hundreds of decisions to be made in a custom house, which cause a lot of anxiety. Doing it after you retire would be a good idea, since it can become a half-time job or more.
This dream project may leave you house-rich and cash-poor.

That said, we have nearly achieved our dream house and will be moving in by the end of this year. For us, it has been a great experience, even though we don’t feel as financially well-off as we did before the house started. However, we look forward to enjoying many happy years together with friends and family in our new home!

2007-07-31T08:07:00.000-07:00

2007-07-31T07:51:00.000-07:00

Surviving Politics in the Workplace

Although I am now happily retired and can eat my dinner on a sundeck overlooking the Pacific Ocean as a majestic eagle soars overhead, I still occasionally have disquieting dreams at night that remind me of the intense struggles I experienced at work. The most powerful dreams are reminders of the heavy stress from brutal politics during my days as a rising manager and later as a CFO and CEO. Memories of Machiavellian plotting for my downfall come back so vividly that it seems just like yesterday.

These days I sometimes meet with people going through similar struggles in their workplace. Whether you work for a small business, a large corporation, or a government or educational system, the struggles at work are similar. I want to provide encouragement so that you can survive these challenging times and succeed in your career, but not to minimize the intensity of the struggles you may be going through at times.

Every job (with more than one self-employed person) has its politics. People compete at work for pay and promotion. Employees vie for the attention of the boss. There are rumours and intrigues nearly every day in the workplace. There are insiders who seem to be getting ahead and outsiders who are feeling upset and isolated.

Politics operate at every level of the workplace, whether or not you are aware and noticing. (Actually, ignoring the politics most of the time is good idea, if you can do it.) At the higher levels of organizations the politics get even more intense. Some managers are being promoted and their pay is increasing rapidly, while others are losing out for reasons they can barely understand. Ethics are sometimes conspicuous by their absence.

Much of politics has to do with the boss and/or the organizational hierarchy. Aggressive employees are constantly seeking greater authority and pay. They often help topple vulnerable managers. Sometimes it seems like the same behaviour as seen in a wolf pack.

The culture of each workplace is unique; however, each workplace has many elements in common with other organizations. The personality of the CEO or boss determines much of the culture, but there are other influences as well, particularly when there are outside owners or a long history. There are some companies with a relatively good working environment, and other workplaces are so negative that survival seems especially hard; however, most working environments are a mixture of both healthy and less healthy elements.

Other articles have been written on this subject, but I want to give you my observations of how to survive in this world of uncertainties:

Concentrate on doing your job well above all
Never speak disrespectfully about your boss or your organization to anyone, no matter what your private opinion may be. If you have nothing positive that you can articulate, it is better to say nothing about them.
Take time to chat with people briefly when they are friendly, but avoid becoming part of a gossip network.
Learn to get along with bosses and coworkers with a minimum of conflict
Be helpful to everyone to the extent that you can manage it (but beware of people dumping their work on you)
Be a friend to everyone you work with, but don’t become particularly friendly with one or two persons (even the boss) at the expense of others
Be prepared for lots of ups and downs in your popularity and reputation, even when you are doing a good job
Make sure that you maintain a strong emotional life with friends and family outside of your workplace

Counter the job stress by eating well, getting enough rest and setting aside time for recreation.

Remember that you can influence everyone around you for the better if you conduct yourself well. You will be noticed.

Trying to find a job without any politics will succeed only if there are no humans working there. Politics can become intense and demoralizing at times, but if you try hard, you can succeed and enjoy your work despite the office politics.

The worst of workplace politics usually comes out during times of major organizational change or when there is new leadership. Fortunately, these intense moments do not last long. There are long periods when the politics subside to a minor distraction. During these times the more positive aspects of the workplace are more noticeable.

My waking memories of work are mostly quite positive: office parties, wonderful friendships that have lasted longer than the job, chances to learn and travel, and many other wonderful things that happen at work. I don’t know why my dreams reflect the extreme negative experiences – perhaps it is like war; no matter how long the peacetime, the memories of conflict remain.

2007-07-05T11:17:00.001-07:00

2007-06-28T07:12:00.000-07:00

Social Skills and Relationship Skills

Our world is mesmerized by appearance: the handsome movie star, the glamorous actress, the one-liner politician, and all of the trendy and beautiful people – they look out at us from every magazine and from every screen. When we meet them occasionally in real life we are tempted to accept them at face value.

In business, social skills seem to mark the highly successful person. We envy someone who can walk into a room, figure out who is important, and is able to make just the right comments instinctively. They can tell stories and jokes with aplomb, they go to the right restaurants and resorts, and they are usually in the know about most popular topics.

But in my long business experience, social skills are often not enough to go the full distance. Obviously, social skills are a real asset in sales and in management. They can facilitate effective presentations for technical experts. But entertainment skills without real substance in building long term relationships don’t work for very long.

Those with the best social skills often burn out early. They often go from one position to another and change employers frequently. They may promise too much and deliver too little. They don’t always wear well. People with social skills alone lose their credibility over time.

The missing ingredient for successfully working with people in the long term is relationship skills: the ability to build and maintain important relationships for many years with the people who matter most, whether inside or outside of an organization. I have worked with highly successful people who were deficient in their social skills, but nonetheless had remarkable relationship skills.

Obviously, having strong technical, financial or other specialized business skills also makes a big difference in building business relationships. But apart from knowledge and expertise, there are other ingredients to building effective relationships:

Commitment to building relationships People are the most important ingredient in any business, so they must always have first priority. People are more important even than projects or profits, since there are no major accomplishments possible without developing effective relationships. Commitment means spending time with people and regularly calling or visiting key people that you don’t see in the normal course.
Integrity In the long run, if you are not trustworthy, your relationships will fail. And if you waste your time developing relationships with others who lack any integrity, you will be disappointed!
A long term focus Relationships take lots of time to develop. A powerful presentation without much follow up will never suffice to gain a really important relationship. Tending relationships is like growing plants – they require constant care and attention to flourish. (However, too much attention is invasive and will be unwelcome.)
Selectivity You need to choose carefully with whom to invest yourself in relationships, since they require much continuing effort. Obviously, you can have numerous light relationships with a low level of activity and commitment, but key relationships need more focused involvement.
Empathic listening Listening attentively to others is the key to understanding them and to ultimately delivering to them what they seek. We all gravitate to those who are sympathetic and understanding of our own needs.
Reciprocity Relationships ultimately need to be based on mutual satisfaction, although at times, one party may be delivering much more than the other. If you invest in a relationship, you can eventually make legitimate requests from that person.
Focus on others more than self Those with social skills alone usually fail: they are so impressed with themselves that they are not truly impressed with other people; before long this becomes all too apparent.
Loyalty People can not be fooled about whether you are loyal and reliable, or just opportunistic and fickle. Maximising short term profits in a business relationship often prevents you from developing a more valuable longer term relationship.
Offering value We offer value on both a personal and on a business level. Few customers or associates are fooled about those who manipulate and exploit, rather than delivering solid value.
Sincerity and candor Social skills often depend on adopting a persona or image that is not authentic. Real relationships require honesty, vulnerability and self-disclosure.

Relationship skills obviously apply to other dimensions of our lives beyond business. Strong relationships help develop family and community. The best business environments are those which seem like family or community, where all can share in the success of the enterprise.

A leader with high relationship skills creates powerful morale which ensures the success of their enterprise. A glamorous personality is far less important for long term success. Social skills are only valuable in business when they are employed as a tool for developing lasting relationships.

2007-06-16T07:34:00.000-07:00

2007-06-09T18:03:00.000-07:00

Finding Sound Economic Advice

One of the hazards of managing your money and planning your career is that finding good economic advice is almost impossible.

