The past year has been tough for small businesses, particularly in the UK. The dramatic fall in the value of sterling, the increased cost of borrowing and the reluctance of banks to lend to SMEs (small and medium sized enterprises) have all hit firms hard. There are three million family-run businesses in the UK, employing 9.5million people and contributing to more than 30 per cent of GDP and with many facing a white knuckle ride into 2009 there has been an understandable focus on how to ensure the survival of this part of the economy. If unemployment is to be kept to somewhat manageable levels next year this is seen as a key area to target. Small businesses cannot protect themselves from clients, suppliers and bankers in the same way that big companies can, so the speed with which they can run into difficulties when sailing through the current storm is very much heightened.
The British Chambers of Commerce has warned that many small firms will struggle to survive in the coming months, with access to finance and cash flow likely to be major issues. BCC Policy Adviser Steve Hughes says: 'The Government's stimulus failed to help smaller businesses. Many will be forced to lay off staff and in some cases businesses will go to the wall. We must do all we can to help small firms survive, not only because they will get us out of this downturn but because the businesses we lose will never return". One certain opportunity that will come as a consequence is that anyone who is good at running real business is going to become a valuable commodity. If you can manage your way through this and keep people employed the government is likely to be very much "on your side".
Private equity companies, I believe, have a great opportunity in this area. They will quickly need to transfer their focus away from the financial engineering approach of the past five years to a focus on sales growth and productivity gains; i.e. doing something "real". The true secret of private equity performance in the past five years was recapitalisations and pass the parcel secondary buyouts which led to ever more leveraged companies, and unbelievable returns during the good times. Now that the world has turned, there has to be real value added - which is much harder work. Nonetheless, given the likely purchase prices that will be available for the next rounds of private equity deals, the opportunity for those willing to do the hard yards is potentially very high. Many of these opportunities will come as over-levered companies fall by the way side, and government will be keen to help if part of the focus is on keeping people employed.
In the last few weeks and months, a raft of well known high street retailers in the UK have been taken into administration, Woolworths, Zavvi, Adams Kids and Whittards to name a few. Many more will undoubtedly follow early in the New Year after they tally up the numbers for what must have been extremely difficult trading times over the all important Christmas period. 30-50% discounts were not hard to find, even early on in the season, and the impact on the margins of these retailers will become clear soon enough. The ability of government to look at more bail-out type packages to support those who are next to fall off the cliff has got to be increasingly limited. Other non-financial solutions are being desperately looked at, in order for it to be as easy as possible for companies that are big employers to remain in business and keep paying wages.
Many of the companies that will fail, will do so because their balance sheet leverage increased over the past 10 years and as a consequence their sensitivity to margin erosion is acute. This tale is applicable to many more high street names - Boots, MFI, Countrywide, Hilton, Gala Coral, EMI for example. As these leveraged companies come to refinance their original loans (taken in the good times at low interest rates), banks will either choose not to refinance at all, or will do so at incredibly penal credit costs. 2009 will see plenty of covenant breaches on the loans that backed these highly levered deals, which will lead to banks embarking on restructuring programs that will see existing private equity investors diluted out of sight. At this point in time most of the debt that exists from the LBOs mentioned above trades in the market at yields that reflect that the private equity holders investments are worthless, and that these companies are technically insolvent. The insolvency expert Begbies Traynor has predicted that at least 15 national retail chains will go bust in the UK by mid January.
That is where we are heading, but the above commentary can be read in any newspaper so is not particularly revelationary. What is more compelling, and optimistic is that out of all this, there will be some really great opportunities for real business people to pick up the pieces. And these pieces will likely come at very low cost.
A private equity company (that one of the readers of this blog works for), was responsible for purchasing Whittards (the speciality tea and coffee maker) out of pre-packaged administration in the last couple of weeks. Whittards employs 950 people in 130 different stores across the UK. It generated close to £50mm worth of revenues last year, having been purchased by the now beleaguered Icelandic retail group, Baugur, for over £20mm 3 years ago. The sale price out of the "pre-packaged" administration process this time was believed to be less than £1mm. Presumably given Baugurs troubles, they were forced sellers as they would not have had the money to have put into the business at this point in time to get it back on track. I don't know the ins-and-outs of whether Whittards can be turned into a viable business, but if it can then the upside to the investors on their small purchase price could be huge. They are in effect buying a cheap call-option; not quite free, but close.
There will be plenty of opportunities of this nature that start to rise up from the ashes in 2009. I would suspect that there will be other non-private equity participants looking to enter the fray; consultancy firms who earn fees for fixing ailing business should probably look into this area. They have the right people in place to oversee the real business change that will lead ailing companies back onto the right track - so why not see the upside through ownership? I expect to see more fund raising taking place of this nature. Pre-packaged bankruptcies, where obligations to past creditors are close to nil, could well be the territory where the seeds for a broader economic recovery are grown. Governments will certainly be on the side of anyone who is willing to try to keep people employed in the process, especially if they don't have to spend any more taxpayers money. What is for sure is that there certainly won't be much sympathy for creditor complaints that have arisen out of the excesses of the past.
Monday, 29 December 2008
Monday, 22 December 2008
Status Anxiety
"Were an alien to pick up our news channels, it would conclude that human civilisation depended on the production of cheap plastic tat." This would be the outsiders view of our existence according to Tim Harford, in his book "The Logic of Life". For my money, he probably goes a bit far in discrediting our ability to produce useful things, but the importance of the consumer to economic growth during the last 25 years, particularly in the UK and the US, has been very clear.
In a simplified story-line, China has been the global producer of last resort, and the US has been the consumer of last resort. This plentiful arrangement had worked quite nicely for both parties up until recently. China funded a decent chunk of the credit that US consumers fed-on, and in return the US purchased the "tat" and not-so-tat stuff that was made in China, creating jobs, prosperity and a very large current account surplus in China. This surplus was then recycled into more US government and consumer debt, and more "tat" was bought to fill the houses that were rising in value so nicely in places like California and Florida. Then a wheel fell off the wagon.
