Friday, May 31, 2013

Robust Real Estate Hides Truth

cartoon image in color of a small house
How great would it be to have lots of extra cash now that houses sell for much less than during the bubble? This is certainly the wish of millions of people looking to buy a house but struggling to get a loan. And now, to complicate things further, there are no more homes for sale. Things are clearly not as simple as offer versus demand.
The Pending Home Sales Index produced by the National Association of Realtors has hovered at a recent low due to insufficient inventories of homes available for sale. The glut of homes left after the bursting of the housing bubble seems gone. The few homes left are now going up in price due to aggressive bidding. As a result, the well respected S&P/Case-Shiller Home Price Index recently reported robust increases of more than 10% in year over year home prices. The natural conclusion to all these is that historically low interest rates have created a housing bounce.  
image of graph of CME's Lumber futures showing a sharp decline in the commodity
Lumber Future - Chicago Merchantile Exchange
Unfortunately, things don't look so great just below the surface. Lumber prices, for example, have collapsed since reaching a top at the end of last year. Whenever the housing marked is healthy, lumber goes up in price. This drop is an indication that construction has not recovered. Why wouldn't builders rush to construct more homes after selling prices and demand increased while competing inventories dropped? They clearly know something that the rest of us don't.
Meanwhile, real estate agents are seeing peculiar patterns in the market. Today, it is safe to be the highest bidder for a house. Once the winning bid is selected, everybody knows that appraisers will value the property much lower than the bid, dictating the actual selling price. After finding themselves in the middle of the housing bubble mess, appraisers are no longer willing to help drive pricing higher. To their detractors, appraisers are responding by being overly conservative with their valuations. As a result, winning bidders can eliminate competing bids before renegotiating a lower price that more closely approximates what the bank will lend. The bidding process is therefore irrelevant now.
Now that sellers know how to play the game too. They prefer to take a second or third highest bid if it comes from a cash buyer. Aside from eliminating low appraisal risks, sellers also protect against last minute loan denials, which seem to happen often. This means that high bidding cash buyers have the leading edge in this environment. 
illustration of a small house atop a pile of US cash
Hard Money
But these aren't the typical local cash buyer. The residential industry has long had a core local buyer: an investor who bids low and pays with so called hard money. Bidding high works against this type of investor because hard money costs too much in interests. To be profitable, he needs to bid low. He must also flip the homes quickly. Any delays reselling a house cost too much in interests. Notice that homes sold are not coming back to the market for resale and that winning bids are going up and not down. These local investors are therefore complaining that they are losing the bids to the few homes available. So who is devouring the homes for sale?
A recent conversation with a Palm Beach real estate investor shed light on the issue. "BlackRock is buying everything" he said after I asked who was buying all the homes. "And they are bidding high", he continued. BlackRock is a leading global investment manager best known for managing a few billion dollars of the Chinese sovereign fund. 
Every Wall Street hedge fund and money manager has been looking at all possible ways to take advantage of the state of the home market. Even Warren Buffet made repeated comments about loading up on homes if he could find a way to manage them. His comments reflect the fact that serious problems arise from holding residential properties within a portfolio. The market is quite fragmented; there are homes in every city in the nation. Yet, each home is different. Just buying all those homes is a logistics nightmare. Then there are the challenges of handling maintenance and payment collection. These has kept really big money out of each local market; until now. Rather than talking, BalckRock and a few others are acting.  
On May 29, CNBC's Squawk Box anchor Andrew Ross Sorkin asked BlackRock's CEO, Larry Fink, about the state of the economy. Among other comments by Mr. Fink, he said "we can't find enough good investments"; implying that they hold more money than what they are comfortable deploying. 
But how is it possible that there's so much capital available for money managers to buy all the residential inventory but there isn't enough for families to borrow to buy a home?
The reality is that BlackRock is not alone. There are massive pools of capital struggling to find assets where to invest. With low interest rates on treasuries and a Fed that continues to be a large treasury buyer, risk-adverse capital is being crowed out of typical investment vehicles. These funds are pushing dividend-paying low-risk stocks higher, for example. They also have depleted residential inventories.
cartoon image of a red blowing bomb, labeled "RISK"
Considering such large and homogeneous market participants, it should pay to know the risks associated with their involvement. First, there is the possibility that a change in macro-economic risk may increase fund redemptions at these firms, forcing their managers to dump properties at low prices. The real estate market would relapse; pushing many home owners further underwater and adding many more to the list.
Next, there is the question of exit strategy. When will all money managers get out of their investments and what if all exit at the same time? This unknown is probably what's forcing builders to think twice before fully firing up their engines once again. A large and sudden increase of new listings from exiting money managers as they take aim at the next hottest asset class could ruin builders who are caught flat footed.  
Then, there is the uncertainty of the returns. Despite great expertise within companies like BlackRock, there is the possibility that successfully managing properties at this scale may not result in the risk-adjusted profits they expect. In money management, there is always a question about being invested in the categories that have the highest yields. At some point, real estate property management will certainly fall below other asset categories forcing them to liquidate faster than would have been the case for local investors. 
Finally, there is the risk of exhaustion. There is the possibility that all or most of low priced properties have already be taken. Money managers have pushed prices higher, reducing the potential profits from the rest of the properties still in inventory. At the same time, prices are yet to be high enough for builders to construct new homes at profitable levels; thus limiting builders ability to drive the next leg up of the real estate recovery. 
In a nutshell, the recovery that we see in the real estate market should be approached cautiously. Purchases by families are not driving the apparent improvement. Construction of new homes is not responding either. Furthermore, the properties sold could suddenly comeback to the market, making it collapse once again. Until we see families buy sufficient homes at prices high enough to help builders remain profitable, any signs of recovery could be just a mirage.

