Study in Contrasts

Last week I read two news stories in such stark contrast to each other that flummoxed me so much I almost blew a gasket thinking about the repercussions.

• Big Pay Packages Return to Wall Street
  Compensation on Track to Soar as Earnings Recover From Crisis; 'Like It's 2007 Again'
  (http://online.wsj.com/article/SB124649352055183157.html#mod%3Dtodays_us_money_and_investing%26project%3DBONUSES0907%26articleTabs%3Dinteractive)

• ADP Estimates U.S. Companies Cut Payrolls by 473,000
  http://www.bloomberg.com/apps/news?pid=20601087&sid=a5utvno88qDM)

OK, so the investment banks are now officially bank holding companies and are supposed to be levered considerably less than the dangerous 30:1 leverage ratios before the big crash. But just today a Barclay's analyst comes out and says that Goldman Sachs sees no limits on leverage and no reason to pull back on any of its business lines. That's a convenient line of thinking for a firm that now has access to the Fed's discount window and can effectively print money for themselves on the spread between short and long-term yields driven primarily by the administration's stimulus policies. Let's not forget the short-term rates have been artificially suppressed by government actions and long-term rates are reflecting concerns about inflation as a result of the same actions. The circularity of this is astounding.

Back in September when the conversion by the two remaining investment banks to bank holding companies was announced and there was financial blood all over the Street, the New York Times ran an article with the following:

"It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives. It effectively returns Wall Street to the way it was structured before Congress passed a law during the Great Depression separating investment banking from commercial banking, known as the Glass-Steagall Act."
(http://www.nytimes.com/2008/09/22/business/22bank.html)

Hmmmm....sounds like we've got a disconnect between what was supposed to happen and what is actually happening. Goldman's basically saying it's business as usual against a backdrop of worsening labor, housing and general economic conditions that's raising the spectre of a second stimulus package. When I think hard about this my mind hurts. The general population is getting kicked in the proverbial nuts over and over again while the Lords of Wall Street jump on the back of the government and stroll merrily unencumbered by the concerns of the common man. And as the year progresses and awareness of this grows, I sense we're in for a pretty significant populist uprising. All I really know though is this just ain't right.

Minimize Me

One of the most enjoyable documentaries I've ever seen was "Supersize Me," a 2004 film chronicling Morgan Spurlock's month-long McDonald's-only diet. The psychological and physical torment he experienced was as compelling to watch as it was revolting to contemplate. Here we had an otherwise healthy man destroying his body little by little over the course of a month. By the end it's clear if he continues on this path he would seriously endanger his life. As viewers we're thankful he's done with his misadventure by the end of the month.

Mr. Spurlock's artery-clogging journey parallels in some ways the American consumer's behavior during our most recent debt-fueled economic binge. During that time it seemed as though enough would never be enough for all but the most frugal among us. Immediate gratification was the preferred path since people could acquire anything and everything they wanted without really having to work for it. The only problem with that path was the non-trivial requirement to incur sizable and in many cases unsustainable debt loads to live the showcase lifestyle. Like Mr. Spurlock at the end of the movie, we are now dealing with the painful after effects of this binge and trying to figure out how to improve our financial diet and get healthy again.

A lot has been written about the 'paradox of thrift,' a primary policy conundrum being addressed by our current administration. That paradox is essentially this: what is in the best interests of people individually (higher savings and investment, less consumption) is not necessarily in the best interests of the country as a whole since consumer spending accounts for roughly 70% of total economic activity. Keeping our economy propped up when its citizens are already way overleveraged, unemployment is high and jobs are scarce is not unexpectedly proving to be a herculean task. Unfortunately much like the government after 9/11 that asked us to go out and shop to support the country, this administration has been employing equally spurious incentives geared toward goosing short-run consumption despite the potential adverse longer-term impacts.

