“Practical wisdom,” Aristotle told us, “is the combination of moral will and moral skill.” A wise person knows when and how to make the exception to every rule, as the janitors knew when to ignore the job duties in the service of other objectives. A wise person knows how to improvise,as Luke did when he re-washed the floor. Real-world problems are often ambiguous and ill-defined and the context is always changing. A wise person is like a jazz musician — using the notes on the page, but dancing around them, inventing combinations that are appropriate for the situation and the people at hand. A wise person knows how to use these moral skills in the service of the right aims. To serve other people, not to manipulate other people. And finally, perhaps most important, a wise person is made, not born. Wisdom depends on experience, and not just any experience. You need the time to get to know the people that you’re serving. You need permission to be allowed to improvise, try new things, occasionally to fail and to learn from your failures. And you need to be mentored by wise teachers.”

Bill decides to sell his business to his good friend Dick. He needs the money to pay for his third divorce. Dick, who doesn’t know anything about Bill’s business hires Bill back at more than his existing pay package.  Dick doesn’t use his own money to buy Bill’s business, he borrows all of it from from Bob.

Servicing all that debt, paying that big salary, and generating a return for Dick puts a strain on the business Bill’s grandfather built.  Bill announces that he can no longer afford to offer health care and that people will need to take a pay cut.  He blames the government (the one he got the tax break from; the one that buys half his product) and foreign competition.  He blames his employees.

Meanwhile Bob has bundled Dick’s loan with a bunch of other loans and sold them to George.  This allows Bob to lock in his return while completely eliminating his downside.  George pays Bob to service the loans.

Bill becomes less and less interested in doing things that made his grandfather’s business great, like developing new products, thinking of new ways to delight customers, and keeping his employees motivated. He has too much to do courting his soon to be fourth wife.  He moves out of town to a big house.  He plays golf with Dick, Bob and their Senator.  They discuss things that they shouldn’t, but there’s nobody around to listen or to enforce the law anyway.

Dick needs more money to fund his other financial adventures so he pressures Bill to increase his margins and generate more cash.  Because Bill hasn’t been taking care of business, most of his customers have moved on.  In fact, the only customer he has any more is the government.  He blames his employees. He makes a contribution to his Senator’s PAC. Soon another contract shows up.  He also cuts benefits further, cuts pay, and fires his older workers.  He travels to China and negotiates a contract to have some of his manufacturing done there.  Margins improve. Bill and Dick pays themselves a bonus.

Meanwhile Dick buys three more businesses with money he borrows from Bob. He’s now his own conglomerate. Bob is celebrated as a hot shot at his bank. It’s a great American Success Story. Dick pays himself a bonus. Bob gets paid a bonus. George buys more loans from Dick which he packages and resells. He also buys a credit default swap that will pay off big if Bill’s business goes in the tank and shorts the stock of the bank where Bob works.

It turns out that the orignal loan to Dick had a variable rate and reindexed after three years.  Payments are now going up.  Dick, Bob, and George all want more money from Bill.  Productivity at Bill’s company has gone down, perhaps having to do with the fact that the employees have taken repeated pay cuts, have no more benefits, and have watched as their brothers and neighbors have been fired over the past several years. Bill blames them for the financial pressure he’s feeling . . . when he’s not blaming the government, the same one that buys his product and to whom he doesn’t pay taxes, and the Chinese competition that he buys from.

Bill makes across the board cuts.  He also borrows more money to buy some equipment that will allow him to replace even more employees.  He buys a new car with tinted windows so he doesn’t have to look at all those sullen homeless people that keep popping up. He gives himself a raise.

Oh no, suddenly the economy turns sour.  Who could see it coming?  Nobody.  These things just don’t happen.  It’s not supposed to be this way!  It’s a plot!

Bob is in a panic because his whole world has just collapsed: He may have to close up the summer place early this year! He pressures Dick to collect his loan even though it’s not due.

Now Dick is in a panic.  All of his loans are coming due, he doesn’t actually have any equity, and his investors want their money back . . . and there isn’t any.  It turns out he used it to buy art, boats, jewelry . . .

Now Bill is in a panic.  He fires even more people, becoming nothing more than sales agent for the Chinese. He blames rapacious lenders. He blames short-sighted shareholders. He blames his employees for not doing more.

