The Future of Europe

We have all heard the range of opinions on the effects of the sovereign debt crisis in the European Union.  Greece has gotten the most press as their crushing debt load and rapidly declining economy has their citizens up in arms.  We have all seen the footage of peaceful protests on the Greek Parliament building turning suddenly violent and scary.  Portugal and Ireland are the next worse off in terms of their balance sheets.  Both have large overall debt loads and large current deficits that need to be addressed.  The most recent fear is that of Italy and Spain who have each much larger economies and therefore pose a drastically greater threat to the global financial system. 

The question then is how does this whole situation get resolved?  To answer that question we look a little deeper into the situation and ask further questions.  Who are making these decisions?  What are their primary interests?  Who are their constituents and what do they feel about it?  All in all its a messy situation but one that I think has a logical outcome.  One that is not nearly as scary as some people might think.

The Problem
Greece is a failed economy at the moment.  Every ounce of austerity that gets passed is causing massive civil unrest.  The Greeks have been used to a certain lifestyle, and now because of excess spending by the government, who paid investment bankers lots of money to keep their large amounts of leverage hidden, its time to pay the piper, and everyone has empty pockets.  While some commentators call out the Greek people by saying they were living beyond their means with very generous government benefits which they did not pay for, (in Greece you are considered a sucker if you pay your taxes), I think the Greeks have a legitimate beef.  Their government told them that this way of life was ok and that it was sustainable.  Now the government pulls back the curtain and says "sorry, we were wrong and the party is over".  Its understandable to be a little upset at that situation.

What revealed all these problems, of course, was the 2008 financial crisis.  The only thing that keeps the party going for a country like Greece is the ability to keep borrowing, and keep hiding the liabilities.  Once that merry-go-round stops, the game is up.  Now the risk is that by defaulting on its obligations, Greece brings into question all the other financially challenged nations in the Euro-zone.  Creditors think "If Greece defaults, what is to stop Portugal and Ireland?" and therefore demand higher interest rates to continue to lend to these countries.  This higher interest rate increases the cost of funds, and thereby makes a difficult financial situation even harder, making it a vicious circle of decline.  The endgame being the default of Italy and Spain, which would hamstring the entire European economy and throw the entire global economic system into a funk for many years.

The Likely Solution
The only way to stop this kind of negative feed-back loop is to get out in front and make a credible back-stop at some point in the Domino chain.  Its obvious to everyone in the financial markets that Italy and Spain are "Too Big to Fail" and need to be included in that backstop.  The question is, where do they get the funds to make this kind of back stop?

That's also the main question with the recent resolution that was passed.  Sure the European Financial Stability Facility (EFSF) has been boosted on paper to around one trillion Euros, but where is that money coming from?  The banks are being asked to take "voluntary" (key to avoid a "credit event" default) haircut on Greek debt of 50%.  Where do they get the extra capital to keep their balance sheets in good shape?  Assuming 50% mark-down on Greek debt is one thing, being that its a small amount, but now we have Ireland and Portugal getting in line to get some "voluntary" forgiveness as well.  The amounts of losses and the drain on bank capital is growing.  Where does it stop?

The most likely resolution is going to have to include a global coalition to support bank debt.  The Europeans have enough capital on paper to address the potential losses, but not enough to sufficiently "shock and awe" the credit markets into believing that a resolution will hold up.  And, much like the "Lehman Moment" of 2008, as confidence continues to falter, the losses continue to mount.  It becomes a problem of chasing a moving target, where you cant aim at the size of the problem where it is now.  You have to lead out a sufficient distance and tackle the problem as it could grow to, much you like a quarterback has to lead a receiver downfield.

I regret to inform everyone here in the US, that we will all be a part of this solution eventually.  In a time of increasing austerity, and suspicion of bail-outs, it will be a political nightmare to announce any kind of assistance to this problem.  We had enough trouble bailing out our own financial system.  But I don't think it will be all that bad, and people will need to realize the necessity of this situation.  First of all, China will NEED to be included for this all to work, however, China will definitely not go it alone.  They will need the assurances of the US that they will cooperate as well.  How big this eventually gets in terms of the commitments needed, I have no way of knowing.  But they are coming, and hopefully with a combined effort between the two largest economies in the world, no actual capital will have to be deployed, but merely placed on the table to reassure the markets.

Will the EU Hold Together Under the Weight of this Crisis?
The answer to this question is unequivocally yes.  Very quickly there are two main reasons for my confidence in this.  The first is that the Maastricht Treaty which formed the EU holds no provisions for countries to exit.  Just like the Hotel California, you can check in, but you can never leave.  Therefore, there would need to be an amendment passed by all member countries to arrange for some type of exit strategy.  Euro leaders have made it abundantly clear that this is not currently on the table.  Some would say this is posturing and that they are looking into behind the scenes, but I am not so sure.  That leads us to the second reason, which is incentives.

