Archives for November 2013

Still in Politics 1.0 After 237 Years? (Part Three)

“Whether a cat is black or white makes no difference.

As long as it catches mice, it is a good cat.”

——Deng Xioping

Copyright. All rights reserved by HitAndRun

Copyright. All rights reserved by HitAndRun

This was one of the major ideas behind Deng Xiaoping’s profound transformation to China. In other words, there is no substitute for good performance, far beyond any other consideration, including political ideologies.

Sadly, as 2013 draws to a close, the manifestations of Barack Obama’s incompetence are too conspicuous to ignore. The healthcare debacle seems to be the cherry on top of the proverbial cake. Obama’s administration has characterized itself by permanently overpromising and continuously underdelivering (OPUD).

There is no question about some strong assets Obama has. Probably heading the list is being a very able public speaker, coupled with a charismatic personality. Unfortunately, his shortcomings are too many, and in critical areas for the presidency. Chief among those shortcomings is his lack of  prior executive experience, paired with an apparent inability to learn from his inexperience with sufficient humbleness and lucidity. The multiple missteps and fumbles along his presidency are an uncontroversial evidence of it. His credibility abroad has also suffered ostensibly.

Even Bill Clinton, the Dean of the democrats, has recently turned against Obama, in connection with the healthcare fiasco. Clinton’s opinion carries a lot of weight given the extraordinary results that he delivered during his presidency, on the average. While in office, Clinton showed a very pragmatic way of doing things, far from the typical rigidity and dogmatism of most political parties —be it left, center, or right-wing. Clinton’s performance was indeed outstanding.

How did the most powerful, and debatably the most advanced nation on Earth get itself into this big mess?

If a careful analysis is made, this should not come as a total surprise. It is no exaggeration to state that this was an accident waiting to happen. The US, as most contemporary societies, operates under a highly dysfunctional political system, with very few, limited, and highly ineffective checks-and-balances practices in critical fronts.

Most corporations in the US —in fact, all over the world— have a pretty much refined methods  and practices for selecting their chair people, CEOs, and all management positions, including lower level jobs. Even so, given the inevitable complexities of selecting the most able individuals for top management, it is not uncommon at all to occasionally end up with deplorable results. Yet, on the average, due to the multiple checks and balances, and particularly to a well proven set of management practices, most of the time good results are obtained; moreover, when the result is unacceptable, most private organizations tend to react swiftly, firing the incompetent managers and replacing them with new ones.

Then, how come the US and world’s politics have evolved largely disconnected to the best practices on corporate management?

Quite easily! The world of politics, for practical purposes, is an island in the middle of society, but run in many ways very differently from the rest. The incentives system currently in place in the political world is a near perfect reflection of this painfully simple and humiliatingly obvious and sad reality.

In a nutshell, the major effort of most politicians, in any country, is devoted to trying to perpetuate their party’s position in power, preferably winning elections most of the time; simultaneously, politicians also try to personally remain in power as long as possible. It’s human nature in the raw. This leaves little room for true statesmanship, and for the genuine pursuit of the common good.

As clearly stated in Part Two of this series, contrary to popular perception, in politics there are neither absolute victories nor absolute defeats. Yes, for the losing candidate, sometimes his/hers political career could be over. For the defeating party, however, that’s seldom the case. Thus, the rules of the game are markedly tilted towards maintaining the status quo, since even when losing, the privileges and political power remaining most of the time are substantial.  Hence, nobody within the political system in his/hers right mind has any incentive to go beyond, more so when what is required is a profound restructuring of the incentives and the political system as a whole. According to current rules of the game, the risk/reward ratio makes it extremely unprofitable and risky to behave differently to what is already established. Hence, logical evolution and continuous improvement have mostly been negated in the political system.

Thus, it is safe to state that contemporary political systems have essentially been operating in a different reality than the rest of the business world and society in general. They have been doing so simply because that’s where their comfort zone is, the area of the minimum resistance path, where the maximum benefits and minimum risks lie, according to the primitive current rules of the game. Politicians try to maximize their performance according to the rules established, as they know them.

Regrettably up to now, society has been fairly complacent about how the system works, despite so many blatant shortcomings and limitations.