You can’t trust economic forecasts. Economists are good at providing data and charts, but their forecasts should not be taken seriously for two reasons:

Economists are typically employed by governments or commercial organizations, which have agendas quite different from neutral economic analysis. In particular, overly optimistic forecasts are used by financial institutions to get you to invest money where they will be able to collect high fees.
Furthermore, economic models are fundamentally incapable of predicting the future, because economics is not a science; at best, economists might be able to tell you approximately where the economy is now and to predict a continuation of recent trends.

Even worse, you can’t trust the governments who collect and interpret the raw economic data which economists use in their models. Governments believe that their job is to keep the population happy and optimistic, so they continuously revise their data systems to make the statistics seem more pleasant.

Check out John Williams’ Shadow Government Statistics (http://www.shadowstats.com/cgi-bin/sgs?) He says:

Have you ever wondered why the CPI, GDP and employment numbers run counter to your personal and business experiences? The problem lies in biased and often-manipulated government reporting. We offer an exposé of the problems within the reporting system, and an assessment of underlying economic reality.

I do not endorse this newsletter (nor do I endorse any other source), but it is a sobering contrast to official data. Most likely, John Williams overstates his points somewhat, but his fundamental conclusions are absolutely in the right direction. He believes that inflation is much worse than reported; that government deficits are worse; that economic growth is lower, if not negative; and, that money supply growth is far higher than claimed.

The recent euphoria in the global stock markets seems mostly a result of low interest rates and rapid growth in the supply of money. The American Government has been pouring out cheap money at rock bottom interest rates in order to prevent an economic meltdown. However other governments around the world are now tightening credit to tame inflation, but I wonder if global inflation isn’t already beyond control by such modest tightening.

So my outlook is much darker than that of official forecasts. I am gradually selling all the stock I plan to dispose during this boom cycle. Not that I am predicting all gloom and doom, like some soothsayers. But the immediate future is clouded by the spectre of rising inflation which will likely drive up interest rates and bring down stocks, real estate and economic growth.

I am not trying to set my self up as a new financial forecast guru; I assure you that I have no crystal ball at my desk. However, my lifetime experiences of studying at Harvard, working as a banker on Wall Street, and later as a corporate executive, cause me to doubt governments and economists. Their motives are rarely just to provide objective advice, but rather to soothe and to encourage.

Not everything is dark and gloomy in the economy, but there are major warning signs. Inflation scares me. Just look at how drastically prices have jumped for gasoline, houses, commodities, and for many other products in recent years.

Sound financial management pays off in the long run. Do not get further into debt. Do not buy real estate with little money down. Do not buy stocks with borrowed money. Do not assume that your income will always rise faster than your expenses.

And be careful of following the crowd in economic matters – they could be quite wrong. I hardly know where you can find sound economic advice in a field of so many commercial and political motives. Maybe you might just have to think for yourself!

(As a footnote, several points in my December 7, 2006 blog Investment 102: Stocks have now been confirmed by a major financial study at the University of Toronto. After analyzing the performance of a broad spectrum of mutual funds, they found that they generally perform noticeably worse than the general stock market, because of the exorbitant fees charged by the mutual fund industry; this is exacerbated when investors switch from one mutual fund to another, vainly trying to find the best mutual fund. These professors found that investing in stock market indexes with very minimal fees would have served most investors far better. They have confirmed what I told you in December. Thank God, there are a few objective souls out there providing helpful economic information in a sea of financial misinformation!)

2007-05-07T13:25:00.000-07:00

Luck, Skill and Big Fortunes

In 1991, I met Torben Karlshoej, the founder of Teekay Shipping, which is now a global shipping empire with billions in revenue, assets and company value. Mr. Karlshoej was an unforgettable character who would take many pages to describe. I will just say that his private yacht was a converted freighter which I saw at anchor from my small 36’ power boat. His dinghy was likely larger than my whole boat.

Mr. Karlshoej founded his company in 1973 when he arrived in L.A. from New York with only a few dollars in his pocket. But he had several things of great value: he had worked in the ship chartering business, so he knew the shipping industry better than most. He had incredible drive and determination and worked truly around the clock. But he had a final gift which made the big difference: his timing was impeccable. There had just been a major setback for the global shipping industry in the early 1970’s and most people were pulling back. He saw the opportunity to expand and to buy or charter ships at rock bottom prices, which later soared in value. In 20 years, he became a global shipping magnate, starting from nothing. His luck, skill and timing brought him enormous wealth.

I have had the good fortune in my banking career to meet many other successful entrepreneurs: some worth millions, others worth tens of millions, a few with hundreds of millions, and a handful of genuine billionaires. (I mention Mr. Karlshoej by name, since he tragically died a year after I met him. I do not like to write about business people by name who are still alive, since I respect their privacy.)

I have witnessed first-hand what a top international banker told me as a young man: it takes both good luck and great skill for big-time success in business. Some people believe that luck alone can get you there. That is rarely true. I met someone who won $8 million in a lottery, but if he was a typical winner, a few decades later he would have very little left. The same is true for inherited wealth; it rarely lasts more than 2 generations, if that long.

In my experience, the successful business people were incredibly skilled, but that alone did not account for their success. They also needed timing, lucky breaks, and other fortuitous factors on their side.

Similarly, I could begin to describe the skill-set that it takes to become a great entrepreneur. Determination is crucial, together with discipline, financial shrewdness, marketing savvy, technical smarts, access to capital, industry knowledge, willingness to take big risks, and sometimes ruthlessness. (I personally would rather die a pauper than to lie, cheat and steal; but unquestionably, a shrewd entrepreneur needs to make very hard decisions.)

But sometimes misfortune can also play a role in our success. I suffered from Polio at age 5, which left me severely crippled for a few years. Although I gradually recovered and now enjoy comparatively good health, my childhood illness put me into hospital for a year and left me unable to compete in sports. Consequently, I became a voracious reader, which accounts for my exceptional academic performance and a scholarship to Harvard. Obviously, I also had a good attitude towards my misfortune, or I would not have used it as a stepping stone to a successful career.

But life is much more than about making big fortunes. When Mr. Karlshoej died suddenly in his early 50’s, I felt very sad for him. Although he made it to the big times, he didn’t live long enough to fully enjoy it.

My advice to those seeking a fortune is don’t try too awfully hard. You can never achieve it by determination alone. Unless the wind of providence is blowing in your sails, you will likely be part of the 99% who tried and failed, rather than the 1% who makes it big. And enjoying life is even more important than financial success!

2007-05-04T09:11:00.000-07:00

ABC’s for Success – final installment

Hope is a priceless gift. If you can hold on firmly to hope in the worst of situations, your career has a real future. Always keep your hopes high, but keep your short-term expectations low.

Hurry is usually unnecessary, when you are headed in the right direction. Hurry may bring disaster if you are going the wrong way. Just keep up a steady pace in your work – that is better than hurry. Work is a long distance race. Learning to pace yourself is a key job skill.

Limitations – everyone has personal limitations; we never have all of the skills, training and ability which are needed in our work. These limitations may be physical, mental, or due to lack of motivation and determination. You and I need to overcome our limitations, every day, in order to become the best that we can be. Blaming others is just an excuse – we can usually accomplish what we really want to do, regardless of the external obstacles or our own internal limitations.

Pay Work is about much more than just your pay. Obviously, you need money, and pay ought to be fairly allocated. However, when you concentrate on doing your job well, your pay usually sorts itself out in due course. You may not get your full rewards immediately, which can be discouraging. It takes considerable time for your organization to realize how well you work and for your pay to therefore increase. But if you concentrate on doing great work, your financial future will be assured

Punctuality is evidence of commitment, right attitude, and good planning. If you fill your schedule too full, it will get out of control; every thing will become late, including you.

Self-reliance and Independence – Learn to become independent at work and to rely on your own resources most of the time. That doesn’t mean that you should not ask for help, but don’t become dependent on a friend, or boss, or on an organization. Sooner or later, they will let you down, because nobody else can look after you all of the time. You must do it yourself.

