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The New Economy

Perspectives on economic changes under way in the US and around the globe

Anglo American's Chief Executive Officer Cynthia Carroll attends the G20 CEO Summit in Seoul in this 2010 file photo. Ms. Carroll is stepping down after more than five years on the job amid a difficult strike in its platinum operations in South Africa. (Aly Song/Reuters/File)

Anglo American's female CEO stepping down. It's 'right time.' (+video)

By Staff writer / 10.26.12

There's plenty of speculation about whether Cynthia Carroll, the first woman to head British mining company Anglo American, is stepping down because of her performance or her gender.

The first woman and the first non-South African to head the company, Ms. Carroll took the world's largest producer of platinum in new directions – both in the way it operated and the commodities it mined. But on Friday she said it was "the right time" to leave.

Did she push modernization too hard? Did the company accept, as the Financial Times put it, her "double-outsider" status?

Perhaps. But timing is everything for chief executive officers – and sometimes it really is the right time to go, even if they've done the right things for the company to prosper in the long term.

The American-born Carroll took the reins in 2007, when Anglo-American was booming. Its stock price had doubled in just two years. The future seemed bright.

Then the financial crisis and Great Recession hit and Anglo American stock (like other commodity stocks) plunged. The stock recovered in 2011, when Anglo American announced a record operating profit, reaching post-recession highs.

But this year's economic slowdown pushed down commodity prices. And the company ran into unique problems. It became embroiled in a dispute with Chile's state-owned copper company, Codelco, after it announced last year it was selling its copper operations to Mitsubishi. Instead, Anglo American backed down and in August reached a deal with Codelco, reducing its stake in the copper operations.

Then in September, its all-important platinum operations in South Africa were hit by wildcat strikes from workers demanding more pay. Anglo American called the strike illegal and fired 12,000 miners at one mine earlier this month. Shareholders complained.

The sometimes violent strikes reached beyond Anglo American. Some 100,000 South African miners walked out in August. But on Thursday, gold mining companies and the workers' union announced a wage agreement (under the threat of worker firings similar to Anglo American's tactics). There's no sign of a similar resolution at Anglo American's operations.

The strike has cut Anglo American's platinum output by $217 million. The Congress of South Africa Trade Unions has called for a giant street protest Saturday to show solidarity with the miners that Anglo American fired.

In a company-sponsored video, Carroll says the decision to leave was her own: "I think it is the right time to hand the baton on to someone else who can continue to develop and capitalize off the foundation that we have been building."

Carroll will stay on until a successor is found.

The idea was echoed by Anglo American's chairman, John Parker, in a separate video:  "We always listen to our shareholders very carefully, but today's decision was very much based on Cynthia's decision."

But then he emphasized, for the second time, that the board has accepted the decision.

Maybe that's because when it's time for a CEO to leave, everyone can read the writing on the wall.

Teaching Fellow Lauren Carvalho (left) and Shareen Asmat (center) check out Dee Charlemagne's project at the CS50 tech fair at Harvard University in 2010. Entrepreneurs with great ideas often fall short because they can't attract the capital they need to grow their business. (Courtesy of Rose Lincoln/Harvard University News Office/File)

First-time entrepreneurs' biggest mistake? Lack of capital.

By Dave LavinskyContributor / 10.26.12

Like everyone else, entrepreneurs make lots of mistakes. They don’t market themselves and their companies as well as they should. They fail to hire the right people and motivate those on the payroll. And they are notoriously poor at assessing their costs and their break-even point.

But the biggest mistake that entrepreneurs, particularly first-time ones, make precedes all this. It comes before they earn their first dollar and have to really worry about marketing, human resources, and financial management. And this mistake is starting a business that requires significant start-up capital.

The reality is that most entrepreneurial ventures fail before they even get off the ground because they fail to raise their initial funding. Fewer than 1 in 10 get “angel funding” from someone wishing to help out. According to estimates, fewer than 1 in 100 advance to venture capital.

And that’s unfortunate. Entrepreneurs have a great idea. They get rejected by angel investors, venture capitalist, and/or banks. As a result, they give up and their venture never materializes.

But there is a solution. Start a business that requires as little money as possible and allows you to start generating revenues as quickly as possible. Raising small amounts of money, for example via a credit card, is extremely easy. Once you start generating revenues, two things happen. First, you have money you can reinvest in your business to grow it. Second, investors are much more likely to fund you since you have proven you can execute and that customers will buy what you are creating.

Clearly, you may have to get creative here, because the business you ultimately want to build may absolutely require outside funding. If so, brainstorm other low-cost business ideas (such as providing consulting) that would serve the same customers as your ultimate business. In doing so, you can gain connections to these customers. These same customers may help fund the company that you truly want to build. And by serving them now, you’ll better understand their wants and needs, which will help you succeed in your current and ultimate business.