Now, attempts to fix the broken wagon have almost been fully exhausted; the Federal Reserve has reduced interest rates to 0% and we have been through a variety of various asset purchase plans and bail-out plans. The only remaining tool left in the bag is to start printing money - which didn't work quite so well for the Weimar Republic in Germany in the early 1930s. Hyperinflation, and the Nazi party followed in short order.
Within the US and the UK, the solutions being proposed to "get things back on track" seem to be aimed at recreating a more sustainable version of the spend, borrow, work philosophy that successfully drove up economic growth over the past quarter of a century, and that also led to the current implosion. After the initial stage of the overall crisis, which started as a banking crisis, we have gone through several stages of thinking within what is termed the "real economy", that have led us in a downward spiral:
1) Pessimism. Fueled by news commentary on the plight of the financial system, which led to:
2) Lower planned spending;
3) More pessimism from banks, because of this lower planned spending. As a consequence, banks started to lend less;
4) Lower spending because of less consumer credit;
5) Lower earnings for companies because we are buying less of their stuff;
6) Less credit available to companies because their earnings are falling;
7) Companies can't get credit, so lower inventories/ stock or companies can't refinance debts so they either sell assets or default;
8) Banks need to lend less because the are taking writedowns against past loans to these failing companies;
9) Layoffs/ recession etc. etc.
It looks like in the short-run, there is a serious dependence on consumption to keep this legal "Madoff" scheme going ("Ponzi" is so last year). In the run up to Christmas, which the British theologian Don Cupitt referred to as "the Disneyfication of Christianity", we are reminded on news channels of how absolutely critical it is for our shopkeepers lives that we get out and spend this year.
In the longer term, perhaps there are more choices, and we could go about things in a different way. A completely counterintuitive approach might be that we collectively accept a lower average income and take more leisure time, doing things that don't involve consumer spending. It's interesting to note that the typical British man earns roughly twice what his father did at the same age, on an inflation adjusted basis. When today's children are in their forties and fifties, perhaps they will opt to use their increased prosperity to work less and take more leisure time. Instead of being twice as rich as their parents, they may opt to start their weekend on Wednesday afternoon. In theory this would be possible, as we are rich enough already. A survey done 10 years ago by a couple of US economists (Solnick and Hemenway) found that many Harvard students would rather have an income of $50,000 in a world where most people were poorer than an income of $100,000 in a world where most people were richer. Perhaps that survey says something about those Harvard graduates, but the point is played out across society. There is no rational economic logic to this behaviour.
To continue the theme of Harford's "The Logic of Life", he identifies this sort of behaviour with what he calls "status anxiety". The desire that "status anxiety" produces is almost insatiable because it is largely relative - the better someone else is doing, then the better you need to be doing. Perhaps in China, the opposite happens to what happens in the US; status comes not from having a yacht, but from having produced the most stuff and having saved the most. It is what George Soros would call a reflexive process; i.e. it is a self-reinforcing process, and becomes the bias of a society or culture. Neither route is necessarily right.
On a personal level, I would like to retain the choice to work longer, for more ability to consume or to work less for more free time, and to take the trade off decision at a personal level.
One worry is that the current response to the excesses of past consumerism, might make this trade off more difficult for us all. Current government bail-outs that are aimed at reinvigorating our consumer orientated economies will in effect be placing the motherload of a credit card bill onto future generations, which may limit those choices. Taxes will need to go up at some point in the future.
The erosion of tax revenues will only be made up by longer working lives, or more successful, innovative companies. If there is a collective move away from 'consumerism', towards working less and taking more leisure time we will see plenty of defaulting governments in 15-20 years time as the burden of today's debts are unmet by the desire of the next generation to sustain the approach our generation so eagerly lapped up.
As many people around the world are facing up to their relatively tough economic situations, there is evidence that a significant number are looking to reconsider their work/life balance - either through their own choosing, or through an enforced situation...i.e. they have been laid off. For many in this camp, the lucky ones who were closely involved in the gold-rush of the last 25 years, or those who've worked long enough to have achieved the standard of living their parents had at a considerably earlier age, there are real choices.
The flexibility to opt for a simpler more frugal existence is there for the taking, albeit that many people would say this is too difficult a change to contemplate; private school fees, 2 cars, golf club membership can't be given up. The alternatives are substantial; perhaps working in the 'day job' from monday to wednesday afternoon (by which time you will be at your parents income level) and then spending thursday and friday working on charity projects, sporting endeavours, or whatever else flicks our collective switches.
The burden of financial responsibility for the problems that the work, spend, borrow philosophy advocated over the past 25 years, is being shifted onto the next generation, who will not have been the beneficiaries of the 'good times', but will be picking up the tab. Is it fair, given that they may want to move down the route towards a more holistic lifestyle, that they should be burdened with an even greater responsibility for tax revenue generation than ever before?
It's a difficult time to be making policy decisions, but the law of unintended consequences may mean that widespread economic bailouts just reinforce the behaviour patterns that got us into this mess. As difficult as it is to swallow for many people and many businesses, it is important that sufficient pain is felt by the system in the short-to-medium term so that we are really forced to consider what approach we choose to collectively take for the long term.
In a simplified story-line, China has been the global producer of last resort, and the US has been the consumer of last resort. This plentiful arrangement had worked quite nicely for both parties up until recently. China funded a decent chunk of the credit that US consumers fed-on, and in return the US purchased the "tat" and not-so-tat stuff that was made in China, creating jobs, prosperity and a very large current account surplus in China. This surplus was then recycled into more US government and consumer debt, and more "tat" was bought to fill the houses that were rising in value so nicely in places like California and Florida. Then a wheel fell off the wagon.
Now, attempts to fix the broken wagon have almost been fully exhausted; the Federal Reserve has reduced interest rates to 0% and we have been through a variety of various asset purchase plans and bail-out plans. The only remaining tool left in the bag is to start printing money - which didn't work quite so well for the Weimar Republic in Germany in the early 1930s. Hyperinflation, and the Nazi party followed in short order.