What happens if Greece leaves the EU from the perspective of just Greece and Germany.  For Greece, they would go back to using the Drachma as their currency.  This currency immediately becomes worthless as it is backed by a failed economy.  All their debtors have to work out some form of payment in a combination of Drachma and Euros.  This doesnt just go for the sovereign debt, but every single foreign financial obligation from every business in Greece.  The logistics of working that out are nightmare-ish at best, and (I would guess) impossible at worst.

For Germany, they would also be adversely effected by such an event.  Germany is an exporter of high-value specialized manufactured goods.  If Greece leaves the Euro-currency it instantly becomes stronger, and therefore makes all of these German goods more expensive.  In an environment where growth is hard to come by as it is, the Euro becoming more expensive is a headwind that the Germans can ill afford.

The Bottom Line
I am optimistic at the end of the day, despite the fact that every analysis I have read from every analyst out there, says otherwise.  The solution agreed upon last week was a start, and greatly exceeded market expectations, but is clearly not a long-term solution.  It has shown that the leaders in Europe have a political will to keep this European experiment moving forward.  The simple fact is that these countries need each other, and despite the line from all the doubting pessimists "calls to China for money are not going to work", the rest of the world needs a functional Europe.  China will go along if it can get the US, Japan, and other governments to put some skin in the game.

We have to all look at this situation through the lens of the costs and incentives of possible outcomes.  Euro Area Depression and destruction is not good for anyone, and a chaotic destruction of their financial system will un-hinge the global economy.  So while analysts correctly predict that a solution will be difficult, the alternative is unacceptable, and avoidable with global coordination.

A Personal note on 9-11-11

On a day like today, aptly called Patriots Day, its important to remember and acknowledge those we consider true Patriots. I love, and want to thank, all the firefighters, police officers, nurses, and teachers out there, in addition to the soldiers past and present that make this country great. My friends who fall into these categories are too many to name, but I want to thank all of you for doing the work you do.

I also remember one of the finest people and the greatest patriots I had the honor of calling my friend, Jason Ritter. A man who exemplified American greatness.  His leadership and selfless drive to make everyone around him better is what this country is all about.  Jason, your memory drives me to continue to want to be a better person, and strengthens my faith in America.

A day like today makes it easy to be optimistic about the future of this great country.  It shows what our American spirit is capable of in the face of what seems like insurmountable hardship.  We can all come together as a nation; as brothers, friends and countrymen, and put aside our idealogical differences in order to rise together.  God Bless all of you on this humble day.

"Where in the World is This Thing Taking Me!?" - The Wild Ride of the "Shock-Market"

If you have been watching the markets these last few weeks, there is a strong possibility that you could be now suffering from Vertigo, or at the very least a mild nausea. 

The volatility and dyslexic nature of the price movements (starting Monday, Aug 8th, the S&P500 was down 6.5%, up 4.7%, down 4.5%, up 4.6%, and up 0.5%), along with the historic rise in the price of gold (now at record highs over $1,800), illustrates the huge levels of anxiety and uncertainty that investors, still licking wounds from two years ago, are faced with. 

This article is meant to serve as an explanation to what is happening with the markets, what is likely to happen in the near to middle term, and finally what investors should do about it.

"Whoever is driving this thing needs to get pulled over and served a DUI"
This comment, from a physical therapist that works with my wife, in response to seeing the market during that week of volatility, is a more astute analysis than any of the hours of commentary I have heard on CNBC or read in any of the financial periodicals.  So who is behind the wheel and what have they been drinking?

First of all, lets start with the backdrop.

Economic growth is sluggish, as the government and Federal Reserve stimulative measures begin to wear off.  The market has rallied over 35% in the last two years, and while corporations are making money hand-over-fist the unemployment picture has not improved nearly as much (from 10% to 9% roughly).  So for many people it does not feel like a recovery at all.  The Europeans are further complicating the situation by letting the financial drama of a few locales evolve into a near-crisis.  Bring along the Theatre of the Absurd we had in Washington over the debt ceiling debate, throw in a US debt downgrade as an exclamation point, and you have all the ingredients for a very explosive, reactionary, and indecisive market. 

These over-anxious traders behind the wheel, if they go to hard and fast in either direction, will then get a nitrous boost when the program-trades kick in.  These program-trades are set up by a computer to go off when the market hits certain technical levels and are designed to protect traders from losing too much money when the market goes against them.  The problem is that these then become self-fulfilling prophecies as an onslaught of selling leads to further panic and further selling.  At this point, economic fundamentals fail to matter as the markets ride solely on the emotion of the moment.

What happens next?

A lot and more.
The volatility we have seen lately, while hopefully not maintaining the same break-neck velocity of the last two weeks, will not go away anytime soon.  Rumors and blurbs about the Fed, the Super-Committee, and our friends in Europe will all lead to anxious times ahead for investors.  The good news, however, is that unlike 2008, corporate America, as well as John Q. Public, have all de-levered their balance sheets to a large degree.  The stimulus policies of the last two years have been used in part to pay down debts and build cash reserves (which is part of the reason they were less "stimulative" than hoped).  Banks, corporations, and individuals are all standing on much firmer footing this time around. 