Bill goes to town hall meetings and rails at the blight of all those homeless people in the town he used to live in.  He becomes apoplectic at the idea of the government stepping in to help his former employees, even though he doesn’t actually pay any taxes himself.  Taking money from the government is socialism.  It’s nothing but income redistribution from productive people like Bill, Bob, and George to people who should do more to help themselves.  He and Dick pay themselves a bonus.

In the end, the company that Bill’s grandfather built and his father turned into a success is closed. George makes a killing on the credit default swap and even more on shorting Bob’s bank.

Dick goes to jail where he finds religion.

Bob now specializes in troubled debt and is making a fortune. Again.

Bill rediscovers his grandfather’s entrepreneurial fervor.  He is now seeking stimulus money from the government he loathes and didn’t pay taxes to in order to start a new business building wind mills.  He will buy parts and assemblies from the Chinese and Fins and use equipment bought from the Germans, Japanese and Chinese to do final assembly. He will get a tax credit for hiring back some of his old employees at 60% of what he used to pay them.  He offers no benefits figuring that the socialist government he hates will take care of that.

The first thing he does upon receiving his stimulus money is pay himself a bonus.

The second thing he does is make a contribution to the local Tea Party.  He’s mad as hell and he’s not going to take it anymore.

And so it goes.

For most of the things in our lives, we have too many choices and the differences are miniscule.  Walk down any aisle in your favorite supermarket, warehouse club, or electronics store if you need an example.

We hate making choices in situations like these.  There is more information than we can manage in working memory.  We become overwhelmed.  So rather than make a choice, we pick.

Making a choice means we have considered reasons for doing something.  We can discern the distinctions, they are relevant, and they are meaningful.

Picking something means the opposite.  We are not able to discern meaningful, relevant, or interesting distinctions (even if they exist).  So we give up and go with the (red, cheap, tall, short, closest, easiest, etc.) one.  Any reason will do as long as it makes the confusion stop.

For decisions that really matter, we seem to have the opposite problem.  We give ourselves too few choices.  Generating alternatives is hard work, it may mean we must break existing mental models, and it often requires that we admit something we are doing currently no longer works.  So we jump at the first option that looks good and hope for the best.

The single best thing you can do in this case is to give yourself interesting, attractive, and doable alternatives when you have an important decision to make.

I found an interesting example of the concept of too many choices in action in the New York Times the other day.

Everything Apple produces these days is a hit.  An obvious example is the ubiquitous iphone, a gadget many pundits tagged for failure when it first came out.  One of the reasons given by the naysayers, and this is true of nearly everything that Apple does, is that the system isn’t open, meaning that the company exercises a significant amount of control over the use of the product.  It turns out that consumers appreciate the lack of choice, or the presence of a strong editor.

“Apple represents the “auteur model of innovation,” observes John Kao, a consultant to corporations and governments on innovation. In the auteur model, he said, there is a tight connection between the personality of the project leader and what is created. Movies created by powerful directors, he says, are clear examples, from Alfred Hitchcock’s “Vertigo” to James Cameron’s “Avatar.”

At Apple, there is a similar link between the ultimate design-team leader, Mr. Jobs, and the products. From computers to smartphones, Apple products are known for being stylish, powerful and pleasing to use. They are edited products that cut through complexity, by consciously leaving things out — not cramming every feature that came into an engineer’s head, an affliction known as “featuritis” that burdens so many technology products.

“A defining quality of Apple has been design restraint,” says Paul Saffo, a technology forecaster and consultant in Silicon Valley.”

Fast forward to the present day.  Apple has opened their iPhone platform to third party apps.  Happy day, choice returns.  Except it turns out nobody is that interested.

The average iPhone or iPod Touch owner uses 5 to 10 apps regularly, according to Flurry, a research firm that studies mobile trends. This despite the surfeit of available apps: some 140,000 and counting.

Last week’s announcement of the Apple iPad, a tablet device that runs iPhone applications and will not be available until March, has already spurred the development of more, including a version of a drawing app called Brushes; Nova, a shooter game; and Apple’s own app called iBooks, which will connect to its new online e-bookstore.

But that doesn’t mean that people will change their habits. Actually, it may just make them feel a tad more overwhelmed. The next generation of gadget users might prove different, but for now it is clear that people prefer fewer choices, and that they gravitate consistently toward the same small number of things that they like. Owners of iPhones are no different from cable TV subscribers with hundreds of channels to choose from who end up watching the same half-dozen.