Stress is inevitable at work. Moderate stress is healthy and motivational. However, too much stress is a killer. Stress can gradually build up and accumulate until it becomes truly overwhelming. It can rob you of both your physical health and your emotional health. Learn to reduce work stress by relaxation, recreation, time away from work, by taking mental breaks, and by getting more exercise. Your work life depends on managing your stress levels.

“Unemployable” is a term which might apply to you due to your age, your race, religion or health, which are not your fault. However, most people become unemployable due to their negative attitudes, their poor work habits and/or unrealistic job expectations. People of any age or background can usually find work if they have a wonderful attitude, good work habits, and the willingness to take any reasonable job offered to them, however menial. Those people may start low, but they will eventually rise to greater success. However, people who complain constantly, who do poor work, who are habitually late, who can’t get along with their bosses or fellow workers, and who do not deliver what they promise, will find themselves out of work indefinitely. Become employable! It is mostly up to you.

Training your thoughts seems almost impossible, but it is crucial for success in work. What you read, what media you watch and listen to, forms much of the input for your thoughts. Mental discipline requires the same dedication as physical training, but the benefits are even greater. Observing your thoughts and slowing them down helps to achieve control. Meditation and prayer are means of training your mind, as are reading, music, science, academic study, and gardening, to name a few activities which are good for your mind. Watch and guide your thoughts carefully. They determine who you are and what you will become.

Working well in difficult circumstances is a real challenge, but it is something we face during much of our lives. We cannot change these difficult circumstances quickly, but with courage and determination, we can adapt ourselves quickly to make the best of the situation.

Those who have the gift of positive thinking are able to see hope and opportunity when people all around them are giving up in despair. Overcoming difficult circumstances makes us stronger and more capable for other challenges. Those who overcome challenges again and again rise up to become heroes, artists and leaders.

Yielding is a sign of grace, intelligence and maturity. There are definitely important matters where we need to hold our ground at all costs, but for small matters yielding is generally advisable to avoid conflict and bad relationships.

2007-04-17T07:25:00.000-07:00

2007-04-17T07:18:00.000-07:00

Job Transitions

Most people – myself included – have very short memories. When the weather is nice outside, they can hardly remember the cold, heat or rain they suffered from quite recently.

Job change and job transition are as unavoidable as changes in the weather. This is true even if you have been working for many years in the same organization. Even the most stable jobs are subject to sudden, unexpected change. This is not a reason to panic, but to stay alert.

Here are just a few of the many reasons you could suddenly lose your job:

Sales are going down for you company
Your company isn’t making enough profit
The management of your company decides to go in a new direction
Your plant or division of the company is not staying competitive
A financial crisis occurs outside of your company
Your company is sold or merged
You get a new boss
You are in conflict with co-workers
You are getting older
You gradually lose interest in your job

I am not writing this to scare you, but to prepare you for what most people face, sooner or later, at your job. No job is secure for life.

There is little advantage to worry about your job, but giving it careful attention and thought occasionally is helpful. It helps to anticipate job changes before they come and to prepare in advance for likely job transitions. In particular, that means saving money, living frugally, and avoiding too much debt; that way, you can survive times of unemployment.

It is also useful to note what is going on around you. Is your area at work being reorganized? Is it growing or shrinking? Are sales increasing or decreasing. Are there plenty of orders? Often, you can sense when changes are coming to your employment, whether good or bad.

But other times, change comes quite unexpectedly, like a swift storm. Suddenly, everything you thought was permanent gets blown away. Being prepared helps you survive, but it may not be easy.

During difficult times keep your mind calm and think carefully. Spend time with friends and advisors. Get outside and walk around. Don’t just crawl into a hole and hope it will all go away. How well you can manage job transitions will significantly influence your future life.

Finding new jobs is easy at times – if you are young and the economy is booming. But as you grow older, jobs become harder to find. If you have worked in a very good job you may need to accept a lower position for a time and build your career back up gradually as you become known and accepted in a new organization. It is difficult to be graceful under such circumstances, but necessary.

Above all, accept full responsibility for managing your own career and your own future. Bad bosses and bad employers are all over the place; finding good ones is very hard. Most employers are half-good at best. But you can survive in that environment if you are determined and don’t spend your energies on complaining.

I suggest 3 things:

Build up enough savings that you can survive for 6 – 12 months of unemployment. That is hard to do, but necessary. No matter how well you work or how stable your company seems, you can never be sure to keep your job. Getting out of debt and building up savings is hugely important.
Always think about what other jobs you could find if this one ends. You need to be ready to find a new job all throughout your working life. You next job might be much better, or much worse than your current job. You might need to move, or to work in a new field with job retraining.
Don’t ever take your job for granted; you need to prove your value each day and each year.

Most of us do better than the worst that we fear in bleak moments, but not as good as we may hope at optimistic times. My mantra is “keep your expectations low, but also keep your hopes high”. In the short run, things often go worse than we expect, but when we work diligently to improve our situation, things can gradually change for the better. Staying cheerful and determined helps us to weather any storm.

2007-03-27T08:46:00.000-07:00

2007-03-27T08:31:00.000-07:00

Bankers and Entrepreneurs

My working career has been spent working as a commercial banker and later as an entrepreneur (someone who starts up new businesses and makes them grow). Bankers and entrepreneurs represent two fundamental dimensions of the business world.

Many years ago, I was struck by the remark of a major bank president, who said that all businesses, big and small, have 50% of their elements in common: they all have owners; bankers; customers; employees; suppliers; competitors; lawyers; assets; an office, shop, or store; inventory; receivables; accounting; a supply of capital; etc.

Businesses get started by entrepreneurs (even if they don’t know this word). And most businesses usually need other people’s money to grow, which they mostly get from their banker.

Let me start first with bankers and how they think and operate. Bankers use other people’s money which they get as deposits. They lend this money to businesses at a higher interest rate then they pay for deposits. This interest spread is their income, which pays for operating their bank.

Imagine that a banker takes $50,000 of capital and then matches it with $950,000 of deposits; so 95% of the money loaned out belongs to depositors, who must be repaid, no matter what. So bankers are concerned above all about keeping the risk very low for all loans.

The entrepreneur starting out in business usually has very little money, unless they inherit a lot. So they must “beg, borrow or steal” enough money to get their new business going. The entrepreneur typically goes to the bank, hoping to get a bit more money to get the business up and running. But the banker says: “NO. Come back once your business is successful and I will be happy to lend you some money”. So entrepreneurs and bankers mistrust each other from the start, and their relationship rarely gets any better.

The only way they can get along is to understand each other very well. The banker must keep risk very low, because it is other people’s money being loaned out. A depositor expects zero risk. So the banker cannot afford to make many mistakes. That attitude causes entrepreneurs to think of bankers as being uncaring and unintelligent.

Entrepreneurs by contrast take enormous risks. They put every thing they own on the line to support their new business concept. If it succeeds, they hope to get back 10 times or 100 times their investment. They often go broke, or nearly broke. They live on the edge. They become incredibly resourceful.

I have oversimplified the banker and the entrepreneur types to make it easier to understand how they operate. But in a 25 year career as a banker to both small businesses and to some very large businesses, I have seen these fundamental patterns occur again and again.

I also have had a career as an entrepreneur, first working on several small businesses while I was still a banker, and then later working as a CFO to several major entrepreneurs, where I was a risk partner in the business.

Our economy needs bankers who keep risks low and don’t get swept away by the temptation to take bigger risks to earn quicker profits. Due to economic cycles and other unpredictable events, it is very hard for bankers to make loans which are going to be repaid in full. Bankers are not paid to think like entrepreneurs.

Equally, our economy needs great entrepreneurs who are the backbone of economic growth. Most entrepreneurs will never make much money; they are lucky if they don’t go broke and stay broke. But for those who eventually succeed, their huge rewards are fairly earned. They sometimes get paid well for taking the big risks.

Although bankers must keep their risks low and entrepreneurs necessarily need to take enormous risks, they have one thing in common: they both need to be exceptionally good at calculating risks in order to succeed. Surprisingly, some of the best entrepreneurs are those who have been originally trained as bankers.