Add also that corporations have been able to keep growing profits with out hiring anyone, which means that many of them are running skeleton crews.  Consumers have already gone through some painful lifestyle changes, and have not shown signs of resuming their irresponsible spending habits.  In short, this means that we have much less further to fall.  People can't stop going to Wal-Mart for groceries.

Is it possible that the economy stalls and we fall back into a recessionary environment?  Yes.  However, I do not feel like the results would be much worse than we are seeing now.  Stocks could fall further, certainly, but the unemployment rate would not get much worse and not many people really feel like we ever got out of a recession to begin with.  Times are still tough!

The upside is that there are a lot of near-term opportunities to really break out of this recent bout of negative hysteria.  If the President's job bill, (planned to be presented to congress when they get back in session next month) is a credible, meaningful, and sustainable plan to get America back to work, that would be a big economic boost.  If the super-committee comes out with a balanced approach to reduce our deficit by more than the mandated $1.5 Trillion, the markets would react very positively.  And, if the powers-that-be in Europe make serious steps to deal with their sovereign debt problems, that would instill a lot of confidence in the market.  Now what are the chances of all of this happening?  Here is a hint....its less than 100%, but even if we dont get all three, we can still come out ahead, and there is reason for optimism since we have already tried all the wrong answers, and now there are really only the right solutions left.

As an Investor, What's the Plan?

Don't Panic!
If you are a long term investor (think longer than 15 years) than you have very little to worry about and you should continue buying into this market and reinvesting your dividends.  Even though the price level of the market is flat over the past ten years, if you continually reinvested all the dividends you received from the S&P your account balance would be up 50% over that time.  You should not have any money in stocks if you have need of it sometime in the next five years.  Anything being saved for a house, or college tuition should be placed in low yielding, short duration, high quality bond funds.  These are lessons two and three of Financial planning 101.  What is lesson one, you ask?  Diversify.

What are the Best Investments Right Now in this Market?

Education!
Does this sound like a strange answer?  Let me just tell you that there has not been a better time, a more necessary time, for people to go out and get additional credentials, training, and plain old knowledge.  Borrowing rates are at all time lows, and the job environment, as we all know, is incredibly tough, and not likely to let up anytime soon as we face continuing competition from around the globe.  If you are just out of undergrad, you should look into graduate school.  The numbers show (courtesy of Bureau of Labor Statistics) that people with advanced degress earn 20% more on average than those with only an under-graduate degree.  Professional designations earn even more.  If you can borrow money over 30 years at 3% to increase your income 20% over that time frame, that seems like a pretty good deal.  Just make sure that you first have the capacity to borrow, the ability to pay back the loan, and that you are learning something relevant to your primary living pursuit.  Do not borrow $20,000 to take a photography appreciation class, if you work in the medical field.  These hobbyist pursuits need to be saved for better times.

Large Capitalization, Domestically Based, Multi-National, Dividend Paying Stocks
These companies are still making profits, hold lots of cash, can take advantage of faster growing markets, and pay you a stream of income while you wait for the market to sort itself out.  Not only that but they are trading at fairly low valuations in relation to historical norms. 

Not Gold!!
Please ignore the commercials and the talking head gold bugs. The problem is that gold is currently being held by investors in place of interest yielding securities because interest rates are so low. The only problem is that this only works while the price is still rising. After the price stops going up, why would you continue to hold gold? At this point we get some selling for profit taking, and as the price falls we could see a negative feedback loop as many people who bought into gold really just want to protect some of the appreciation they captured over the last two years. Since there is no floor on the price of gold, there is no way to tell how far it could fall in that scenario. Basically, gold is Ultra-Risky right now (though, full disclosure, gold still can hold a small place in a portfolio as a hedge against some of the risk factors above, but it should only be used with that in mind.)

The Bottom-Line
It is important to react to stock market uncertainty the same way you should act towards any unforeseen circumstance.  Keep calm, gather the facts, determine how it effects your goals and situations, and make measured changes as the situation warrants.  Lets remember that due to the severity of the last crisis we went through, the road to recovery is going to be a difficult one, full of potholes and bumps and other hazards.  It is important to continue playing defense and make sure that your as secure as you can be with your finances, pay down debt, and keep saving.  After you have these immediate bases covered, I believe you will get rewarded in the long run for being optimistic in your investments.  I buy into Warren Buffett and Jaime Dimon when they warn that its not wise to bet against America.  This is still the greatest country on Earth, and as soon Washington starts acting like it, and people begin believing it, the sky will be the limit.

Stop Saying the Stimulus Didn't Work

The tag-line of many hard-line conservatives this year, as the economy continues to struggle, is that the stimulus package was a failure.  They say "the Democrats promised that this stimulus spending would bring the unemployment rate down to 8%."  Since this did not come to pass, they say that it was "a colossal waste of money."  While the democrats may be guilty of bad forecasting, to say that the stimulus did not work shows a complete lack of basic economic understanding.  You will also notice, if you pay attention, that none of these tag-line parroting hard-liners ever follow up this claim with what they feel would have been a better solution.

