Guilt versus Shame

The West’s Judeo-Christian moral ethic constitutes a long-term economic advantage over economic cultures based on Confucian ethics. Judeo Christen morality is based on guilt, forgiveness and redemption. At its core, guilt is a much more evolved form than shame. Shame is tribal; it represents “I am bad” Guilt is a delimited feeling “I have done something bad”.

Guilt is more effective at guiding positive economic behavior in comparison to the decisions made in “Shame” focused cultures. Guilt motivates conscious actions for forgiveness, resolution and redemption. This is a cycle based on problem-recognition, decision-making and solution-focused action. It’s an economically healthy cycle, and one which fully embraces of the art and mystery of “creative destruction” a process vital for persistent economic growth.

The guilt system works because it rewards action for admitting fault (confession of guilt), forgiveness (for acknowledging errant ways), redemption (the hope and action - for a better tomorrow, and opportunity (to pursue that future including debt forgiveness, bail-outs, et al.) Guilt, by the cleansing action of acknowledgment and its by-product, action, more often than not, produces economically healthy, future-focused, decision-making. Perhaps not in all cases (think General Motors)–but usually.

Confucian culture suffers from decision delay and the tribal ideal of “saving face”. Positive action is obfuscated. With little incentive to admit fault, the system fails to correct, mature and advance.

Consider the rhetoric of the late 1980s. Japan was going to take over the world. The Japanese had mastered production and quality control in many industries. But long-term economic strength is not founded on the basis of several industries; it is founded on values and work ethic. No number of industries can sustain a nation over time, because industries, by definition, are mortal. They expire. (Think of the buggy whip, the carriage wagon, the PC industry.) All lines of business must transform themselves over the generations, simply to continue to exist. Transformation requires an admittance of difficulty, fault, blame and corrective, strategic action to adopt–or die. As Andy Grove stated “only the paranoid survive”.

The Japanese production dominance of the 1980s was similar to the German war-making dominance in WW2. But mastery in several industries, was not sustainable over time, because technological innovation and creative destruction, rendered certain industries and technology, insufficient. Case in point, the H-bomb made the perfection of the blitzkrieg and the surprise attack, mute.

The Christian response to economic calamity and asset bubbles particularly, is much different than the Japanese response in the 1990s. I bring this up because I’m coming to believe that the predicted demise and doom saying, so widespread, prevalent and gloating, is an increasingly myopic vantage point. China has a fatal banking problem. This may be one of the reasons that China makes surprisingly little headway developing a consumer economy.

Bottom-line: The predicted demise of the American economy is wrong. Southeast Asia has a radically different ethic that does not support long-term growth, due to the absence of self-correcting mechanisms.

Fast forward two months. Its June now, and the market is telling whomever will listen, that things are better than they were in the dark days of November or early March.

I’m not convinced yet, but what I do know, is that for all the abrasively transparent faults of the U.S.’s profligate ways, the American economy enjoys powerful long-term economic advantages, one of which is our self-effacing cultural value of forgiveness over denial and mea culpa over hari kari.

Daniel A. Barnes, CFA

June 2, 2009

Reconstructing the Social Fabric

Like Icarus’ fall, this crash was necessary. Now don’t misunderstand, I wish it were not so. I wish asset inflation could have steadily eroded our debts and currency while floating the collective’s boats, in a non-catastrophic way. But irrational actors, i.e. regular people, are simply too darn greedy to let peace and prosperity reign for too long. Wall Street professionals weren’t satisfied with their $500,000 salaries; no, they needed to start hedge funds charging 2% management fees and 20% of profits (2+20 in industry parlance), in order to achieve 8-figure paydays. Meanwhile, guys selling windows, chucked lucrative jobs to go into the house-flipping business.

Similar other anecdotes abound. The point however, is cleansing, repentance, and a return to core American values is the mandate today. While American society propelled consumerism it wasn’t always mass consumerism. That would be putting the cart in front of the horse. Prosperity requires productive core values. And Americans have these in spades: thrift, diligence, work ethic, tenacity, perspiration, inspiration, and idealism. Above all: Optimism and Faith. With these traits, the productive spirit of the individual is released, so long as the civic values are in place: good government, fairness, the rule of law, and the respect for natural laws. These principles of civil society have been with us, and improved upon, for over 200 years. The requisite values of a prosperous society are the individual ones, which, within the safe environment of civil society, propel the energy of man forwards in productive activity. These are: creativity, spirit, work-ethic and risk-taking (the good kind - entrepreneurial activity). These values come, by definition, first. Goods and services can not be produced in a vacuum or in an unfree-society. American industriousness and pragmatism, our utility, our unburdened consciousness- these are our collective cultural values which foster and drive our countries awesome industrial capacity. We didn’t need the value of conspicuous consumption in order to become a great production society. We only needed mass consumerism to create the bubbles of recent times. When CEO payoffs our in the $100s of millions of dollars, then something goes awry in the social fabric of our culture.

And it's this pretense of reality, which embodies the only world Generation Xers (Born 1965-1979) and Generation Y's (born 1980-2000) have ever known. Further, its this world that the Baby Boomers mainly know. Anecdotes of past generations and old movies seek to bridge our vapid experience, but fall woefully short if the educational goal. That’s where the invisible hand comes in to save the us from ourselves.