– Dave Lavinsky is president of Growthink, a Los Angeles-based consulting firm that since 1999 has helped more than 500,000 entrepreneurs develop business plans, raise funding, and grow their businesses.

In this July file photo, a container ship from China is offloaded at Massport's Conley Terminal in the port of Boston. Since China joined the World Trade Organization, many US manufacturers have closed US factories and set up shop in China to reexport their goods here. (Stephan Savoia/AP/File)

America's best jobs program? Trade reform with China.

By Peter NavarroContributor / 09.28.12

The best jobs program is trade reform with China – not more government stimulus. The presidential candidate who best conveys this singular, ineluctable truth to the American people between now and election day will carry the manufacturing swing states of Michigan, Ohio, Virginia, and Wisconsin and thereby win the election.

The case for China trade reform as both a winning political and economic strategy is firmly rooted in the history of U.S.-China trade relations and its destructive consequences. In 2001, China joined the World Trade Organization with strong bipartisan support, and in lobbying for China’s entry into the WTO, President Bill Clinton promised “for the first time, China will agree to play by the same open trading rules we do” and “for the first time our companies will be able to sell and distribute products in China.”

Instead, since 2001, China has flagrantly violated WTO rules by flooding our markets with illegally subsidized exports. Meanwhile, putatively “American” multinationals like Boeing, Caterpillar, and GM have shut down plants in cities like Seattle, Peoria, and Detroit while opening massive operations in places like Beijing, Chengdu, and Shanghai – all to leverage China’s illegal subsidies and ultra-lax environmental and worker rules and then dump their products back into American markets.

As a result of this twin assault on America’s manufacturing base by state-run Chinese companies and offshoring multinationals, our once great country has devolved into a “Triple Zero Economy” characterized by near zero growth in jobs, wages, and, stock returns even as over 50,000 factories have disappeared along with 6 million manufacturing jobs.

Here is an even more chilling set of statistics: For the five and half decades prior to China’s entry into the WTO, our gross domestic product grew at a rate of 3.5 percent. Since 2001, however, that rate has fallen to a mere 1.6 percent annual growth rate. This slower growth, in turn, has led to the failure to create more than 20 million jobs – not coincidentally, exactly what we need to put America back to work. 

Perhaps the most astonishing element of the US-China relationship is the inability of so many of our politicians, journalists, and academics to firmly connect the dots between China’s unfair trade practices and the abject failure of trillions of dollars of government stimulus to jump start our economy. Indeed, as recently as last week on the stump in Ohio, President Obama insisted that we have “a constructive economic relationship with China” and that our differences can be resolved through “dialogue.” However, the history of his administration as well as that of his predecessor has been the abject failure of dialogue to halt China’s massive unfair trade practices and its gross human rights and environmental abuses. 

On the media front, editorial boards of influential papers like the Wall Street Journal and Financial Times have been mercury quick to jump on candidate Mitt Romney for cracking down on China’s cheating – oblivious to the irony of these free trader newspapers supporting China’s mercantilist and protectionist cheating. Meanwhile, pundits like Tom Friedman and Fareed Zakaria insist our manufacturing jobs are gone forever to the forces of globalization and are never coming back – this despite the fact that Germany has 25 percent of its workforce in manufacturing compared with only 9 percent here in the US.

Perhaps most alarming, the academic world itself is becoming increasingly co-opted by Chinese funding of US-China institutes that are springing up at cash-strapped American universities all around the country. Few of these institutes and the academics they employ are willing to bite the hand that feeds them.

In the end, the biggest victims of China’s unfair trade practices are not just American manufacturers and workers. It is also the Chinese people – almost a million of whom die each year for industrial accidents and the effects of air pollution.

In this election season, it would be refreshing to see both presidential candidates along with our media get it right on the China issue. To that end, I would love to see both candidates asked during the upcoming debates whether they believe that the best jobs program truly is trade reform with China – not more government spending. Their answers would be quite revealing – and possibly change the course of not just the election but our economy.

– Peter Navarro is the director of the new documentary film "Death By China" and a business professor at the University of California-Irvine.

President Obama (R) meets with China's President Hu Jintao at the G20 Summit in Los Cabos, Mexico, in June. Every presidential election, a foreign bogeyman pops up. In 2012, it's China. (Jason Reed/Reuters/File)

Candidates indulge in China-bashing. But it's a distraction, not a solution.

By John L. GrahamContributor / 09.25.12

Xenophobia is the oldest trick in the book. Another election and another foreign bogeyman conveniently appears.