Thankfully though, we're starting to see early signs of rationality and prudence creeping back into consumers' decisions as they attempt to define for themselves their own 'new normal.' A couple good examples:

• "A survey released this month by the National Association of Home Builders shows that the average home built during the first quarter of 2009 was 2,335 square feet, down from 2,629 square feet during the second quarter of 2008."
  (http://online.wsj.com/article/SB124630276617469437.html?mod=googlenews_wsj)

• "...the savings rate surged to 6.9 percent, the highest level since December 1993."
  (http://www.bloomberg.com/apps/news?pid=20601068&sid=an7UdA7Bo8xg)

It appears many are now waking up with a grueling hangover and coming to the realization that over-consumption is a costly and unhealthy habit. The perception that more material possessions translates to happiness may finally be over for some - at least until the memory of this whole episode fades. Many are learning to minimize, rather than supersize their lives as a natural response to economic pain. They have found that simplifying and downsizing - actions which unfortunately provide headwinds to the administration's short-term economic goals - lead to a better way of life. It will be quite interesting to observe the future policy tensions created by such actions of rational self-interest.

Play the Ball Where it Lies

The US Open golf tournament that concluded today provided a reminder of one of the many important life lessons that are part of the game. At Bethpage Black this weekend, golfers had to contend with not just the extraordinary difficulty of the course and the pressure that comes with playing in a major tournament, but rainy weather conditions that consistenly stymied their rhythm and momentum. This was a tournament that ended on Monday not because of an 18-hole playoff but because of multiple weather delays. In the end, a talented but lesser-known player named Lucas Glover prevailed over such legendary names as Phil Mickelson, David Duval and Tiger Woods.

What's interesting about this is that the simple luck of the draw allowed Glover to play the majority of his tournament in good scoring conditions while many other players, including Tiger Woods, played in conditions much worse. Though golfers would confess their frustration that the conditions differed so much among the players (and frankly contributed to the end result), none would gripe about his fate or blame his result on this. This is because in golf, players know they have to play the ball where it lies. You hit it into the tall weeds, you deal with the circumstances and play it from there. Golfers are trained at putting the last shot behind them and focusing simply on the next shot ahead.

A teacher of mine, in response to my griping about some result, once told me "it's not a question of fairness." His glib retort to me was eloquent in its simplicity. He essentially told me life is not fair so I'd better deal with it. Over the years I have come to realize this was one of the most important pieces of advice I'd received. It's easy to get bogged down in self pity about things, particularly when life throws us one of its inevitable curveballs. But the ability to take that circumstance, accept it and move on with purpose is the only way to turn it around. Obsessing about the past does nothing but impede our future.

Many here in the US get bummed because they don't have enough money to buy that fancy new car or take that luxurious vacation abroad. Meanwhile, almost half the world (over 3 billion people) lives on less than USD $2.50 per day (source: http://www.globalissues.org/article/26/poverty-facts-and-stats) and roughly 80% of the world lives on less than USD $10 per day. The magnitude of these numbers are astounding:

They don't play much golf in places like Zambia and the Gaza Strip (where over 80% live below the poverty line), as their concerns are typically more about survival than the neverending pursuit of increasing comfort. I would venture to say that if more people here in the US thought about where their own ball really lies, they'd realize it's been lifted up, cleaned and placed for them right in the middle of the fairway, 100 yards from the pin. Just a simple wedge will get them to the hole. The lion's share of people on this earth will never even get to take that shot.

On Individualism

I was reminded this past weekend of the importance of collaboration while watching the NBA Finals. It was particularly instructive to hear Kobe Bryant's remarks about winning after the final game. He basically said every really good team has a dynamic duo or key group of players, and that no championship can be won on the back of just one player. When I heard this, I thought back to the Kobe who, as a rookie, tried to take it upon himself to win a key playoff game against the Utah Jazz and threw up three airballs. The Lakers season was over after that first-round loss in 1997.

This is not to criticize Kobe; in fact quite the contrary. He showed rare moxie and poise at an incredibly early age and displayed the kind of unrelenting self-confidence and fearlessness that allowed him to take shots most others would not dare even contemplate. But in this most recent season, he seemed to evolve into a much more mature and seasoned leader - which is saying something given his previous remarkable achievements.

Much like Michael Jordan before him, both of these 'best-ever' talents took some time before they finally realized that they would have to make the rest of their team better to achieve greatness. Kobe over the years has come to realize that true glory comes from team championships, not individual accomplishments. And, those championships are won not by a single star, but by a group of team players who rise above the competition with their collective effort.