When you have a difficult decision to make, and at this point picking a mobile phone shouldn’t be one, give yourself choices.  For low consequence choices, you are better off with fewer.  You will choose more easily and be happier with your decision.

This is a must watch. You have never seen anything like it. It was forwarded to me by a colleague.

This video shows the winner of ” Ukraine’s Got Talent”, Kseniya Simonova, 24, drawing a series of pictures on an illuminated sand table showing how ordinary people were affected by the German invasion during World War II. Her talent, which admittedly is a strange one, is mesmeric to watch.

The images, projected onto a large screen, moved many in the audience to tears and she won the top prize of about £75,000.

She begins by creating a scene showing a couple sitting holding hands on a bench under a starry sky, but then warplanes appear and the happy scene is obliterated.

It is replaced by a woman’s face crying, but then a baby arrives and the woman smiles again. Once again war returns and Miss Simonova throws the sand into chaos from which a young woman’s face appears.

She quickly becomes an old widow, her face wrinkled and sad, before the image turns into a monument to an Unknown Soldier.

This outdoor scene becomes framed by a window as if the viewer is looking out on the monument from within a house.

In the final scene, a mother and child appear inside and a man standing outside, with his hands pressed against the glass, saying goodbye.

The Great Patriotic War, as it is called in Ukraine , resulted in one in four of the population being killed with eight to 11 million deaths out of a population of 42 million.

Kseniya Simonova says:

“I find it difficult enough to create art using paper and pencils or paintbrushes, but using sand and fingers is beyond me. The art, especially when the war is used as the subject matter, even brings some audience members to tears. And there’s surely no bigger compliment.”

Please take time out to see this amazing piece of art. Think about it often, particularly when you watch something vapid like American Idol

Financial Highlights

Obama

Dow at the beginning of the year: 8,281.22
Dow at the end of the year: 10,428.05

Bush

Dow at the beginning of the year: 10,887.36
Dow at the end of the year: 9,920

Advantage Obama

Obama inherited an economy that had incinerated on the previous guy’s watch.
Bush inherited a massive budget surplus.  9/11 didn’t help the market, but hey, it happened on his watch.

Islamic Jihad Highlights

Obama

Islamic radical, who in retrospect we knew about and could have stopped, lights his underwear on fire.

Bush

Islamic radicals, who in retrospect we knew about and could have stopped, crash four planes, two of which destroy the World Trade Center.

Advantage Obama

This one isn’t even close. As intelligence failures go, Obama’s is a flyspeck.

Embarrassing Security Highlights

Obama

A couple of social climbing party crashers snag pictures with Biden and eat canapes.

Bush

US Sub crashes into Japanese Trawler and sinks it, killing 9 people.
China forces Navy Reconnaissance plane to land after it strays into Chinese airspace touching off an international brouhaha.

Advantage Obama

Another Obama slam dunk

Public Health Highlights

Obama

H1N1 panic fizzles

Bush

Unsolved Anthrax attack panics nation

Tie

In both cases the death toll was negligible; they hype was worse than the bite.  Neither administration covers themselves in glory.  Personally I put this in the Obama column but that’s just me.

Tiger Highlights

Obama

Tiger returns from major injury, wins a bunch of tournaments, finishes the year with major injury.

Bush

Tiger holds all four major titles at once.

Meaningless win for Bush

Not like either had anything to do with Tiger.

Sports Highlights

Obama

Lakers win NBA title
Yankees win World Series

Bush

Lakers win NBA title
Yankees lose World Series

No score unless you’re a Yankees fan

Useful reminder that despite partisan rhetoric, not everything is the fault of the President.

NYC Political Highlights

Obama

Bloomberg wins mayoral race (again).

Bush

Bloomberg wins mayoral race.

Tie

Doesn’t matter what you think about Bloomberg.  He just keeps on spending, and spending . . .

Maters of the Universe Highlights

Obama

American Recovery and Reinvestment Act of 2009 passed to clean up the mess left by the Bush years.
Major financial institutions pay back TARP money, make obscene amounts of profits using public funds.

Bush

Economic Growth and Tax Relief Reconciliation Act gives rich people big tax breaks, begins the process of incinerating the Clinton surplus.
Bush BBF Kenny Lay pushing Enron into bankruptcy.

Advantage Obama

Another one that isn’t even close.  Bush’s entire legislative resume is made up of tax breaks for the rich, attempting to hand the public pension system to the masters of the universe to run (aren’t we glad that didn’t happen), running up massive deficits to fight two undeclared wars, No Child’s Behind Left, and the trillion dollar Medicare Drug Bill.