In my own political memory, first it was the Saudis. In the mid-1970s, they were going to buy the United States with all their OPEC oil revenues. Then it was the Japanese. In the late 1980s, the American public was more afraid of Japanese yen taking over the country than Soviet missiles. Mexico via NAFTA would wreck the economy, or so said the Republicans in 1996 at their convention, strategically positioned in San Diego. For the 2000 election it was Chinese spying, Al Gore visiting a Buddhist temple, and such.

Just one of the problems with crying wolf is exemplified by our tragic vulnerability to Al Qaeda in 2001. You may remember the Bush administration was distracted playing Spy vs. Spy with the Chinese – bargaining for the return of our crash-landed spy plane from Hainan Island that summer, just short days before Sept. 11. 

Somehow in 2012, while the Middle East boils and roils once again, we’re talking about China as our biggest problem. Really?

Chinese defense spending is second in the world, but still just 20 percent of ours. American job losses? You cannot blame the Chinese, unless you ignore the facts. Indeed, my colleague Peter Navarro at the University of California, Irvine, is head xenophobe at the moment with his new book and movie, "Death by China." Perhaps Peter will thank me for adding to the press on his warmongering tome?

Unfortunately, both presidential candidates are pandering in this same vein.

Since 1960, through all the foreign bogeymen mentioned above, the US economy has faltered only once. In 2009, gross domestic product (GDP) per capita in this country declined to $45,192 from $46,760 in 2008.

In other words, the average American has gotten richer every year for the last half a century, except for 2009. The OPEC oil crisis, Japanese Sonys and Toyotas, NAFTA, Chinese made iPhones, not even Al Qaeda disrupted this steady growth in the average American’s wallet. If you control for inflation, this positive picture of the power of American commerce dims a bit, but not so during the last decade as cheap goods from China have kept inflation in check. 

If the Chinese were stealing our jobs, the flow would have begun in earnest in 2000/01 with our granting them Permanent Normal Trade Relations (PNTR) and their accession to the World Trade Organization (WTO). Even controlling for inflation, the GDP per capita of Americans has marched steadily higher despite those trade liberalizations. During that same period, unemployment was not a problem, meandering between 4.7 percent and 5.8 percent in the US. Then in 2009, it abruptly ballooned into a painful 9 percent.

Now, if you’re an unemployed autoworker reading this, you're getting pretty angry – “What about my job, you academic know-it-all?” Well, you can go along with the xenophobes who blame Mexicans and Chinese and so on. But, I repeat, the average American’s income has increased throughout the last half century. What has changed is how we distribute that average income.

Circa 2012 we are witnessing a dangerous continuing bifurcation of our people into rich and poor. We are losing the stability of our middle class.

These divisive changes have taken two forms. First, tax policies established during the George W. Bush years are getting scrutiny in the present presidential campaign. And,they are crucial. But the second change is not being addressed directly. 

Yes, formerly high-paying union factory jobs have gone to the cheapest labor countries around the world. Having worked in a heavy-industry factory myself, I can attest to the mind-numbing and dangerous work in such places. Thankfully, the US is now a services economy.

Think FedEx, teachers, nurses, McDonalds, Wal-Mart, etc. Because of the Bush league’s successful emasculation of American labor unions, the wages in such jobs are low. That growing “average GDP per capita of Americans” isn’t being distributed fairly for both reasons.

These causes of our economic divide are internal. Exacerbating them is the failure of our pension and health-care systems. In the US we are now in year four of a decade-long adjustment to the demographic shift that is wrecking the social system designed by the so-called Greatest Generation. Social Security and Medicare have served them well, but not us baby boomers. The problem is my parents’ generation didn’t plan beyond their own demise.

The Chinese have no culpability in this. Thus, bashing them with rhetoric and/or trade sanctions will have no effect on our problems. The Chinese are just a distraction. Indeed, the Chinese have much bigger problems of their own. The reason they maintain such a huge army is to control their own, often unruly people. And if you think the graying we’re now experiencing in America is bad, just wait 10 years when the Chinese run headlong into the consequences of their one-child policy. Who will take care of the elders there?

Aside from being a distraction from our own policy mistakes, the current wave of xenophobia is a disaster for the US in at least two other ways: First, isn’t it too bad we can’t see the common interests we have with the Chinese, such as in keeping the Strait of Hormuz open so oil can flow to thirsty customers around the world. Second, but of primary importance, trade has always enhanced peace. Lack of it has encouraged wars. The burgeoning commercial interdependence of China, Taiwan, and the US will always make war in the region unthinkable – except, of course, for the panderers of xenophobia.