No one will contest the statement that governing is a very serious matter. The repercussions caused to society from the quality of leadership and management —or lack thereof— cannot be overestimated. Additional costs and foregone benefits of a highly inefficient and ineffective government, run in the hundreds of billions of dollars a year of missed output —in the US’ case—, not to mention the painful harm done to the unemployment front.

The ancient Greek sages very clearly advocated that top government positions should be occupied by the most able and wisest citizens.

The great classic Greek philosophers had it right, with a crystal clear concept of meritocracy. Contemporary political systems are miles away from that axiomatic ideal. Thus, contemporary political systems have a great deal of work ahead of them in order to truly advance, consistently and permanently in the meritocracy direction.

Greek treeManagement science has continually and considerably evolved and progressed in the past decades. Peter Drucker (1909-2005), the father of modern management, a naturalized US citizen, made tremendous contributions to the then nascent science, since the 1930s. Numerous contributions have been made from many more management experts ever since, most of them US citizens.

Let’s take an example. Job descriptions are one of the most basic concepts in any organization, including many in government. The same can be said about the screening processes to select the best and the brightest. However, these job descriptions and screening processes are conspicuously absent when it comes to selecting public officials —be it legislators, presidents or prime ministers. Granted, there is a relatively short and very elementary list of some very basic legal prerequisites for candidates to office: to be a national of the country, to be an adult, and so on. There is not, to my knowledge, any written criteria and requirements about competence and former experience, as well as about the selection process itself.

President Obama is an articulate, intelligent person, a Harvard graduate. Most unfortunately, he arrived to the presidency with very poor prior experience and credentials. Even as a legislator, he was an inexperienced junior senator. Furthermore, and most unfortunately, he has not shown any particular proclivity to learn from his mistakes.

The US’ political system is fairly representative of the rest of the world’s. The same shortcomings and limitations apply all around the world. If there is any doubt in this regard, let’s take a quick look to Italy, where Silvio Berlusconi, had an exaggerated political influence for around two decades, until recently. Berlusconi’s influence in Italy’s fate was disproportionately high, unfortunately the wrong type. Berlusconi’s ascension to power in Italy was achieved by navigating through the loopholes of an extremely primitive way of doing politics, quite often outside the law.

All over the world there is an abundance of examples of highly incompetent, and not too rarely also very corrupt elected officers that were able to arrive to top government positions due to the very lax rules of the game, as generally understood and practiced today. Some extreme examples are Venezuela and Argentina, among many others. Governing well is a tough command.

Substantial improvements in governance systems, procedures, and practices in no way guarantees excellent results. However, in many cases, the absence of them is an almost assured failure.

In other words, in the way politics are being played today there is a lot to lose, and virtually no substantial gain to attain. A deplorable cost/benefit relationship. In fact, a truly suboptimal situation. The world should not continue to operate under the Politics 1.0 umbrella. It is extremely costly, ineffective, and dysfunctional.

Despite the severe limitations of contemporary political systems, once in a while and very fortunately, when extraordinary statesmen appear in the scene, personal virtuosity tends to prevail. In varying degrees, there are some examples of gifted statesmen —and stateswoman— in the recent past and in the last quarter of the 20th century: Lula in Brazil, Reagan and Clinton in the US, Winston Churchill and Margaret Thatcher in Britain, Nelson Mandela in South Africa, Sir John Cowperthwaite in Hong Kong, Deng Xiaoping in China, Alvaro Uribe in Colombia, and Lee Kuan Yew in Singapore. Though this list is not in any way an exhaustive one, it is not that far from being it.

Nonetheless, It is utterly irresponsible and naive, to say the least, for any political system in the world to be dependent upon rather exceptional personal virtuosity.  A well conceived, modern political system that truly incorporates what the best practices have to offer should function so effectively that even with relatively mediocre top officers at the helm, things will tend to run smoothly. That should be the main aim in mind. Nothing else will do.

The logical response to this type of atrocious dysfunctionalities in modern political systems —like highly incompetent politicians at the helm— should be constructive change. The concept of the political world as an island where proven practices elsewhere do not apply cannot go on any further. It all boils down to effective management. The opportunity cost of keeping the status quo is unbearably high.