Within the US and the UK, the solutions being proposed to "get things back on track" seem to be aimed at recreating a more sustainable version of the spend, borrow, work philosophy that successfully drove up economic growth over the past quarter of a century, and that also led to the current implosion. After the initial stage of the overall crisis, which started as a banking crisis, we have gone through several stages of thinking within what is termed the "real economy", that have led us in a downward spiral:
1) Pessimism. Fueled by news commentary on the plight of the financial system, which led to:
2) Lower planned spending;
3) More pessimism from banks, because of this lower planned spending. As a consequence, banks started to lend less;
4) Lower spending because of less consumer credit;
5) Lower earnings for companies because we are buying less of their stuff;
6) Less credit available to companies because their earnings are falling;
7) Companies can't get credit, so lower inventories/ stock or companies can't refinance debts so they either sell assets or default;
8) Banks need to lend less because the are taking writedowns against past loans to these failing companies;
9) Layoffs/ recession etc. etc.
It looks like in the short-run, there is a serious dependence on consumption to keep this legal "Madoff" scheme going ("Ponzi" is so last year). In the run up to Christmas, which the British theologian Don Cupitt referred to as "the Disneyfication of Christianity", we are reminded on news channels of how absolutely critical it is for our shopkeepers lives that we get out and spend this year.
In the longer term, perhaps there are more choices, and we could go about things in a different way. A completely counterintuitive approach might be that we collectively accept a lower average income and take more leisure time, doing things that don't involve consumer spending. It's interesting to note that the typical British man earns roughly twice what his father did at the same age, on an inflation adjusted basis. When today's children are in their forties and fifties, perhaps they will opt to use their increased prosperity to work less and take more leisure time. Instead of being twice as rich as their parents, they may opt to start their weekend on Wednesday afternoon. In theory this would be possible, as we are rich enough already. A survey done 10 years ago by a couple of US economists (Solnick and Hemenway) found that many Harvard students would rather have an income of $50,000 in a world where most people were poorer than an income of $100,000 in a world where most people were richer. Perhaps that survey says something about those Harvard graduates, but the point is played out across society. There is no rational economic logic to this behaviour.
To continue the theme of Harford's "The Logic of Life", he identifies this sort of behaviour with what he calls "status anxiety". The desire that "status anxiety" produces is almost insatiable because it is largely relative - the better someone else is doing, then the better you need to be doing. Perhaps in China, the opposite happens to what happens in the US; status comes not from having a yacht, but from having produced the most stuff and having saved the most. It is what George Soros would call a reflexive process; i.e. it is a self-reinforcing process, and becomes the bias of a society or culture. Neither route is necessarily right.
On a personal level, I would like to retain the choice to work longer, for more ability to consume or to work less for more free time, and to take the trade off decision at a personal level.
One worry is that the current response to the excesses of past consumerism, might make this trade off more difficult for us all. Current government bail-outs that are aimed at reinvigorating our consumer orientated economies will in effect be placing the motherload of a credit card bill onto future generations, which may limit those choices. Taxes will need to go up at some point in the future.
The erosion of tax revenues will only be made up by longer working lives, or more successful, innovative companies. If there is a collective move away from 'consumerism', towards working less and taking more leisure time we will see plenty of defaulting governments in 15-20 years time as the burden of today's debts are unmet by the desire of the next generation to sustain the approach our generation so eagerly lapped up.
As many people around the world are facing up to their relatively tough economic situations, there is evidence that a significant number are looking to reconsider their work/life balance - either through their own choosing, or through an enforced situation...i.e. they have been laid off. For many in this camp, the lucky ones who were closely involved in the gold-rush of the last 25 years, or those who've worked long enough to have achieved the standard of living their parents had at a considerably earlier age, there are real choices.
The flexibility to opt for a simpler more frugal existence is there for the taking, albeit that many people would say this is too difficult a change to contemplate; private school fees, 2 cars, golf club membership can't be given up. The alternatives are substantial; perhaps working in the 'day job' from monday to wednesday afternoon (by which time you will be at your parents income level) and then spending thursday and friday working on charity projects, sporting endeavours, or whatever else flicks our collective switches.
The burden of financial responsibility for the problems that the work, spend, borrow philosophy advocated over the past 25 years, is being shifted onto the next generation, who will not have been the beneficiaries of the 'good times', but will be picking up the tab. Is it fair, given that they may want to move down the route towards a more holistic lifestyle, that they should be burdened with an even greater responsibility for tax revenue generation than ever before?
It's a difficult time to be making policy decisions, but the law of unintended consequences may mean that widespread economic bailouts just reinforce the behaviour patterns that got us into this mess. As difficult as it is to swallow for many people and many businesses, it is important that sufficient pain is felt by the system in the short-to-medium term so that we are really forced to consider what approach we choose to collectively take for the long term.
Sunday, 14 December 2008
The Long View...
One of the most striking aspects of some of the grandest cathedrals in Europe is that these buildings tended to take an incredibly long time to complete. Notre Dame in Paris was started in 1163 and finished 1345, St. Peter's in Rome was started in 1506 and completed in 1626 (a bit of a rush job, that one), and Barcelona's Sagrada Familia - started in 1882 and still under construction. On the subject of the long construction period of the Sagrada Familia, Antoni Gaudi (the original architect) was reported to have commented that "...my client is not in a hurry". The agreeable client, God in this case, makes this "long view" a bit more viable.
What strikes me about these undertakings is that those who devoted their working lives to these magnificent, all encompassing, projects would likely in many cases never actually see the fruition of their work. Presumably the divine connection that they were attributing to their work, may have been sufficient compensation. Many of an atheistic persuasion would say that they were deluded. Personally, though, I'm glad that they did, whatever of their reasons. Those individuals involved in these projects will have had greater legacies attributable to them than most of the projects people concern themselves with in their working lives. The trade-off is that with mortgage payments to be met, banks tend not to accept 'godliness' as an acceptable form of credit, so most of us are pushed down the route of a form of pragmatic short-termism.
Recently, I had the opportunity to take a insiders tour of the Sagrada Familia, with the current leading architect and construction engineer on the project. The passion that was on display for their work was pretty awe inspiring - to be honest i was fairly jealous about feeling as engrossed in an undertaking as these guys did. I also set to thinking as to where else in the world, and what sort of other projects exist that encompass this "long view" mentality. What becomes clear is that the notion of what the term "long-term" means in the developed world is shorter than it used to be. There are cultural consistencies - the Japanese when asked for a nominal figure in years as to what the "long-term" means always give a longer time period than people from the US, but in both cases that figure is less than it was 25 years ago. There are plenty of good reasons for this - the acceleration of technology, the short-horizon perspective of market-drive economics, the next-election perspective of democracies, or the basic requirement for personal multi-tasking. All of these are on the increase.