– John L. Graham, professor emeritus of marketing and international business at the University of California at Irvine, is coauthor of "China Now: Doing Business in the World’s Most Dynamic Market."

Rebecca Fernandez protests outside of the University of Miami where Republican presidential candidate Mitt Romney was attending a candidates forum held by Univision, Wednesday, Sept. 19, 2012, in Coral Gables, Fla. After his gaffe about 47 percent of Americans believing they're 'victims,' Mr. Romney is insisting that his campaign is about 'the 100 percent in America.' (Lynne Sladky/AP)

47 percent vs. 1 percent: the emergence of tax-class warfare

By Business editor / 09.20.12

Election 2012 is supposed to be all about the economy: How to get it moving. How to create more jobs.

But the only economic issue that has generated much excitement so far is taxes. Mitt Romney's gaffe about the 47 percent of non-taxpayers is only the latest example.

Remember the frenzy over Mr. Romney's refusal to release more tax returns, or Warren Buffett's complaint that his secretary had a higher tax rate than he did? Fears about higher taxes have rallied the tea party on the right. Anger that the top 1 percent of earners pay too little tax coalesced Occupy Wall Street on the left.

All of this tax angst doesn't mean that Americans are blasé about the loss of jobs or the agonizingly slow recovery. It's just that behind those fears lies another, often unspoken dread: the growing federal debt and how we are going to pay it down.

That debt is so large that President Obama can't remember its size when David Letterman asks him on national TV. It's growing so fast – more than $4 billion a day – that few voters want to address it head on.

The candidates know this, so they speak in a kind of code. When Romney dismisses the 47 percent of Americans (actually 46 percent) who don't pay federal income tax as people "who believe they are victims," or when he appoints deficit-reduction hawk Paul Ryan as his running mate, he's trying to reassure wealthy voters and donors: "Don't worry. I know the debt isn't your fault. When it comes time to pay up, you won't get stuck with the lion's share of the burden."

Mr. Obama has his own code. When he talks about raising taxes on those who make more than $250,000 a year, or plunks Mr. Buffett's secretary beside the First Lady at the State of the Union address, he's trying to reassure the poor and the middle class: "Don't worry. I know the debt isn't your fault. When it comes time to pay up, you won't get stuck with the lion's share of the burden with higher taxes or big cuts in government services."

These are comfortable political platitudes in the heat of a presidential election. They're also completely disconnected with any known branch of mathematics in the universe.

Deep down, wealthy voters must sense that their taxes are going to rise. Mr. Ryan's let's-slash-government approach may sound reassuring, but the cuts in Medicare and other government services would be so severe that it would feel like a tax increase to the poor and the middle class. And Republicans can do electoral math as well as anybody. They know they can't get reelected by catering to 5 percent of the voters.

Deep down, middle-class voters must sense that their taxes are going to rise and that government services will be cut. Obama can pledge not to turn Medicare into a voucher system, and that the wealthy must pay their fair share. But Medicare is unsustainable in its current form and, even if the wealthy paid a lot more tax, the debt problem is so large that taxes will have to be raised on those who make less than $250,000.

Maybe that helps explain why the tea party remains a small minority and the Occupy movement has had trouble regaining momentum. Few Americans want to talk about debt. And maybe voters realize that America's federal debt is a shared burden.

More tax-class warfare won't help us figure out how we divvy up that burden.

Tencent headquarters is seen at Nanshan Hi-Tech Industrial Park in the southern Chinese city of Shenzhen in this 2011 file photo. China's biggest Internet company by revenue, Tencent Holdings is one of J.P. Morgan's Nifty Fifty of emerging markets – a collection of fast-growing stocks that should deliver strong earnings despite a weak global economy. (Bobby Yip/Reuters/File)

Jobs outlook is tepid, but investors don't have to be glum

By Business editor / 09.08.12

The global economy has its doomsayers, who point to the threat of a European meltdown, a “hard landing” in China, and America’s fiscal cliff. There are a few optimists, who point to a resilient stock market and stable consumer demand, among other things.

But what if they’re both wrong? What if the tepid recovery, evidenced by Friday’s disappointing jobs report in the United States and continued weakness abroad, just keeps dragging along?

That’s the forecast from at least one investment house. And if turns out to be true, then many central bankers, businesses, and investors – not to mention politicians and voters – are going to be awfully disappointed. And they’ll have to adjust their expectations. The tepid outlook would seem to bolster Mitt Romney’s election prospects and dim President Obama’s, give Fed Chairman Ben Bernanke more reason to try a third round of bond-buying in an attempt to lower interest rates, and make it more difficult for politicians to make hard choices on the government budget once the election is over.

For investors, however, the outlook doesn’t have to be bad, if they know where to put their money. According to J.P. Morgan, one place to park funds is the Nifty Fifty.