Tuesday, May 28, 2013

Chief Command-And-Control Officer not needed

"Delegation is the art of second best", said the Dubai Sheikh being interviewed for Discovery Channel's Richest People Of The Middle East documentary.
He added that "no one can do it better than the person who founded it and created it and knows what he wants out of it". He was referring to his dream of hosting a Grand Prix in his homeland. He was rationalizing his need to control every detail of the event.
Dawn photo image of a Dubai Grand Prix car in front of the Burj Al Arab
Burj Al Arab
Did his highness mean to say that delegating the programming of broadcast equipment to engineers would be second best to him doing it? By any chance, did he also think that it would be best for him to drive every car in the race since other drivers were clearly not at his level?
This is an area of the world where political leaders spend half their day individually listening to dozens of citizen complains as a way to demonstrate that they are in touch with their people. I said dozens because a day does not allow for much more than that. How then could they ever expect to run a large institution, like a nation, if they are involved with every little detail?
In response to the comment that delegation results in "second best" performance, I would suggest to his highness that he needs to learn how to hire qualified people instead of the incompetents that he obviously surrounded himself with.
Now, I am well aware that Dubai and other Arab Emirates have created incredible urban icons, like the Burj Al Arab, and that those accomplishments were possible only because of the fantastic work of some of the best engineers and architects in the world. But what I wonder is whether the people leading these Emirates know this fact as well? Anyone who thinks that delegation renders lower results has certainly missed the incredible landmarks that are rising over there daily. Many of these leaders design their own homes to show that they are great designers. Why? With their money, I would rather hire Frank Gehry to design my house. There is no way that one of my designs could out-cool Gehry's.
image of Frank Gehry building
Architect Frank Gehry
Even our armed forces now know that generals can not get involved with every aspect of war. Modern military intelligence ensures that information and decisions flow in whichever direction is best. Field intelligence often responds to threats much more rapidly than would otherwise be possible the old fashion way. In the past, a command and control mindset meant that everything flowed from top leaders to bottom soldiers. Bottlenecks were created as everybody had to wait for leaders who were burdened with so many details that they had no time for important stuff.
But command and control problems were not limited to yesterday's military. These had spread throughout business too. As thousands of military leaders returned from World War II, they were asked for their service once again.
black and white image of World War II returning heroes being welcomed home in a parade.Burgeoning manufacturing companies hired these heroes as managers. After the global industrial complex was left in shambles because of the war, American industrial companies experienced historic success. At the same time, former generals, colonels and majors deployed the same command and control techniques learned while at war. As a result, the image of the business leader who screams orders, is perpetually busy and is emotionally detached became iconic. It created an ideal image for millions of aspiring managers to follow.
Thankfully, there is plenty of evidence that such larger-than-life characters aren't necessarily effective leaders. From the great Emotional Intelligence work by Daniel Goleman to Jim CollinsLevel 5 Leader, we know that leaders must be much more inclusive in order to successfully navigate against the competition. Jack Welch's personal adviser, Peter Drucker, quantified the rate of change in the importance of delegation. It turns out that forty years ago, only 10% of a scientists' work required help from other scientists. In the late nineties, this changed to more than 62%. Even the smartest people in the world have to communicate their vision to others and count on their assistance to reach success. The image of the solitary inventor who innovates by divine intervention is no longer valid. Modern scientists are social animals first.
old image of a typical command and control manager; the typical office asshole
Surviving Workplace Assholes
If a person feels to be sufficiently smart to accomplish her goals, then the goals are simply not ambitious enough. Leaders with great dreams depend on the synergistic work of brilliant and effective teams. As Jim Collins once wrote, "people are not your most important asset. The right people are". Yesterday's manager had to be brilliant because selecting great people for their team was not important. On the other hand, the manager of today is dead-on-arrival without having access to the best people in the industry.
Command and control blinds business leaders from the fact that it is incredibly valuable to hire people who are better or smarter than they are. This blindness is what makes business owners think that employees are incompetent and that leaders are the only people who can get things done.
And why do managers need the best people available? To delegate big and complex responsibilities. Today, leadership is no longer just about the leader. A leader will often have to follow guidance from subordinates who are more knowledgeable and capable on the subject at hand. In 360 degree leaderJohn Maxwell illustrates how important it is for mid level managers to lead upward as well as sideways. In order to accept orders from an employee, you must be a leader who's very comfortable in his own skin. Any emotional insecurity and the whole delegation thing will go out the window.
It is time to eradicate the obsolete and unproductive command and control system. Build the best team you can. Hire people who are much better than you. Dream big. Reach your goals.

