The Big Picture

MIB, Ron Williams, Aetna CEO

This week, we speak with Ron Williams, former CEO of Aetna. He joined the company when it was not doing well, and turned it around, making it profitable, eventually selling the firm to CVS. He is the author of Learning to Lead: The Journey to Leading Yourself, Leading Others, and Leading an Organization.

Williams describes his experiences at Control Data, which 70,000 people to a 3 person start up to Blue Cross of California at about 5,000 people. But he notes that it is not the size but the corporate culture that is most important. He explains how Blue Cross would hold dinners for senior executives, bringing in former CEOs to explain their experiences insights. Williams says these evenings helped him develop the skills he needed to become a CEO.

When he took over as CEO of Aetna, he started a listening tour of the company to speak with various employees. When an employee doctor asked why anyone should believe him — he was the 5th CEO making the case — it was the start of an honest but painful turnaround that helped save the company. “Buy-ins from all constituencies” was the key to any success in William’s experience.  The company eventually is named Fortune’s most admired health care company 3 years in a row.

In his book, Learning to Lead, Williams also describes via Peter Drucker that you must lead yourself before you can lead others. This includes teaching yourself the skills in team building, transitional change, and communication before you can lead an organization.

His favorite books are here; A transcript of our conversation will be available here.

You can stream/download the full conversation, including the podcast extras on Apple iTunes, Overcast, SpotifyGoogle Podcasts, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.

Next week, we speak Jay Bowen of Bowen, Hanes. They hav been the sole manager of the Tampa Firefighters’ and Police Officers’ Pension Fund over the last 44 years, and have managed to significantly outperform the markets during that period. The “Tampa Fund” has become shorthand for a simpler, cheaper and more effective way of managing capital in the public pension space.

 

 

 

 

 

Ron Williams authored book

https://www.amazon.com/exec/obidos/ASIN/1626346224/thebigpictu09-20

 

Ron Williams favorite books

https://www.amazon.com/exec/obidos/ASIN/1476795924/thebigpictu09-20

 

https://www.amazon.com/exec/obidos/ASIN/0066620996/thebigpictu09-20

 

https://www.amazon.com/exec/obidos/ASIN/142212312X/thebigpictu09-20

 

https://www.amazon.com/exec/obidos/ASIN/0060833459/thebigpictu09-20

 

 

https://www.amazon.com/exec/obidos/ASIN/0307593967/thebigpictu09-20

 

 

And Herbie Hancock album discussed

https://www.amazon.com/exec/obidos/ASIN/B000UVLK1M/thebigpictu09-20

 

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10 Weekend Reads

The weekend is here! Pour yourself a mug of Danish blend coffee, grab a seat o a pool float, and get ready for our longer form weekend reads:

• The month a shadow fell on Trump’s economy: A chaotic, contradictory response to a slowdown (Washington Post)
• The machine always wins: what drives our addiction to social media (Guardian)
• The Financialization of the American Elite (American Affairs Journal)
• Battle of the Bubbles: LaCroix Won the Bubble Battle, But It’s Losing the Sparkling Water War (Bloomberg Businessweek)
• The quantum revolution is coming, and Chinese scientists are at the forefront (Washington Post)
• The Collapse Of A Hospital Empire — And Towns Left In The Wreckage (Kaiser Health News)
• Is Big Soda winning the soft drink wars? (Politico) see also The Barbaric History of Sugar in America: The sugar that saturates the American diet has a barbaric history as the ‘white gold’ that fueled slavery. (New York Times)
• Inside the search for Amelia Earhart’s airplane: Many attempts have been made to discover the famed aviator’s fate, but never with the technological tools at Robert Ballard’s disposal. (National Geographic)
• The California coast is disappearing under the rising sea. Our choices are grim (Los Angeles Times)
• Welcome to Cleveland, where the Browns are true contenders (Sports Illustrated)

Be sure to check out our Masters in Business interview this weekend with Ron Williams, former CEO of health insurance giant Aetna and author of Learning to Lead: The Journey to Leading Yourself, Leading Others, and Leading an Organization.

 

Economic Anxiety Among Voters Is a Sign of Vulnerability for Trump

Source: New York Times

 

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Succinct Summations of Week’s Events 8.23.19

Succinct Summations for the week ending August 23rd 2019

Positives:

1. FOMC meeting in Jackson Hole seems to be progressing well
2. Index of leading economic indicators rose 0.5% in August, above the expected 0.2%
3. E-Commerce retail sales rose 4.2% q/o/q, higher than the previous increase of 3.6%.
4. Existing home sales came in at 5.420M for July, above the expected 5.385M.
5. Same store sales rose 4.9% w/o/w, higher than the previous increase of 4.4%.

Negatives:

1. More trade war idiocy sends Markets lower for 4th consecutive week
2. Bond yields plummet on recession fears;
3. Home mortgage apps fell 4.0% w/o/w, lower than the previous increase of 2.0%.
4. Kansas City Fed Mfg Index fell 5 points m/o/m from -1 to -6.
5. PMI Composite FLASH shows 50.9 for August, below the expected 51.9.