The Nifty Fifty was a popular idea back in the late 1960s and early ‘70s, when economic growth slowed and much of the stock market did very little. (The Dow lost 100 points between 1966 and 1973). But a group of high-powered growth stocks – including IBM, Disney, McDonald's, and Xerox – outperformed the market. Although they were expensive to own, with sky-high price-to-earnings (P/E) ratios of 49 to 91, investors believed they had to own them because the companies delivered consistent growth in an environment where very few investment sectors were doing well.

In the early ‘90s, growth stocks again did well against a slow-growth environment.

Then last month, J.P. Morgan introduced an emerging markets Nifty Fifty: a collection of 66 stocks (the ’60s version didn’t have 50 stocks either) from Mexico, Brazil, China India, Thailand, and so on, that are growing rapidly despite the ho-hum world economic environment. Their P/E ratios are more reasonable than the 1960s-era American stocks, and they've outperformed the MSCI’s emerging market index by 120 percent in the past three years.

 “I feel a lot more optimistic about my growth asset class today than I have in the last 18 months," says Adrian Mowat, J.P. Morgan’s chief emerging market and Asian equity strategist.

Among the stocks on the list are Mexican bottling company Arca Continental and supermarket chains Pick n Pay (South Africa) and Bim Birlesik (Turkey). Even in countries where Mr. Mowat is underweight, individual stocks could soar, such as toll-road operator CCR in Brazil and Internet service provider Tencent in China.

 The investment company is now working on a Nifty Fifty for the developed world.

Of course, these opportunities look particularly good because most other investment opportunities don't. Interest rates are so low that investors can't make any money on low-risk bonds. With Europe in recession, the US economy anemic, and China not yet rebounding, the global economy doesn’t show signs of rocketing ahead.

"We are in a bottoming phase," says Bruce Kasman, J.P. Morgan’s chief economist. "The optimism is that it's not going to get worse."

These [J.P. Morgan's??] projections assume that Europe will find a way to save the euro. Continued growth in the US, tepid though it may be, is another key to this so-so outlook.

"We call the US the little engine that must." says Mr. Kasman. He does not foresee growth improving until well into 2013 at the earliest.

People make their way in front of the Parthenon temple at the Acropolis hill in Athens last month. To climb out of its deep economic and political hole, Greece will have to embark on unimaginably difficult reforms. (John Kolesidis/Reuters/File)

Greece is crumbling. Is there any way out?

By Tom WinnifrithContributor / 09.04.12

Regularly, we are told that Greece will get another bailout from the International Monetary Fund and the European Union bailout if it agrees to dramatically reform every aspect of its government operations. A few months later we are told that more time is needed to “fully implement” the reforms and another bailout is needed. As these games continue, the misery of the Greek population intensifies to levels we in America or Britain cannot imagine.

There is no solution forthcoming. There can be no solution as long as Greece puts off government reforms. But what can Greece's politicians do? If they embrace reform, the government cuts will knock the economy and Greek living standards back to levels worse than in the Great Depression. Doing  nothing is not an option and the third way means leaving the eurozone

Greece's dilemma is no proverbial rock and hard place. It's like swimming in volcanic lava and trying to survive.  

The problems of Greece stretch back to 1974 when democracy returned after military rule. A corrupt two-party state instituted a patronage-based system that was grotesquely inefficient (and corrupt) at two levels. First, in order to dole out patronage, the state was bloated. Even today, every department of government is overstaffed. State-owned industries, notably rail and the post office, are even more overmanned. Workers were paid for 14 months a year, enjoyed 35 hour weeks, and could retire on a full pension at 50.

Second, in order to buy support from the unions and companies, systems were put in place that made Greece uncompetitive. One can buy a lorry or a moving van in Greece for the same price one pays anywhere. But to operate such a vehicle, one has to fork over hundreds of thousands of dollars for a license. It is illegal to transport goods or move a household using any other vehicle. The cost of those licenses is recouped via massively inflated transport charges, which are then passed on to customers. So it costs twice as much to move house in Greece as it does in London, while a litre of milk costs 60 percent more. This sort of modus operandi is endemic.