Nevertheless, on the search for projects that encompass the long view, my brother (who was also on the Sagrada Familia tour) highlighted a group based in the US, called the Long Now Foundation. Their website advertises that they hope to "provide a counterpoint to today's 'faster/cheaper' mindset and promote 'slower/better' thinking. We hope to creatively foster responsibility in the framework of the next 10,000 years." Pretty heady stuff. The term "Long Now" was apparently coined by one of the founders of the foundation, Brian Eno (the former U2 producer), who upon moving from the UK to New York "found that here and now meant this room and this five minutes as opposed to the larger here and now he was used to back in England". The point of their foundation is to explore whatever may be helpful for thinking, understanding, and acting over very long periods of time.
The initial project that the Long Now Foundation decided to embark upon was the construction of a 10,000 year clock. The idea for this was borne out of an observation by a computer scientist called Danny Hillis, who helped form the Foundation.
"When I was a child, people used to talk about what would happen by the year 2000. For the next thirty years they kept talking about what would happen by the year 2000, and now no one mentions a future date at all. The future has been shrinking by one year per year for my entire life. I think it is time for us to start a long-term project that gets people thinking past the mental barrier of an ever-shortening future. I would like to propose a large (think Stonehenge) mechanical clock, powered by seasonal temperature changes. It ticks once a year, bongs once a century, and the cuckoo comes out every millenium."
A brilliant idea. The complexity of trying to design something of this nature is where the concept becomes really interesting. Once you start to think of the logistics and planning that would be required, especially in the knowledge that you need to get things right at the outset, because making big changes even in the early years of the project (the first thousand years or so) is going to be beyond your control. 10,000 years is roughly about as long as the history of human technology. There are very, very few pieces of technology that are that old, currently still in existence - basically a few fragments of pots. Geologically, though, 10,000 years is a drop in the ocean. When this group started thinking about building something that lasts that long, the real problem they established was not with decay and corrosion, or even with finding a sustainable power source. People are the real problem. If something becomes unimportant to people, it tends to get destroyed, or substituted. There are countless cathedrals that have not survived for these reasons.
The conclusion that was drawn by the foundation was that the only way to survive over the long run is to be made of materials large and worthless, like Stonehenge and the Pyramids, or to become lost. They point to the Dead Sea Scrolls, that managed to survive for a couple of thousand years because they were lost. Now they've been located and preserved in a museum, the sense is that they won't last as long again. The Pyramids and Stonehenge have survived close to 5000 years, but over time they have been periodically pillaged and looted and its not clear as to their original purpose.
The principles that directed the design of the clock were vast and complex. As a starting point, they considered the very basic idea of how to power it in a sustainable way. Options included atomic power (poor maintainability, transparency), chemical power (poor scalability) etc. (full list at http://www.longnow.org/projects/clock/principles). Other issues that were up for consideration were - how to create a source of timing, options for how to display time, what concept of time to display and where to house the clock to ensure survival. On this last question, given the failure of human constructions to have survived the test of time, they reverted to Nature. A mountain in the Great Basin National Park, Nevada, will house the clock on the basis of its remoteness (over 200miles from any city), and is a relatively inaccessible and inhospitable location.
Whether this project will survive the 10,000 year test of time, obviously remains for the future. It would be against the balance of probabilities if it did. What I find interesting in the design concepts that are raised by undertaking a project that is so forward looking is that there are so many variables to consider. Very basically, what the future looks like thousands of years forward, and what civilisation will look like at that time.
One of the criticisms of the endeavours of our current institutions; governments, companies, charities, agencies etc. is that they are constructed in ways that don't benefit from taking this design principle into their construction, and consequently find themselves in life-threatening difficulties when we have periods of relatively high stress. Much of this happens because these institutions are reactive as opposed to proactive about the direction they want to take themselves. What I mean by this is that a public company often runs itself on the basis that it needs to report on itself to stakeholders every 3 months. A proactive institution will have considered the long view design principles, not necessarily for 10,000 years, but over a longer period such that they are less surprised about the "once in a generation" shifts that occur. There is no guarantee that they will succeed in understanding the future context ahead of time, but considering it in the way the Long Now Foundation looked at the design issues the "Clock for the Long Now" encountered would certainly create a fighting chance during stressful periods, like now.
What strikes me about these undertakings is that those who devoted their working lives to these magnificent, all encompassing, projects would likely in many cases never actually see the fruition of their work. Presumably the divine connection that they were attributing to their work, may have been sufficient compensation. Many of an atheistic persuasion would say that they were deluded. Personally, though, I'm glad that they did, whatever of their reasons. Those individuals involved in these projects will have had greater legacies attributable to them than most of the projects people concern themselves with in their working lives. The trade-off is that with mortgage payments to be met, banks tend not to accept 'godliness' as an acceptable form of credit, so most of us are pushed down the route of a form of pragmatic short-termism.
Recently, I had the opportunity to take a insiders tour of the Sagrada Familia, with the current leading architect and construction engineer on the project. The passion that was on display for their work was pretty awe inspiring - to be honest i was fairly jealous about feeling as engrossed in an undertaking as these guys did. I also set to thinking as to where else in the world, and what sort of other projects exist that encompass this "long view" mentality. What becomes clear is that the notion of what the term "long-term" means in the developed world is shorter than it used to be. There are cultural consistencies - the Japanese when asked for a nominal figure in years as to what the "long-term" means always give a longer time period than people from the US, but in both cases that figure is less than it was 25 years ago. There are plenty of good reasons for this - the acceleration of technology, the short-horizon perspective of market-drive economics, the next-election perspective of democracies, or the basic requirement for personal multi-tasking. All of these are on the increase.