For those of you out there brave enough to take an economics course in college, and unfortunate enough to not have been able to sell back your textbook at the end of the semester, you can look back at a couple of equations that represent the most fundamental relationships for an economy.  The first is as follows:

GDP = private consumption + gross investment + government spending + (exports − imports)

Ok, so now lets take a look at what happened in 2008.  A recession of massive proportions drove down consumption and investment to the point where GDP was shrinking by 6% at its worst point.  So when you have a total absence of consumption and investment, and we all know that the U.S. has imported far more than we have exported (aka running a negative trade balance), then the only hope to get an economy to stop shrinking is to increase the government spending variable.  We have to increase spending and increase the overall debt level in order to prevent the recession from worsening.  If the economy continued to fall at a 6% clip, what would have happened to employment levels?  What would have happened to tax revenues and unemployment and social entitlement costs, if the economy continued to shrink?  Steadily falling revenues and continually increasing costs would have been worse for the debt situation than a one time shot aimed at preventing those effects.

The other important equation to consider is the following:

M * V = P * Q

What does this translate into?  Money * Velocity = Price * Quantity, or even more simply, the supply of money in the system times the speed at which it turns over, is equal to price times quantity, aka GDP.  While this is a little more convoluted for a non-economist, here is how it breaks down in real terms.  In 2008 the credit markets froze up as banks were afraid of lending any money out.  The supply of money was shrinking (which is actually a pretty rare occurrence for the US).  The money that was in the system was not being turned over as fast because consumers were not spending it.  So banks not lending, consumers not spending, will lead to a lower GDP as well.  What the government hopes to do by increasing their spending is to increase the supply of money and credit, and hope that the extra supply will turn-over (read, get spent) at a fairly rapid clip.  The absence of government spending in that situation could lead to a continuing decrease in both and thus, continuing decrease of GDP.

The choice that the government has is to allow the country to spiral dangerously close to a depression type scenario, or to add another slug of money to our debt level in order to float the economy, and also then "stimulate" the private economy back into a growth mode.  The question is not whether or not we have recovered from recession, but rather where would we be absent this critical level of government spending?

The second argument is that this money was "wasted" on bad projects that did not have the pay-off they should have.  The most famous tag-line for opponents of stimulus in this argument is pointing out a line from President Obama where he said "maybe some of these shovel-ready projects were not as shovel-ready as we thought."  Now we can argue all day and night about the stimulative effects of one congressman's pet projects vs. the others, but the bottom-line is that the difference between the two is nowhere near as important as the actual level of the funds being spent.  Further more, if you log onto to recovery.gov you can actually see what the break-down of the spending really is.  Curiously, well over a third is represented in by tax-cuts, which I thought many conservatives tend to favor.

I realize that politicians never let facts get in the way of a good argument so, with this next election season coming up, I am bound to suffer through all of the republican candidates regurgitating the stimulus package argument.  I just hope that we can make our decisions based on facts and figures instead of convenient sound-bites.  The worst mistake the democrats could have made was trying to tag a target rate of 8% unemployment to this bill.  Their big underestimation was on the productivity of Americans who are nervous about the possibility of losing their job.  Companies have not hired more workers because they have been able to get more and more out of their current skeleton staffs.  In my January prediction piece I also quoted a forecast of 7.5% unemployment by the end of the year because of the same mistake.  Today we are still seeing a 9.1% rate and this is not expected to drop much further by year end.

Bottom-line is that the stimulus was a necessary step from the government to prevent our recession from devolving into a full blown depression.  Am I satisfied with where we are in terms of our recovery?  Of course not.  It will take time to work through our malaise, and unfortunately require some action from our action-phobic congress.  In the end, I am optimistic that our country will continue to prosper... it just might not be at the level many of us were used to in the last two bubble economies of the 90's and early 2000's.

Debt and Deficit - A Misguided Debate

Being that it has been a very long time since my last post, I felt it appropriate to pick a fight.  This time I am calling out both Democrats and Republicans for their apparent lack of even a modest amount of economic training.  Unfortunately, members of both parties have little time, due to their full-time job of fund raising, in addition to their part-time job of fighting with the other side, to fully verse themselves on economic realities.  Therefore, we see congressmen and congresswomen on the campaign trail pulling out sound-bites, statistics, and headlines that fit into their political party platform.  Often this is to disastrous effects.  See, the benefit of being an independent is that you have the ability to call out both parties without feeling like you are compromising any underlying loyalties.  I try very hard not to get political, but at times, I suppose, its necessary.

The debt problem is bad, and the budget deficit needs to be addressed, but the proper way to handle both of these problems is within a framework of established economic relationships.  The United States of America is not Greece, (who by the way has spent half of the last 200 years in some sort of default or restructuring), and is not subject to the same market forces as Greece.  We are also not Japan, a country with over twice the debt load we have and a falling population.  Parallels to either of these countries fail to hold any relevance.  Therefore, I will start with the answer... Focus on economic growth first and foremost, through getting people back to work, even if this comes with a cost, and address debt and deficit in terms of medium and long-term commitments.  The question:  What is the proper way to handle the current budget and debt crisis in the United States?  What follows is a brief explanation.