Saturday, May 25, 2013

Proverbial Failures

Do it well, or not at all...
In the past, I have expressed my dislike for the use of proverbs (also known as idioms) as a tools for decision making in business. Don't take me wrong, I think that, when used timely, proverbs can break the tension of a difficult board meeting, for example. But in general, proverbs are of little value.
A problem with proverbs comes from their enhanced and undeserved credibility. Who could disagree when someone says do it well, or not at all? Out of thin air, this proverb lends credibility to the person saying it. Some how, it seems like he thought deeply and extensively about the problem at hand before uttering the proverb. Unfortunately no time was spend at all. Proverbs are quite shallow and very portable. Anyone can dish them out anywhere and at any time with out much effort.
photo image of a person on a suit from behind. the person is making a hand gesture indicating that it is uttering a lie.
So I'll ask again, who disagrees with do it well, or not at all? Well, another proverb does. The half a loaf is better than none proverb directly contradicts it. Both make assertions of comparative value. The first one assures that the question is binary in nature and that we must chose between all or nothing. It implies that anything in the middle is inferior to nothing. The second proverb, on the other hand, concludes that the middle is better that nothing. In isolation, both seem credible. Together, there is a clear contradiction.
Someone could make the argument that both are correct albeit during different occasions. But since these proverbs had no instructions on when to deployed them, the argument about time-relativity is inadequate.
In short, managers should never allow proverbs within the business environment. Their overvaslued nature will make them a distraction. People will listen to proverbs and waste valuable mental processing resources when catching one of these grenades.
There is plenty of evidence supporting the use of a two part methodology for solving complex problems. First, clearly identifying the problem; something that requires clearing the noise created by things like proverbs. Second, let the reptile brain do the heavy processing. To accomplish this, we start by understanding the problem, follow with consciously thinking about every contextual aspect of the problem and finish by "sleeping" on the problem. We don't actually have to sleep. We just walk away from the decision and let the subconscious process the data in the background. The limbic system of the brain has demonstrated to be much better at processing complex relationships that the neocortex (the part that separates us from other animals). This is why we get eureka moments when we least expect them. The limbic system had continued to work on a problem until it suddenly found a solution and made the rational part of the brain aware of the news.
I bet that, when you started reading this post on proverbs, you had no idea that we would end up describing the parts and function of the human brain. We went from a trivial topic to a dry and serious one. Be assured that this was by design. You see, allowing the use of proverbs within the business environment is, in my opinion, serious in nature; just as serious as brain anatomy.
illustration of the brain and its various functional sections
Reptilian Brain and Neocortex

PS: I will leave you with these two proverbs. See if you think that either is more right than the other.
  • You can't teach an old dog new tricks
  • It is never too late to learn

Friday, May 24, 2013

Driving operational excellence and employee pride

Would I hire a CFO to help drive branding of my company?
photo of Joe Knight, CFO at Setpoint Systems in Ogden, Utah.
Launch Joe Knight's LinkedIn
Typically, the answer would be no. But if we are talking about Joe Knight, then all general rules go out the window. He is doing some really good brand building stuff at Setpoint Systems, a custom maker of automated manufacturing equipment in Ogden, Utah. The interesting part is that he is also helping drive operational productivity throughout the company while not forgetting to do the typical CFO job. Unlike most CFO's who shun interaction with others and prefer to collect and redistribute data, this is one who's truly engaged with the business.
That Joe finds time to share value with others is even more impressive. Recently, Joe wrote two books narrating his successful work. Financial Intelligence - A guide to knowing what the numbers really mean and Profit Management for Profit - A Failsafe Guide to Keeping Projects on Track and on Budget. These help employees and managers improve both their financial literacy and operational effectiveness in a simple and approachable fashion. The well tested methods that he now shares, have served to improve corporate performance at Setpoint already.
I strongly suggest that you view the various videos that Setpoint Systems has created in YouTube. As a B2B supplier, Setpoint benefits quite a bit by sharing these videos with its customers. By opening the kimono and showing how much Setpoint cares about what they do and how well they do it, Joe helps build strong customer loyalty while creating a robust image of their products. Who said that a CFO could not do great marketing?
image of two books by Joe Knight. "Project Management for Profit" and "Financial Intelligence"
Launch Business Literacy Institute
There are several aspects of Joe's work that I really like. First, he operates with transparency. The fact that many managers refuse to share critical financial performance data with their employees spells a high degree of emotional insecurity, as in feeling that a well informed and smart employee could take their job. It also implies that the manager thinks that the employee would be incompetent and immature at properly handling such information. I have zero tolerance for either prejudice because they create glass ceilings that become impenetrable over time. Simply, data empowers, as Joe has proven.
Second, I like that he communicates clearly. We have grown so accustomed to speak gibberish in business that we forget that, in order to fully include everybody within the company, we must fist communicate in a simple and succinct way. Joe takes the dark and cryptic world of finance and democratizes it by simplifying the terminology and by focusing on what is important. He clears the noise.
Third, Joe developed a simple system called Profit Based Project Management that allows employee's to improve company performance in a way that creates employee pride, easily connects actions with results, publicly acknowledges great work and creates a simple way to improve everybody's decision making process.
On a public board, employees keep track of costs incurred during the day; they account for hours of labor and the amount of materials used. They also note the percentage of project completion. The latter gives a value to the output created. With these statistics, they can calculate return on investment in real time. Rather than waiting for the bureaucratic system of the company to give employees feed back months after any changes would have mattered, each worker can see how much value they are creating immediately and can thus deploy all necessary improvements to their work. Because they are being measure not on units nor in revenue but on return on capital, they are better aligned with the company's goals.
Don't be misled by the simplicity of his system. You could conclude that there is less value in Joe's work because of how simple it is to implement. You may even fear that outcomes could be trivial. But you would be wrong. The opposite is true. A simple system has a better chance of improving performance everywhere in your company.
I am a strong believer in transparency with employees. I feel that only through clear and available data can employees be made accountable. While I just now discovered Joe's system. I have deployed many similar systems in the past where employees are given the tools to control the directions of the metrics used to evaluate them. In this way, there are never any performance surprises and metrics are not used to punish anybody. On the contrary, they serve to highlight to \others the great work being done by any one member of the team. Even when problems arise, these systems create early warning signals of trouble for managers to solve when employees are unable to create the value desired. In a nutshell, everybody wins.
screen shot image of Setpoint System's YouTube page
Watch Setpoint's Videos on Youtube
What Joe Knight has built will have such a great impact in your company that you just can't afford to miss it. Follow his videos and read his books. You will find his approach to be very valuable.