Thanks, Matt

 

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Overstock Saga Ends With a Whimper . . .

I never went looking for a fight with Overstock. Its not what I cover, and its weird collection of oddball employees, sycophants and various, assorted asshats holds no lure for me.

In the mid aughts, I was writing about real estate and derivatives and (de)regulation and silly investor errors. Eventually, I began documenting the fallout from financial crisis, and those writings morphed into a book. I would end up short Lehman Brothers, AIG, CIT and others as it all fell apart. I happily debated the legitimate issue of the role of short sellers in the marketplace (see this and this).

I was not that interested in writing about specific companies: first, it creates a compliance headache for me, and second, I have little interest in the minutia or day-to-day operational issues of companies. The blog is called the Big Picture for a reason.

Besides, OSTK was not especially relevant — a 3rd tier online retailer operating in the shadows of giants like Amazon, eBay, Walmart, Etsy, etc. They did less business online than Sears, for crying out loud.

But publicly-traded companies must expect some degree of scrutiny from financial journalists and analysts that do cover them, including writing about their execution and performance. That this even needs to be stated warns you that something strange is afoot in Utah. My writings on Overstock are listed below, but given I have written over 40,000 posts (1351 on Behavioral finance/Psychology alone), the < dozen or so writings of mine on this crew hardly amounted too much at all.

The pithiest, pissiest thing I said about Overstock was this:

“Overstock shareholders must be 1st rate fools happy to own a 2nd rate internet retailer managed by a 3rd rate CEO whose 4th quarter numbers were awful (400-bps gross margin miss and a 100% negative variance on EPS?), and for the 5th consecutive Q missed the prior sunny forecasts; we can expect to be missed for a 6th time in May.”

I was a minor voice in a chorus that included Herb Greenberg, Bethany McLean, Gary Weiss, Jeff Matthews, Sam Antar and many others.

As best as I can figure, that was enough to get me dragged into the $OSTK’s self-declared war on what they described as naked short-selling. Some of us figured out that this all was a giant misdirection to distract from a bizarre combination SEC investigations and violations, fraudulent accounting, frequent restatements, losing libel suits, including this scathing judicial decision, and even criminal activity. To say nothing of Overstock being simply a mediocre company.

What stands out — what stood out in real time as it happened — was sheer the idiocy of the behavior of the CEO of a public company. These were in pre-Trump days, and we had not yet seen this Trumpian form of distraction via outrage, insanity and misdirection. It was a foreshadowing of the present era of politics.

I have a thick enough skin, so I ignored the attacks on me — until Overstock thought it was a good idea to create an enemies list, and engage in the legally dubious practice of “pretexting” the friends and relatives as a way to track, harass and threaten anyone who had the temerity to either cover or criticize Overstock, or who (legally) sold stocks short.

When professional creep and (now) convicted felon Judd Bagely pre-trexted my 14 year old niece, that was my red line. I said he was a pederast, on radio and tv, called for a boycott of Overstock, and dared him to sue me in court. (He did not). Gary Weiss recounts his criminal history with the nutty company and the illegal acts it participated in here.

Thus, it ends not with a bang, but with a whimper. Overstock CEO Patrick Byrne resigns, says he is heading to South America, to which I say good riddance to him and to the entire Overstock saga.

 

 

 

Previously:

Is Overstock Behind Hedge Fund Testimony? (June 29, 2006)

Overstock.com (February 16, 2007)

DeepCapture.com Scraping Facebook Friends (December 9, 2009)

Boycott Overstock.com December 14, 2009  (Street.com version)

Is Patrick Byrne America’s Nastiest Dumbest CEO? (January 19, 2010)

Overstock.com to Restate Earnings (February 4, 2010)

Overstock.com: We need even more time to file last year’s 10k (March 16, 2010)

Dumb Headline of the Day: Associated Press on OSTK (April 6, 2010)

More Overstock Pretexting? (May 5, 2010)

 

 

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10 Friday AM Reads

My end of week morning train reads:

• What a Yield-Curve Inversion Really Says About the U.S. Economy (Bloomberg Businessweek)
• Taylor Swift is smart enough to not let her shows sell out (Quartz) see also Taylor Swift hits high note in battle against ticket touts (Financial Times)
• Manufacturers Want to Quit China for Vietnam. They’re Finding It Impossible. (Wall Street Journal)
• A President at War With His Fed Chief, 5 Decades Before Trump (New York Times)
• Remainers can no longer take yes for an answer (Sky News)
• It Is Criminal That We Aren’t Borrowing Trillions to Fix the Country Right Now (Slate)
• How Amazon and Silicon Valley Seduced the Pentagon (ProPublica)
• A crack in Trump’s ‘poorly educated’ base? (Washington Postsee also Anthony Scaramucci and the 9 biggest 180s on Trump, ranked (Washington Post)
• Why Is Joe Rogan So Popular? (The Atlantic)
• His bat handle says what?! 10 of the most hilarious and unforgettable baseball cards (ESPN)

Be sure to check out our Masters in Business interview this weekend with Ron Williams, former CEO of health insurance giant Aetna and author of Learning to Lead: The Journey to Leading Yourself, Leading Others, and Leading an Organization.