The budget deficit is the annual amount of money that the US spends in excess of the revenues it brings in.  For 2010 this amount was $1.4 Trillion and represented 8.5% of GDP.  The debt ceiling is the legal limit imposed by congress that the US is capable of borrowing in terms of their total debt.  This is very much like the credit limit on your Visa card.  We are about to run into this limit now at $14.29 Trillion which at current times equals 98.6% of GDP.  This is roughly equivalent to having a debt load equal to your annual income (like making $100k and also owing $100k on a mortgage).  As logic would have it, the debt level goes up every year by the amount of the deficit, which over time is not sustainable.  Analysts vary widely in their forecast for the amount of debt the United States can carry without getting in trouble with the rating agencies, and thus, more importantly with our creditors.

The democrats maintain that this burden should be helped paid off by ending what are popularly known as the Bush-era tax cuts for people making over $250 thousand, taking their marginal tax rates from around 35% up to around 39%.  Republicans believe that spending needs to be brought under control and that way too much money is being spent on social entitlements such as social security and medicare.  While neither side is out of line in their approaches, what makes the current arguments so frustrating is the single mindedness with which they champion their causes at the expense of simple compromise and logical thinking. 

As I have mentioned before, this country's biggest problem right now is the 12 million people who are unemployed.  Furthermore, the effects of this latest recession are still being felt by many at the bottom rungs of the economic ladder.  Hiking taxes and slashing benefits for the economically disadvantaged is not the answer right now. This country needs a comprehensive job bill which will get Americans working again, even if this causes further stress on the debt load.  I strongly believe that social security needs to be refigured, and I also can believe that millionaires and billionaires (as President Obama puts it) can afford contribute an additional 3% of money they make over $500, or whatever the latest iteration of the democratic proposal is.  But neither one of these measures will mean a thing if it clogs up the economic engine.

The current passionate debate on these issues is at least heartening in the sense that we are having the debate.  Their is finally a political will to get something accomplished on these very hard issues.  But the lack of compromise at the expense of economic growth and possible debt-ceiling-imposed-default is inexcusable.  Business owners need one thing right now and that is certainty.  With so many major issues up in the air with no clear sign of what the future will hold, business owner cannot properly plan for the future.  Normally, the less congress does, the better for the country.  In this case, action is required, and all we are getting is angry ideologues misquoting dead economists.

Here is what needs to be done, and what I am still hopeful will eventual get squeezed out of congress.  Pass the debt ceiling increase which includes some token amount of spending cuts.  Pass a comprehensive jobs bill, including the idea from the administration of creating an infrastructure bank, which will start putting people back to work.  Then, and only then, can their be some serious work done on fixing the tax code, and reworking the entitlement programs.

Bottom-line for those worried about your investments is that the United States will not go bankrupt.  STOP buying gold from guys on radio commercials.  Stop listening to these over-dramatic doomsayers who throw out huge figures forecasted way out into the future, like "by the year 2030 the United States will owe China $50 Trillion dollars".  Its all ludicrous.  The US dollar will remain the worlds reserve currency because there is no alternative and we are still the safest investment on the planet.  The debt market would not be lending the United States money at less than 3% over ten years if there was serious concern about its solvency.  This country has only defaulted twice, each time only technically so, (meaning our debts were not unpaid, only that the terms were altered due to ulterior motives... this was the civil war, and going off the gold standard.) and it is still the destination of millions of immigrants who risk life and limb just to BE here.

Our only risk right now is that the recession will get drawn out due to congresses inaction based on political ideology instead of logical economic principal.  This is still the greatest country in the world, its just time that congress started acting like it.

A Profile of Leadership

Throughout my "quest for knowledge", I have read a number of books on the topic of leadership.  I have read great works by some of the acknowledged experts in the field like John Maxwell, Jack Welch, and Noel Tichy.  While these books do an excellent job at providing helpful insights on ways to improve as a leader, they cannot compare to the example set by a man whom I have the privilege of calling my dear friend.

What these books try to convey is that leaders are not born, but made.  Through hard work, and with the helpful hints of these guides, (only $19.99 on sale now!) you too can be a great leader.  The truth of the matter is that some people are born with a natural ability to bring people together and work for a common cause.  I have seen no clearer and more powerful example than the one set by Jason Ritter; a social studies teacher at Legend High School in Parker, Colorado, and also my former Resident Assistant (RA) in Henniger Hall at Western Illinois University.

What's funny is that the job of RA at any mostly freshman, college dormitory across the U.S. is not really a breeding ground for great leaders.  People signing up for that job are asking for trouble, by voluntarily agreeing to babysit 18 and 19 year-olds, away from home for the first time, on a campus of thousands of other stir crazy co-eds.  Most often the job of the RA is to plea with residents to keep their music down, and try to keep the arrests and vandalism at a minimum.