Thursday, May 23, 2013

Face-off with Risk - Stock and Bond markets respond

After a decade of trading equities, options and futures, I could recognize yesterday's morning reversal as something important. Today, we face further downdraft as market participants adjust their risk profile to the level where they will be comfortable next Tuesday, when markets reopen after the holiday weekend.
illustration of a May Calendar crossed over
Sell in May and go away
Next, we face the issue of seasonality. The whole sell in May and go away is real. Much of Wall Street takes longer vacation breaks during the summer. As a result, liquidity drops and intraday volatility increases. In general, except for something big unexpectedly happening, money managers are not willing to add money to rising positions during the summer. Valuation growth usually waits for a few months.
I am sure that you have experienced a time when your company grew nonstop. The feeling among your team was that momentum would carry sales higher, but instead sales dropped. Why? It was simply that all possible buyers of your products made purchases during the momentum buildup until there was no one else to buy. In market terms this is referred to as a lack of marginal buyers. With not one additional willing buyer, sales abruptly stop and momentum turns negative instead.
As I saw the futures go negative in real time during Bernanke's speech yesterday, it looked as if marginal buyers were pushing for the last time. An absence of sellers gave the last buyers the chance to quickly drive prices very high. Then a flood of new sellers came in; overwhelming buyers. At the end of the day, the large reversal and the massive volume confirmed suspicions that the market was ready to exit risk.
It is important to understand that US equities have been rising due to a lack of good alternatives. It is not abnormal for money managers to drink their own Kool-Aid and wax poetic about the great logic behind their purchases of ballooning assets. I saw this exact same phenomenon during the last recession. Despite seeing construction spending collapse after April, 2006, buyers of real estate assets continued to binge for over a year more.
We now need to keep an eye on the end of the month. If the S&P 500 ends the month around 1,600 or lower, be ready for the fall to continue.
image of US Treasury bonds
Treasury Bonds
For bonds, on the other hand, things are not so simple any more. Summer is usually the time when bonds go up in price. This time, though, there are doubts looming over the historic bubble that, after thirty years, is now finally ending. When bonds start to move, they will drop in value so much faster than equities that your head will spin. Incredibly, bond assets that are usually associated with safety now carry disproportionate risk
As long as our political leaders continue to promote ideas of wealth confiscation, or as Obama calls it wealth redistribution, market risk will not change. Businesses everywhere will continue to refuse to make long term investments.
image of a Nobel Prize medal
Nobel Prize
There are a few economists who believe that people do not actually think rationally about what they do. As a result, they assume that businesses do not respond to risk with the same predictability as perfectly rational players. To them, I offer that large companies do in fact plan based of sound risk assessments. Medium and small companies, those lacking the expertise to process such information, depend instead on banks to determine when the right time to make investments is. Yes, the bond vigilantes are back. Everybody knows that the bond market is much smarter than the equities market. Bond holders are lenders; bankers are lenders; there must be something in the water they both drink. As market risk increases, bankers increase borrowing hurtles. This serves as an effective mechanism that forces small and medium businesses to operate as if they too were perfectly rational about risk. There you have it, cake all over the face of those Nobel winning economists. They should get out more often.
If we want to see a better economic future, a new era when markets reflect real values and not distortions created by governments, we need to stop allowing our leaders to continue to make business the bad guy of the movie.

Wednesday, May 22, 2013

End of stocks' bull run?

10:32 AM. As I write this, we may be seeing the end to the stock market's bull run. No, I am not too eager to look foolish by making a call that would be both wrong and memorable. Nonetheless, I am witnessing a momentous occasion and simply had to write about it.
Federal Reserve Chairman, Ben Bernanke, is at this moment testifying in front of the Joint Economics Committee of Congress about the state of the Federal Reserve accommodations and the economic outlook. This is something that has gathered great expectations from market participants even when the general public is probably oblivious to it. At stake is the continued stimulus support by the Fed. If they decided to end Quantitative Easing or any component of it, the market would have no more reasons to continue to climb.
composite image of Federal Reserve Chairman Ben Bernanke speaking to congress at left and the S&P 500 futures chart reacting to his speech at right.
There are major risks hidden behind the recent rise on equity prices. Most dividend paying companies, those that are going up in value most, have gargantuan shortfalls in their pension funds due to ballooning entitlements an unusually long low-interest environment. For example, Delta, a company that has gathered momentum as the whole airline industry has seen renewed appreciation for their stock shares, has pension liabilities equal the whole value of the company. In order to solve the problem, they are hoping for an increase in interest rates. But even substantial increases in interest will not be enough. They will have to use cash from future earnings to moderate their pension shortfall. This will not affect their future profits but will destroy their cash position; and we are talking about a lot of cash.
Because other companies are in the same position as Delta, we should expect for dividends to come dramatically down. Since present stock prices take into consideration dividends, it is almost certain that these valuations will come down as dividends suffer. The question here is not whether this will affect stock prices but when.
In order for prices to stay the same, corporate profits or the premium that investors are willing to pay for them would have to rise. Because most of the money chasing stocks higher today is risk-adverse, the probability of the higher premium is almost not possible. This leaves us with profits going up. Here, remember that much of present corporate profit performance has been due to two factors. First, companies have been taking advantage of low interest rates to borrow to buyback shares of their stock. This increases the per share profit performance. These companies have bought at a rate of about $1 trillion worth of their shares per year. The stock market is about $18 trillion in size. My gut feeling is that they would not be able to continue this for long.
The other thing that has helped improve profit performance is directly related to the massive decrease in payroll that has taken place over the last five years. But how far can you cut payroll? At some point companies have to begin hiring; making this technique least sustainable.
If the stock market ends at near the opening price for today, we might have seen the top. That this would coincide with Bernanke's presentation is not abnormal. The Fed's tactics have pushed risk-adverse money into riskier assets. These funds are looking for the smallest indication of change to exit the market.
They say that no one rings a bell at the top. So, I can not say that I heard any bells. Nonetheless, the day seems like a reversal kind of day.
What does the market mean to average people? Nothing directly; everything indirectly. The White House has continued to press regulations and fear onto business at such furious rate that corporations have refused to commit to long term investments. This means that the country will lose the ability to sustain a strong middle class every day more. Not only are we seeing lousy economic performance, but we can expect to see more of the same. I have written extensively about the economic subject recently; most of it has not been optimistic. Witnessing the Federal Reserve consider an exit and seeing the market react does not help. The Fed has been the only good thing going for the country. Now, we may have to face the music. Keep today marked on your calendar. I hope to be wrong.

