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December 2, 2008

Surprise! It’s a Recession. Who Woulda Thunk?

Category: Companies,Observations – Tom Harrison – 4:33 pm

I find it remarkable that we appear to keep getting surprised. Yesterday the stock market took a tumble, and the Times’ headline was “Dow Plunges 680 Points as Recession Is Declared“. Were all the people that sold holding out in hope of some wonderful financial miracle? Were the other indicators that have added up to this rather obvious outcome not sufficient?

This is far from the first example of this phenomenon. Bad news is announced and the stock market tumbles disproportionately. The inverse is true, as we saw with five straight sessions of gains.

Well, of course markets are crazy! They over-react, they under-react, the act wrong, and everyone says “don’t pay attention to the markets”.

My amusement over recurring surprises relates more to the CEOs and Boards of significant companies who are making really important decisions, and peddling great amounts of influence on many different areas, many of which relate to energy and climate, not to mention the financial system. Are they paying attention to their businesses and the well-being of that business, or to the markets?

Last week, Citigroup was said to be surprised by the degree to which their holdings were riddled with bad securities. Sorry, it’s not like this whole financial thing is new, nor is it minor; one might have guessed that a diligent company would realize they might be exposed and try to find out how bad the exposure is. What were they paying attention to that they could be surprised?

The US auto companies are all surprised by events of the last year, notably high gas prices, and the more recent financial meltdown. They thought everybody loved SUVs and would pay for bigger and better ones. True in the short term, but there have been many, many signals that the market would change, whether from high gas prices, regulation or competition.

Peak Oil theory has been out there for a long, long time. We had a very similar oil crisis back in the 70’s and 80’s. The rise in gasoline prices has been happening for years. Are they surprised that there would be a perturbation that might cause a massive (if brief) market change in oil prices? Bob Lutz at GM is still one of the few remaining global warming deniers.

Same for oil companies that refuse to change and think of themselves as energy companies (record profits last quarter … but I wouldn’t bet on the current one). Or coal companies that are still lobbying hard to keep things as they were. Steel companies, textile companies and many others before all were “surprised” by what are and were easily predicted outcomes.

And yet they reacted only after it was too late.

Why? Is it because they are too big, cumbersome, entrenched, or are they just downright dumb? Is it that these companies have such bravado that they believe that “it is true because they think it”? Who knows, some might even look at a bailout as a reasonable option (but I doubt that one).

Or perhaps these large companies are also looking at the stock market, in particular the market for their own stock. Corporate governance documents frequently list their primary mission as to “act on behalf of the best interests of stockholders” (check the results of the link, a google search, to see).

But if you’re a CEO or a Board of Directors, there’s not a lot of joy for those who plan ahead. Spending money on things that do not have a clearly defined, low-risk ROI just reduce profits and make for an uncomfortable quarterly meeting with analysts. ExxonMobil has deliberately not called itself an energy company; it’s good at getting oil. Is this truly long-term thinking? Well, yeah, for the next years its product should have strong demand, and prices should be historically high. But what about five years, or ten? Instead of investing heavily in the future, they are, of all things, returning their profits to stockholders as dividends. Short-term thinking rules the corporation.

Are these companies truly surprised? It would take a great reduction in my faith in humanity’s basic intelligence to believe that. They simply have no incentive to work in the best long-term interest of their stockholders.

It’s the stockholders’ fault, because their stockholders are really just huge financial institutions managing mutual funds, 401k, and other massively diversified portfolios that eventually you or I might own shares of. Do you know what companies your 401k invests in? I don’t. I barely know when my funds make a trade. All I care about is if my fund goes up or down. This isn’t anything about what’s best for the company, it’s about making money, now.

So maybe this is why everyone’s so surprised about what appears plain and obvious to people whose interests lie elsewhere. And in this failure to look forward, these huge companies are forced to forgo long-term planning, and are literally taking down the world, both financially and climatically.

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