(There are other sources of capital for entrepreneurs, beyond conventional bankers. I will write later about venture capital, investment banking, and the role of capital in company growth.)

2007-03-08T13:20:00.000-08:00

A Hard Rain's A-Gonna Fall

Bob Dylan, the poet and singer, often captured economic reality in his metaphors better than thousands of economic analysts. He understood storms of all kinds when he sang:

And it's a hard, and it's a hard, it's a hard, it's a hard,
And it's a hard rain's a-gonna fall.

Here were some of the news headlines from March 2007:

World stock drop hits second week
U.S. Stock-Index Futures Slide; GM, Wal-Mart Drop After Asia, Europe Slump U.S. stock-index futures tumbled after shares in Europe and Asia extended a global selloff that wiped out $1.5 trillion in world market value last week
Mortgage Crisis Spirals, and Casualties Mount

A few weeks after these headlines, the world markets recovered and everyone quickly forgot about their fears of the economy going into free fall. They returned to complacency. But they shouldn’t.

Sooner or later, we will see fierce worldwide economic storms that make the Indonesian Tsunami and Hurricane Katrina seem like small local incidents. At some point in the coming years or decades, stock markets will likely plunge around the world in dismaying amounts. Potentially we could see 20%, 40% or even 60% of equity values wiped out in a very short time. And nobody will know the date or the year of this disaster until afterwards, because that is the way it is with the biggest storms.

This has happened before and it will happen again. My father lived through the Great Depression of the 1930’s and that event was etched into his mental wiring. It is likely that this giant economic storm was also the largest cause of World War II where tens of millions of people died all around the world.

No one can adequately explain the cause of economic calamities. They are partly caused by physical realities, like energy shortage, wars, and other natural disasters. They are also caused by speculative build-up of markets to unhealthy levels, which makes a collapse a near certainty. They are caused by enormous debt loads by consumers, companies and governments that prove unsustainable. Finally, there is a psychological element where euphoria can turn overnight into nightmarish fears.

When I was a student at Harvard, and soon after as a manager on Wall Street, I was told that these economic disasters would never happen again, due to rapid progress in economic knowledge and monetary management by central banks. My teachers and bosses were unfortunately overconfident and mistaken. Several major recessions have occurred throughout my working life, and none of them has been expected by the experts.

It was helpful decades later to hear someone of the stature of Allan Greenspan, the former Chairman of the US Federal Reserve Bank publicly acknowledge that central banks and economists live in the dark like the rest of us when it comes to predicting the economy. At best, they examine trends and potential scenarios to get some sense of the direction of the wind.

So, don’t ever leave yourself vulnerable by betting everything you own on the assumption that markets will always go up. You might be right for a year or two, but dead wrong later. Remember the thousands of technology millionaires that lost everything when the NASDAQ market collapsed by over 75% at the end of the 1990’s. A few cashed out in time, but most believed that this new easy money would last indefinitely.

So I return to Bob Dylan, who describes this well:

And what did you hear, my blue-eyed son?
And what did you hear, my darling young one?
I heard the sound of a thunder, it roared out a warnin',
Heard the roar of a wave that could drown the whole world,
Heard one hundred drummers whose hands were a-blazin',
Heard ten thousand whisperin' and nobody listenin',
Heard one person starve, I heard many people laughin',
Heard the song of a poet who died in the gutter,
Heard the sound of a clown who cried in the alley,
And it's a hard, and it's a hard, it's a hard, it's a hard,
And it's a hard rain's a-gonna fall.

2007-02-11T13:36:00.000-08:00

Climbing the Career Ladder to a Decent Job

One of the most frustrating challenges is finding a job that pays you enough to live. For some people the challenge is just getting any job at all. For others it is going from a good job to an even better job. However in this post, I will focus on progressing to a job beyond the most basic wage level. This is the first step in climbing the career ladder to a better economic future.

Obviously, there is a great deal more to job satisfaction than how much you get paid. However if you are making only McDonalds-level wages, there is almost no money left over after paying for rent, food and clothes. It is hard to find job satisfaction when you are poor.

These low paying jobs are often called “McJobs”, because they are the most typical job at McDonalds Restaurants, one of the world’s largest employers. McDonalds sell cheap food and pay cheap wages. But so many companies are now using the McDonalds formula of paying low wages and hiring mostly unskilled workers that some experts believe that McJobs are the wave of the future. McJobs are everywhere – in schools, retail stores, manufacturing, service industries, almost any where you look. So getting paid more than McJob wages is the most basic challenge for many people.

Surprisingly, people with McJobs are often intelligent, hard-working and well educated. They often have amazing skills as well. But in the job market, they find that their particular creative skills are not in much demand. They may have university education in liberal arts or science. They may be talented in music, art, sports, or in countless other ways, but find that these talents matter little to prospective employers.

So what should you do?

Get training for skilled jobs. This is usually done by a combination of technical programs in schools, colleges or universities, and on-the-job apprenticeships. Research to find out which skills are in demand is essential. Check with government offices for advice. Ask everyone you know where the better jobs are in your local area. You might even need to move to find them. You might consider training in construction, plumbing, electronics, accounting, sales, etc.

Find employers who don’t structure their organizations like McDonalds. There are entire businesses that are run like McDonalds where most people are paid very low wages. Avoid those employers completely, if you can. Small local companies often pay better wages than giant global firms. Find out about the wage structure before you start working for an organization.

Think long term. Finding a better job in just a few weeks or months is often impossible. But if you develop a sound strategy of getting both important skills and relevant job experience, you can eventually make progress. McJobs may actually provide you with very good training, providing you use it as a stepping stone to a higher level job and don’t stay stuck in this type of organization.

Find Job Counselors or Mentors to advise you. Often you will know people who have excellent jobs and knowledge about the economy who can advise you what steps are required to advance.

Take responsibility for your own success. People who blame the government or aggressively criticize their current employer will rarely get beyond just talking and complaining. You must take the initiative and accept full responsibility for your own future. Your success is not determined by the obstacles in your path; it depends almost entirely on you.

You must also present yourself positively at all times. Negative thinking patterns, attitudes, or a less than positive style of dress and mannerisms can often discourage friends or acquaintances from recommending you for jobs they are aware of. Try to be positive 24/7.

Develop your people skills and your social network. Getting good jobs often depends on who you know and how well you can present yourself. Stay in contact with many people, because often that is a better way to find job opportunities than through newspapers or the internet.

Finally, make your career your top personal priority – not just until you get a job, but throughout your entire working career. Getting a better job is only the first step to career success. Often, your job will come to an end for reasons other than your own performance. You should constantly improve your skills and experience to be ready for the next opportunity.

Life in the working world is tough, unless you are determined and very well prepared. But with patience, imagination and hard work, you can succeed!

2007-01-24T14:59:00.000-08:00

More ABC’s For Success

Ambition is like spice in your job. Too little ambition produces a very dull career, while too much can leave you with an upset stomach, due to needless worry and stress. Ambition needs to be combined with Patience and Determination, like three essential spices for a wonderful dish.

Daily habits determine most of our success or failure in work. Not that we can ever rely on habits alone – we also need flexibility, creativity and innovation. But there are certain qualities of character which must become regular and habitual. We work steadily toward a goal; each day requires fresh effort and determination, but it builds upon hundreds of past days of commitment. Success is cumulative. It is the sum of all previous efforts carried forward with fresh determination at every step. Such a force is unstoppable!

Debt is a big trap for the unsuspecting. Avoid borrowing for any reason other than for the purchase of a home. Don’t use credit cards unless you can pay them off every month – otherwise tear them up and throw them out. Debt will keep you poor forever.

Discipline is doing the things you don’t like, but which really need to be done; and also, avoiding the things you strongly want, but which would be bad for you. Success is inevitable for those who make self-discipline a daily habit. There is no progress in life for those who lack self-discipline.

