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An Open Letter to Global Business Leaders

By

Deteriorating Social Mood Challenges the Transnational Business Model of the S&P 500.

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MINYANVILLE ORIGINAL

Dear S&P 500 CEOs,

With all due respect, as I read your earnings releases, your analyst presentations, and your various op-ed pieces, I am afraid that you really don't understand what is happening around you. The economic, financial, business, political, and even cultural environment that brought you and your organizations enormous financial success in the past is now seeming to fight you at every turn -- and yet you still use words like "economic uncertainty" to describe the current business environment as if once we get through this current "economic uncertainty," life will return to the way things were.

What I am afraid you fail to appreciate is that the confidence of the world around you -- the people you serve, the government leaders you work with, the vendors you buy from, and many of your own employees is far lower than your own and as a result how they see the world around them and what they want is very different from you. Worse, the transnational businesses that you have built -- which rely on the unprecedented free mobility of goods, labor, services, capital, and even data -- are woefully ill-suited to our current low level of social mood.

Since you live in a world of endless PowerPoint presentations, let me give you a few slides that may help you to see what I mean.

First, here is the gap between what I measure as your own personal level of confidence and the confidence of the world around you.



Given how heavily you are compensated in stock and options, you live in a nominal world. And in that nominal world, there has been an enormous recovery since 2009. For the rest of the world – most of your employees, your clients, the folks in Washington, etc. -- as measured by the Bloomberg Consumer Confidence Index, there has been no recovery. Outside of your small group, folks are currently experiencing their twelfth year of weak or declining confidence.

But please appreciate how lucky you have been. As two economists from the New York Federal Reserve pointed out recently, without investors front-running the Fed, your world would be much closer to the world that everyone else lives in.



Source: NY Federal Reserve

Even setting aside the gap aside, though, what I don't think you (or most economists) fully appreciate is just how much our level of confidence drives how we act and the decisions we make. People with low levels of confidence make very different choices from people with extremely high levels of confidence. As I explain in my book Moods and Markets" our level of confidence determines our "Horizon Preference." The mantra, so to speak, for confident people is "us, everywhere, forever" – a Kumbaya sensation of one for all and all for one with limitless opportunities. But for people lacking confidence, their choices reflect very clear "me, here, now" options.



Put simply, you and the transnational organizations you built are "us, everywhere, forever" entities at a time when the world around you wants (thanks to its low level of mood) "me, here, now."

So what do low-confidence "me, here, now" people want?

Here's a quick list:

Simple, not complex.
Authentic; not fake, pandering, wavering, or duplicitous.
National, if not local/tribal; not foreign or transnational.
The ability to rent, not own.
Solutions customized to "me."
Disclosure that is transparent, immediate, complete, and authentic.
Small, intimate, close.
Monoline excellence in one thing.
Clear accountability, if not outright harsh consequences, for those who betray trust.

If I am still not being clear enough, go spend a day at a local farmers' market, which I would pause to note are up 250% in number since our 2000 peak in confidence! Nowhere to me are our "me, here, now" social mood-driven preferences, like the locavore movement, more clearly transparent than in our food choices today. Recently, New York Times writer Jessica Bruder offered in an article entitled "The Picky Eater Who Came to Dinner" that "Consumers seem to be building self through sustenance, adjusting their appetites to reflect independence and moral character. In numerous interviews with restricted-diet adherents and those who study and feed them, control and identity were two common themes on everyone's lips.

The article continues: "'It's an alternative way of finding an identity in a place where identity is increasingly uncertain,' said Richard Wilk, the director of Indiana University's doctoral program in food studies. 'So much of our lives are completely out of our control. You can go to college and not get a job. You can do an internship and not get a job. The economy takes some new tack every 15 minutes.'"

Please appreciate that the "fragmentation" and "atomization" applicable to our current food choices (both terms used by Ms. Bruder) are also what we are seeing in politics and culture. Few companies have captured the current "me, here, now" trend better than Apple (AAPL) with its i-everything products allowing for the individualized and customized selection of our music and video. And one look at the enormous dispersion of votes -- from extreme left to extreme right -- in the May Greek elections and you will see clear "fragmentation" if not "atomization" in the voting booth too. (For more information on the eurozone, please see The European Onion.)

But please appreciate that even Apple is now finding itself to be the subject of front-page articles suggesting that it is not American enough. To me, it was no surprise to see Google (GOOG) try to capitalize on this shift in sentiment by portraying its new Nexus 8 as "Made in America."

I am afraid, though, that Google faces a real uphill battle. Much like Airbus, which "coincidentally" announced plans to assemble planes in Alabama the week of July Fourth, it is extremely hard as a transnational corporation to be "authentically" national, which is something that consumers and political leaders around the globe are clearly demanding today. As Airbus immediately discovered in the aftermath of its announcement, it is hard to be a slave to two -- let alone not six or eight -- individual national masters. (For more information on multinationals, please see Pledging Allegiance: Multinationals in an Increasingly Nationalist World.)

But this is what you face ahead of you, particularly if mood continues to deteriorate. Preferences will become much more individualized, if not "atomized," and everything you do will face increased scrutiny. As I have repeatedly offered to my clients, "Never underestimate the inverse correlation of prosperity and scrutiny." Worse still, the free mobility of labor, goods, capital, and data that you have built your entire business model around will come under siege. Should mood fall further, what you are witnessing in Switzerland (capital controls) and Argentina (expropriation) today will become commonplace.

Please appreciate that I am not endorsing these outcomes, but the work that I have done looking at the historical correlation of particular behaviors to specific levels of confidence suggest these patterns. Extreme "me, here, now" thinking naturally accompanies falling social mood and falling stock prices.

For you and your leadership teams, this is the challenge ahead: To authentically convert your complex "us, everywhere, forever" transnational enterprises to simple "me, here, now" local businesses. But I would move quickly. Social mood waits for no one, and those who merely react to events, as we have seen repeatedly in the financial services space, will be swept away by the tide of falling social mood.

Peter Atwater's groundbreaking book "Moods and Markets" is now available for pre-order on Amazon and Barnes & Noble.

"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world." -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation


Twitter: @Peter_Atwater
Position in SH and JPM
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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