Jason took a very different approach to the students on his floor.  He started by signing everyone up, within the first week of arrival, for the floor's intermural softball team.  (Which was a little curious to me since I found out later you normally had to present your student ID and sign your name to be on a team).  This rag-tag group of Henniger 8 residents, (myself included) none of whom, had they gone to high school together, would have hung out in the same "cliques", grudgingly took the field for the teams first "practice".

Without a single star athlete on the roster, except of course for Jason, we very quickly each found our spot on the field and started playing.  To Jason, the only thing that was important was that you showed up, and you tried.  Of course, this instantly became very easy because you could tell he was having a blast just having "his guys" out there playing ball.  At first it was almost comical, because he went full steam, all the time, even while we were just out there throwing the ball around.  But, as we found out that we actually had a pretty decent team, we started taking practice more seriously, and began taking a lot of pride in our work on the inter-mural softball diamond.  With Jason out there giving it all he had, each one of us stepped up and tried harder, and more importantly, had lots of fun doing it.  We lost only one game that semester, and won the championship in what has since gone down in history as one of the all-time great college inter-mural 16" softball seasons (I'm sure its written out there somewhere).

While I know this may seem like a trivial episode to highlight the qualities of a leader, I can assure you that to me, and the other 10 guys on that team whom I still consider to be my very closest friends, it is anything but.  The important result was not decided by the championship game, but best displayed by the photo below, of mostly that same team, taken six years after that fall semester, out in Colorado, on Jason's wedding day.

What is incredible about the softball story is the fact that a bunch of strangers were placed on a dormitory floor, and Jason, through softball, turned us all into lifelong friends.

The truly amazing thing about Jason's leadership qualities are that they are so completely natural, so completely a part of who he is.  Everyone of us looked up to him as a mentor, a big brother, and also a great friend.  He led from within, as a part of the group, as opposed to leading from above, barking orders.  No one put in more effort, and no one had more fun seeing all of us succeed.  It was empowering to have that kind of leader on your side.  He was like the general who was always first to step out on the battlefield, and the last one to leave.

I know the students at Legend High School feel much the same way.  See, the curse of inviting a dozen of your friends from Illinois, to stand up in your wedding in Colorado, is that you have thus committed yourself to a dozen return trips, as these friends themselves, eventually get hitched.  However, every time he came back in town, he would talk endlessly about his students with such excitement and pride.  Student government projects were the coolest thing in the world, and the students working on them did the most incredible job, in Jason's retellings.  The same went for the basketball games and class projects.  And listening to him, watching his eyes light up, you had no choice but to be totally convinced.  Jason turns the ordinary, into the extraordinary, and changes you in the process.  That is what its like for a leader to be committed.  That kind of leader makes you want to follow, because you know he is all in, heart and soul, and will do everything he can to help you succeed.  I am sure those students will have many softball stories of their own someday.

Even as Jason's life has taken a tragic turn, his commitment to the people whose lives he has touched has remained strong.  Even after being diagnosed with stage 4 cancer, he has gone to great lengths to help those around him deal with the reality of his illness.  It would be easy, and completely understandable, for a person in that situation to lose touch and concentrate on themselves.  It takes a hero to post a picture like this, right after hearing, and having to deliver, devastating news.

His advice was to find a way to laugh at yourself, even in the face of difficult times.  Unbelievably humbling.

In an article in the local Colorado news, (found here) Jason was quoted as saying that during his eight years as a teacher he never thought of one day as work. I would turn that around and say that in those eight years, I don't think he ever clocked out. In fact, at a friends wedding in October, in Illinois, which happened to fall on the same weekend as a school dance at Legend, Jason had co-conspired with some students and faculty to arrange a break in the action where he would Skype in and to let his students know he was doing OK, and was sorry that he couldn't be there in person to celebrate with them. When he was talking about his plot over dinner, it sounded as if he were planning the heist of the century. The effect in Colorado must have been awesome.

Its often said in the consulting world "People don't care how much you know, until they know how much you care."  In Jason's case, you know right away.  It is automatic, it is genuine, and it is powerful.  The outpourings of support and get-well wishes sent to Jason and his family have been reflective of the support he has shown so many people through the years.  His house is literally overflowing with cards, notes, and the 1,000 colorful folded paper cranes from the students of Legend High.

The collective summation of the qualities of an effective leader, as outlined by the leadership experts mentioned above, are as follows:  A truly great leader inspires confidence, garners trust, empowers others, believes in the mission and the team, and executes with enthusiasm.  A great outline of Maxwell's 21 Irrefutable Laws can be found on this link as well.  Reading through these lists, I cannot find a more accurate personification of leadership than Jason Ritter.  A self-less advocate, whose impact lasts far beyond the mission at hand.  He is not simply a kind soul handing out fish to the hungry, he is the guy setting up shop in the school of fishing, handing people rods and reels, giving them the ability, and confidence, to feed both themselves and future generations.

While I will undoubtedly continue reading books about leadership and many other topics, the most important lessons I have learned come from examples set by people like Jason.  If I can absorb a quarter of what he exemplifies, I will benefit greatly, as will those whose lives I touch.  That, in and of itself, is the mark of a truly great leader, and a truly great man.