Dissipation is spending personal resources without thought of replenishment. This may involve spending our money, our energy, health, reputation or friendships. Discipline is nourishment and building up of all our resources. We either save up, or else we exhaust our resources and spend ourselves into oblivion.

Failure is just unfinished success in many cases. People abandon jobs or careers when they become too difficult, but if they would persevere in the same direction for 5 – 10 years, they might find the pot of gold at the end of the rainbow. Most of the successful people I have met had to endure hardship for a long while before they achieved great success.

Flexibility is a wonderful quality of both body and mind. When someone puts an obstacle into my path, it is usually better to find a way to get around it than trying to push the obstacle aside. There are many different ways to accomplish my purpose – but I need a flexible mind to find alternatives when my plan is thwarted.

Good jobs, bad jobs Most of us find ourselves in bad jobs at some time. It isn’t always possible to change jobs quickly. But we can bring a positive attitude to any job, if we are fully determined. That can help change a bad job into a better job, and sometimes even into a good job. It is not wrong to leave a bad job, but that is often impossible in the short run. By transforming ourselves gradually from the inside out, we can learn to succeed in all circumstances. Adversity builds strong character!

(Please see my October 29 post for the previous list of ABC’s for Success)

2007-01-14T08:09:00.000-08:00

Take Care!

I find that I frequently sign off an email or end a phone conversation with the phrase Take Care, which has become a sign-off for many people at the end of their communications.

What I am wishing for the person I am speaking with is safety, caution and active guarding against misfortune.

On the positive side, I also use these words to mean take care of your health, of your family, your finances, your job, and of your life. That means nourishing them, building them up, developing them and giving them your full attention.

At this time of the year in northern climates, I find taking care of our bodies is one of the biggest challenges. In the past few months many of my family and friends have suffered colds, flues, and other health concerns.

It is January, and at 60 years of age, I am restarting the annual battle of diet and exercise to bring my body back into fighting trim.

Having survived many difficulties in my career, in my travels, and particularly with my health, I am ever more keenly aware of how easy it is to neglect proper care of my body.

Most of us know almost everything we need to know about caring for our bodies:

Get regular daily exercise, or at least 3 times per week
Eat lots of fresh fruits and vegetables and whole grains
Avoid too much red meat, fats and processed foods
Avoid smoking, and go very light with any drugs or alcohol
Get plenty of sleep and take a few naps on weekends to restore your strength; take one day off per week to relax
Keep your thoughts and emotions positive; avoid worry and negative emotions
Don’t overwork or run your body down too far!

I could go on. Most of us know what we should do to take care of our bodies – we just don’t put it into practice consistently enough. That may work adequately in our youth, but poor habits in younger years turn all too quickly into significant health concerns by middle age. As I am now at retirement age, it is sad to see many friends who have virtually ruined their health through lifetime neglect.

Good physical health is as important for people doing desk work as it is for those doing physical labour, if not more so. Clear thinking is nearly impossible when our bodies run down.

So why do we take chances with our physical health? Why do we over-work, lose sleep, over-eat, and party too much? I can’t answer that question for you. I am still trying to understand myself better.

But don’t be surprised if you sometimes hear me say

Take Care!

2006-12-23T19:30:00.000-08:00

Managing Priorities for Success

Among the central skills for success in life and work is the ability to distinguish between the importance of various tasks or objectives. For busy people, there appears to be too much to do at every moment. Trying to work harder, run faster and become more efficient helps a lot, but ultimately we hit a wall. There just isn’t enough time available to get everything done.

One of my hardest challenges came when I was quite suddenly placed in charge of 15,000 employees at a large corporation. Previously, I had been Chief Financial Officer with huge responsibilities, but this sudden promotion to Chief Operating Officer left me virtually breathless for a few days. Fortunately, I was able to rely on the habits, skills, and priorities I had developed over many years. I wrote down my key priorities and set out to achieve them quickly. My number one priority was to quickly assemble an effective executive team from among the people already in the organization, which was a manageable goal. Doing that right enabled me to meet the other looming challenges.

Fortunately, my business career started out with much simpler challenges. For many years, I was engaged in building up several corporate banking offices, which started humbly. I can well remember having only one assistant to help me in the early days. Later, I had offices with 7 people, then with12 people, then 20 or 40 people. What enabled me to thrive and prosper was to cut through all of the sophisticated sounding management talk and to reduce our objectives to the basics, like:

build and nurture a strong team, and
serve our best customers and prospects well.

Simplify your goals

This may sound too simple for a Harvard graduate who started his career on Wall Street. But in my academic studies, I learned about the principle of simplicity called Occam’s razor, named after a 14^th Century monk, which says essentially that the simplest scientific explanation possible is more likely to be correct than the more complicated possibilities. This principle has now been applied to virtually every field of human endeavor.

In modern business parlance, we could translate Occam’s razor to say: “just cut through all the crap and get it down to the basics.” Leonardo da Vinci said "Simplicity is the ultimate sophistication". That applies equally to life, art or business.

Regrettably, I do not subscribe to the theory that greater efficiency will enable you to accomplish everything that needs doing. In my experience, we are constantly choosing between doing one thing and another, all day. Should we spend quality time with our friend on the phone, or move on with an urgent task?

There is no simple easy solution to this dilemma, like “always do your work first”, or, “always spend time with people, no matter what”; these both sound equally good. However, in real life, we must choose between many seemingly important calls on our time. This gets especially complex in balancing family responsibilities against work demands.

Sort your priorities

Another guiding principle I have found and practiced for many years comes from an Italian philosopher who said that if you have a list of 10 items, or 10 possessions, or 10 of almost anything, one or two items will outweigh the remaining 8 or 9 on the list in total importance. I have confirmed that principle repeatedly throughout my career. Learning to sort out what is important from all the other demands in our lives is a consummate skill.

My daily practice for many years has been to write a quick list in a minute or two of what most needs to be done. Then I decide which of these tasks is most important and make sure that this one gets done for sure, no matter what it takes.

Sometimes we need a friend or advisor to help us sort out what is absolutely crucial from what is merely important. At work, it is good to ask your boss and colleagues what is most crucial, so that everyone works together toward a common goal, rather than pursuing conflicting priorities.

Look long term

Whether at work or in our family, we may often get tempted to do what seems important today and thus ignore tomorrow. Many years ago I heard someone say we should spend 50% of our time on longer term goals. I have tried to do that for a lifetime, which has helped me enormously.

That doesn’t mean no time out for relaxing, for family, sports, or entertainment. Those are also important for our long term well being. I have tried to limit my work week to 45 – 55 hours at most, which becomes possible by sorting priorities.

Conclusion

Sorting out and simplifying our tasks and priorities is crucial for success. Take a few minutes to do this daily. Occasionally it is worth taking an hour or two to contemplate your life and work to reassess your situation. At New Year, or some other time, it may be worth spending a full day to figure out your future direction.

I have found that the people who “work hard” rarely do as well as the people who “work smart”, although both are good. Turn your brain into a superior navigation instrument. That is its purpose!

2006-12-07T07:19:00.000-08:00

Investment 102: Stocks

It is customary when giving investment advice to provide a disclaimer about your qualifications, self-interest, or bias. Unfortunately, these disclaimers are attached at the bottom of complex documents and written in fine-print legalese, so that mere mortals don’t actually read them. My disclaimer however is rather simple:

Although I am a financial pro, I am not a stock expert. If you think by reading the next few pages that you will become expert in stock investing, please ask me to refund all of your money right now!

I have never charged anyone for investment advice, so please don’t send me any of your gains on investments, nor a bill for any of your losses. Having given that warning, I will now plunge in:

Investing in stocks can be quite good if you are cautious, disciplined, skeptical, and:

If you are not expecting to make a quick, dramatic gain. This is a long-term business where only enduring investors do well.

If you understand that every stock and every industry has significant cyclical swings, up and down. That is the basis of stock market psychology: the bears are always seeing the dark side, while the bulls are eternal optimists; each of these groups is right about half of the time. Don’t become a bear or a bull. Stay dispassionate.