Bad is Good Business

As the great recession became ever more present, businesses faced challenges never before seen by their managers. On December 2008, Mobile Electronics magazine requested that I write an article on what retailers should do as they face their new environment. Following is such article. As I have commented before, it is quite insightful to revisit former thoughts with the benefit of hindsight. Some times we were right; some times we weren't. In any case, we are always better off after the exercise.

A Bad Economy Can Be Good for Business
Downturns bring innovation and separate strong from weak

It’s no real secret that recent spikes in oil and gasoline prices have consumers to trim their spending habits, and those of us in the electronics industry – from manufacturers to distributors to dealers – are feeling the economic slowdown in a painful way.
Cover image of December 2008, Mobile Electronics magazine
Launch Mobile Electronics
Anemic floor traffic has become the norm for many retailers across the country, and customers seem to be spending less of their hard-earned cash on what you sell. Even though oil prices have fallen, downward sales trends don't seem to be dissipating anytime soon. And with many volatile factors contributing to the seesaw value of oil, there is a chance gasoline prices may climb higher in the near future. If this economic slowdown persists well into 2009, what will happen to the industry and your businesses?
It may seem counter-intuitive  but recessions are actually good for business. They help to cleanse the excessive exuberance of the past and create a Darwinian environment where only the best (the fittest) companies survive. Good times tend to breed bad businesses and, once the tides turn, many poorly conceived or operated companies close their doors when the plentiful supply of willing customers ends.
Retailers should be focused on this factor rather than the price of gasoline, regardless of the possibility of a continued economic downturn. Think of now as a time when those businesses that offer superior quality, better products, excellent customer service and support, and efficient operations will be rewarded with the right to continue operations and, most importantly, with a larger piece of the pie. Stated simply, this is a period of opportunity.
During a conversation a couple of years ago, David Hall from Traffik Jam said to me “I did not become a business owner by degree, but by decree.” Though he was an avid electronics enthusiast first, he had taken upon the role of running a successful business, managing multiple employees and maintaining relationships with distributors and clients. While he may not have completely understood (or even actively participated in) the decision to own a retail business, David charged ahead, focusing on the potential rewards. David’s story teaches an important lesson: looking at the upside of a daunting situation can help turn a serious challenge into a bountiful opportunity.
At a time like this, banks lend at high rates, if they lend at all. Therefore, it is paramount that you make your cash work harder than ever. The way to do that is to aggressively reduce your current inventory. Savvy salesmanship and clever marketing are what you need to take products gathering dust in a warehouse and push them out the door. Meanwhile, ensure you keep enough of the “quick sell”  products in stock – getting rid of these (or drastically reducing the amount you order) may result in unhappy customers that will take their business elsewhere.
cartoon image of a winner staking hi flag over a pile of loosersAdditionally, you should buy from vendors who can quickly and inexpensively deliver the products you and your clientele need. This will give your sales people great agility and will ultimately maximize each and every selling opportunity that presents itself. Subsequently, you must also identify what products and services present the best opportunities for boosting your bottom line. While margin percentage is good, margin dollars are better, so concentrate on selling the products that contribute the most margin dollars to your business.
Another step you can take to remain successful during hard economic times is to pay down outstanding loans as quickly as possible. Often, during high-growth periods, business owners can’t help but feel optimistic about their ability to buy (and pay for) everything from real estate to just plain old toys. As a consequence, they end up overloaded with burdensome loan payments that place the health of the business in jeopardy. Rather than continuing to deplete your income with debt, sell nonessential assets to pay down loans – especially those with high interest. Cash is king in business, so protect your cash whenever possible.
The final recommendation I have, and I can’t emphasize this enough, is that you continue to build the best team you can. In this environment, your goal should be to capitalize on each and every customer that walks through your door. That means you must have an efficient and effective workforce that can deliver excellent customer service while also being mindful of costs, time expenditures and company goals. This requires a cohesive, focused team who can work tirelessly to ensure each and every business opportunity is fully exploited. Cash may be king, but good people are what bring value to a business.
The present inflation and economic stagnation may be with us for many more months, possibly as long as this same time next year. Gasoline prices may rebound in the near future, placing further negative pressure on consumer wallets. Nevertheless, the resulting cleansing effect this has on markets (particularly ours) creates opportunity.
Screen shot image of Mobile Electronics magazines web page displaying Alberto A Lopez's article "A bad economy can be good for business", "Downturns bring innovation and separate strong from weak"
Launch ME Mag
Rather than focusing on what is driving these tough times, focus on the rewards that await those who drive their business. After all, if all things go well, you may even be able to expand into your competitors’ closing location.