 

How Are U.S. Stocks Doing? The Answer Comes Down to Size

Source: Dave Wilson

 

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1958 Ferrari 250 GT LWB California Spider by Scaglietti

What could be more lovely on a summer’s day?

A V-12 engine, 2 valves per cylinder, 3 Weber carburetors, mated to a 4-speed manual transmission, making 240HP in a light (2,646 pound) spider equals a fun, fast ride.

The design by Pininfarina is one of the most spectacular ever. Gorgeous from every angle, the covered headlights, front grill and especially side shark gills, is simply spectacular. The dashboard is especially lovely, very functional, well organized and workman-like.

It is a car near the top of my list of favorite cars.

 


Source: RM Sotheby’s

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The Hidden Tribes of America

In the process of assembling the morning reads (sign up here!), I come across lots of really interesting things. A perfect example is these sets of charts via More in Common (hat tip Brent X Donnelly).

These show the “exhausted political majority” of America, driven to annoyed distraction by the extreme partisan wings of the country’s outlier political groups — 25% on the far right and the 8% on the far left — are really vexing to the 67% (literally 2/3rds) of the rest of the country :

Source: More in Common

 

Here is another example: How the left and right see each — note the perception gap of each:

 

 

 

Progressive Activists’ estimates of Republicans’ views
The table shows, for each issue, what percent of Republicans Progressive Activists think hold each view, and what percent actually do

 

Devoted Conservatives’ estimates of Democrats’ views
The table shows, for each issue, what percent of Democrats Devoted Conservatives think hold each view, and what percent actually do

Source: More in Common

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The Illusion of Explanatory Depth

I am utterly fascinated by the concept of metacognition — how we evaluate and measure our own skills and abilities. This is the main idea underlying the Dunning-Kruger curve, the tendency for those with lower levels of  competency to wildly over-estimate their own skill levels.

This impacts everything and everyone, from policymakers to entrepreneurs to most especially, investors.

There is a related concept I referenced earlier this month called “The Illusion of Explanatory Depth.” It is the intriguing idea that we think we actually know much more about things — and can easily explain them — when in fact we do not.

We know how to get the information; we know who to call to fix a toilet when it breaks — but (most of us) do not ourselves actually know how these things work or (and this is the key) have the ability to explain them.

Stephen Dubner discussed the idea of Illusion of Explanatory Depth in a recent episode of Freakonomics: “Think of something you have a really strong opinion about. . . Now think about why you have such a strong opinion. How well do you think could you explain your position?”

If you want an even simpler example, could you explain how a toilet or zipper or ballpoint pen or bicycles work? Can you describe how pencils are manufactured?  You probably think you understand these things, but once you try to explain the specifics, you might find you falter and understand less than you previously imagined.

Here is professor Steven SLOMAN, a cognitive psychologist at Brown University:

If you’re forced to give an explanation, you have to really understand, and you have to confront the fact that you might not understand. Whereas when you give reasons, then you do what people do around the Thanksgiving dinner table. They talk about their feelings about it, what they like, what they don’t like.”

This is why Nobel winning physicist Richard Feynman suggested “If you want to master something, teach it.” Dr. Mortimer J. Adler, founder of the Institute for Philosophical Research, was even more blunt: “The person who says he knows what he thinks but cannot express it usually does not know what he thinks.”

The illusion allows people to believe they know more than they do. I suspect the reason for this can be described as being “Knowledge Adjacent.” Feynman also observed “I learned very early the difference between knowing the name of something and knowing something.”

Consider how often we do not know the answer to specific detailed questions — for example about how things like zippers or ballpoint pens work, but we do know how to find those answers. Knowledge Adjacency seems to be is a misleading form as a form of intelligence and understanding. We confuse what our community collectively knows with our own individual understanding.

This leads to a form of misperception, that creates a false belief that we know more than they actually do.

Now apply this to social media and the internet.

We are surrounded by other people, and dependent upon their abilities and expertise. This is true whether it is an Uber driver or a medical doctor or home builder. We enjoy massive technological advancements, not because we can build an iPhone or an index the internet ourselves, but because we know how to Google and where to buy a phone.

Knowledge is distributed widely in our society. We err when we believe this is our own understanding.

 

 

 

Sources:
Unskilled and unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments.
Justin Kruger and David Dunning, Cornell University
Journal of Personality and Social Psychology, 77(6), 1121-1134  (December 1999)
https://www.ncbi.nlm.nih.gov/pubmed/10626367

How to Change Your Mind (Ep. 379)
Stephen J. Dubner
Freakonomics, May 29, 2019
freakonomics.com/podcast/change-your-mind/

 

Previously:
How to Change Your Mind (August 7, 2019)

 

 

More of the Dubner/Sloman discussion after the jump…

 

As you can see, there are a lot of reasons why a given person might be reluctant to change their mind about a given thing. Ego, selective memory, overconfidence, the cost of losing family or friends. But let’s say you remain committed to changing minds — your own or someone else’s. How do you get that done? The secret may lie not in a grand theoretical framework, but in small, mundane objects:

SLOMAN: Toilets and zippers and ballpoint pens.