Obama has been playing clean up since his first day in office.

War in Afghanistan Highlights

Obama

Obama doubles down to finish war that Bush started but didn’t finish.

Bush

Bush starts (undeclared) shooting war in Afghanistan.

Advantage Obama

Obama disappoints his supporters, pundits keep whistling “grave of empires”, Republicans can’t figure out how to criticize Obama on this one but do anyway.

Bush has Bin Laden in his gun sights and tells the special forces guys they can’t go get the bastard for fear one of our trigger pullers might get hurt, or lost in the snow, or something like that.  Bin Laden goes free.

Environmental News

Obama

G8 fails to reach agreement with the world in Copenhagen.

Bush

G8 fails to reach agreement with the rest of the world in Kyoto.

Tie

We all lose.

Obama tells us that we can have quality, universal health care without increasing the deficit. He tells us that he intends to have the 9/11 detainees given a fair trial in a civilian court but assures us that the trials will end in convictions. He declares that he will wage war in Afghanistan, but pledges to start bringing the troops home in 18 months. And everybody nevertheless takes these contradictory, irreconcilable statements seriously, as they parse, analyze, scrutinize Obama’s every word for some kind of coherent meaning. The president is like the character Chance in the novel and movie Being There, whose every fatuous utterance was celebrated for its profundity.

Some of Obama’s defenders chastise his exasperated listeners for their inability to detect the president’s “complexity.” But a fantasy of universal popularity that panders to every conflicting interest simultaneously is not the same thing as “complexity.” It is complexity if I tell my wife that I have to move to another state where I know I can find work, but that I realize the strain it will put on our marriage, and that I know the effect it will have on our child, and that I am aware of the consequences of such an attempt if I don’t find a job, having spent so much money on moving and establishing myself in a new place. It is not complexity if I tell my wife that I have to move to another state where I know I can find work, but that I will be back next week, and with lots of money.

In the spirit of full disclosure, my caution is based on two points.  The first is that I was and largely still am an Obama supporter (though I fully admit my reasons may not be rational).  The second is that I made a promise to myself that I would stop writing political screeds. So why this?

I have been reading for the second time a book on decision making called The Paradox of Choice by Barry Schwartz.

The Paradox of Choice

Barry Schwartz. Harper Perennial 2005, Paperback, 304 pages, $7.07

It’s not my favorite book on decision making though it and he have certainly enjoyed a lot of attention for a “perfect for the times” message that can best me summed up by the B-Head for his book:  How the Culture of Abundance Robs Us of Satisfaction.

Schwartz quotes a considerable amount of research to make the case that:

• An over-abundance of choices ultimately leads to confusion, poor decision making, and dissatisfaction with the decision once it is made.
• The more we are forced to justify our choice, the more dissatisfied we become with our choice.
• The reasons people give for making a choice are seldom the real reaons.
• The more people are forced to make trade-offs, the lower the satisfaction with the choice ultimately made.  Worse, the stress of making difficult trade-offs leads to low quality decision making.

Or to put it another way.  Many of us fancy that we are rational decision makers, or at least we can be on-demand when we must be.  The implication here is that we can, on an as needed basis, turn off our biology, our socialization, the mental short cuts, and the internal angels and demons we haul with us and simply add up the plusses and minuses or review the numbers and make the obvious right choice.  That’s a big ask.

That’s not to say that we can’t wrangle our emotions and engineers ourselves past many decision traps becuase we can.  It is to say that we don’t stop being human through the process. So if we believe Schwartz, and I do, many of us are left looking for paths through irreconcilable differences that often don’t exist, not becuase the facts support such a notion, but becuase we believe in Santa Claus.

I have never met the current or previous president but it seems plausible from afar that one of their many differences is that 43 didn’t appear to agonize and certainly had no visible regrets.  The same can be said for Cheney and Rumsfeld (though not Powell).  Critics of the three would say that one of the reasons that’s true is that they didn’t bother to consider alternatives that conflicted with what they had already decided to do.  If that is in fact an accurate accusation, it makes them no different than most of us (hard as that is for my liberal friends to hear).