Until January 2001, Greece offset its utterly uncompetitive economy and unsustainable national debt by retaining its own currency, the drachma, which simply lost purchasing power each year. It was inflationary, unsustainable, but Hellas muddled by. Then, having moved most of its state debts off its balance sheet (aided by Wall Street’s brightest), Greece persuaded the rest of the European Union that it was fit to join the single currency, the euro. It has been downhill ever since. Grants flowed from Brussels for more or less anything. Much of that cash went astray, but the effect of suddenly having very low interest rates prompted a rash of speculative, highly leveraged investments to be made.
 Eleven years later, Greece’s banks are all effectively bust. No structural reforms have been made. And the Greek state cannot even service the debt on its interest. Unable to maintain competitiveness via currency deflation, the economy (led by the tourist industry) has crumbled. Real unemployment (government statistics are unreliable) is about 30 percent. Youth unemployment is 55 percent. To stay in the eurozone (and receive more bailouts), Greece must privatize the state-owned industries, fire half its civil servants, slash state pension provisions, and institute all the structural reforms needed.

That will push unemployment up to 50 percent. The soup kitchens of Athens cannot cope now. Under that scenario, society would crumble.

Mass emigration is already underway. Others are leaving the cities and heading back to a subsistence existence in the villages. The two old parties are hemorrhaging support to new extremist groups (including the Nazi Golden Dawn party). Will democracy survive?

Or Greece could default on its debt and go back to the drachma. But if that happens, there will be no driver for the structural reforms she needs. A one-off 45 percent depreciation of the drachma against the euro will bring temporary relief. But with no reforms, the Greek currency will simply lose another 25 percent each year. Nothing fundamental will be solved. Emigration, urban depopulation, grinding poverty, and political chaos will still be the order of the day. There is no easy solution, only pain on an unprecedented scale for the people of Greece.

While no national nightmare lasts forever, Greece's could last decades – and its rebound decades more. It took Ireland 120 years to fully recover from its 19th-century famine and the mass emigration and social chaos that ensued.  Greece could take as long to recover.

– Tom Winnifrith comments on life, economics, politics, and investments from a libertarian perspective on and a number of British websites, tweets on @tomwinnifrith, and divides his time between the Balkans and London.

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A Facebook worker waits for friends to arrive outside of Facebook headquarters in Menlo Park, Calif., last Friday. Facebook shares are trading below $20 and have lost nearly half their market value since the company's May public offering. (Paul Sakuma/AP/File)

Facebook is worth $5 a share

By Tom WinnifrithContributor / 08.24.12

Everybody knows the price of Facebook stock has fallen to just above $19, nearly half its value back in May, when it first sold shares to the public. But that plunge is nothing compared with the deluge that's coming.

Last week, I warned that Facebook (FB) will fall to $7.30 a share. I now believe it could trade as low as $5. If you hold the stock and have not sold, you really should do so at once.

What has changed is the quite unbelievable selling of shares by those who until last week were locked in to hold the stock since its initial public offering (IPO) in May. As a reminder, lock-ins of more than 268 million shares expired on Aug. 16. Another 1.7 billion lock-ins will expire by Christmas. That whole process will increase the number of shares that can be traded by 276 percent by the end of November. Many if not most of the folks holding locked-up shares bought them for as little as 50 cents apiece, so even if they sold at $5 they would be banking gains of 900 percent. Not bad.

I expected heavy selling from certain quarters last week. What has horrified me is the selling by a non-executive director of Facebook, Peter Thiel, who dumped $400 million of shares, according to a regulatory filing. at between $19.27 and $20.69 per share. Having already stuck $640 million into his bank account from sales made at the IPO, Mr. Thiel has turned $500,000 into $1 billion of cash and has now sold 36.8 million shares and holds just 5.6 million.

This message could not be more explicit. Thiel knows this company better than almost anyone. He does not need the cash. And having put his name to a prospectus to get other folk to buy stock at $38 in May, he is now happy to sell for less than $20. He has no doubt read all the Wall Street analysts reports saying that the shares are worth $23 to $45. But having read them, based on his intimate knowledge of the company, he does not wish to own the shares.  There could be no clearer message to the rest of the world.

And that message will not be lost on the folk who own those 2 billion shares where the lock-in is still to expire. They too can make the sort of returns you and I can only dream of, even if they sell at $5. The next lock-in expiry is Oct. 14,h a couple of days after the next quarterly earnings numbers from Facebook. If, as I suspect will almost certainly be the case, the key metric (revenue per user) sees another decline, there will be carnage.

You have a choice. Follow the Wall Street analysts who have got this one spectacularly wrong and buy. Or follow a man who knows Facebook better than almost anyone else on this planet and sell. It really should not be a hard choice to make, should it?

– Tom Winnifrith comments on life, economics, politics, and investments from a libertarian perspective on and a number of British websites, tweets on @tomwinnifrith, and divides his time between the Balkans and London.

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In this 2010 film publicity image released by 20th Century Fox, Michael Douglas, left, reprises his role as Gordon Gekko (with Shia LaBeouf as Jake Moore) in a scene from 'Wall Street: Money Never Sleeps.' In the original 1987 'Wall Street' movie, Gekko made the famous 'greed ... is good' speech, which popularized today's narrow and destructive form of capitalism. ( Barry Wetcher/20th Century Fox/AP/File)

Greed is (not) good. Here's a better capitalism.