*     *     *

Think of something you have a really strong opinion about. Maybe the best ways to address climate change. The perils of income inequality. How to balance privacy and security. Now think about why you have such a strong opinion. How well do you think could you explain your position?

Steven SLOMAN: If you’re forced to give an explanation, you have to really understand, and you have to confront the fact that you might not understand. Whereas when you give reasons, then you do what people do around the Thanksgiving dinner table. They talk about their feelings about it, what they like, what they don’t like.

That’s Steven Sloman.

SLOMAN: I’m a professor of cognitive, linguistic, and psychological sciences at Brown University.

DUBNER: And that means, in a nutshell, that you try to understand what?

SLOMAN: I try to understand how people think.

DUBNER: Easy question first: How do you get someone to change their mind?

SLOMAN: Well, first of all, there’s no silver bullet. It’s really hard. But if you’re going to try, the first thing you should do is try to get them to change their own minds. And you do that by simply asking them to assume your perspective and explain why you might be right. If you can get people to step outside themselves and think about the issue — not even necessarily from your perspective, but from an objective perspective, from one that is detached from their own interests — people learn a lot. So, given how hard it is for people to assume other people’s perspectives, you can see why I started my answer by saying it’s very hard.

One experiment Sloman has done is asking people to explain — not reason, as he pointed out, but to actually explain, at the nuts-and-bolts level — how something works.

SLOMAN: People don’t really like to engage in the kind of mechanistic analysis required for a causal explanation.

That’s true not only for big, thorny issues like climate change or income inequality, but even for things like:

SLOMAN: Toilets and zippers and ballpoint pens.

Unless you are a plumber or you make zippers or ballpoint pens, you probably can’t explain these very well. Even though, before you were asked the question, you would have thought you could. This gap, between what you know and what you think you know is called, naturally, the “illusion of explanatory depth.”

SLOMAN: So, the illusion of explanatory depth was first demonstrated by a couple of psychologists named Rozenblit and Keil. And they asked people how well they understood how these things worked, and people gave a number between 1 and 7. And then they said, “Okay, how does it work? Explain in as much detail as you can how it works.” And people struggled and struggled and realized they couldn’t. And so when they were again asked how well they understood, their judgments tended to be lower. In other words, people themselves admitted that they had been living in this illusion, that they understood how these things worked, when, in fact, they don’t.

Where does this illusion come from?

SLOMAN: We think the source of the illusion is that people fail to distinguish what they know from what others know. We’re constantly depending on other people, and the actual processing that goes on is distributed among people in our community.

In other words, someone knows how a toilet works: the plumber. And you know the plumber; or, even if you don’t know the plumber, you know how to find a plumber.

SLOMAN: It’s as if the sense of understanding is contagious. When other people understand, you feel like you understand.

You can see how the illusion of explanatory depth could be helpful in some scenarios — you don’t need to know everything for yourself, as long as you know someone who knows someone who knows something. But you could also imagine scenarios in which the illusion could be problematic.

SLOMAN: So we’ve shown that that’s also true in the political domain.

Sloman and his collaborator Philip Fernbach basically repeated the Rozenblit and Keil experiment, but instead of toilets and zippers, they asked people about climate change and gun control.

SLOMAN: We gave people political policies. We said, “How well do you understand them?” and “Please explain them.”

Unsurprisingly, most people were not able to explain climate-change policies in much detail. But here’s what’s interesting. The level of confidence in their understanding of issues, which participants were asked to report at the start of the experiment, was drastically reduced after they tried, and failed, to demonstrate their understanding.

SLOMAN: In other words, asking people to explain depolarized the group.

Now, was this a case of simply slowing down and thinking the issue through? Could it be that we’re often inflexible in our thinking simply because we come to conclusions too quickly? Apparently not.

SLOMAN: If instead of saying, “Explain how the policy works,” if what we said to them was, “Give us all the reasons you have for your view on this policy,” then we didn’t get that effect at all. That didn’t reduce people’s sense of understanding; it didn’t reduce their hubris.

DUBNER: The ability to change your mind — would you say that’s really important as a human?

SLOMAN: I see the mind as something that’s shared with other people. I think the mind is actually something that exists within a community and not within a skull. And so, when you’re changing your mind you’re doing one of two things: you’re either dissociating yourself from your community — and that’s really hard and not necessarily good for you — or you have to change the mind of the entire community. And is that important? Well, the closer we are to truth, the more likely we are to succeed as individuals, as a species. But it’s hard.

DUBNER: Do you think that most of us hold the beliefs that we do because the people around us hold those beliefs, or do you think we’re more likely to assemble people around us based on the beliefs that they and we hold?