Conversely, President Obama appears to pride himself on his thoughtful, inclusive, and complete decision making processes.  As a decision engineer, I heartily applaud his instincts and his practices.  But listening to his recent address at West Point about Afghanistan I am left wondering if Barry Schwartz doesn’t have his number: That at the end of the day, Mr. Obama hates making trade-offs and therefore makes others do it for him.

If that is true, it makes Obama like the rest of us as well.  It is also leadership sin number one: Forcing people below your pay grade to make the tough trade-offs you’re paid to make.

Most of us are not as good at decision making as we think we are or would like to be. There are many reasons why this is true.  Here are some.

• While we are experienced decision makers, we are not necessarily skilled in the sense that we have not thought about and internalized processes that lead reliably to high quality choices.
• We are much more easily influenced than we care to admit: by people, by word choices, by events, and by our own emotions.
• We are driven by psychological forces most of us don’t really understand: We were not evolved in modern industrialized, information-overloaded, choice-rich environments.
• We are wired to take mental short cuts.  It’s how we go through without having to make decisions about everything that we need to do.  Those mental short cuts can and do work against us causing us to make low quality decisions (again, far more often than we want to believe).
• We hate having to make trade-offs.
• We are evolved to adapt to our circumstances and to revisionist thinking,  We quickly learn to live with the consequences and outcomes of our decisions and retrofit our stories so that we can be right.

Despite everything we appear to have going against us, most of us manage to be highly functional and successful in life: We can say with confidence that we must be good decision makers judging by the outcomes we’re associated with.  Either that or we just got lucky (or a bit of both).

So why try to get better?  Why spend time and energy learning how to make higher quality decisions (and what does that mean anyway)?  After all, it’s not like we wake up in the morning thinking we need to be better decision makers?

We have over the years asked thousands of executives and leaders two simple and related questions:

• Are you a good decision maker (and how do you know)?
• Are “we” (meaning the group that person is part of) good decision makers?

As you might expect, the most frequently occurring answer to the first question is, “It depends.”  The answer to the second question is most consistently, “No.”

Why all this matters can be summed up in an oft quoted statistic from a now-retired professor named Paul Nutt who after years of research concluded that more than 50% of all decisions in business are unsuccessful.  Some of us think he’s a wild-eyed optimist.

Why Decisions Fail

Paul C Nutt. Berrett-Koehler Publishers 2002, Paperback, 332 pages, $13.84

While the dynamics of making decisions by yourself and making decisions with other people are different in many ways, they are similar in many ways as well.  Particularly where the decision is complicated—meaning difficult trade-offs, lack of clarity about the real problem, lots of uncertainty, long feedback loops, significant consequences associated with the outcomes—we can increase our confidence that we’re making a high quality choice by improving the quality of the decision process we use.  Steps that lead to decision quality include the following:

• Take time to explore the problem.  Words matter.  You’ll get new insights about the problem and later see a better set of alternatives by taking care in how you frame the problem.
• Give yourself good alternatives.  As consumers we usually face way too many choices.  In that case, quality may come from limiting alternatives.  In business, often the opposite is true: We rush to solution.  So time spent thinking about alternatives THE RIGHT WAY is important.
• Be smart about how you gather information.  As is true about choices, it is possible to have too much and too little information . . . and in the end it is not possible to know everything you might like to know.  Focus your information on gathering on what is important.  Focus on what could go wrong and what that means to your decision.
• Identify clear values and not too many of them.  Too many trade-offs is as problematic as too many choices and too much information.  The opposite is also true.

As you would expect, there are many ways to go about building quality into each of those steps.  Fortunately, for most decisions, the principles, methods, and tools you need are simple, easy to understand and master, and easy to use in both individual and group decision settings.

For more on making quality decisions visit these links:

One of the things we talk about when teaching decision making is that decision making is a distinctly human activity. That is to say that it is more than responding to stimulus . . . it is an cognitive act.

Because it’s a human activity, it’s subject to all the wonders and foibles that make us human. To the extent that it is a conscious act, the part of the brain most involved is the prefrontal cortex.  It’s a very cool piece of wetwear that is also not capable of keeping track of infinite amounts of data.  As a result, we construct mental short cuts (called heuristics by people who like big words) to get us through life.  So, for example, when we see scissors and we think about crossing the room with them, there’s a mental shortcut that pops up for most of us that says, “don’t run.”

Mostly these mental short cuts work well for us, but only mostly.  It turns out that there are lots of times they don’t.  We call those a lot of things, but in this context, a useful term is a “decision trap.”  It means what you think it does: a mental process that traps us, vs. helps us, make a high quality decision.