Tuesday, May 21, 2013

Innovation: key to preventing job confiscation

Following the simple instructions, I took the spoon with my right hand and cut right through the caramelized nitrogen-frozen mint leaf and then through the moose supporting the leaf. Cutting through both was smooth as silk. I then took the perfume paper strip with my left hand and placed it near my nose ready to be smelled. The goal was to take a bite off of the leaf and moose at precisely the same time as smelling the perfume. The result was absolutely beyond this world. For the first time in my life I experienced total silkiness. The symbiotic characteristic of taste, smell and texture was like that of a smooth rose petal blowing up inside my head; and I mean blowing up.
photo image of a signature dish at El Celler de Can Roca, undeniably the best restaurant in the world.
Launch El Celler de Can Roca
This was just one of the great dishes I enjoyed at El Celler de Can Roca, undeniably the best restaurant in the world. From solid soup to food that turns into gas when in contact with your mouth, nothing is what it seems. Following on the foot steps of grand master chef Ferran Adria, these new superstars of the culinary world practice what is known as molecular gastronomy. They have completely destroyed any preconceptions or traces of what food used to be. French cuisine, the king, is dead; long live the king.
What these new chefs have done is to restart something that we view as basic: food. They have taken the proverbial white canvas and splattered it, Jason Pollock style, with all sorts of innovative ideas. Food is no longer just about tacos.
Photo image of Frank Gehry's Guggenheim museum in Bilbao, Spain
Launch Gehry Technologies
Another great innovator I was lucky to find before reaching broad fame is Frank Gehry. He is the only architect in the world who has designed museums where the building represents a much higher expression of art than any and all paintings and sculptures inside. The first time I saw the Guggenheim museum in Bilbao, I was completely taken by its majestic expression of shapes. I immediately knew that I was witnessing something special. From looking at his structures it is immediately clear that only the latest in computer aided design software could convert his ideas into real buildings. But the truth is that this genius has never used a computer. It is up to his studio to handle the details of the concepts that made him the only modern architect of the 21st century.
Why could we not execute with the same degree of creativity in business? The two innovation examples illustrated above demonstrate that new thinking can transform even industries where ideas are so old and so set in stone that one would think it impossible to erase preconceptions.
While trade has been around for a long time, our business institutions are very young. Many of the principles behind our corporate institutions are not older than 250 years old. The industrial revolution launched an alternative way for wealth creation. It was no longer necessary to win a war to become wealthy. Business promised to bring long lasting wealth to its owners. To see how things used to be, follow the history of descendants of British and French army generals. The long lasting nature of wealth creation through successful soldiering should be readily clear.
Through an innovative perspective, there surely are new ways businesses could be structured; ways that could bring added value to all stake holders: citizens, employees, owners and the environment alike. I am referring to innovative methods of wealth creation for all. I am not referring to superficial responses to regulations, unions or environmentalists pressures.
photo image of hurricane Katrina survivors ridding a post office truck
Launch New Orleans / Katrina
To me, businesses have civil responsibilities just as much as I do. I do not rob my neighbor; not because there is a law that protects him but because doing so would destroy our civil world. Look at New Orleans after being hit by hurricane Katrina and the state of total absence of civility. No thanks, that is not for me. I prefer to respect my neighbor and never have to deal with such depressing problems. A person who litters, affects everybody. Another who picks up after herself may not benefit directly, but in doing so improves everybody's lives. Broken windows theory anyone?
Businesses can create value without government pressure. This is important because property protection, an essential element of wealth creation, is in fact performed by government. If elected officials decided to confiscate property, they could. In fact, they already confiscate property. Taxes are the most obvious way that governments take from us to fund their projects. But if governments somehow decided to confiscate all of what we own, it would be very difficult to stop it. I have heard countless stories of Venezuelan business people who heard a knock at their door one morning, only to open and be informed by the soldier standing outside that a destitute family will now live in their house with them. Not a nice way to start the day. Such orders continue to be enforced by the army.
image of Venezuela's dictator Hugo Chavez
Launch The Economist
The Venezuelan government had designed a public program that confiscated part of a home and no one seems to have come up with a way to prevent it. Even Chavez's death did not put an end to the practice.
Note that President Obama has explicit desires to continue to conduct wealth redistribution programs. So we, in the US, are also exposed to the risk or confiscation. Perhaps the most important long term threat to property will be in the form of a change in job ownership. Let me explain.
Today, jobs are created by companies. Companies hold title to these jobs. If an employer wishes, it makes jobs available. If she so likes, the employer can refuse to hire someone who is not qualified to fulfill the business' needs. But what if government was to confiscate job ownership. What if employees held ownership of jobs. This is not far fetched. Have you heard of employment entitlement; as in holding title? Unions exercise it. If you operate within a unionized industry, unions will determine whether a business can add or remove jobs. Unions can also determine who can hold such jobs. In these cases, businesses no longer own title to the jobs; making the threats of job confiscation much more real than one would think at fist glance.
So there are strong incentives for businesses to innovate in ways that creates value for all. At the one side there is the threat of job confiscation by government. At the other, there is the possibility to create a civil environment where we can all thrive and be happy. I therefore do not see environmental and social responsibilities as anti-business. They are essential for business instead. Businesses are where the brightest and most innovative humans practice. Why could we not deploy their great outputs to invent the business of the future? Why could we not eliminate sacred cows to give rise to a better future for all? Let's build a future free from unions and threats of confiscation by government.
Yes, today I took the very poetic and deeply philosophical route. But my conviction of a strong need to innovate is nonetheless present every day.