Nevertheless, on the search for projects that encompass the long view, my brother (who was also on the Sagrada Familia tour) highlighted a group based in the US, called the Long Now Foundation. Their website advertises that they hope to "provide a counterpoint to today's 'faster/cheaper' mindset and promote 'slower/better' thinking. We hope to creatively foster responsibility in the framework of the next 10,000 years." Pretty heady stuff. The term "Long Now" was apparently coined by one of the founders of the foundation, Brian Eno (the former U2 producer), who upon moving from the UK to New York "found that here and now meant this room and this five minutes as opposed to the larger here and now he was used to back in England". The point of their foundation is to explore whatever may be helpful for thinking, understanding, and acting over very long periods of time.
The initial project that the Long Now Foundation decided to embark upon was the construction of a 10,000 year clock. The idea for this was borne out of an observation by a computer scientist called Danny Hillis, who helped form the Foundation.
"When I was a child, people used to talk about what would happen by the year 2000. For the next thirty years they kept talking about what would happen by the year 2000, and now no one mentions a future date at all. The future has been shrinking by one year per year for my entire life. I think it is time for us to start a long-term project that gets people thinking past the mental barrier of an ever-shortening future. I would like to propose a large (think Stonehenge) mechanical clock, powered by seasonal temperature changes. It ticks once a year, bongs once a century, and the cuckoo comes out every millenium."
A brilliant idea. The complexity of trying to design something of this nature is where the concept becomes really interesting. Once you start to think of the logistics and planning that would be required, especially in the knowledge that you need to get things right at the outset, because making big changes even in the early years of the project (the first thousand years or so) is going to be beyond your control. 10,000 years is roughly about as long as the history of human technology. There are very, very few pieces of technology that are that old, currently still in existence - basically a few fragments of pots. Geologically, though, 10,000 years is a drop in the ocean. When this group started thinking about building something that lasts that long, the real problem they established was not with decay and corrosion, or even with finding a sustainable power source. People are the real problem. If something becomes unimportant to people, it tends to get destroyed, or substituted. There are countless cathedrals that have not survived for these reasons.
The conclusion that was drawn by the foundation was that the only way to survive over the long run is to be made of materials large and worthless, like Stonehenge and the Pyramids, or to become lost. They point to the Dead Sea Scrolls, that managed to survive for a couple of thousand years because they were lost. Now they've been located and preserved in a museum, the sense is that they won't last as long again. The Pyramids and Stonehenge have survived close to 5000 years, but over time they have been periodically pillaged and looted and its not clear as to their original purpose.
The principles that directed the design of the clock were vast and complex. As a starting point, they considered the very basic idea of how to power it in a sustainable way. Options included atomic power (poor maintainability, transparency), chemical power (poor scalability) etc. (full list at http://www.longnow.org/projects/clock/principles). Other issues that were up for consideration were - how to create a source of timing, options for how to display time, what concept of time to display and where to house the clock to ensure survival. On this last question, given the failure of human constructions to have survived the test of time, they reverted to Nature. A mountain in the Great Basin National Park, Nevada, will house the clock on the basis of its remoteness (over 200miles from any city), and is a relatively inaccessible and inhospitable location.
Whether this project will survive the 10,000 year test of time, obviously remains for the future. It would be against the balance of probabilities if it did. What I find interesting in the design concepts that are raised by undertaking a project that is so forward looking is that there are so many variables to consider. Very basically, what the future looks like thousands of years forward, and what civilisation will look like at that time.
One of the criticisms of the endeavours of our current institutions; governments, companies, charities, agencies etc. is that they are constructed in ways that don't benefit from taking this design principle into their construction, and consequently find themselves in life-threatening difficulties when we have periods of relatively high stress. Much of this happens because these institutions are reactive as opposed to proactive about the direction they want to take themselves. What I mean by this is that a public company often runs itself on the basis that it needs to report on itself to stakeholders every 3 months. A proactive institution will have considered the long view design principles, not necessarily for 10,000 years, but over a longer period such that they are less surprised about the "once in a generation" shifts that occur. There is no guarantee that they will succeed in understanding the future context ahead of time, but considering it in the way the Long Now Foundation looked at the design issues the "Clock for the Long Now" encountered would certainly create a fighting chance during stressful periods, like now.
Sunday, 7 December 2008
Life is about choices...
A few years ago I was lucky enough to take a trip to follow the Inca Trail to Machu Picchu in Peru. Machu Picchu is often referred to as the "Lost City of the Incas", or at least it was lost until a US historian Hiram Bingham rediscovered it after several centuries of lostness in 1911. Since then it has become a major tourist destination, attracting close to 400,000 visitors per year, many of whom travel south from the USA. It was a great trip, to what is a magical place. For some reason, though, I regularly recall a particularly inconspicuous memory from the trip. I was walking outside of Aguas Calientes, which was the small town nearby to Machu Picchu, one afternoon at the base of a very steep rock face. On a part of this face some wise old bean had knocked in some metal rungs, to form a kind of ladder that stretched a hundred odd feet up to a ledge, where presumably you could get a decent view of the area. At first glance the ladder looked reasonably official and fairly well put together, so I decided to head upwards. I got about 5-6 rungs up the ladder and thought this just isn't safe, because there wasn't much to cling on to and it was for all intents and purposes a vertical incline. So I lowered myself back down, and began to ponder why someone could be allowed to put such an unsafe ladder there. I will call my Peruvian legal council I joked to myself.
Later that afternoon back at the backpackers lodge I was staying at I saw a couple returning from what clearly had been an unsucessful tourist outing. The couple were American and the lady was on crutches having just returned from hospital. She had broken her leg in a fall, and they were picking up their gear before heading home from their now shortened "holiday of a lifetime". I asked the husband what had happened. They had been out having a stroll around Aguas Calientes the previous evening and had seen a metal runged ladder hammered into a vertical rock face, that appeared to lead a hundred odd feet up to a good lookout point. They headed up, thinking that it was a little unsafe, but thinking that it couldn't be too unsafe because otherwise someone would have put a warning sign up, or something health and safety conscious to that effect. Unfortunately his wife had fallen from about the 20th rung up, and had broken her leg in the fall.