Thanks to Bernie, ourselves, and all others, we have economic hard times. The punchbowl has been taken away. As a great nation, we are retrenching. As a great people, we return to the core values that are the drivers of production and innovation, the mainspring of wealth and a consumer society. I have no doubt that economic prosperity will return to us in the next decade. Better yet, we will be wizened, and more appreciative, when it doth arrive.

In these Lenten days, let us cherish the solid values that we as a culture embrace, knowing in our hearts, that this too shall pass. The economy will begin to recover in 2010. Failed companies, fallen CEO’s can, and will, in time, be replaced. As the auto industry evaporates, and strip malls deteriorate, we can rest easier, knowing that the future will be brighter when domestic car manufacturers receive their due, while the consumer society of the future will engender nicer places to shop, than the suburban blight of the ubiquitous strip mall.

Early this week (March 9th) the New York Times picked up the “Going Galt” theme that apparently Rick Santelli of CNBC helped propel early this month; Good thinking, but beyond the scope of today’s Blog. See “The Opinionator” at http://opinionator.blogs.nytimes.com/2009/03/06/going-galt-everyones-doing-it/?ref=opinion for more info.

Suffice it to say, that as long as the Chinese buy our government debt for 2% and 3% interest, we have the luxury to pay-off the excesses of past decades with cheap, easy money. The United States will lead in product innovation in new industries. We will continue to be a leader in advanced production technology. Collectively and individually, we will thrive again, as we come through this period in 2010-2012. For the moment: retrench, pay off debts, save, and find an intelligent, trustworthy person who really takes the time to know you, when planning your financial life. A new era is coming just as sure as global warming, it's just a question of when and how fast. At Barnes Capital, we are expecting markets to begin to improve in 2010, and the economy a few quarters thereafter. Stay well through this difficult time. And button up.

Sincerely,

Daniel A. Barnes, CFA
Barnes Capital

Barnes Capital is an independent investment advisor serving private clients in Lafayette, California. We help clients develop a vision for their financial future which encompasses their goals, dreams and values. We turn our client's vision into reality by acting as their personal chief financial officer.

Noblesse Oblige

I visited Yahoo's corporate cafeteria last night in San Jose. Last month when I was there I noticed that they had closed the cafeteria for the evening. This time, it appears, they've turned off the heat as well. Well by the end of the evening, the temperature inside had fallen to about 58 degrees. In the midst of this deep freeze, I was reminded me of the disconnect between Jerry Yang and Yahoo shareholders.

Now we all know that Microsoft is the evil empire of the technology company world. And most of us love to hate Microsoft. But what Jerry Yang represents so clearly, is the utter disconnect between CEOs and their fundamental lack of noblesse oblige. The term is french and translates literally to "nobility obligates". I guess too many of today's corporate founders and CEOs were too busy getting through B-School or starting their company's to learn a little humility and the responsibilities of great personal wealth.

As Yang was playing poker with Microsoft in the negotiations last year I wonder if he ever had fallen on his face before? Had he known great failures? The fundamental absence of fiduciary obligation to shareholders, employees and clients on the part of Yang and so many other CEOs, is just appalling.

A fundamental problem with corporate management is that their is economic disconnect between most company CEOs, the Board of Directors, and the regular people represented by shareholders, employees, and clients. When Microsoft generously offered $32 a share, a value Yahoo hadn't seen in years, I can't help but wonder if Yang would have chosen differently, if he didn't have a $Billion in the bank. Had he the necessity of worrying about how bills and mortgages and retirement, like the rest of us, would he have chosen differently? With a billion in the bank, what difference does it make to Jerry Yang, whether shareholders receive the best price for their company: none whatsoever.

If you are a small business person, or anybody making less than about $250,000 a year, you feel every expense, every mistake, every consequence of your economic decisions, and thus, you make better decisions in time. Its a learning curve. With infinite wealth, comes an insulation, that seems, in this day and age, to desensitize company leaders, from their fundamental fiduciary obligation to check their egos at the door, and make decisions for the benefit of shareholders, employees and clients.

John Pierpont Morgan http://www.netstate.com/states/peop/people/ct_jpm.htm, and others, understood the obligation of stewardship that the noblesse oblige demands. But so many of today's titans are driven by an ego, and a disconnect that leads down the path the place where we are today.

As a shareholder, it pains me deeply to witness the contempt with which so many company leaders have acted. In their bubble worlds of corporate excess and personal wealth they are disconnected from the rest of us. John Thain renovating his office for $1.2 million in a time that the U.S. money center banking industry is essentially insolvent. How does a person achieve such success while showing such a poor lack of judgement?

President Obama is right to make a big deal about CEO pay. The current crop of corporate leaders would learn plenty thinking about the legacy and heritage of corporate giants from the past.



Daniel A. Barnes, CFA

Barnes Capital is an independent investment advisor serving private clients in Lafayette, California. We help clients develop a vision for their financial future, embodying their goals, dreams and values. We help them achieve this vision acting as their personal chief financial officer.