The Global Demographic Opportunity of Our Time

Aging workforce2The world’s changing demographics are presenting a formidable opportunity which, at first sight, might otherwise be visualized as an unsolvable developed nations’ conundrum.

The world’s labor force is rapidly aging. This is especially true among developed nations. In the US, for instance, the baby boom phenomena of post WWII is rapidly morphing into a baby bust. The demographics of Europe, Japan and most notably, China, are in an even worse situation than the US’.

Ironically, although quite understandably, most —if not all— of the poorest nations on earth are still experiencing vigorous rates of population growth. Granted, the poorest nations’ vigorous birth rates are coupled with horrible high levels of poverty, poor health and extremely deficient education, and so on.

To state the obvious, there is a minimum acceptable level to maintain a healthy balance  between the young population and the elderly. Most, if not all of the developed nations already have broken that extremely delicate balance. That’s a big threat. Fortunately, the other side of the coin is a monumental opportunity for growth and overall well being.

There are only three ways to reverse the aging demographic threat:

  1. Sustainable and sizable increase in the birth rate.
  2. Importing workforce from other countries.
  3. A combination of 1 and 2.

Option 1, however, presents its own set of challenges and realities. Probably the most important among them is the many years (between 18 and 22) it takes for the newborns to grow up and incorporate themselves into the workforce. Moreover, even if the correct incentives are implemented to promote new births, there are no guarantees of success, given that there are very powerful cultural and practical factors working against this effort. Hence, option 2 seems to be the only alternative with effective and almost immediate results.

The shrinking labor force of the developed world presents us

with the greatest arbitrage opportunity of our generation.

In order to compensate any surplus or deficit of any sort, countries export and import goods and services according to their needs; the workforce should not be the exception. Countries with an aging population problem should start importing young and able people into their workforce from countries with a surplus in young population.

Yes, it will be a monumental challenge to successfully assimilate droves of immigrants from the poor and poorest nations into the developed world. Nonetheless, the alternative to essentially maintain the status quo is too costly to even deserve consideration. More on the opportunity cost concept.

Is there any better long-term solution to the most menacing population shrinkage of the developed world than importing workforce from other countries?

Take Japan as an example. How in the world can anybody reasonably expect relatively robust economic growth rates in Japan with its overall population shrinking? It’s simply an utter impossibility. We all know of the great reticence that Japan has historically shown towards immigration. The choices, however are crystal clear: either Japan reinvigorates itself with an agile, solid and consistent long-term immigration policy to fulfill the severe demographic shortfall, or it will have to continue facing unnecessarily costly consequences in economic vitality.

Though far from being a developed nation, the case of China is also very illustrative. In most likelihood, one of the major reasons for the relatively recent deceleration in the economic growth rate from low double digits to the current 7% or so rate of growth, has to do with demographics. The Chinese workforce is also aging, without the corresponding counterbalance with new entrants. China, as well as Japan and so many more countries are extremely rigid in their immigration policies and practices. According to a document leaked from the Chinese Communist Party’s Third Plenum meeting last week, the government plans to relax its “one child” policy; a clear sign that the Chinese Politburo is also concerned about China’s demographic threat.

Aging workforceIf the current status quo —essentially inaction— prevails, the demographic challenge in the developed nations poses increasingly troublesome outcomes, with a catastrophic potential. One of the most relevant and terrifying is the unfunded pension liabilities quagmire. Without a proper replacement of young entrants into the labor force, as the population ages, a great deal of the pension liabilities end up being insufficiently funded. This becomes a highly explosive time bomb as the labor force reaches retirement age. Another related terrible reality is the escalating health costs, which tend to increase exponentially as the average age of the population rises.

Deteriorating demographics is essentially a developed nation’s problem. For completely different and opposite reasons it is also a big challenge for the world’s poorest nations still experiencing high birth rates.

Countries like the US, Canada, and Australia have consistently shown the world how to successfully assimilate massive immigration through globalization. Continuous immigration has been a consistent policy and practice in these nations since their inception. The melting pot concept is one of the most fundamental components behind the great success story of these thriving nations. That superlative success cannot be conceived otherwise. Thus, it can be done! Let us take advantage of what globalization has to offer.