What was interesting to me was that this guy was angry at what had happened, not with his wife, but with the local tourist authorities for the ladders existence. He said that if he could have sued somebody he would, and would certainly have done so if it had happened back in the USA. I listened to his unfortunate situation sympathetically - on the exterior, but in the quiet avenues of my mind I was thinking "what a pair of muppets". I regularly think about this when the concept of personal responsibility is up for discussion. Sometimes there are fairly humorous examples of a society's willingness to "outsource" personal responsibility and pass it into the hands of a legal body, agency, a committee, anybody really. For example:
I was reading a newspaper report earlier this week, that outlined how a Brooklyn jury awarded just over $4.5mm to Anderson Alexander, a former New York City police detective injured when the office chair he was sitting on tipped over and he shot himself in the knee with a 9mm Smith & Wesson he was holding.
"This case is not about him shooting himself," Alexander's lawyer Matthew Maiorana told the Daily News. "This case is about a broken chair and an unsafe workplace..."
I cracked on searching for further gems of this nature. You don't have to search very hard...
"A Canadian woman whose 9-year-old son tunneled (under a fence) into an electric sub-station and was badly burned is suing the Manitoba power utility for negligence"
"Brian Hopkins, 25, of Astoria, Queens, New York City, 'who survived an electric shock and fire two years ago when he climbed atop an empty, stationary Amtrak train after a night bar hopping in Boston is suing the railroad - because Amtrak didn't do enough to protect trespassers like him."
These cases are at the comical end of the spectrum, here silly individuals claim that it's someone elses fault that they are silly. Silliness all round you could say. I recall a university lecturer of mine talking about how economics was about choices. He recalled an experience when his 8-year-old daughter and him were going on a walk. He had told her to take her jacket because it was chilly outside. "No, I don't need it," she refuted. He explained to her that she would get cold if she didn't have her jacket, yet she still insisted she didn't need it. "Fine", he said and they went out for the walk. Five minutes later she began to start muttering about how cold it was and was rubbing her arms. What was his response to this? Cut the walk short? Give her his coat? No, he made her walk the rest of the way home enduring the cold. "Life is about choices", he explained to his daughter.
60 years ago people reading this article would say of this example, “Well done, he taught his daughter a valuable lesson.” But today, many reading this would cry, “Child Abuse!". Personal protection is obviously good, but only up to a point. In the liberal societies that we live, freedom of choice is generally considered to be a good thing. I agree. The price of that though, should be that you bear the consequences of the choices that you make, again up to a point. The various groups that have the goal to help people make better choices - governments, regulators, charities etc. - should not by accident be encouraging people to be less self aware and take more risks because of the insurance and legal claims they can call upon if something goes wrong.
The current financial mess is in large part caused by risk-taking behaviour that was excessive because it was fed by a feeling that if something went wrong then the fall out would be somewhere else and somebody elses problem. This runs right through the financial system: from the guy with a poor credit rating, who bought a house he could only afford in very specific circumstances, sold to him by a mortgage broker who knew that he wouldn't be responsible for that loan for more than about 20 seconds, to the banks that bought these loans with a view to repackaging them and selling them on to a hedge fund manager who was investing money that wasn't his, to the successful property millionaire who had invested his money with the hedge fund on the back of making vast fortunes building cheap homes that were being sold to those who couldn't really afford them if the truth be told. Each one of those participants were encouraged by the notion that the personal "fall-out" of their actions could be blamed and claimed against somebody else. Wise up, because now it's every man for himself.
As Herbert Spencer aptly said, “The ultimate result of shielding men from the effects of folly is to fill the world with fools.”
Later that afternoon back at the backpackers lodge I was staying at I saw a couple returning from what clearly had been an unsucessful tourist outing. The couple were American and the lady was on crutches having just returned from hospital. She had broken her leg in a fall, and they were picking up their gear before heading home from their now shortened "holiday of a lifetime". I asked the husband what had happened. They had been out having a stroll around Aguas Calientes the previous evening and had seen a metal runged ladder hammered into a vertical rock face, that appeared to lead a hundred odd feet up to a good lookout point. They headed up, thinking that it was a little unsafe, but thinking that it couldn't be too unsafe because otherwise someone would have put a warning sign up, or something health and safety conscious to that effect. Unfortunately his wife had fallen from about the 20th rung up, and had broken her leg in the fall.
What was interesting to me was that this guy was angry at what had happened, not with his wife, but with the local tourist authorities for the ladders existence. He said that if he could have sued somebody he would, and would certainly have done so if it had happened back in the USA. I listened to his unfortunate situation sympathetically - on the exterior, but in the quiet avenues of my mind I was thinking "what a pair of muppets". I regularly think about this when the concept of personal responsibility is up for discussion. Sometimes there are fairly humorous examples of a society's willingness to "outsource" personal responsibility and pass it into the hands of a legal body, agency, a committee, anybody really. For example:
I was reading a newspaper report earlier this week, that outlined how a Brooklyn jury awarded just over $4.5mm to Anderson Alexander, a former New York City police detective injured when the office chair he was sitting on tipped over and he shot himself in the knee with a 9mm Smith & Wesson he was holding.
"This case is not about him shooting himself," Alexander's lawyer Matthew Maiorana told the Daily News. "This case is about a broken chair and an unsafe workplace..."
I cracked on searching for further gems of this nature. You don't have to search very hard...
"A Canadian woman whose 9-year-old son tunneled (under a fence) into an electric sub-station and was badly burned is suing the Manitoba power utility for negligence"
"Brian Hopkins, 25, of Astoria, Queens, New York City, 'who survived an electric shock and fire two years ago when he climbed atop an empty, stationary Amtrak train after a night bar hopping in Boston is suing the railroad - because Amtrak didn't do enough to protect trespassers like him."
These cases are at the comical end of the spectrum, here silly individuals claim that it's someone elses fault that they are silly. Silliness all round you could say. I recall a university lecturer of mine talking about how economics was about choices. He recalled an experience when his 8-year-old daughter and him were going on a walk. He had told her to take her jacket because it was chilly outside. "No, I don't need it," she refuted. He explained to her that she would get cold if she didn't have her jacket, yet she still insisted she didn't need it. "Fine", he said and they went out for the walk. Five minutes later she began to start muttering about how cold it was and was rubbing her arms. What was his response to this? Cut the walk short? Give her his coat? No, he made her walk the rest of the way home enduring the cold. "Life is about choices", he explained to his daughter.