SLOMAN: The former is more often true. That is, we believe what we do because the people around us believe what they do. This is the way humanity evolved. We depend on other people. And it’s not simply a matter of getting us to think more independently. I actually think that this is one of the major problems with the kinds of solutions people are talking about today for our current political problems. I don’t think the solution is give people the information they need.

Matthew JACKSON: More information can be good if it’s very well-filtered and curated, but that’s not easy to do in an unbiased way.

 

 

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10 Thursday AM Reads

My morning train reads:

• Powell Faces Challenge Defining Doctrine Around When to Cut Rates (WSJ) but see Economists Are Bad At Predicting Recessions (fivethirtyeight)
• Ask active fund managers to explain how they’ll deliver the value they purport to add after fees. (Morningstar)
• Byron Wien: Plenty to Worry About, But Not Much for Investors to Do (RCM)
• Popeyes Chicken Sandwich Is an Economic Indicator (Bloomberg)
• Feeding the 11 billion: Population growth and environmental catastrophe mean that the very future of humankind is threatened. In the Netherlands, a group of scientists is working on an urgent challenge (Wired)
• Cannabis restaurants are coming to California, with ‘budtenders’ and ‘flower’ service (Washington Post)
• Donald Trump’s Economic Anxiety (The Atlantic)
• You Should Definitely Track Your Loved Ones’ Phones. Actually Maybe Not. (Wall Street Journal)
• Earth’s last magnetic pole flip took 22,000 years to complete (Syfy Wire)
• ‘You’re the guy with the ball to the crotch’: The inside story behind the funniest baseball card ever made. (ESPN)

Be sure to check out our Masters in Business interview this weekend with Ron Williams, former CEO of health insurance giant Aetna and author of Learning to Lead: The Journey to Leading Yourself, Leading Others, and Leading an Organization.

 

The Hottest Thing in Food Is Made of Peas, Soy, and Mung Beans

Source: Bloomberg Businessweek

 

 

 

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CEO of Israeli Spyware-Maker NSO on Fighting Terror, Khashoggi Murder, and Saudi Arabia

This was utterly surprising to me; I assumed this was possible, but not nearly as specific and detailed as this reveals, via 60 Minutes:

“Tonight we’ll take you inside the growing, shadowy global market of cyber-espionage. We looked specifically at a controversial Israeli company called the NSO Group, valued at nearly a billion dollars, that says it developed a hacking tool that can break into just about any smartphone on earth.

As we first reported in March, NSO licenses this software, called Pegasus, to intelligence and law enforcement agencies worldwide, so they can infiltrate the encrypted phones and apps of criminals and terrorists. Problem is, this same tool can also be deployed by a government to crush dissent. And so it is that Pegasus has been linked to human rights abuses, unethical surveillance, and even to the notoriously brutal murder of the Saudi Arabian critic Jamal Khashoggi.

Headquartered in the Israeli city of Herzliya, NSO Group operates in strict secrecy. But co-founder and CEO, Shalev Hulio, has been forced out of the shadows and not into a good light, accused of selling Pegasus to Saudi Arabia despite its abysmal record on human rights.” 

 

Click for video.

Source: CBS

 

 

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Pegasus: Hack Any Cell Phone

Astounding:

Tonight we’ll take you inside the growing, shadowy global market of cyber-espionage. We looked specifically at a controversial Israeli company called the NSO Group, valued at nearly a billion dollars, that says it developed a hacking tool that can break into just about any smartphone on earth.

As we first reported in March, NSO licenses this software, called Pegasus, to intelligence and law enforcement agencies worldwide, so they can infiltrate the encrypted phones and apps of criminals and terrorists. Problem is, this same tool can also be deployed by a government to crush dissent. And so it is that Pegasus has been linked to human rights abuses, unethical surveillance, and even to the notoriously brutal murder of the Saudi Arabian critic Jamal Khashoggi.

Headquartered in the Israeli city of Herzliya, NSO Group operates in strict secrecy. But co-founder and CEO, Shalev Hulio, has been forced out of the shadows and not into a good light, accused of selling Pegasus to Saudi Arabia despite its abysmal record on human rights.

 

CEO of Israeli spyware-maker NSO on fighting terror, Khashoggi murder, and Saudi Arabia
VIDEO EMBED
Source: 60 Minutes

 

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BBRG: Stakeholder Capitalism Fails If It’s Just Talk

Stakeholder Capitalism Fails If It’s Just Talk
Companies will have to prove they’re committed to goals beyond maximizing shareholder value.
Bloomberg, August 21, 2019

 

 

 

For 47 years, the Business Roundtable has lobbied on behalf of corporate America. Much of that time, it maintained a fiction — that the sole purpose of a corporation was to maximize profits on behalf of shareholders. This philosophy has been under assault for several years now, and this week the Business Roundtable announced it wants to put it to rest.In a widely circulated memo, the 200-member organization reversed itself, writing that “shareholder primacy” is no longer the sole purpose of a corporation. Instead, corporations must include a commitment to “all stakeholders,” which includes customers, employees, suppliers and local communities.