By Cleve W. StevensContributor / 08.21.12

In the years since we first heard film character Gordon Gekko tell us “Greed … is good,” we’ve experienced a lot that reminds us just how wrongheaded that assertion is. The most convincing evidence, of course, is the recent near total collapse of the world economy and our continuing painful slog out of the residue of the Great Recession. And if you think that the greed-is-good mindset is not what informed those who led us off the economic cliff, then, to put it in clinical terms, you’re in denial.

Of course, Oliver Stone’s film "Wall Street," where we first meet Gekko, was not intended as a platform for laissez-faire economics, but a less-than subtle critique of it. Yet the would-be financial masters of the universe were not dissuaded. Indeed, they were emboldened by the words of the cheeky antihero. “Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit,” Gekko declares. And suddenly they were off and running as never before. Looking for pop-cultural reinforcement for Milton Friedman’s economic mantra – shareholder value is the only value – they surely had found it.

And boy did they ever run up the profits. Until, that is, reality came crashing down on all of us in the autumn of ‘08. And as we struggled to get to our knees, our business and political leaders assured us that we (and they) would learn from our (and their) mistakes and things would be forever different going forward.

But four years later, things don’t seem so dramatically different. Witness the two most recent de facto case studies: Chase loses well over $2 billion of investors’ money in an instant, yet CEO Jamie Dimon waltzes through his ensuing “confrontation” before Congress virtually unscathed; and more recently, just before London is to host the Olympics, BarclaysLibor scandal hits (Barclays’ portion of which, Warren Buffet declares, will be but the tip of the global iceberg).

And our economic malaise continues. The Dimons and Blankfeins (as in Lloyd of Goldman Sachs fame) of the world are still in charge (not an adult in sight) and, frankly speaking, you and I are still in trouble, perhaps now more than ever.

We’re still in trouble because the underlying and still-unaddressed problem seems so daunting at first blush that we would prefer to ignore it altogether. But it’s not as ferocious as it might at first seem. The problem is that we remain unwilling to question the reigning dogma of Western capitalism. Dogma, remember, is a belief that is accepted without evidence, often perceived as self-evident, and is not to be disputed by adherents of the faith. The economic dogma of our time is a belief that business is and must be exclusively based on the supremacy of profit, a belief that a relentless focus on profit above all else is the one and only way of creating sustainable business success. It’s a narrow and crippling bit of economic doctrine that seems now to pervade nearly all quarters of the business world.

But in the words of Stephen Green, former HSBC chairman (and currently Conservative minister for trade and investment in the British government), this “will no longer do.” Of course we need a profit, he says but “profit is not the be-all and end-all of business. It is not the raison d’être of business.”

But if we are to smash this false idol, what then is to take its place?

Perhaps the most compelling possibility is found in an approach to business leadership called “transforming integrative leadership” or “transformative leadership” (TL) for short. The TL approach picks up where Lord Green leaves off. It defies the dogma of the day by requiring a dual-perspective approach to understanding profit.

The first perspective is the “Of course” perspective: Of course we need to turn a profit, much as we need food, air, and water to stay alive – we must generate a profit to reward employees (and shareholders) and surely to keep the lights on and the wheels turning. This is the no-brainer piece of the equation. But focusing on that as the endgame of business is like believing we live in order to breathe air rather than the other way around. It is myopic, just plain stupid. We may have gotten away with such myopia in a different time but not anymore.

The second and most important perspective is the “byproduct” perspective: Profit is a natural byproduct of business well-done and done for the right reasons. As Green says, “It is the byproduct and hallmark of success.” In the TL approach, business well-done is 1) the achievement of thoroughgoing organizational excellence, which is the result of 2) the systematic, rigorous development, professionally and personally, of the organization’s people, leaders, and followers.

And here’s what is curious to some (though quite reasonable to others). When this method is wisely and thoroughly implemented, profits soar. In fact, when all other things are equal, this approach has the peculiar tendency to run circles around its more traditional (transactional) competition. Employee and customer satisfaction improves and so does profitability. Just ask Southwest Airlines in the US, which practices a version of the transforming approach and recently completed its 39th straight year of profitability! (At some point you’d think that United, American, US Airways, and Delta would start asking why this might be so.) Or ask retail powerhouse John Lewis in the UK – whose commitment to customer service and the well-being of its employees is legendary. These are just two examples of an excellence-driven, people-centric approach.