60 years ago people reading this article would say of this example, “Well done, he taught his daughter a valuable lesson.” But today, many reading this would cry, “Child Abuse!". Personal protection is obviously good, but only up to a point. In the liberal societies that we live, freedom of choice is generally considered to be a good thing. I agree. The price of that though, should be that you bear the consequences of the choices that you make, again up to a point. The various groups that have the goal to help people make better choices - governments, regulators, charities etc. - should not by accident be encouraging people to be less self aware and take more risks because of the insurance and legal claims they can call upon if something goes wrong.
The current financial mess is in large part caused by risk-taking behaviour that was excessive because it was fed by a feeling that if something went wrong then the fall out would be somewhere else and somebody elses problem. This runs right through the financial system: from the guy with a poor credit rating, who bought a house he could only afford in very specific circumstances, sold to him by a mortgage broker who knew that he wouldn't be responsible for that loan for more than about 20 seconds, to the banks that bought these loans with a view to repackaging them and selling them on to a hedge fund manager who was investing money that wasn't his, to the successful property millionaire who had invested his money with the hedge fund on the back of making vast fortunes building cheap homes that were being sold to those who couldn't really afford them if the truth be told. Each one of those participants were encouraged by the notion that the personal "fall-out" of their actions could be blamed and claimed against somebody else. Wise up, because now it's every man for himself.
As Herbert Spencer aptly said, “The ultimate result of shielding men from the effects of folly is to fill the world with fools.”
Monday, 1 December 2008
When I grow up I want to be...
When I was growing up in Dublin in the early 1980s, my uncle Jim regularly asked me what I wanted to be when I grew up. Jim worked for the insurance and pensions company Prudential, or "the Pru" as he would proudly say in his thick (ish) Northern Irish accent. He was a great advocate of his job, but suggested that I'd make a good lawyer, disturbingly because he thought I could lie well. I used to tell him that I wanted to be a train driver.
Over time, I lost my focus and variously moved through aspirations to play for Manchester United, to wanting to be a professional golfer. In fact the only unifying thing that I can think of was that I wanted to do something that was its own end, meaning that I wanted to score the winning goal in FA cup final, not to be the coach. Later as i moved through the latter stages of school and then on to university the reality dawned somewhat that a) you are slow and can't hit a barn door from 15 yards with a football, or a golf ball for that matter and b) that train driving may not be the lucrative sort of job that will make you a "catch" with the girls you are trying to impress, or help fund the lifestyle that James Bond seems to make look so compelling.
The prolific US bank robber Willie Sutton was once asked by a journalist late in his life:
"Willie, why did you rob banks?" to which he responded quite reasonably "...'cos that's where the money is."
Although I'm keen not to draw a direct parallel between myself and Willie Sutton, the truth is that when I was moving through the latter stages of an economics degree at university the most appealing places to work were investment banks. Cos that was where the money was. The milkround was full of glamorous looking, seemingly big hitters who were only a couple of years older than me. They were living the work-hard, play-hard, moneyed lifestyles that seemed to be an attractive kickstart to the ultimate journey towards success, whatever that was. A couple of years later I found myself returning as one of these people on recruitment trips for Lehman Brothers amongst the Dublin graduates, feeling a bit like the "boy done good" and advocating the banking lifestyle to the current crop of the best graduates that Dublin had to offer. My sister still, rightly, takes the micky out of one of the presentations that we gave in Dublin, where one of the senior Lehman guys spoke of new graduates having an immediate impact when they start their careers for Lehman - the phrase he used was "flying your desk". Worthy of micky taking, to be fair.
The world for university graduates of 2009 will be very different. Across the board graduate recruitment by investment banks will either be non-existent (Lehman for one) or scaled back to almost nil. For the best and the brightest from undergraduate and the MBA universe, things must seem pretty confusing. The Dean of the Harvard Business School was quoted last year saying that he would only buy shares in the US stock markets again when the percentage of his MBA students going into investment banking jobs was less than 10%. Last year it was 41% of the class that went to investment banking jobs. The forward looking statistics for this year showed that 45% of the MBA class were targeting investment banking jobs; albeit that these statistics were put together before the full extent to the current financial mire was known. The statistics for 2009 may well tell a different story.
The point of view the Harvard Dean was trying to express was that banking was always meant to be the facilitator in real business, being the coach, not the goalscorer, i.e. not the end game in itself. A crucial part of the economic jigsaw, but in my view and his not the most important. Banks move capital around the system to the places where that capital is going to get the best reward for a given level of risk. A lot of the time they aren't very good at this. What they don't do is make the widgets, cars, baby-shuffles (whatever they are) that improve the quality of life of people in the world. "Non-financial" companies do that. Banks cannot create jobs in and of themselves, they only exist because of the ambition and entrepreneurship that exists amongst these non-financial companies. Banks facilitate these companies growth by organising their financing requirements, and the banks should do well when their clients do well, but not the other way round. If the movers and shakers that were coming out of Harvard were aspiring not to be creating or joining great non-financial companies, but more to be facilitators of others who ran great companies then there was something at issue. Why had we found ourselves in a situation where instead of being the person to hole the putt to win the Open, the aspiration was to be the proverbial caddy?
The answer was 'cos that was where the money was', and the ability to create that sense of achievement within that "caddying" part of the economy. The ability of investment banks to pay starting salaries of $150,000 to MBA graduates, with potential for bonuses, and for the real prospect of earning many hundreds of thousand or even millions of dollars within a 5 year period, was hard to baulk at. That world no longer exists. I would predict that we will see a reversal of the trend, back to the way it was when my Dad finished his MBA at the London Business School in early 1970s.The jobs to be getting then were with industrial companies, who made real things themselves.
A positive point amidst the changing scenery is that many of the worlds great companies were formed at times of high economic stress. Microsoft is an excellent case in point. The capacity for the brightest minds coming out of top level education to come up with new ways of creating their own version of success is likely, I think, to be fuelled more at this time than when it was 'easy' to slide into a well paid banking job and thrive financially that way.