"If your actions inspire others to dream more, learn more, do more and become more, you are a leader."
— John Quincy Adams

How One Man Ignited the Protests in the Middle East, by Igniting Himself

Self-Immolation.  That's the term used to describe the grisly act of dousing oneself in accelerant and lighting a match.  Many people hear the news about Egypt's uprising and now Libya's civil war (more like civil skirmish) but few really know that the spark that ignited the protests, which are toppling long-standing dictator regimes, was lit by a man named Mohamed Bouazizi.  In a desperate act of protest, Mr. Bouazizi stood in front of a government building and lit himself on fire.
Now the important thing to look into in this story, is not simply this man's reason for such an awful display of protest, but why was this act copy-catted all throughout North Africa and the Arabian peninsula, and then followed by popular uprisings of a scale not seen in at least 50 years?  Finally, what are the probable conclusions to these rebellions?  What does it mean for these countries, the region, and the global economy?

Mohamed Bouazizi was a 27 year-old street vendor in Tunisia who was trying to support his younger siblings.  After his produce cart, which was apparently purchased on credit, was confiscated by police, who beat him for the privilege, Bouazizi went to the municipal building to complain.  No one in the office would offer to listen to his complaints, even after he said he would light himself on fire if no one would speak to him.  Sure enough, he was ignored and so he followed through with his threat. He died from his injuries after 18 days in the hospital.

Within hours of Bouazizi's very public display of defiance, people on the street started forming.  In the days following, many reports of similar acts of martyr-dom spread across the region.  Protests began gaining steam.  The president of Tunisia fled the country.  Egyptian protesters, emboldened by the Tunisian people's victory, camped out in Tahir square.  Protests broke out in Yemen, Bahrain, Syria, Iran, and Libya.  Egyptian leader Hosni Mumbarack got help from the military in resigning.  And, now the fate of Libyian dictator Mohammer Gadafi is all but sealed.

Lets make clear that these protesters are not speaking out against unfairness against one Tunisian street vendor.  Unemployment is the underlying fuel that is keeping this mass demonstration alight.  All of the countries in this region have massive amounts of young, fairly well educated citizens who cannot find jobs (in the range of 20 to 45% unemployment among citizens under 35).  When you add food price inflation of 20 to 50% and now these unemployed souls cannot even afford to feed their families.  And when they go to ask their governments for help, their pleas are falling on deaf, though very well-fed, ears.

Humiliation has long been recognized as one of the most rage inducing feelings out there.  And when a man has the dignity of pursuing a livelihood stripped from him, and is then cast aside and mocked, a bubbling pocket of rage can start forming very quickly.  This added with a desperation of not knowing how to provide for one's family is a devil's brew that can incite normally well intentioned people to not only sacrifice their life, but do so in an agonizingly painful and public way.  When a quarter of a country's population all suffer from the same oppressions, the mobs start to form, and heads are demanded.

So what's next?  Well as has been the case for the last 2,000 years for the middle east, violent changes in power do not resolve themselves overnight.  Egypt has not become a job engine for the people simply because Mubarak has left office.  So the near-term outlook is challenging, while the remaining parties jockey for power in Tunisia, Egypt, and soon Libya, and many more countries face the prospect of similar fates as protests continue.  Longer term, one has to believe that things will improve in many of the self-liberated nations, but that is no guarantee.  The people have proven they have the ability to dispatch a dictator, but there is not much evidence of an ability to self-govern, historically.  There are not many cases of thriving democracy throughout the MENA region.  So for now, these countries continue to be what they have always been; volatile,  conflicted, and hugely unpredictable.

While the epicenter of this seismic shift in power is a street corner in Tunisia, the after effects can be far reaching.  As I have mentioned a few times in my modest blog, things are not as good as they seem in China.  The Chinese government have shut-down protest websites and censored coverage of numerous street gatherings, while the people there are also quite angry.  The problem there is not unemployment, but under-employment, and these persistent protesters in the middle east may further embolden their eastern cousins into demanding better treatment.  Again, the dignity in making a living is severely impaired when you can't live on what you make.  To be treated like an animal in a factory for two cents an hour can lead people to sudden and violent reactions, and suicides in Chinese factories have continued to climb.

In closing, the ramifications for us in the United States is rather modest.  The fighting in Libya has caused some minor interruptions in the oil markets, causing some investors to worry, and gas prices to creep higher, but these effects won't last long.  Food price inflation could continue, and even get worse if mother nature continues to slam the planet with draughts and floods, which will affect all of our pocket books as well, but again, a decent global harvest and a little dose of political stability could cause the price of some ag products to drop in half. 

I think the great big take-away in all of this is that as bad as things got here in the United States, around 90% of all people who wanted a job could get one, and while the middle class has gotten squeezed, we have the forum to be heard, and the tools and opportunities to move up in the world.  It helps to remember sometimes how good we actually have it.