Some kudos are in order for JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, and chairman of the Business Roundtable, for driving these changes. He has been discussing the need for a more inclusive form of capitalism, both in public speeches and in his letters to shareholders, for some time.

But turning this aircraft carrier around won’t be easy, in large part because of the group’s own history. Indeed, the Roundtable has spent most of the past four decades advocating against the interests of those exact stakeholders. To cite some of the more notable examples . . .

 

Continues here

 

~~~

I originally published this at Bloomberg, August 21, 2019. All of my Bloomberg columns can be found here and here

 

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10 Wednesday AM Reads

My midweek morning train reads:

• Buying Municipal Bonds for Tax-Free Income (Penta)
• Big-Box Rebound: How Target Packaged a Turnaround (Fortune)
• The Trump vs. Obama economy — in 15 charts (Washington Post)
• The WeWork IPO. (Stratechery)
• Automattic CEO Matt Mullenweg on what’s next for Tumblr (Verge)
• Startups Are Safeguarding Real Estate Against Schemers and Scammers: Wire-transfer fraud cost $150 million last year (Wall Street Journal)
• What if aging weren’t inevitable, but a curable disease? (MIT Tech)
• How Conan O’Brien and Other Top Hosts Are Tapping Into the Podcast Revolution (Variety)
• Fox News: Trump in big trouble for 2020. Political and economic warning signs there for all to see (Fox News)
• Do You Understand the N.B.A. Salary Cap? Imagine Enforcing It (New York Times)

What are you reading? Tell me here with #Reads.

 

A Few Industries Are Behind Rising Corporate Leverage

Source: Wall Street Journal

 

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Data Behind Fear of Yield Curve Inversions


Source: FRED Blog

 

FRED can help us make sense of the recent discussions about an inverted yield curve. But first, some definitions to get us started: The yield curve is the difference (or spread) between the yield on the 10-year Treasury bond and the yield on a shorter-term Treasury bond—for example, the 3-month or the 1-year. The yield curve is flattening if short-term rates are increasing relative to long-term rates, which is what’s been happening lately. The yield curve is inverted if short-term rates exceed long-term rates, making the spread negative. Inverted yield curves have historically been reliable predictors of impending recessions, which is why people are paying so much attention to the yield curve now.

This FRED graph effectively illustrates that every recession since 1957 has been preceded by a yield curve inversion. (Note that the lag between the inversion and a recession varies: With the 10-year and 1-year yields, the lag is between 8 and 19 months, with an average of about 13 months.) A common interpretation is that the yield curve measures investors’ expectations of economic growth in the current period compared with economic growth in the future. According to this interpretation, a yield curve inversion implies that investors expect current economic growth to exceed future economic growth, indicating a recession is likely.

Of course, some question the strength of the relationship between U.S. yield curves and recessions. The graph shows that, in 1965, the yield curve inverted but a recession didn’t closely follow. So, although yield curve inversions are good predictors of recessions, they’re not perfectly correlated and the exact relationship isn’t completely understood.

In December 2013, the spread between long and short rates was very close to 3 percent. In September 2018, the spread was 0.44 percent for the 10-year and 1-year yields and 0.87 percent for the 10-year and 3-month yields. If the yield curve were to continue its downward trend from its previous high in December 2013, the yield curve would invert in August 2019 (using the 10-year and 1-year yields). Historically, this would predict a recession sometime in 2020. As the yield curve flattens, we can expect economists and financial markets will closely monitor its level and make many predictions about whether and when a recession will follow.

How this graph was created: On the FRED homepage under the search box, use the “Browse data by…” option to search under “Category.” From there, select “Interest Rates” under “Money, Banking, & Finance.” Select “Treasury Constant Maturity.” Find and select the monthly “10-Year Treasury Constant Maturity Rate” series. From the “Edit Graph” menu, use the “Customize data” section to search for “1-Year Treasury Constant Maturity Rate” and select the option with “Monthly, Percent, Not Seasonally Adjusted” and add to the graph. The latter series is labeled as series “b.” Under “Customize data,” type a-b into “Formula” box and select “Apply.” Now select “Add Line” and follow this same process using “3-Month Treasury Bill: Secondary Market Rate” as the “b” series.

Suggested by Matthew Famiglietti and Carlos Garriga.

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Corporate America & the Rules of Capitalism

 

I jumped on MSNBC with Stephanie Ruhle to discuss the possibility of recession and the changes in the Business Roundtable views of “Shareholder Value.”

CEOs say corporations need to change the rules of capitalism
click for video

 