Monday, May 20, 2013

Techno-naturals; fun seeking powerful disruptors

My daughter is a native; I am an immigrant. But I am not talking about geographical origin; I am referring instead to technology. I was born with not much in the way of electronic devices in the house. We did not have a phone or television until a few years after starting elementary school. Then again, I should probably clarify that it was a "wired" phone. Forget about remote controls, microwave ovens or computers.
My daughter, on the other hand, has only known a world with all these gizmos and more. Today, it is hard to believe that the internet, as we know it, did not exist before Netscape created the graphical interfaces that helped us see more than just code on a screen back in the early 90's . Yes, like my daughter, there are many young technology natives who were born at a time of rapid technological changes. These are now professionals being hired by our companies.
These techno-naturals come loaded with all sorts of acronyms and weird ideas about things that you have probably never had to deal with. These are the children of a wealthy nation. They have never experienced hardship when compared to all other generations. Perhaps more challenging is the fact that they will push their ideas harder than anyone else in your team. They feel entitled to get whatever they want. Don't be surprised if they even tell you, with a high degree of authority and confidence, the reasons why your business will disappear in a couple of years. They will call attention to your obvious lack of understanding of things such as four-square, or something like it. Good luck handling the new load!
An expected question would therefore be: do they bring any value at all? The answer is yes; with a caveat that they will force you to run a much better business in order to maximize their value.
First, techno-naturals are very different than many of your present employees. This difference will increase the diversity of your team. It is well documented that diversity is the basis for higher levels of innovation; something essential when trying to create separation between your company and your competition. Continuous innovation will also help keep your business periodically transforming, as a way to stay competitive within all sorts of rapid changing environments. Examples of better innovation through diversity range from cities to companies. New York city is a place where the density of people from everywhere has repeatedly made it the center of art, fashion, banking, etc in the world. At the start of the 20th century, Paris was such a place with people from all over the world flocking to it. At the other end of the spectrum, there are companies like IDEO. Perhaps the most creative design consultancy in the world, IDEO systematically solves product development and marketing challenges by deploying diverse groups with great individual expertise in their fields but with not much in common. The results are breathtaking ideas. They have purposely embedded diversity into their structure. While many teams actively exclude members who act or look different, taking the opposite attitude holds the best promise in business in a long time.
It is common for managers to struggle when handling opinionated individuals who prefer to rock the boat rather than just comply with the status quo. But having the energy to challenge a whole team is not necessarily a bad thing. Their efforts should be channeled in a way that best serves the company. For this, I have found that it is very important that managers have clear goals, a commitment to really empowering employees and the systems to create accountability.
Hard as this may be to believe, most companies do not have a clear goals. I am not talking at the kind of document that is written in isolation by a superior being and which is then placed in a museum away from all mortals. No! Instead, I am talking about the kind of stuff that any employee could talk about at the water cooler. Time and time again, I would ask a manager or business owner what their goals were only to hear a mumbling of disjointed and obvious platitudes. I then ask if it is possible that all employees give the same answer to the question. They inevitably respond with a "no, but they know what I want". Really? I don't think so.
There is a reason why most businesses stall when the owner or president is absent; something that these leaders admit openly. I must stress the importance of having a simple, clear and portable goal. It is also essential to constantly push it. It must be easy for any employee to see how their day to day activities can contribute to reaching such goal. If there is no connection between what they do and the company goals, perhaps the goals are wrong or the employee's activities must be immediately stopped. The right goals will allow everybody to gain pride from contributing to something important to all. What a better way to bring a new member into your team? Show that there is progress and that everybody counts; things that are important to techno-naturals.
Once the goals are set, each person should be allowed to drive the team there. This is where empowerment kicks in. Managers should be comfortable letting their people drive the bus to its destination; especially when these people are better at doing so.
I often hear employees complain that there is no empowerment within their company. Insecure micro-managers create the kind of environment where this can easily be used as an excuse. Most of the time, it is just because such managers do not know how to get people to act without taking the company in the wrong direction. This is where accountability systems are essential.
To create accountability, a clear direction and well established mile markers are essential. Professionals should have the latitude to best reach the destination in a different way than their manager. But how to know if they are truly going in the right direction? Well, through the use of mile markers. More than prescribed ways to do something, mile markers are the deliverables that are expected within a window of time. If they are reached outside of the specified time window, the project could miss its overall time target. So a review of resources or expectations should be undertaken before continuing. If the deliverables are simply not there, then the professional is not accomplishing what she should, may have to quickly adjust to a different plan and perhaps even forfeit the project. There is simply no latitude here.
I love it when I get a new team member coming with all the energy in the world but who lacks any forethought. I think that there is simply no better way to make them valuable team members than through the use of empowerment and accountability. They usually love the idea of empowerment. Accountability, on the other hand, goes right through their ears... until they hit the wall. Typically, it takes missing the first mile marker for them to go through all the stages of emotional grief.
Launch Elisabeth K├╝bler-Ross 
Starting with (1) Denial, you will hear them try to do a Jedi -mind-trick on you by swearing up and down that they did not miss the mile marker. They then will turn to (2) Anger; not really mad, just acting upset. Immediately after, they will try to (3) Bargain with you. Once all else fails, they will feel (4) Depressed; not clinically depressed, just sad. In the end, they will (5) Accept. Now we are talking. The whole experience cycle is closed. You should then assure them that you can be instrumental at helping them achieve success next time. you should also take a mental Polaroid shot of the moment as it is the beginning of the long and arduous process of trust-building. I love management!
The difference between the employees of yore and the new generations is not about them but about your company; which at least from your perspective is what matters. Companies that have not developed superior productivity and effectiveness mechanisms will fail to maximize what techno-naturals bring to the business. The keys again are: clear goals, empowerment and accountability. The rewards are: better productivity and innovation.
Everything that I have discussed so far is quite serious (or even stiff), but techno-natives are not so serious people themselves. If there is something that they want to get out of life is fun. So, I thought of loosening the end of this post a bit by sharing a link to a very funny parody of the difficulty in communication to be expected between old school managers and their new-age warriors. Enjoy!
Launch Video