The Year 2011 - a look into the Crystal Ball

It has a been a long time in between posts, and I fear it will be even longer from now until my next post.  Life has a funny way of getting in the way of the more fun, interesting, and thoughtful pursuits.  I did however, feel compelled to write a prediction piece, just so I can have a documented, published account of how I see the next 12 months unfolding.  That way I can look back and find out how backwards my thinking really is.  I will try and touch on some of the posts I wrote in the fall of last year, just to tie it all together.

The Economy - Economic activity will pick up markedly this year.  GDP estimates from most economists show decent growth at around 3 to 3.5 percent.  I think it will be up around 4 percent for the year. 

Why the optimism in the face of such looming potential hazards?  After all aren't the states going bankrupt, along with the peripheral Euro countries like Greece, Portugal, and Ireland?  Aren't housing prices expected to stay flat?  Well, the reason for my optimism is cash.  Corporate entities have a ton of it sitting on their balance sheets, waiting to be deployed.  Whats the hold-up, you ask?  Well the last two years have made these large firms fearful and unable to find productive uses for the funds.  Therefore, they have horded cash to be safe, shore up their balance sheets, and wait for a time when it makes more sense to invest in growth and productivity.  Now, as the economy recovers, moderately, these companies will feel safer starting to spend that money as they go from survival mode to growth mode.  This means capital investment will pick up, and so will.....jobs!

Employment - Unemployment will drop to below 8% by the end of the Year.  (7.5 is my official prediction)

We are sitting at a 9.4% unemployment rate at the moment, which still does not tell the entire picture of jobs in the US right now.  There are a staggering amount of people who have been out of the workforce for more than 12 months, who will need to be retrained, and there are also a lot of people who cant move in order to find a job, because they are underwater in their Mortgages.  So again, why the optimism?  Corporations have been running skeleton crews to survive the last two years and now as demand starts to pick up, they will need to spend some of this cash on their balance sheets to grow the business.  That means hiring new employees.  And, while the pace of hiring will be moderate, with more people employed, brings more consumers willing to buy goods, which of course will spur even more job creation.  The problem with the current outlook is that most economists look at trend lines, without going out to the second derivative.  In other words, they miss the growth of the growth.

Stock Market - A solid 10 to 15 percent year, with another mid-year panic thrown in.

The growing economy and improving job scenario will lift markets higher through the rest of winter and all of spring.  Europe will be able to push past their sovereign debt problems for the time being with Germany reluctantly agreeing to increase the European Financial Stability Facility (bailout fund), which will allay investor fears of default in the near-term at least.  The summer will show correction type behavior as harsh austerity measures provoke the inner rioter in the European youth.  Optimism turns to caution domestically, as employment and productivity numbers come in good, and investors look to take profits, wondering when the other shoe will drop.  At the end of the year however, things are better, again, then they were last year.

Inflation - Still very very modest at 1 - 2%.

Even though I am predicting improvements in the economy, the inflation rate will stay muted for two reasons.  Wages will stay fairly flat, and housing prices will remain low.  That means the low-for-long interest rate policy of Mr. Bernanke will prevail for most of the year.  All of the believers in the hyper-inflation "my dollars will be worthless" scenario are sensationalists with no basis in economic reality.

Gold - Bubble will maintain some air with lingering concerns on sovereign debt.

The price wont move dramatically higher thanks to other asset classes performing well, however, the negative real-interest rate environment (US 3mo. at .01%, and Inflation at 1%, means you are losing purchasing power on your savings), will hold the price above $1,000 (currently around $1,350).  With all the threats of sovereign defaults in Europe, military action in Korea, and political uprisings in the middle east, expect gold to be incredibly volatile as these events unfold.

China - Investors beware.  Cracks in the greatest growth story of the last 30 years make this the biggest risk of 2011.

While everyone has been very high on emerging markets as the fuel of economic growth of the last 10 years and for the next 10 as well, there are still a lot of problems that need to be worked out.  Again, if you read my post on China it will give all the details, but it basically boils down this; massive amounts of frustrated Chinese workers who want a better quality of life, a currency that needs to appreciate soon, a real-estate bubble ready to burst, and a gargantuan pile of US Treasury Bills that are going to lose value as interest rates go up. 

Commodities - Volatile across the board.  Again, play with caution

Food prices have been rising, and do not currently show signs of slowing.  Oil is getting close to $100/bbl again, and everything from coffee to cotton, is rising in price as well.  Whether this continues or not through 2011 is very much up in the air.  My official prediction would be most of these commodities go lower, but another few draughts and floods could mean otherwise.

Conclusion - From Ron Weasley "I know what this means.  There's going to be loads of fog tonight"

Obviously the course of 12 months can take many different paths, and there are an infinite amount of uncertainties over the horizon.  Knowing full well the futility in making and relying on predictions, its still a worthwhile analytical exercise merely for the sake of exploring cause and effect relationships.  If a prediction does not come to pass, why not?  What factors play in the shaping of world events?  One thing we do know for certain....just like the crystal ball, the future is cloudy.

Let me know your 2011 predictions.