The CEOs of nearly two hundred companies say it’s not just about shareholders anymore, it’s about stakeholders. Risk Reversal Advisors Principal Dan Nathan, Chairman of Ritholtz Wealth Management, Barry Ritholtz, and “Kochland” author Christopher Leonard join Stephanie Ruhle to discuss how corporate America is trying to change the rules of capitalism and whether we can believe them.

CEOs say corporations need to change the rules of capitalism

Source: MSNBC

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Here Comes the #TrumpRecession

The #TrumpRecession Label Is Going to Stick
Presidents usually get too much blame for economic slowdowns. This time is different.
Bloomberg, August 15, 2019

 

 

 

Spend a decade or two writing about financial markets, and a few themes will begin to emerge. These are:

No. 1. Politics and investing do not mix;

No. 2. Presidents usually get too much credit when things go right and too much blame when things go wrong;

No. 3. Most of the time, markets don’t care about politics. But the president and presidential appointees can and do have a major impact on the economy, monetary policy, the dollar, trade relations and alliances;

No. 4. History is replete with examples of presidents messing up and stumbling into wars, aggravating recessions and market crashes, even inflicting long-term structural damage on the nation.

Points 3 and 4 deserve extra consideration, since they seem most applicable to the current state of economic affairs. In other words, the broader economy, the market, and any potential recession are now firmly attached to, and under the influence of, President Donald Trump.

Trump came into office in the midst of a robust recovery from the financial crisis, with an economy operating at close to full strength. Between 2010 and January 2017, when Trump was sworn into office, the economy created 16.1 million jobs (5 million have been added under Trump) and the unemployment rate had been cut by more than half, from 10% to 4.7% (it has declined 1% under Trump). As of June 2009, when the recession ended, the expansion had been underway for 91 months. Perhaps the president’s most favored metric, the stock market, had already risen 236% from its March 2009 low.

In other words, Trump inherited an accelerating post-credit crisis recovery, and he only had to avoid disrupting those healthy — and improving — economic trends. What occurred instead is a litany of unforced errors and misguided decisions, many of them made by Trump political appointees. Let’s consider just two of the more consequential ones that are driving events:

• Peter Navarro, the architect of this president’s trade and tariff policies, particularly vis-à-vis China. Trade wars, despite what Trump said, are neither fun nor easy to win. Mainstream economists have been warning that Navarro was in over his head and that his unsound trade theories would cause economic problems. Indeed, the Navarro brand of protectionism has already had a number of damaging economic consequences, blunted for now only by the momentum of the economic boom Trump inherited. We are about to find out exactly how long that will last.

• Jerome Powell, an inflation hawk who Trump appointed as Federal Reserve chair. Unless you prefer high rates, this was an almost unaccountably foolish choice. Trump fired Janet Yellen as Fed chair, reportedly because he thought she was too short for the job, and after disparaging her management of monetary policy, saying she “should be ashamed of herself.” The irony is that Yellen was an inflation dove, who favored lower rates for longer as the economy was still recovering when Trump took office. That irony no doubt is lost on Trump as he rails against Powell and the higher rates he adopted — something Trump called for when Barack Obama was president and fighting the worst recession in three-quarters of a century.

But don’t blame Navarro or Powell; it’s not like they sold themselves as something other than what they are.

Making appointments merely to troll one’s predecessor is something less than smart. Expertise matters, as does the ability to vet your appointees. If the president today is unhappy with higher rates, well, he has only himself to blame. And if China is proving harder to wrestle with in trade negotiations, maybe the president shouldn’t have been so quick to pull out of the Trans-Pacific Partnership. That deal (remember how great the president is at deals?) would have lined up the U.S. and almost a dozen other nations as counterweights to China and its trade policies.

Actions have consequences, and the undeniable consequences of this president’s actions are rates that are higher today than they would otherwise have been and worldwide trade disruption.

To be sure, we can’t place all of the blame on Trump for the economic slowdowns in Europe and China, for the chaos of Brexit and other issues that predate his term in office. Much of the unsettled environment was already in place. He was just the spark in the gas-filled room.

My original thesis in 2016 was that investors who were blaming Trump for market volatility were being partisan and unobjective. To damage this stock market, Trump would have had to do a series of things that were ill-advised and counterproductive. As it turns, he has done just that. If a recession occurs in 2020 — and the current model of the Federal Reserve Bank of New York puts it at a 32% chance in the next 12 months — a good measure of the blame must go to this president.

Trump reveled in taking credit for the boom he inherited. If the U.S. goes into a contraction, he shouldn’t be surprised if the “Trump recession” label sticks.

 