Sunday, May 19, 2013

Krugman's economics, cumbaya and pseudo-science

The man started screaming at the store's clerk. Shocked and scared, I fixated on his long hair and bear. He had clearly not showered for many years and seemed very thin. Truly angry, the guy used more obscenities than I had ever heard from any one person. I was seven years old.
After the man stormed out of the store, the clerk, a store owner's daughter who was left shaken, told us that the store had been giving money to the homeless man for many years. It turns that that day she had not gone to the bank to change the big bills yet. This was the first time that the store had not given him any money.
This is how I learned that giving someone money would not solve their problems but would instead create an obligation for the giver. I also learned that having good intentions was not enough.
Over the years, I resisted giving money to the many people who beg the streets of Mexico, where I grew up. I was therefore called heartless by many friends whose opinion I valued. It did not matter that I had supported many projects aimed at helping people learn to do better by themselves instead. It was difficult to follow my convictions with so much pressure but it was a matter of integrity; I had to do it!.
End This Depression Now
Paul Krugman, on the other hand, seems to be willing to bend his beliefs so long as everybody likes him better. Of course that I don't know the man. This is just the impression that I was left with after reading his book, End This Depression Now! In it, he claims that Economics should not be driven by morality, yet makes many economic arguments based on moral principles. It seemed convenient to take both sides. Often, he would build credibility on one idea only to claim to believe on an opposite one without clarifying what the connection between the dual positions was.
I was therefore turned off by his seeming lack of integrity and a deep emotional insecurity expressed through an obvious desire to be liked by everyone. I rather prefer personal character and a strong conviction, even when I may disagree with the ideas.
As someone with background in engineering and scientific research, I have very little tolerance for those who claim to have mathematical or scientific evidence but who have not applied sufficient rigor to their process. In such cases, I would be much happier if the claims were described as a thesis instead. For example, Mr. Krugman builds his position that government spending will get us out of the recession on a very small sample of correlated data. Just like the Quants who developed the mathematical models that could not see risk in housing derivatives because of only using recent data, Mr. Krugman did not address any of the historic evidence for or against his ideas from before the 1900's; no Rome or Spain. Against claims that promoting business activity would be equal or more effective than government spending, he offered thin arguments. He focused on a single aspect of business incentives: lower taxes. He completely ignored the universe of other possibilities. Moreover, he never described extreme historic examples of too much or no government spending during recessions.
I should probably mention that any true scientific test must include evaluations of opposite or inverse scenarios. Here again, he omitted describing how government spending by the USSR's leadership failed to lift the union's economic collapse during the eighties. A sound evaluation would had then compared the USSR's investments during the 80's with that of China's during the last decade. It would had served as a good variable-canceling pair since both were centrally managed. In such case, the difference was that China promoted private business activity while the USSR did not.
There was one great concept that Mr. Krugman offered in his book; the idea of a Liquidity Trap. A Liquidity Trap happens when additional injections of capital into the financial markets by central banks betray traditional expectations by failing to stimulate the economy. This seems to only take place during deep recessions. It is clear from the way that this phenomenon is defined that it is happening right now and that it offers a better explanation than those from the many economists who have failed to predict results since 2009.
Launch Paul Krugman
Unfortunately, there is no explanation of how a Liquidity Trap transitions back to normal under the weight of so much stimulus. A graph with an approximation of the slope would have been helpful. We are thus left with the possibility that high economic stimulus would continue to work until the moment it doesn't. In other words, the graph would show an elbow with a sudden change from deflation to utter inflation. Yes, Mr. Krugman opposes the idea that there would be any inflation at all during the Liquidity Trap, but what he does not address is what happens when such Liquidity Trap ends. He seems to take the position that the graph would show a gradual change in slope; yet he fails to provide evidence behind such conclusion.
On the other hand, the idea of a Liquidity Trap could just as well support the ideas put forth by Edward Conard in Unintended Consequences. Mr. Conard describes how capital can act in either of two fashions: risk-averse or patient. The idea that excess risk-adverse capital is inappropriate when trying to fundamentally rebuild the economy could easily fit the concept of a Liquidity Trap if the excess liquidity happens to be risk adverse. It would also contradict Krugman's suggestion that investment by governments is the only alternative; lowering economic risk expectations could promote deployment of patient capital by business. Even Mr. Krugman had a hard time arguing in his book that government investments were effective enough to merit consideration. He had to rely on correlations; something that earlier he discredited.
In a nut shell, if you do read the book, focus on the concept of Liquidity Trap. Do let me warn you, though, that the road there is paved with lots of religious rhetoric. So you may better spend your time and money studying the concept of Liquidity Trap through other sources. On my part, I was so frustrated with the cumbaya that I almost dropped the book right in the middle of reading it. In my opinion, it could have been better written as a brochure on the concept of Liquidity Trap rather than a book on Krugman's religious beliefs on economics.

Book Title: End This Depression Now! 
Author: Paul Krugman
Publisher: W. W. Norton & Company
ISBN: 978-0393345087