But lest you suppose that the transformative approach is a thorn-less bed of roses, I should also point out that this leadership model is far more demanding and rigorous than old-world profit-is-everything models. It is arguably the single most demanding approach to leading ever instituted. It expects that the leaders not only systematically invest in the growth of their people – body and soul, as it were – but it also requires that they (with the support of their colleagues and their bosses) actively grow themselves in meaningful ways.

Far from being some softheaded, "Kumbaya," handholding approach lifted from a bad '60s joke, it’s a sometimes-in-your-face method that places a premium on unvarnished truth-telling, deep commitment, and tough-minded caring. Because of these core demands, to be sure, it is not for everyone, surely not for the faint of heart.

But for those who have a greatness of spirit that awaits expression, and for those who hunger to achieve the extraordinary – or in the words of Steve Jobs, those who long to put their own “dent in the universe” – it’s an approach to leadership whose time has come. And not a minute too soon. The time for proclaiming yesterday’s dogma is over.

– Cleve W. Stevens, a social ethicist and leadership development consultant, is president of Owl Sight Intentions in Los Angeles and author of a new book, "The Best in Us: People, Profit, and the Remaking of Modern Leadership."

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In this May file photo, the Facebook logo is displayed on an iPad in Philadelphia. Facebook's stock closed near its all-time low Tuesday and may fall even further as millions of new shares become eligible for sale. (Matt Rourke/AP/File)

Facebook shares down nearly 50 percent. Set for another fall?

By Tom WinnifrithContributor / 08.15.12

You bought Facebook (FB) stock during its May initial public offering at $38? Too bad. It closed at $20.38 Tuesday, its second-lowest close ever and a 46 percent drop in 12 weeks.

But far worse is yet to come. This stock is worth no more than $7.30 a share and the really big sell-off could start as soon as this Thursday.

Why Thursday? Until now the number of shares in Facebook that have been freely tradable has been limited by lock-in agreements covering original investors who paid as little as 50 cents a share. Lucky them. Those lock-ins start to unravel on Thursday when 268 million shares will be released (more than half the shares offered in May). This will be followed by 247 million released on Oct. 14, 1.33 billion on Nov. 13, and 124 million on Dec. 13.  At a stroke, the free float of shares increases by 50 percent on Thursday and by 276 percent by November. Putting this in context, over the past 10 trading days the average number of shares traded has been 39 million a day. So nearly 20 million shares bought and the same number sold. On top of this will come this huge wave of earlier owners of Facebook, who even at $21 a share will have made vast gains.

Why will many sell? Firstly, those with early lock-in expiries will sell before later expirees get the chance. Secondly, because capital gains tax may well rise in 2013. And thirdly, because on fundamentals, Facebook is still grotesquely overvalued.

But Facebook is growing, is it not?  Yes and no. In the second quarter earnings statement, Mark Zuckerberg’s company boasted that headline users were approaching 1 billion. But the value of a company is determined not by headline users but by its ability to turn users into cash flow. Since the earnings report, it has emerged that around 1 in 10 users is of no use to an advertiser, since it is either a pet (dogs do not buy online), a ‘bot ( an automated computer program – purchasing power nil), or a duplicate account (for users so boring that the only person to “friend” them is themselves).

Converting users to advertising cash has always been hard as so many users have low disposable incomes (teenagers, students, and those from the developing world). Attracting advertisers became even harder when a New York company (Limited Run) claimed that 80 percent of those click-per-views it had paid for were from ‘bots not humans. As if that was not bad enough, increasing numbers of the 1 billion now use Facebook through mobile devices, not PCs, where it is far harder to sell advertising. Hence in the second quarter (even before the Limited Run accusations), revenue per user actually fell.

So the forecasts used by Wall Street analysts to justify the $38 initial public offering (IPO) are just meaningless. There is no visibility of revenues or earnings going forward. We should value the company on the basis of historic earnings.

Historically, the Dow Jones Industrials average trades on historic earnings multiples of 13 to 22. Facebook could grow its earnings at a far greater rate than most Dow components. But it could grow at a far slower rate. (Would you advertise there right now?) And there must be a heavy risk of legal threats arising from the Limited Run scandal and the botched IPO (there are already numerous suits pending).

On that basis, an historic price-to-earnings (PE) ratio of 20 is generous, especially if sentiment towards this company gets even more bearish as the lawsuits start to fly and if there is any hint of advertising weakness. On an historic PE of 20, Facebook would trade at $7.30. Given recent news, even that looks toppy.
 At $21.60, I’d call my broker and sell before Thursday.

– Tom Winnifrith comments on life, economics, politics, and investments from a libertarian perspective on and a number of British websites, tweets on @tomwinnifrith, and divides his time between the Balkans and London.

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