~~~

I originally published this at Bloomberg, August 15, 2019. All of my Bloomberg columns can be found here and here

 

 

 

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10 Tuesday AM Reads

My Two-for-Tuesday morning train reads:

• In shocking reversal, Big Business puts the shareholder value myth in the grave (Los Angeles Times) see also America’s CEOs Seek a New Purpose for the Corporation (Fortune)
• An Appreciation for the Bull Market in Long-Term Bonds (A Wealth of Common Sense)
• Maybe it’s time for Larry Kudlow to stop making predictions (Washington Post) see also The Modern Kudlow To Standard English Translation Guide (The Big Picture)
• UPS Has Been Delivering Cargo in Self-Driving Trucks for Months And No One Knew (Gizmodo)
• Investors Are Seeking More Support for Private Equity Co-investments (Chief Investment Officer) see also Once-Unpopular Carbon Credits Emerge as One of the World’s Best Investments (Wall Street Journal)
• Why It’s Immigrants Who Pack Your Meat (The Atlantic)
• Matt Drudge Has Barely Changed Anything About The Drudge Report In The Last 20 Years. This Summer, He Upended Its Advertising Business. (Buzzfeed) but see Advertisers Blacklist News Stories Online (Wall Street Journal)
• Tumbler = Porn (Galloway)
• Conservative Joe Walsh: Trump Needs a Primary Challenge (New York Times) see also If This Fox News Poll Is Right . . .  (New York Magazine)
• The shows we’ve lived by: From classic sitcoms to ’80s excess, a timeline of the most influential homes on TV (Curbed)

Be sure to check out our Masters in Business interview this weekend with Josh Wolfe, co-founder and managing partner of Lux Capital. The venture firm was set up to support scientists and entrepreneurs who pursue unconventional solutions to the most challenging problems of our time.

 

Yield Inversions Are Hardly a Death Knell for U.S. Stocks

Source: Dave Wilson

 

Sign up for our reads-only mailing list here.

 

 

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Vanguard Has World’s 3 Largest Bond Funds


Source: Financial Times via @NateGeraci

 

 

Talk about burying the lede: In a longish Financial Times piece about Franklin Templeton’s star bond fund manager Michael Hasenstab, a graphic mentioned in passing some of the changes in bond fund league tables since 2014.

Over that period, Vanguard became the home of the world’s 3 largest bond funds, and 5 of the top 10 bond funds. (Hat tip to @NateGeraci who spotted this).

The top 3 bond funds by assets are Vanguard Total Bond Market (VBMFX), with $232 billion in assets; Total Bond Market II Index Fund Investor Shares (VTBIX) with $185 billion in assets; Total International Bond Index Fund (VTABX) with $135 billion in assets. Vanguard also has Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) with $70 billion in assets; Short-Term Investment-Grade Fund Investor Shares (VFSTX) with $60 billion in assets.

The other 5 funds in the top 10 include 2 PIMCO funds, a Met West, Franklin Templeton and an iShares fund.

The likely drivers of Vanguard’s gains are twofold: In general, investors have been migrating towards fee-based fiduciary advisors and away from commission based brokers. Practitioners who are also fiduciary advisors typically move investor holdings towards low cost, passive funds. Vanguard dominates the list of bond funds in this space. The combination of more passive investors (see all funds by assets) and more households moving towards fiduciary advisors are both accruing to more assets for Vanguard.

The “Vanguard Effect” — the company’s influence on other funds to lower their fees to be competitive — will likely to continue driving fees lower in the fixed income space, despite the modest yield.

 

 

Previous Related Discussions:

Vanguard Group

Active/Passive Management

Fiduciary Rule

 

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MIB: Venturing with Capital into Basic Sciences

Venture Capitalists seem to be focused mostly on software, apps, and technology. This dearth of entrepreneurship into the basic sciences created an opportunity that was capitalized on by Josh Wolfe and his partners at Lux Capital. The venture firm was set up to “support scientists and entrepreneurs who pursue counter-conventional solutions to the most vexing puzzles in physical and life sciences.”

In our wide-ranging Masters in Business conversation, Wolfe, a co-founder of Lux, discusses the process of investing in entrepreneurs in basic sciences. He notes it requires a mix of skill and luck, and a diverse thought-process, with a healthy dose of contrarian thinking.

One of Lux’s first investments epitomizes this: In an era of rising alternative energy investment such as solar, wind, biofuels, ethanol, batteries etc., Lux went a different direction. In the face of a green consensus, their variant perception was that nuclear energy was being neglected by the venture community. The biggest issue in the space was the processing and clean up waste products of the nuclear energy industry. Rather than joining the crowded consensus in clean and green alternatives, Lux invested in a high-tech solution to nuclear waste. The work required expertise in a variety of basic sciences, including materials, chemicals, physics, and vitrification. They formed a start-up to address the issue, naming it Kurion (after Marie Curie). Not many firms worked in this space, and when the Fukushima disaster occurred, Kurion played a huge role in the cleanup. It was eventually sold to French energy giant Veolia, returning a 100x on the initial investment.

Wolfe explains the advantages of locking up investor capital for 7-10 years, seeking a 3X return on invested monies. The assumption is that 1 or even 2 companies will return all of the initial capital (1X). The next 5 companies return will similarly generate that sort of 1X return; the next 15 – 20 investments should also return that (1X). All the remaining investments — often a majority — are assumed to most likely to show losses.

His favorite books are here; A transcript of our conversation is available here.

You can stream/download the full conversation, including the podcast extras on Apple iTunesBloombergSpotifyGoogle PodcastsOvercast, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.

Next week, we speak Jay Bowen of Bowen, Hanes. They have been the sole manager of the Tampa Firefighters’ and Police Officers’ Pension Fund over the last 44 years, outperforming the markets during that period.

 

 

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