Ethics and Trustworthiness - Semantics?

I had a friend ask me the other day as we were talking about one of the papers I had written in which I had mentioned core character traits that were important to me.  My friend thought these were so closely related as to be redundant or at best unclear in the sense of being different.  These core traits were being ethical (in behavior and thought) and being trustworthy.  Not wanting to get into a discussion of what Webster defines these I attempted to explain how I view them and I invite my readers to sound off as well.

Simply put, you cannot have one without the other.  You also need to include integrity.

The differences between being ethical and trustworthy are not just semantics.  Ethical behavior in my mind is doing the right thing in a moral and cultural context with morality having the upper hand.  Trustworthy on the on the other hand is linked to ethics in that an individual can be relied upon to do what he/she says they are going to do and that the actions fit in with the moral guidelines of society and culture.  Of course, an individual can be trusted to do bad things but he is not “trustworthy.”  Trustworthy in my opinion is a trait that an individual exhibits when he/she will safeguard my confidences, protect communal and personal property and put the interests of others before his/her own interests.

This can get deep into philosophy, which I have done on many occasions.  This also reminds me of a quote from an early mentor (Dan Rivera, 1979):  “The true measure of a man’s character is defined by what he will do when he knows he will not be held accountable for his actions.”  This quote, which I have lived with for over thirty years and more embodies ethics, trust, and integrity.  You cannot have one without the other two.

Chinese Bank to Buy Stake in U.S. Arm of Bank of East Asia

Does this bother you and why has not the mainstream media picked up this?  Okay.  I am not xenophobic but I am a patriot and a diehard capitalist.  Having established that (for those of you who do not know me very well) I must confess I am a bit perplexed about the Federal Reserve’s recent decision to allow The Industrial and Commercial Bank of China to purchase 80% of the Bank of East Asia.  The only press I have seen to date has been from the NY Times and the Wall Street Journal.  I will keep looking.

This is a watershed moment as it is the first time a Chinese institution would have a controlling stake in a United States financial institution (as reported today in the NY Times and the Wall Street Journal).  I mean, I am fan of the Fed on the general principle that someone needs to manage the money supply and supervise the banking system.  But when they are overseeing the domestic banks there are a multitude of regulatory guidelines and laws that actually make the domestic banks pay attention (okay – the 2008 Crisis still happened, but..).  However, how is the Fed going to get the Chinese banks to heel to their will.  After this transaction, the playground gets a little muddled and I am afraid no one is paying attention.

The Chinese government owns 65% of The Industrial and Commercial Bank of China.  Let that number sink in.  Who is going to have the most influence over the bank: the Fed or the People’s Republic of China?  If the question is too difficult for you then you need to brush up on comparative politics (Hint: The Communist government controls the actions of the bank when it comes to a pinch).  This will be a problem.  What is next – sale of one of our major shipyards to the Chinese?

Our banking system still has not recovered from the 2008-09 crises with earnings well below where they need to be for every bank to be healthy and growth anemic at the majority of the banks (JPM and GS notwithstanding).  The additional competition from the Chinese banks will apply more pressure (not at first according to the WSJ) overtime and the action will be fierce as the Chinese government will want a decent return on their investment (don’t we all?).  The FED can be satisfied that concerns about capitalization are non-existent since the Chinese treasury is awash with U.S. Dollars.  It must be appealing to the FED to have additional liquidity strength in our market but what if the Chinese decide, say in 10 or 5 years they do not want to play by the FED’s rules.  What does the FED (We) do?  Control of our own currency may be in the hands of the socialist (there I said it) Chinese government.

Let me know what you think.

Investment Themes for Client Portfolios

These general themes will persist in our investable markets for the next 3-5 years. Some of these will be persistent whereas some will be transient from time to time. Overall, these will have
direct bearing on portfolio performance going forward.

Asset Allocation and risk:

We are still in a secular Bear Market and have been since July 2000 and this threatens to be one of the longest in history. The average bear market has been 9.5 years with the longest in excess of 16 years. Our current secular Bear market may be ending but the volatility we have endured for the past 9-12 months still gives one pause on the investment direction to take.

I am taking a wait and see point of view and I favor high quality dividend paying stocks with a good exposure to companies with demonstrated growth of earnings, market share, and produce
products and services we will need to live our lives.

Here are the trends I am following and acting upon as I invest client assets.

Ø Equity markets both domestic and international are in a secular Bear market and could remain
so for the next 3-5 years but potential exists in equity even after a significant recovery from the March 2009 bottom.
o
Expected annual returns for the period will be below historical average (9.5%) with elevated volatility
o
Interest rates will be low for the next three years but eventually will rise as inflation increases
o
Economic Growth will remain anemic (< 3%) combined with unemployment rate above the
historical average (4-6%). Unemployment will likely remain above 7% for the next two – three years.
o
Fixed income bubble – low rates will eventually translate to a rising rate environment, increasing inflation risk and reinvestment risk.
o
Money will flow from fixed income to equities
o
Equity dividend rate for the S&P 500 will continue to rise (currently about 2%)
o
Expected rate of return for equities for the next five years is between 5-9% per annum, less than the historical rate of 9.5 for the S&P 500 going back to 1926

Ø Infrastructure
Rebuild and improvement – This area has been neglected in nearly every developed nation on the planet. Essentially governments have been maintaining at the lowest level possible. It is now time to pay the piper so to speak.
o
Applies to Domestic and International Markets
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Transportation
§ Highways
§ Railroad
§ Airports
§ Seaport improvements
o
Water
§ Purification
§ Desalination
§ Pipelines
§ Infrastructure (average age in the USA is extremely
long)
o
Power
§ Nuclear
§ Natural Gas
§ Electricity
Ø Healthcare
for an aging America – The Baby Boomer generation will demand higher level of care to maintain a very active lifestyle and this applies in all developed markets as well. Everything from new drugs to artificial joints to preventive healthcare will be driving forces in this sector.
o
Pharmaceutical companies over healthcare providers
§ Uncertainty of the Affordable Healthcare Act in the future
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Biotech and artificial instruments (knees, hips, etc.)
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Research and development of new drugs for old diseases (diabetes, heart disease, and cancer)