If appropriately implemented, the solution discussed will generate healthy economic growth rates for years to come wherever set in motion.

Russia Just Shot Itself in the Foot

Governments are either doers or, at the very least, simulate to be doers. They shouldn’t  go around conceding defeat before even trying to do something about it.

dream vs realityLast Thursday we shockingly read the appalling statements made by Alexei Ulyukayev, Russia’s economy minister, slashing the long-term growth forecast to 2.5% through 2030, instead of the 4.3% published in April: “The drivers behind the brisk economic growth in the years before the 2008 economic crisis are exhausted.”

The economy ministry also stated that it expected the growth in salaries and corporate earnings to decelerate, and the wealth gap to widen further, with the share of the middle class falling from half to just one-third of society.

In over thirty years of closely following important developments in major countries of the world, I have never seen anything like this.

The straightforwardness of those statements is unprecedented. If anything, governments from all sorts of ideologies always, as a principle, try to bolster their performance, however mediocre —or even unacceptable— it could be.

Furthermore, those statements reflect some fundamental lack of coherence within the Russian government. Does Vladimir Putin agree with those statements?, or were they pronounced unilaterally by the economy minister without prior consultation?

For practical purposes, the answer is not that relevant, because in either case this is about a major inconsistency, an offense to the basic principles of good governance. Granted, Russia is not exactly a role model in this paramount area. Nonetheless, no senior government officer anywhere on Earth will dare to publicize the outrageous statements that Mr. Ulyukayev said last Thursday, regardless of how grim the future appears to be.

The basic reason of the existence of government is to serve society.

Yes, unfortunately that is usually more wishful thinking than a reality, even in the most developed economies in the world. Yet, at least in paper, most politicians and public servants in general go out of their way trying to persuade the society how competent and reliable they are. It is simply inconceivable and utterly unacceptable to throw the towel without even fighting. The economy minister’s statements are an open admission of incompetence and a lack of the most elementary spirit of problem-solving of the entire  Russian government.


On what I completely agree with Mr. Ulyukayev is that the main drivers behind Russia’s vigorous economic growth during the past decade are exhausted. Alas, how about uncovering some equivalent drivers? That’s the major reason of existence of the Russian government —or any other in the world. Russia is far from being a developed nation, with an estimated GDP per capita of US $18,000 during 2012, slightly over 40% below Italy’s, one of the poorest nations of the developed group. As copiously explained in my book GLOBALIZATION, the major drivers of growth of any underdeveloped economy, like Russia’s, lie precisely in closing the huge gap that separates them from the developed world. Any developing nation has a great deal to learn from the the developed countries. Naturally, in order to effectively start closing the gap it is imperative to implement structural reforms in the political and economic system. There is no other way around it.

Something has to give. Either the Russian government does the improbable and begins a profound wave of badly needed structural reforms, or the bad times ahead will be tumultuous with a great deal of misery and unnecessary suffering.

Russia’s fate is of great importance for the rest of the world, being the country with the largest landmass on Earth, the tenth most populated nation, and the seventh biggest economy on the planet, with a 2012 GDP (ppp) of about US $2.5 trillion, right between Germany and Brazil.

The global economy has made us all more interconnected. It is really a great pity to see these horrible developments taking place, and much more so in a country of the prominence and influence of Russia’s.

How Real is Market Efficiency?

Fama, Shiller and Hansen

The 2013 Nobel Prize in economics was awarded to three US economists who have made great contributions to the asset price theory and mechanism, namely in understanding what lies behind price movements. The three Nobel Prize laureates were: Robert Shiller from Yale, and Eugene Fama and Hans Peter Larsen from the University of Chicago.

There is no question about the crucial importance of gaining valuable insights on this topic. Interestingly enough, the points of view and major conclusions from the work of these distinguished scholars are not only different; from certain angles their findings can even seem contradictory.

Dr. Fama’s major work has been about the market efficiency. In general terms, Eugene Fama’s fundamental conclusion is that, on the average, markets tend to behave rationally, since all participants essentially have the same access to the same information in real time; as a result, the rationale goes, it is impossible to outperform the market, on a consistent basis in the long run.