If you distrust the experts. Also, distrust yourself and your own opinions! Even the experts can’t fully understand (or predict) the market cycles, so don’t get hooked on anyone else’s advice (including me), since all of us are too often wrong.

Listen to everyone, but please don’t rely on stock recommendations whether from your broker, from your friends, from an investment newsletter, or from anyone who charges you for advice, or gets a commission.

If you are not putting in money which you will need to take out during the next year or two. Usually, just when you need your money back is when the market will be down. Being forced to sell is never pleasant.

If you invest your money gradually over time and take it out equally slowly. You should avoid trying to figure out stock market timing – when the market will be high or low. The best approach is to put money into the market steadily every month or every year, without trying to guess the future. That way, you will avoid the worst disasters and benefit from upward trends.

If you pick the right industries. A world expert in forest industry stocks once told me that picking the right time to buy forestry stocks was far more important than knowing which forestry stocks to buy. The same holds true for oil & gas stocks, automotive stocks, and for most other industries. However, since most of us are not expert enough to know exactly when to buy which industries, a diversification of stocks and a diversification of industries is a better approach.

If you pick the right countries in which to invest. Never get too patriotic about your own country when investing, because all major countries eventually have their ups and downs. In 2006, stocks from Canada, China, India and other rapidly developing countries have been booming. But this trend will not go on forever. Every national stock market has ups and downs. Diversify.

If you invest in stock market indexes of major countries or in industry sectors, which is now possible to do. Investing in indexes can dramatically reduce the commissions you pay, and likely improve your performance as well.

If you can figure out how to minimize both the stated and hidden commissions by brokers, advisors and fund managers, which can drastically reduce your returns. These costs come at 3 levels:

Buying, selling and administration fees from the broker who handles your stock transactions (Frequent trading is incredibly expensive, unless you trade online through a discount broker)

Annual asset management fees which are charged on mutual funds or investment funds of any type. These can be as high as 2 - 3% p.a., which I would never pay.

Hidden fees paid to your broker for selling you new issues of stocks and other investment products. These fees can be quite large. I usually avoid new issues.

Altogether these charges can range from 1% to 5% p.a. on the money you invest, which reduces your gains considerably. (I don’t like to pay over 1% per year and so I have much of my money in market index funds that cost me only a quarter of 1% per year for administration, and, with a fund manager whose combined charges are just over 1% p.a.);

If you avoid trying to pick out individual stocks unless you are the one person in 10,000 actually trained to do that – even professional stock-pickers rarely beat the market indexes for long, except for Warren Buffet.

(Picking out individual stocks can be a fascinating exercise if you have time, patience, and deep pockets. I would suggest the following approach. Try to find a local company which you know well; that has trustworthy management; that treats employees and customers well; that has consistent growth in sales and earnings; that has superior products at good prices; that has a unique niche in its market; then gradually buy some of their stock. I recommend against putting more than 5% or 10% of your money into any one investment. Regrettably, there are not many companies that meet these criteria, but they are often great investments.)

If you have very realistic expectations. Over 10 – 20 years, you could average up to 10% p.a. by owning a diverse portfolio of stocks (or indexes), but expect enormous swings in good years and bad years. Short term gains or losses mean little.

The allure of stocks is truly beguiling. If you or I could only pick out the right stock in a young company, we could potentially make a 10 or 100 times gain; $1,000 could become $10,000 or even $100,000.

For instance, you or I might potentially have picked Microsoft or any of the hundreds of companies which made that much for their early investors. Trouble is, for every big success, there seem to be thousands of stocks that either fail completely, or never do very well. Furthermore, if you buy into a huge success story near the top of the market (again using the Microsoft example) you might lose 20 – 60% on your money, even though the early investors in that stock have made a real killing.

There are a select few stock professionals who don’t just look at you as just an easy mark. I recently heard a quip from Henry Kissinger saying: “Unfortunately, 90% of the politicians spoil the reputations of the other 10%”. That statement would apply equally to investment advisors!

Stocks have better returns than bonds and other fixed rate investments in the long run, provided that you invest with discipline and diversify your holdings, both by geography and by industry. But remember the higher returns from stocks are compensation for taking more risks:

risks in companies and their management;
risks in industries;
in countries and currencies;
risks in the economy, both local and global.

At times, catastrophic developments virtually wipe out the value of not only one particular stock, but for entire industries, and even for some countries. I believe there is a small chance that we could see another global wipeout of equities, such as happened in 1928 – 1932. So don’t think stock returns are guaranteed!

Despite my necessary warnings about the risks, I really like investing in stocks (and in real estate) for long-term gains.

2006-12-05T03:04:00.000-08:00

2006-11-29T15:35:00.000-08:00

2006-11-28T10:06:00.000-08:00

Investment 101 - Property

One of my favorite courses at Harvard was the introductory class in Economics, which could have been labeled Economics 101. It was fascinating and I got an “A” with ease. Later, I passed the intensive financial training program at Chase Manhattan Bank on Wall Street in New York with high marks as well. But neither of these excellent courses taught me what I most needed to know about handling my personal finances. That I learned very slowly in the “school of hard knocks”.

I have already written about handling money well with frugality, saving and generosity. Now I want to tackle the question I am most frequently asked: how to invest money wisely? (This will involve more than one post.)

For young people starting out, the most important financial principles are:

saving a minimum of 10% of your income (starting today!)

avoiding debt, particularly high interest credit cards.

Once you have some savings accumulated, the main question usually becomes whether to buy your own house or apartment. Although for most people that has been their best investment ever, my advice is not to rush in too quickly. The recent global boom in property has nearly run its course, and prices are already falling in many places, although still rising in other parts of the globe.

This recent property boom was all about interest rates. When interest rates fall and stay low for a few years, property soars. But the old adage still applies: whatever goes up must come down sometime.

The reverse also happens typically in economics – so there is a risk that interest rates could go back up at some point (due to inflation reappearing) and cause a quick property tumble.

In my view, buying your first house or apartment should never be done for getting rich quick, because the opposite could happen just as fast, particularly if you borrow a huge amount. In that case, you would be vulnerable to both interest rates rising considerably and suddenly losing your job (which happens to most people sooner or later).

However, the tax laws in many countries make owning a home very advantageous, due to capital gains exemption or interest deductibility. If you have 20 – 25% saved for a down payment, steady income and no other debts, buying property is good for the long term, no matter what the real estate market does this year or next. But don’t buy with the intention of selling in a year or two, because you may get caught!

I once worked with a group of graduate students who presented me an interesting concept on buying up houses in lower-priced areas throughout British Columbia. As the value of their real estate portfolio would rise, they intended to buy still more houses by borrowing more and more. I rejected their investment thesis, because it assumed that property prices could only rise, and never fall.

This got me into an argument with their professor of business. Sadly, circumstances proved me right. This professor himself bought 4 or 5 houses with high debt and then lost them all in the property crash of 1982 in Vancouver. His dream of financial success was ruined.

(There is a solid strategy for a sophisticated investor to buy more and more property based on steady cash flow that covers all of the debt. This requires long leases and fixed rate debt. However, a property market reversal could still bankrupt this method, unless there is geographic diversification and lots of financial flexibility to withstand sharp market corrections.)

But I like home ownership for two other reasons, beyond the pride of owning you own place. First, it is a forced savings plan, which for many people is almost the only way they will actually save. Second, it avoids the immense pitfalls of buying stocks and other hazardous investments, which I will deal with in a future installment: Investment 102.

2006-11-19T18:40:00.000-08:00

Leadership: Oppressive or Inspired?

Some of the most monumental influences in our lives are the leaders we encounter, whether at school (the teacher or principal); at work (the boss); in religion, government, family, sports, and in any other social organization.

Our leaders create a strong atmosphere around them, for good or for ill. Their attitudes and outlook frequently dominate the context in which a group operates. Leaders often exert such a strong influence over our feelings and perceptions that we can virtually drown in their emanations.