Ø National Defense – The drawdown of the U.S. Military will make our (over) reliance on technology even more important. This combined with the aging of our war-fighting equipment will ensure money for national defense will remain high on the priority of any administration or
Congress.
o
Increased technology requirements to compensate for fewer troops
o
Aging military equipment and infrastructure
o
Unstable world in general

Ø Growth of the middle class in Emerging Markets – As much as other nations may dislike the
Western developed nations, these countries want the products we have developed and mannufactured and continue to do so. Agriculture and the ability to make processes and land more efficient will drive this sector.
o
Increased demand for food rich in calories and protein
o
Increased need for arable land and more efficient agricultural methods/fertilizer/water
§ Fertilizer
§ Equipment
§ Research

Ø Increasing demand for energy from all sources – Fossil fuels will be around for the next 100+ years and we as a culture need to get it more efficiently as well as develop alternatives for the future
o
Oil/Gas exploration in domestic areas
§ Gulf of Mexico
§ Oil Sand extraction
§ Pipeline construction and
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Transport and refinement
§ Rail
§ Sea
§ Pipeline
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Infrastructure – Has been ignored for far too long

Ø Overall Valuations in Equity markets are still below historical levels – Equity markets are the least expensive we have seen in two generations but volatility remains – These sectors are especially compelling:
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Financial
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Manufacturing
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Consumer

Unfortunate Shooting in Afghanistan

I am a retired infantry soldier and have a good idea that this soldier acted alone because of a mental defect or stress. When and if he is tried for these crimes and found to be guilty he will be punished. However, the trial should be in the US not in theater. I can only imagine if he is tried and convicted there. The local populace would demand to be the executioner. Of course getting him out of country will place the soldiers left behind at grave risk of retribution as a result of the anger that will continue to spawn going forward. I too agree we should leave Afghanistan. Our mission of destroying or breaking up Al Qaeda is as complete as any killing of a multi-headed Hydra can be. The people of Afghanistan do not want us there and no matter how long we are there to train, arm and feed them they will not adopt the principles of democracy because of the culture, let alone thank us for the schools, hospitals, roads, water wells, etc we have built for them. I am just sorry that we have expended great resources from our nation’s youth to little or no avail.

The investment landscape changes, it seems, on a daily basis. New products, improved systems and a constantly changing lexicon; all perpetuated by the industry itself and the media. It is a small wonder that individual investors are unsure of where their money is located and what performance they are to expect. Not to mention the risk they may be subjected to on any given market day.

That is where we come into the picture. By we, I mean investment advisors who are dedicated to guiding the investors who are our clients (but also partners in a way) through the shifting maze of the investment world. Some advisors are very adept at this and others are still learning the rigors of the profession so I caution the investor to seek out the information they need to conduct a thorough due diligence of their advisors since so much could be riding on their selection of an investment professional. The next blog I will discuss factors in selecting an advisor.

GroupThink or Leadership - Which One Works for You?

I guess I am a negatron but that is by design. I have a fairly structured decision making process borne of years in the military where decision making at the lowest levels is encouraged to be free thinking (within the regulations of course). Many people think groupthink is alive and well in the US Military and to some extent, it is especially at the general officer ranks. Nevertheless, groupthink in the military, the government and business leads to undesirable outcomes across the board.

Individuals like Gen McChrystal or Carly Fiorina at HP do not adhere to groupthink. Unfortunately, these individuals are drummed out of an organization. Groupthink fails because equal credence is given to all ideas regardless of form and validity, not a bad concept with a strong capable leader able to ferret out the BS. However, without good leadership the common denominator of these decisions is mediocrity not excellence. When management cannot make a decision and allows the groupthink mentality to flourish failure will ultimately occur. I agree that groupthink in and of itself can be useful and lead to better acceptance of good practice and procedures, but it is better defined and characterized as consensus building whereby all ideas are aired and discussed. But decisions based upon how well they will sell with the company masses only perpetuates low standards and drives folks with higher goals and standards to other venues for work leaving the organization with those that accept mediocrity as the standard.

The Fall of The BP Executive

Well the fall of Tony Hayward of BP is complete. However, did he deserve the punishment meted out to him? His use of the English language notwithstanding ("I just want my life back” which I can understand was spoken in an unguarded moment) and his choice of activities in which to relax (yachting) certainly cast a pall over his departure. However, by all accounts BP did as much as could be expected after the oil incident occurred and we may never know what happened on the Deepwater Horizon oilrig.

So..should he be the scapegoat for the misadventures of BP in the Gulf of Mexico?

It is important and we all forget from time to time that leadership is about getting the best out of people even when they don't to do the things an organization needs to do...and get them to do it because they want and need to do it not because you told them to.

Part of this is taking the hit when it comes (and it will come). I have always believed and acted upon this belief: I am responsible for everything my organization does or does not do. If we succeed, it is because, as a team, we all contributed and the team deserves the credit. If the team fails, then I have failed and should take the first bullet from the corporate gun. Others may fall and should but if they have done my bidding in good faith then I may be the only one to pay the price.

I do not begrudge Mr. Hayward's payment as he departs since 90% was earned through his pension over 28 years in the making. Nevertheless, like everything from the yacht to getting his life back, in total it looks bad.