From a different angle, Robert Shiller has concluded that, quite to the contrary, markets are prone to form price bubbles and behave with irrational exuberance, like the in the US subprime bubble. Moreover, Dr. Shiller had been warning since 2005 about the evident house prices bubble, and about its potential to drag prices down by 40%, which not long after proved to be the case. Likewise, Robert Shiller had earlier also timely warned about the internet bubble that culminated in the first quarter of 2000.

“There were a couple of guys in that exchange who couldn’t tell a hide from copper sheeting but they made a lot of money. Why? They weren’t trading a commodity but human nature … and there is something about human nature which is not rational.”

——Alan Greenspan

Lars Peter Hansen developed a method of statistical analysis to evaluate theories about price movements that is now widely used by other social scientists.

The apparent contradictions of Dr. Fama and Dr. Shiller easily fades away when the proper perspective is utilized. The way I see it, being a global investment manager myself with over 30 years of experience, Dr. Fama’s findings are correct most of the time. In fact, it does not even require sophisticated mathematical techniques to prove it; Dr. Fama’s major conclusion is axiomatic, a truism: the market (most market participants) cannot beat itself; that is a practical impossibility —otherwise, there would be no market. From that standpoint, Dr. Fama’s major conclusions are right on target.

Economic theory

The inevitable formations of price market bubbles in a recurrent way, however irregular, is and has been a fact of life throughout mankind’s existence, with no exceptions. Dr. Shiller’s work provides the uncontroversial statistical and mathematical proof thereof. More on this subject in our article Are Bubbles A Product of Economic Cycles?.

By combining both approaches more comprehensive responses can be accomplished. Yes, there is a small perentage of investment strategists that have been able to consistently outperform the major indices throughout time by finding market inefficiencies —in other words market outliers that outperform the market during several years. In fact, market bubbles happen all the time, particularly at the micro level of specific investments, more often than in asset classes. There are literally thousands of unmistakable examples. Let’s elaborate on one of them.

The stock price of [PCLN], now the largest digital travel agency on Earth, once its business model was solidly proven by around 2006, it began to experience an exponential price appreciation that took it from $25 in the summer of 2006 to $144 in May 2008. Once the subprime crisis was manifest,’s stock took a beating along with the market itself, going all the way down to $45.10, in October of the same year. PCLN had experienced an almost sixfold price increase in slightly less than two years, from 2006 to 2008, before going through a temporary price collapse of almost 70% during only five months. Yes, that was in the midst of the subprime parafernalia; and yes, I meant temporary price collapse, because that is what it was. From then on, PCLN’s stock went all the way up to $273.90 in April 2010, an over a sixfold price increase in only 18 months! Only to experience another temporary setback of around 15% during a few weeks –less than 13– before climbing back up to $556.20 in April 2011, an over threefold additional price increase in only 10 months! The current market price is in the neighborhood of $1,074, for a 57% average annual rate of price growth from the summer of 2006 to october 2013.

Was PCLN’s 17 fold price expansion from $45.10 (market low) in October 2008  to $774.90 (market high) in April 2012 a bubble like phenomena? Let’s not get lost in semantics. The truth is that PCLN has developed an ultra reliable business model that virtually exploded during the time frame analyzed. In addition, an appreciation of the multiples at which the stock now trades versus that which was initially commanded has also helped. The major driver behind such a spectacular price rise was an explosive rate of growth in sales and particularly in earnings. There isn’t then that much mystery behind such exponential price appreciations —or market outliers. There are hundreds of examples every year, most of them related to startup companies, and/or new disruptive business models.

Like in most human professional endeavors, there is a lot of hype in the investment world, indeed plenty of it. That seems to be a major reason, a logical one, behind so much reticence to acknowledge that there is a very talented minority of investment managers that is able to consistently outperform the major market indices in the long run. The most conspicuous of those ultra-talented investment strategists is Warren Buffett, the legendary investor. The most remarkable aspect of Buffett’s success is that he has been able to essentially maintain extraordinary average long-term annual growth rates —above 15%, depending on the time frame selected— despite the colossal current size of his holdings —US $458 billion.

Thus, outstanding investment strategists like Warren Buffett have truly been able to consistently outperform the major market indices in the long-run by smartly exploiting market inefficiencies. They are a true minority. They are real, they do exist, and always will.

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