I have enjoyed inspiring leaders and also suffered under oppressive bosses. Recently I woke up from dream vividly remembering how it felt to work for a brutal boss, “William”. I still recall the depression, the revulsion, and the anger in the pit of my stomach, although I haven’t seen William for more than a decade. Perhaps you have felt the same about some leader you have known.

I remember by contrast the pleasure of working with “Harry”, a senior executive who was continuously inspiring. Everywhere Harry traveled, he left behind waves of pleasantness, confidence, and optimism.

Both of these leaders were required to make tough decisions, however their fundamental attitudes towards life, people and leadership were as different as heaven and hell.

Oppressive leaders work to satisfy their own ego. Everyone who gets in their way is an obstacle to be removed. They are controlling, hierarchical, and money dominated. They are usually mean, stingy and impossible to please. They find fault no matter how excellent the work. They have poor ethics and a cynical mindset. They often have a very short term outlook.

Inspired leaders put people and the work to be done ahead of money. They are kind, generous and tolerant. While they hold people accountable for performance and can see through excuses and deception, they are not paranoid. They are visionary and creative in their leadership. They encourage constantly and stimulate passionate achievement. They are highly ethical and have a much longer term perspective.

Obviously, most leaders will fall somewhere between these two extremes of oppressive and inspiring. However, we hear lots of stories about both kinds.

Surprisingly, both types of leaders flourish and they sometimes appear to receive nearly equal acclaim. But in terms of the people they influence, they are worlds apart. The longer term impact of the inspiring leader is immensely beneficial, whereas oppressive leaders cause continuous harm.

We cannot always avoid working under oppressive leaders, but where we have a choice it is good to steer clear of them. When there is no option, it is better to take a positive attitude toward them rather than being drawn into hostility and conflict. Conversely, a chance to work for an inspiring leader should be grasped quickly.

Not everyone aspires to become a leader, but for those who do, beware! You could find yourself gradually becoming like the leaders you have disliked, because there may seem to be no other way to succeed without sacrificing your legitimate self-interest.

Indeed, an inspirational leader needs to sacrifice their own needs to help others. They will need to put their people first, ahead of immediate profits, efficiency, and popularity. Developing and nurturing your team is very hard work, but it pays off in the longer term.

To do that, we need to value each individual person, not just seeing them as an impersonal resource for organizational gain. We need to give up absolute control and share power and authority with our team. We need to share rewards and applause, not just to maximize our own.

Finally, inspired leadership requires enhanced vision and constant creativity. Leaders must welcome new ideas and stimulate new approaches. Our people count on us to find a way ahead despite the innumerable obstacles we inevitably face. It can be tempting in times of stress to demand more or to blame others, but doing that harms the team spirit.

Practice fairness and ethics. Leaders are expected to make choices on behalf of their entire organization, but not just to advance their narrow selfish interests. Our people sense when we follow consistent moral principles. They will trust us more and work harder to achieve our common goals.

Leaders who do these things will always inspire. People respond with heartfelt gratitude to great leaders. Success (defined as getting more money, power and fame) is not inevitable, no matter how cunning or ruthless we might become. Both oppressive and inspiring leaders seemingly succeed at times, and fail at other times. No one succeeds 100% of the time.

However, if success is defined by the lives we impact, the happiness we bestow, or in people nurtured, only one kind of leader can truly succeed.

Why not inspire?

2006-11-08T02:05:00.000-08:00

2006-11-08T02:01:00.000-08:00

Handling Money Well – Frugality

Frugal – dictionary definition

- economical in use or expenditure; prudently saving or sparing; not wasteful: a frugal manager.

- entailing little expense; requiring few resources; meager; scanty: a frugal meal.

My own practical definition of frugality is “consistently spending less than you earn”.

I have not found a good way to become rich quick, or how to spend money freely. But I can tell you some slow, reliable ways to ensure your future financial success.

Frugality is crucial to success with money. The richest people I know (which include multi-millionaires and even one billionaire) are careful and frugal with their money, or else they would soon lose it all.

Many people with much lower incomes are also frugal. They save, avoid debt, and live very happy lives, free from financial stress.

Frugality should apply to all expenditures, both large and small. I grew up relatively poor and have gradually become successful financially, but my spending habits have not changed much.

I try to avoid spending money wherever I can. I always search for lower cost alternatives, even for lunch or coffee. I try to buy good-quality and long-lasting products, if they are not too expensive.

Take cars for an example. When my wife met me in 1974, she was surprised that a young banker would travel by bus or bicycle, and not even own a car, though I could easily have afforded one. Later on, I bought older cars which I could buy for cash in the bank, and thus avoid any debt.

Now, I usually buy demonstrator cars or else last year’s model, which saves me anywhere from 10 – 40% off of new car prices. Then I keep the car for 10 years which also saves money. I could afford to drive a very expensive car, but I live modestly, as do most millionaires. People may laugh at my cars or clothes, but they would envy my resulting wealth.

Kathy (my wife) buys most of her food and clothes at discounts. She loves to shop at thrift stores. Maybe someone might say it is a shame to buy second-hand things when you can afford new luxury products, but fortunes can change quickly, particularly if you become loose with your money.

Virtually anyone who works energetically (every day and every year) and who is constantly frugal will soon reach some basic level of financial success. But if they ever change these important habits, success may just get up and walk away!

There are other important aspects of handling money well, but they all start out with frugality.

2006-11-08T01:53:00.000-08:00

Handling Money Well – Saving and Generosity

Beyond frugality, saving money steadily and giving money away generously are the prime financial virtues. Working energetically to earn money and then using your money well are indispensable for both success and happiness.

I read an interesting quote from Nancy Astor, who said: “The only thing I like about rich people is their money”. (Nancy was a very rich woman from the 19th Century.) However, rich doesn’t have to mean stingy; it can also mean philanthropy, like in the tale of St. Nicholas.

Some people say they would like to earn enough money so they will have enough left over to save, and also enough money to share. In my experience, virtually anyone who earns money can already save some money and also share.

It is strange that people living in North America have nearly the highest incomes but also the lowest savings rates. By comparison, people living in Asia save 10%, 20%, or even 30% of their salary, even though their base income is much lower.

Anyone can also become generous, however low their incomes. My wife Kathy noted as a young girl that when she sold Girl Scout Cookies in wealthy areas, people often refused to buy them, whereas people who lived in poorer houses were more generous. Sadly, I have also noticed that pattern. But there are notable exceptions of rich folks donating most of their wealth to others. That is far better than redistributing wealth by taxes.

There are countless good reasons to save up money, such as to buy a house or car, to finance education, to guard against unemployment, or to plan for retirement. Regrettably, too many people learn about these reasons for saving too late to help themselves, when they are already old and poor.

We all believe in generosity for the rich, but not necessarily generosity for ourselves, just yet. We don’t want to sacrifice our hard-earned money for others. However, our family and community well-being require regular sacrifices by all those who are able. Government is unable to meet more than a small number of the needs of a community; the rest must be met by concerned citizens.

Ultimately, how we use our money and our possessions define the type of person we become. Being rich and stingy is not a happy way to live.

My advice to my children and to other young people is to start saving and donating their money in roughly equal amounts. Some people might be able to save 5% of their income and also to donate 5%. Others may be able to save 10% or 15% and still donate a similar amount to charitable causes, both in their own community and around the world. Starting these important habits early in life is advisable because spendthrift habits are hard to overcome.

Saving must be long-term and permanent to bring lasting success. We need to build up lots of assets before retirement, to avoid poverty in old age.

Saving and sharing should become our lifetime habits, along with frugality. If everyone worked hard, lived frugally, saved, and were generous, think of how many of our financial and social challenges could be soon overcome?

2006-11-07T20:20:00.000-08:00

2006-10-29T19:44:00.000-08:00

Some ABC’s for Success

Accountability is performing to an external standard, reporting to other people who are objective insofar as they are outside of our own subjective sphere. Most of us do not like being accountable, but we rarely become the best that we can be without it.