There are lots of decision traps which I’ll discuss at another time.  The class I’m interested in right here and now relate to how we evaluate information.  Again, there are fancy terms we could use but the general ideas are these . . .

• We tend to over emphasize the most recent news.
• We tend to give more wait to whatever was most vivid.
• We tend to over estimate our role in the good things that happen and understate our role when things go poorly.
• We generally do a terrible job of estimating nearly anything.

The list goes on.

What brings all this to mind is a piece I just read by a very smart man named John Hussman.  He runs big pools of money and is one of what I think is a too small group of voices warning us to not be dazzled (assuming you are) by the run the stock market has experienced since March.  This is a good example of a very healthy and positive decision quality activity: seeking out “disconfirming points of view.”  Which means?  When trying to decide what to do, actively seek points of view that are counter to it.  Another way of thinking about this is to actively think through what could go wrong.  In the case of “the markets,” it’s a lot.  Here’s what Hussman has to say . . .

I should have assumed that Wall Street’s tendency toward reckless myopia – ingrained over the past decade – would return at the first sign of even temporary stability. The eagerness of investors to chase prevailing trends, and their unwillingness to concern themselves with predictable longer-term risks, drove a successive series of speculative advances and crashes during the past decade – the dot-com bubble, the tech bubble, the mortgage bubble, the private-equity bubble, and the commodities bubble. And here we are again.

We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let’s face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we’ve already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.

Taking the weighted average outcome for the two states of the world still produces a poor average return/risk tradeoff.

So basically he’s arguing that even given the best economic interpretation he can see, the intermediate outlook for investment performance sucks.  And that’s if things are interpreted in their best light.

When people think about “markets,” they tend to think in terms of a perfect representation of all that is known about a class of things discounted for net present value.  So all the optimists and pessimists are factored in.  All the information and speculation is factored in as well.  But it’s largely a useless thought if you don’t assume that all participants are rational actors and that all the information is in fact available and being used.  So as long as real human beings aren’t involved, we’re good to go.

The problem here in this version of reality is that the snapshot provided by “the market” is not nearly as reliable as we wish it to be.  Hussman says . . .

Frankly, I’ve come to believe that the markets are no longer reliable or sound discounting mechanisms. The repeated cycle of bubbles and predictable crashes over the recent decade makes that clear. Rather, investors appear to respond to emerging risks no more than about three months ahead of time. Worse, far too many analysts and strategists appear to discount the future only in the most pedestrian way, by taking year-ahead earnings estimates at face value, and mindlessly applying some arbitrary and historically inconsistent multiple to them.

And . . .

In part, the market’s increasing propensity toward speculation reflects the increasing lack of fiscal and monetary discipline from our leaders. Policy makers who seek quick fixes and could care less about long-term consequences undoubtedly encourage investors to embrace the same value system. Paul Volcker was the last Fed Chairman to have any sense that discipline and the acceptance of temporary discomfort was good for the nation.

Our current Fed Chairman’s voice literally quivers in response to the phrase “bank failure,” even though in the present context, a bank failure implies none of the disorganized outcomes that characterized the Great Depression. It simply means that the bondholders take a loss and the remaining part of the institution survives intact as a “whole bank” entity (and can be sold or re-issued back to public ownership, less the debt to bondholders, as such). The same outcome would have been possible with Lehman had the FDIC been granted authority from Congress to take conservatorship of a non-bank financial entity.

So what does that all mean?  At this point, I’ve made my point. If you have a rosy outlook for 2010, at least consider an alternative set of scenarios.  But not to leave you hanging, here is Hussman’s point of view . . .

In my estimation, there is still close to an 80% probability (Bayes’ Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we’ve observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Meanwhile, valuations are clearly unfavorable here, and even under the “typical post-war recovery” scenario, we are observing an increasing number of internal divergences and non-confirmations in market action.

As Gluskin Sheff chief economist David Rosenberg noted last week, “Even if the recession is over, the historical record shows that downturns induced by asset deflation and credit contraction are different than a garden-variety recession induced by Fed tightening and excessive manufacturing inventories since the former typically induce a secular shift in behavior and attitudes towards debt, asset allocation, savings, discretionary spending and homeownership. The latter fades more quickly.

“This is why people didn’t figure out that it was the Great Depression until two years after the worst point in the crisis in the 1930s; and why it took decades, not months, quarters or even years, for the complete transition to the next sustainable economic expansion and bull market.