This got me thinking about the difference between individualism and collectivism and how different cultures approach teamwork and define success. Recently, a co-worker and friend from Asia sent the following in an email to encourage the team (primarily US-based) to support each other through a rough patch when performance was lagging plans:

Fact 1: As each goose flaps its wings, it creates an “uplift” for the birds that follow. By flying in a “V” formation, the whole flock adds 71% greater flying range than if each bird flew alone. Lesson: People who share a common direction and sense of community can get where they are going quicker and easier because they are traveling on the thrust of each other.

Fact 2: When a goose falls out of formation, it suddenly feels the drag and resistance of flying alone. It quickly moves back into formation to take advantage of the lifting power of the bird immediately in front of it. Lesson: If we have as much sense as a goose, we stay in formation with those headed where we want to go. We are willing to accept their help and give our help to others.

Fact 3: When the lead bird tires, it rotates back into the formation to take advantage of the lifting power of the bird immediately in front of it. Lesson: It pays to take turns doing the hard tasks and sharing leadership. As with geese, people are interdependent on each other’s skills, capabilities, and unique arrangements of gifts, talents, or resources.

Fact 4: The geese flying in formation honk to encourage those up front to keep up their speed. Lesson: We need to make sure our honking is encouraging. In groups where there is encouragement, the production is much greater. The power of encouragement (to stand by one’s heart or core values and to encourage the heart and core values of others) is the quality of honking we seek.

Fact 5: When a goose gets sick, wounded, or shot down, two geese drop out of formation and follow it down to help and protect it. They stay with it until it dies or is able to fly again. Then, they launch out with another formation or catch up with the flock. Lesson: If we have as much sense as geese, we will stand by each other in difficult times as well as when we’re strong.

Her email highlighted for me the different approach that our cultures often take when addressing a challenge. I'll never forget the startling and mind-boggling display of teamwork of 2,008 Chinese drummers pounding in unison at the most recent Olympic opening ceremonies:

It struck me that as a culture, we in the US have long canonized the star individual performer, particularly in business, politics, entertainment and sports. We put these people on pedestals often to our own detriment. We seem to forget that none of these people whom we (often falsely) project as an icon of greatness would ever be in that position if not for the collective effort of the people supporting them. The wisest among them realize the fallacy of this and view their 'underlings' as anything but. Like Kobe, they recognize the power of the team and know that leadership is best viewed from the bottom, not the top. And they know that the view from that perspective is far more satisfying.

Priorities, Priorities

According to The Wedding Report (a research firm in Tucson, AZ), US couples on average spent almost $22,000 - excluding the cost for a honeymoon or engagement ring - on their wedding in 2008. Though that was down from roughly $27,500 the year before and will likely decline further in 2009 due to the recession, that still means the average total cost including ring and honeymoon has to be close to or even over $30,000. Note that the average age of marriage for women is 26 and for men, 28.

This got me thinking it would be interesting to connect the dots between the average wedding cost and the average household savings for retirement at later points in life. According to the Congressional Research Service (www.globalaging.org/pension/us/2009/retire.pdf), the median savings for a family with the head of household between ages 45 and 54 was $67,000 in 2007. For the group between 35 and 44, the median was just $37,000. For the non-mathematically-oriented among us, the median is the midpoint of a data series, basically in this case the level at which half of the households have more and half have less than this amount (the mean often skews north of the median with these kinds of stats because high net worth folks can push the average much higher - e.g. just add Bill Gates into a grouping and take a look at mean versus median levels).

It's fascinating to me that the average household savings a decade or two after the wedding isn't that much more than the cost of the event that got the household started in the first place. I wonder how often families that find themselves in tenuous financial circumstances regret the amount of money spent on their wedding. Obviously many marriages are funded, at least in part, by parents. But that's still money flowing out of the family coffers never to be seen again. I'm not saying that spending money on marriages is a wasteful allocation of family funds, it's just that the amount of spend should more closely correlate to a family's available resources. From the above statistics, it's clear that it doesn't.

All of this is kind of like the Starbucks coffee retirement lesson - stop buying that latte and scone every day and you'll retire a millionaire. It's a basic rule that small dollars of savings compounded over long periods will yield tremendous financial outcomes for retirement. For the amount of money spent on the typical wedding, cutting back by even 10 to 20% or more can be the difference between having a comfortable cushion in retirement and spending your remaining days stressed about how little money you've got to last. This isn't a particularly romantic notion, I know, but it's reality. And I would venture to say many couples would make different decisions about their wedding with the benefit of this kind of financial hindsight.