Attitude is the single most important ingredient to success at work. It is also the only thing you or I can definitely change, since it depends only on what is inside of us. A positive attitude in almost all circumstances will bring lasting success. A poor attitude will guarantee failure.

Bad attitudes (how to get past them). Sometimes we find ourselves in a very negative mind space where we are dissatisfied and irritable beyond any rational explanation. My sister told me a humorous way she found to get past a bad mood. A friend told her: “just get over it”. My sister asked how. The friend took a piece of paper and wrote "bad attitude" on it and placed it on the floor. My sister stepped over it, and surprisingly it worked. She got over it!

You must decide, somehow, to change your negative mind space if you want things to turn out right. It is far easier to change your own mind then to change other people, or to change difficult circumstances. Your attitude makes all the difference.

Balancing order and chaos is a lifetime struggle. Chaos brings creativity, growth and change. Order brings stability, logic and predictability. If either of these gains total supremacy so that the other is lost, you will loose a critical dimension of your abilities. Learn the joy of balance, and live joyfully in creative tension. You need some order as well as some chaos to reach your maximum potential.

Career is the succession of jobs you will have during your lifetime, whether you have planned and anticipated this progression of jobs, or you are just swept along by circumstances. Working and planning for better jobs can bring you to a much brighter future. Anyone who doesn’t take the time and effort to plan for future job training and success will need to get used to disappointment at work. It is your career – so make the most of it!

Choices are inescapable – you absolutely must decide. Not making a decision also becomes a decision quickly: you have simply decided upon inaction.

Inaction is most often the wrong decision. It pays to think carefully about important decisions and not to rush forward blindly, but doing nothing is like hiding your head in the sand – it leaves your entire body exposed to danger.

Deciding on some form of action requires boldness and courage. It is scary to face up to the tough issues in your life. But it is even more dangerous to ignore them through endless procrastination.

Constant improvement, not perfectionism. It is important to set a high standard for yourself and to constantly improve, but don’t become a perfectionist. Perfectionism tends to focus obsessively on only one or two dimensions of success, e.g. neatness, academic achievement, or body image. In truth, there are many aspects of our personality, health, attitude, knowledge and skills which need improvement. If we try to become perfect in a single dimension, we will fail due to our inadequacy in all the other dimensions.

2006-09-29T03:58:00.000-07:00

Money Talks!

In my career as a banker and chief financial officer, I have worked daily with millions of dollars, and occasionally even with billions. I have known some of the wealthiest people on this planet.

If there is one thing absolutely everyone talks about – it is money. And you can also say that Money Talks.

The marvelous Italian sports car and the immense private yacht are meant to impress us, and it works. Presidents and queens bow to money like to nothing else.

But I also know some of the poorest of the poor, such as the drug addict who sleeps in a garage, and the poor street children who can’t stop eating when they come to our house, because they don’t know when they will get another good meal. Money doesn’t work well for them.

I will write more later about how to earn money, to invest it, spend it, and how to use it wisely. You could say that I am kind of a money expert. But first I want to tell you about the essence of money; why it dominates our lives.

Money has replaced gold as the main measure of value. How much does he make? How much is she worth? Can they buy whatever they want?

Governments rise and fall by how well they distribute the wealth in social programs and how adeptly they rake it in through taxes. If the economy is booming, a government is powerful. But when recession strikes, we voters throw the government out!

Money is strangely not a real thing – that is why one single piece of paper can be worth either a single dollar, or a million dollars, depending solely on the words the paper contains.

Money is created by governments to facilitate buying and selling, working and saving and other financial transactions. It is a marker in the economic game entitling us to goods and services.

Money is really a social device to organize our whole society. It can be used unbelievably well, like by Mother Teresa, or selfishly and arrogantly.

How we get our money and how we use it tells the real story of who we are. It can never make us happy for long, but money often makes us very sad.

Money can be the goal of our lives that mostly disappoints us. It should however be only a useful tool, rather than our master.

Money is truly the measure of a man: not how much he has, but how he gets it and how he uses it.

Money talks – often far too loudly.

2006-09-23T18:12:00.000-07:00

2006-09-22T04:15:00.000-07:00

It’s not “just a job” – it’s your life

Many times I hear people say “It’s just a job”. What they mean is this job is only a temporary thing, a way of getting enough money until something more important happens in their life. They may be planning a trip, or to get married, to buy a car or house, or to do something else that seems far more important than their work. But they are wrong, quite wrong. It is never “just a job”; work is the most important part of their life.

Work has many, many dimensions. It is the place we invest our energy in order to get money – for all of our needs. It provides a place where we can use our creative abilities and to build friendships, if we try. For the lucky and highly-skilled, it may provide opportunities for promotion or even a chance to become rich.

It is also the place of our greatest frustrations: the hard boss, the scheming co-worker, or of the human tragedies we witness so frequently, like some nice co-worker dying of cancer.

But I think the most important dimension of our job is that it is the place where we spend the greatest part of days, our years and of our lives. It is the place we can become profoundly happy or bitterly sad.

Although we can blame almost anyone for what is bad about our job, at the end of the day our job is what we make it to be. We can make a job into nearly heaven, or else turn it into hellish drudgery. Our own attitude towards our work makes that critical difference between a “good” job and a “bad” job.

For most of us there is almost no escape from work, except at the end of a long day or weekend. But the next day, it again becomes the most important dimension of our life.

Let me give you just a few quick snapshots of people living and working well on their jobs.

Paul runs a tiny shoe store where he has worked for more than 50 years selling and fixing shoes. People come back year after year to his store because it is a special store and Paul is such a wonderful person. Paul takes an interest not only in making my shoes work wonderfully well, but he takes an interest in me as a person every time I arrive in his store.

Rob runs a tiny little bakery helped by enthusiastic teenagers. Rob is known all over the city for the quality of his pastries, but that is just the beginning. He offers a wonderful place for young people to work in their first jobs and he gives away countless pastries and loaves of bread to rich and poor, just for the joy of making people happy.

Jean works as a job recruiter, but she does far more than supplying bodies to employers. She treats every person with such friendly enthusiasm that they are inspired, even if they don’t get the job they hoped for.

Byran is the type of lawyer who never inspires a lawyer’s joke. He is kind, sensitive, and thoughtful. He uses his incredible knowledge of the law to make things work better for people, or at least to rescue them from disaster when the situation looks impossible. He is a lifetime friend to some people fortunate enough to know such a wonderful professional.

Robin is a carpenter and builder, who worked on renovating our old house on the Sunshine Coast of British Columbia. Working for below market wages, he transformed our dilapidated cottage into a lovely home. And he made the whole process fun!

I am sure every one of us knows many people who do their jobs exceptionally well. They could be a police officer, a teacher, a banker, a store clerk, or a tradesman. What they all have in common is giving their very best effort to doing their job well and in treating everyone exceptionally well.

Whether they get promoted or wealthy becomes secondary. What counts is that they are so joyfully alive in their work that their lives are satisfying. They also enrich everyone else they meet. For them, it’s not “just a job”, it’s their life!

If you happen to advance in your career or to get rich, that is a bonus; but not if you sacrifice your happiness and contentment with your work.

Your work is your ultimate creation. It is far more than just a job – it is you life!

Blackberry Abbey

Since the 1930’s governments have used three methods to contain economic downturns:

If I were an academic, I would love to write a book on the thesis that American governments since the 1980’s have been trying to stamp out recessions permanently, but regrettably without success.

We are now likely plunging into a global depression. Time will tell if it will become a great depression on the scale of the 1930’s, rather than like the more ordinary-sized depressions of the 19th Century.

America’s economy risks mother of all meltdowns

We are now likely plunging into a global depression. Time will tell if it will become a great depression on the scale of the 1930’s, rather than like the more ordinary-sized depressions of the 19^th Century.