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Musings Report #52 12-27-14 Theme for 2015: Success as a Source of Destabilization
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Theme for 2015: Success as a Source of Destabilization
Rip-Roaring Success is a funny thing: we assume it's the goal of every person, household, enterprise and nation, but we overlook that rip-roaring success can be as destabilizing as failure.
Rip-Roaring Success can destabilize in a number of ways.
One is the result of human nature. Those who didn't make it onto the Roaring Success Bus feel the gap widening most keenly. Indeed, psychological studies find we assess our wealth and social position not by the actual material prosperity we have, but by the narrowing or widening of the perceived wealth gap with our peers.
This is precisely the situation in the U.S. and China. Both economies are supposedly expanding smartly, but the gains are concentrated in a relative few hands; the Roaring Success Bus has few seats.
the vast majority perceive themselves as being left behind. That is highly destabilizing.
The second is a function of systems and human nature.
Every extreme eventually tends to revert to the mean, which is another way of saying that extraordinary growth rates of profits, stock market advances, etc. that characterize Rip-Roaring Success eventually return to merely average rates of growth.
This inevitably disappoints all who thought outlier rates of growth were permanent features of the system: Apple iPhone sales, China's GDP, etc.
This disappointment greatly exceeds the actual decline in the rate of growth, and the oversized reaction tips the system out of stability.
The collapse in the price of oil can be seen as an example: once oil was no longer behaving as expected, i.e. holding to $100/barrel, the reaction was swift and outsized.
The third is a function of organizations and systems.
Organizations that are hugely successful quickly lose interest in controlling costs. The money is pouring in so fast, every idea is presumed to be worthy of development, every functionary is presumed to need an assistant, and lavish parties celebrating the organization's roaring success become the norm, along with hefty bonuses and grand expansions of benefits.
Another way of saying this is costs that should have remained contingent and temporary become fixed costs. Once costs become fixed, the institutional resistance to eliminating them becomes fierce, and the organization slides into destabilizing crisis as rising fixed costs consume all profits/surpluses and start eating away at what little remains of truly productive activities.
The fourth is a function of success itself.
Success results from the optimization of productive capacity. In many cases, this optimization is accidental, or the result of chance alignments. Even when the optimization is entirely planned, a great many assumptions are made in designing that optimization: for example, that further investments of capital will continue to yield high rates of productivity growth, or that sales can continue expanding as product cycles become shorter, and so on.
But once conditions change, as they inevitably do in a dynamic world, the system that was designed to optimize for success is suddenly optimized for failure--yet nobody perceives the stagnation as the result of the very optimization that created the roaring success.
In effect, the organization is programmed to do more of what's failing.
In a previous Musings Report, I mentioned the example of the World War II bombers that returned from missions heavily damaged. The experts examined the damage for clues as to what could be done to increase the survival rate of the aircraft.
This is entirely rational, right? The best way to improve results is to examine the sources of failure. But the experts did not examine the planes that were shot down, those planes whose damage caused them to crash, and as a result, their observations were limited to those aircraft that were able to return to base. As a result, their conclusions were necessarily incomplete and misleading.
Put another way: we tend to assume our system for understanding the cause of failure must be good, because we've experienced Roaring Success for so long. But the two skillsets are not necessarily related.
The fifth is a function of how we measure success. If a rising stock market is taken as the measure of success, then everyone watching stocks loft ever-higher assumes the system being measured (the economy) is experiencing rip-roaring success.
But the success reflected by the metric may be entirely artificial--for example, China's GDP. The choice of a single metric of success heavily incentivizes those in charge to game the metric to exaggerate the system's health and the competence of their leadership.
Ironically, a steady stream of small failures is the path to adaptation and stability. Experimentation results in a continual flow of failures that informs the process of maintaining progress. Organizations, individuals, households and economies that have been successful without experimentation are increasingly vulnerable to destabilization, for the reasons noted above.
In 2015, I suspect we will see apparent success leading to destabilization as often as we see failure lead to destabilization.
Summary of the Blog This Past Week
We Just Enjoyed the Last Christmas in America 12/26/14
The Christmas Letter I'd Like To See 12/25/14
I Call BS on Projections of a Decade of $20/Barrel Oil 12/24/14
Will the Fed Intervene in the Oil Market? 12/23/14
Maybe Oil Goes to $70 on its Way to $40 12/22/14
Best Thing That Happened To Me This Week
Post-Christmas lunch with friends. Menu: Sonoma Cabernet red wine, non-alcoholic Chardonnay grape juice, brie and prosciutto on French bread, onion-spinach-potato-cheese frittata, salmon with tomato and avocado, roast lamb, stir-fried yao-choy Chinese vegetables with sliced ginger, and quark (petite creme) with fresh raspberries.
Market Musings: checking in on the U.S. dollar bull
I have been a public U.S. dollar bull since 2011, and after noodling around in a rising channel, the USD finally took off in May of 2014.
After such an extended run, we can expect a dip or retrace of some size, and such a dip might well correspond to a pop up in gold, oil and other commodities.
There is no strong evidence of a retrace yet, but we see some divergence in the MACD histogram that suggests the possibility.
Such a retrace would offer a chance to get on the Long USD Bus. Some analysts expect the USD bull to end soon, and retrace its entire run-up. What is the fundamental basis of such a retrace? No one has a satisfactory answer, and so I suspect the inevitable dip in the USD will act more as a B leg down in an ABCD pattern i which the C leg equals or exceeds the A leg.
From Left Field
"Giving Is The Best Communication" (3:02) Thai telecom commercial, a short film on small acts of kindness being repaid in unexpected ways.
"Survival' shoplifting soars as people battle to cope with brutal cuts in austerity Britain
Your Waitress, Your Professor -- good account of supposedly "survival jobs" paying more than white-collar work...
Guzzling in the Gulf: The Monarchies Face a Threat From Within -- the end of the Export Model nears...
The world economy in 2015 will carry troubling echoes of the late 1990s
Behind the restaurant boom: the urban delusion consuming our cities -- that a proliferation of cafes and eateries can be a source of "growth"....
Rise in Loans Linked to Cars Is Hurting Poor (via Joel M.) -- the latest wrinkle in debt-serfdom....
Farmin' in The Hood (16 min) (via Chad D.) urban farming--look at the potential....
The World Is Not Falling Apart (via Lew G.) Steven Pinker on the global decline in violence--
Energy-Storage Plans Gain Ground in California (via Joel M.) -- energy storage may be the better investment than more production capacity...
LISTENING IS BELIEVING (short essay worth reading) "It’s the intensity of one’s imagination that creates a romance."
A Steep Slide in Law School Enrollment Accelerates (via Joel M.) -- finally, some good news...
“People are coming to terms with the fact that this decline is the product of long-term structural changes that are just not going away,” said Paul F. Campos.
The 14 Best Documentaries of 2014 (via Maoxian)
"Every revolution evaporates and leaves behind only the slime of a new bureaucracy." Franz Kafka
Thanks for reading--
charles |
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