In an interview with the FT this week, the Chief Executive of Cobham, the UK aerospace and defence company, was asked: "Do you think this crisis shows that the UK has become too dependent on financial services?" Alan Cook responded: "We employ about 300,000 people in the industry in the UK, either through the supply chain or through original equipment manufacturers. From our point of view, we're really dependent upon recruiting some really key talent from universities and from further education. I see this as a window of opportunity, because in the past 10 years students have been encouraged to join banks and brokers with the desire to earn vast sums of money, huge bonuses and a glittering career. I think maybe we've suffered from that. Now we're looking at turning round to our graduates and young people and saying look, this manufacturing and engineering is a fantastic opportunity for you. Grasp it, take it, this is where the careers are."
As something to be impressed by, or to be proud of, maybe it would be more impressive dinner party conversation in Notting Hill to say - "I helped design the Eclipse 750 jet, which we flew from London to Courchevel for our family ski trip last half-term" rather than "I helped facilitate the design of the jet that we flew last week, by lending the money to the smart people who knew what they were doing."
Over time, I lost my focus and variously moved through aspirations to play for Manchester United, to wanting to be a professional golfer. In fact the only unifying thing that I can think of was that I wanted to do something that was its own end, meaning that I wanted to score the winning goal in FA cup final, not to be the coach. Later as i moved through the latter stages of school and then on to university the reality dawned somewhat that a) you are slow and can't hit a barn door from 15 yards with a football, or a golf ball for that matter and b) that train driving may not be the lucrative sort of job that will make you a "catch" with the girls you are trying to impress, or help fund the lifestyle that James Bond seems to make look so compelling.
The prolific US bank robber Willie Sutton was once asked by a journalist late in his life:
"Willie, why did you rob banks?" to which he responded quite reasonably "...'cos that's where the money is."
Although I'm keen not to draw a direct parallel between myself and Willie Sutton, the truth is that when I was moving through the latter stages of an economics degree at university the most appealing places to work were investment banks. Cos that was where the money was. The milkround was full of glamorous looking, seemingly big hitters who were only a couple of years older than me. They were living the work-hard, play-hard, moneyed lifestyles that seemed to be an attractive kickstart to the ultimate journey towards success, whatever that was. A couple of years later I found myself returning as one of these people on recruitment trips for Lehman Brothers amongst the Dublin graduates, feeling a bit like the "boy done good" and advocating the banking lifestyle to the current crop of the best graduates that Dublin had to offer. My sister still, rightly, takes the micky out of one of the presentations that we gave in Dublin, where one of the senior Lehman guys spoke of new graduates having an immediate impact when they start their careers for Lehman - the phrase he used was "flying your desk". Worthy of micky taking, to be fair.
The world for university graduates of 2009 will be very different. Across the board graduate recruitment by investment banks will either be non-existent (Lehman for one) or scaled back to almost nil. For the best and the brightest from undergraduate and the MBA universe, things must seem pretty confusing. The Dean of the Harvard Business School was quoted last year saying that he would only buy shares in the US stock markets again when the percentage of his MBA students going into investment banking jobs was less than 10%. Last year it was 41% of the class that went to investment banking jobs. The forward looking statistics for this year showed that 45% of the MBA class were targeting investment banking jobs; albeit that these statistics were put together before the full extent to the current financial mire was known. The statistics for 2009 may well tell a different story.
The point of view the Harvard Dean was trying to express was that banking was always meant to be the facilitator in real business, being the coach, not the goalscorer, i.e. not the end game in itself. A crucial part of the economic jigsaw, but in my view and his not the most important. Banks move capital around the system to the places where that capital is going to get the best reward for a given level of risk. A lot of the time they aren't very good at this. What they don't do is make the widgets, cars, baby-shuffles (whatever they are) that improve the quality of life of people in the world. "Non-financial" companies do that. Banks cannot create jobs in and of themselves, they only exist because of the ambition and entrepreneurship that exists amongst these non-financial companies. Banks facilitate these companies growth by organising their financing requirements, and the banks should do well when their clients do well, but not the other way round. If the movers and shakers that were coming out of Harvard were aspiring not to be creating or joining great non-financial companies, but more to be facilitators of others who ran great companies then there was something at issue. Why had we found ourselves in a situation where instead of being the person to hole the putt to win the Open, the aspiration was to be the proverbial caddy?
The answer was 'cos that was where the money was', and the ability to create that sense of achievement within that "caddying" part of the economy. The ability of investment banks to pay starting salaries of $150,000 to MBA graduates, with potential for bonuses, and for the real prospect of earning many hundreds of thousand or even millions of dollars within a 5 year period, was hard to baulk at. That world no longer exists. I would predict that we will see a reversal of the trend, back to the way it was when my Dad finished his MBA at the London Business School in early 1970s.The jobs to be getting then were with industrial companies, who made real things themselves.
A positive point amidst the changing scenery is that many of the worlds great companies were formed at times of high economic stress. Microsoft is an excellent case in point. The capacity for the brightest minds coming out of top level education to come up with new ways of creating their own version of success is likely, I think, to be fuelled more at this time than when it was 'easy' to slide into a well paid banking job and thrive financially that way.
In an interview with the FT this week, the Chief Executive of Cobham, the UK aerospace and defence company, was asked: "Do you think this crisis shows that the UK has become too dependent on financial services?" Alan Cook responded: "We employ about 300,000 people in the industry in the UK, either through the supply chain or through original equipment manufacturers. From our point of view, we're really dependent upon recruiting some really key talent from universities and from further education. I see this as a window of opportunity, because in the past 10 years students have been encouraged to join banks and brokers with the desire to earn vast sums of money, huge bonuses and a glittering career. I think maybe we've suffered from that. Now we're looking at turning round to our graduates and young people and saying look, this manufacturing and engineering is a fantastic opportunity for you. Grasp it, take it, this is where the careers are."
As something to be impressed by, or to be proud of, maybe it would be more impressive dinner party conversation in Notting Hill to say - "I helped design the Eclipse 750 jet, which we flew from London to Courchevel for our family ski trip last half-term" rather than "I helped facilitate the design of the jet that we flew last week, by lending the money to the smart people who knew what they were doing."
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