“Mortgage applications for new home purchases hit a 12-year low in the middle of November (down 22% in the past month!), fully two weeks after the Administration said it was going to not only extend but expand the program to include higher-income trade-up buyers. Once again, there is minimal demand for autos and housing, and that is partly because the market is still saturated with both of these credit-sensitive big-ticket items after an unprecedented credit and consumer bubble that went absolutely parabolic in the seven years prior to the collapse in the financial markets an asset values. We are probably not even one-third of the way through this deleveraging cycle. Tread carefully.”

Andrew Smithers, one of the few other analysts who foresaw the credit implosion and remains a credible voice now, concurred last week in an interview with my friend Kate Welling (a former Barrons’ editor now at Weeden & Company): “The good news so far is that the stock market got down to pretty much fair value or even, possibly, a tickle below it, at its March bottom. But now it has gone up… we probably have a market which is, roughly, 40% overpriced.  In order to assess value, it is necessary either to calculate the level at which the EPS would be if profits were neither depressed nor elevated, or to use a metric of value which does not depend on profits. The cyclically adjusted P/E (CAPE) normalizes EPS by averaging them over 10 years. It thus follows the first of those two possible methods. Using even longer time periods has advantages, particularly as EPS have been exceptionally volatile in recent years – and using longer time periods raises the current measured degree of overvaluation. The other methodology we use measures stock market value without reference to profits: the q ratio. It compares the market capitalization of companies with their net worth, also adjusted to current prices. The validity of both of these approaches can be tested and is robust under testing – and they produce results that agree. Currently, both q and CAPE are saying that the U.S. stock market is about 40% overvalued.”

I’ll leave you to make your own list of large-scale secular forces that could upset the apple cart.  It’s worth the time doing that.  Then ask yourself or your investment adviser, what impact these forces would have if you were right on the down side or wrong on the upside.

Bailout Nation

Bill Fleckenstein (Foreword). Wiley 2009, Hardcover, 332 pages, $12.38

Reading back over my notes I was re-struck (is that a word?) by Barry’s point of view on what drove the vaunted American Consumer-led economy (we buy all the world’s doo dads): Real Estate.

According to a 2005 study by Asha Bangalore of Northern Trust Company, 43 percent of all new job creation between November 2001 and April 2005 was real estate related.

So what did that mean . . .

The housing boom was creating jobs for builders, contractors, real estate agents, mortgage brokers, and even employees at Home Depot and Lowe’s. But the most significant impact to the economy came from home equity lines of credit (HELOCs) and cash-out mortgage refinancings. With wages stagnant, Americans turned to home equity withdrawals in order to maintain their standard of living.

This was one of the single biggest and most unexpected elements of the debt-driven economic expansion. Outside of real estate, employment gains were modest and real wage gains flat. It was debt that drove the increase in consumer spending. Mortgage equity withdrawals normally a small portion of consumer debt‚exploded.

Without this home equity-based consumption, the nation would have been in recession territory, with GDP flat to 1 percent. At least, according to an unofficial Fed study by none other than Alan Greenspan

And this . . .

The wealth effect of home price appreciation is much more widely distributed than stocks. This made the generational-low interest rates the single largest factor that resuscitated the economy. Sure, tax cuts, deficit spending, increased money supply, war spending, and the like all played a role‚but it was the ultralow rates and the mortgage equity withdrawal they allowed that dominated U.S. economic activity.

As a result, the economy will continue to look  crappy to wage earners for some time to come (assets are still mispriced).

The book is just brilliant. Read it.

At some point it occurs to every executive. Maybe it’s a nagging thought in the middle of a meeting or while playing chess with a tough opponent. Maybe it’s a raging impatience. Hopefully it’s a strategic and permanent insight. “It” often sounds like this: “”We’re spending all this time, money, and resource on marketing, sales, fulfillment, information technology, and about forty other things. Tell me again how they all fit together“?

Or let’s put it in the positive.

The demand side of our business, the supply side, and the supporting infrastructure must all line up through clear strategies and initiatives that serve customers and produce value.

Well you’ve just defined a go-to-market strategy.

• Go-to-market strategy: A coherent set of choices that align your people, processes, products, premises (physical and virtual channels), and partners to deliver your brand promise, the desired customer experience, and tangible value.

This paper can also be downloaded from the DQI Website.