All Posts By

The Hutch Report

The Hutch Report

A Day of Carnage in the Trading Rooms

By | Economics, Markets

Thirty-four years ago, on Oct. 19,1987, the Dow Jones Industrial Average plunged 22.6%, its largest one-day percentage-point drop ever.

In comparison, here are five of the worst stock market crashes in US history, based on daily percentage losses (source: ajc.com):

Five Worst Stock Market Crashes in US History

Oct. 19, 1987

Percentage change: -22.61 percent

About: Known as “Black Monday,” this devastating crash began in Hong Kong, spread to Europe and then hit the U.S. hard.

Oct. 28, 1929

Percentage change: -12.82 percent

About the crash: The Wall Street Crash of 1929, also known as the Great Crash or the Stock Market Crash of 1929 started on Oct. 24 and signaled the beginning of the 12-year Great Depression. Black Monday, the fourth and worst day of the crash, saw a drop of 12.82 percent.

Dec. 18, 1899

Percentage change: -11.99 percent

About the crash: During the Panic of 1896, the U.S. experienced an acute economic depression caused by a drop in silver reserves and deflation.

Oct. 29, 1929

Percentage change: -11.73

About the crash:  Black Tuesday was the fifth day of the the Wall Street Crash of 1929, also known as the Great Crash or the Stock Market Crash of 1929 that started on Oct. 24 and signaled the beginning of the 12-year Great Depression.

Nov. 6, 1929

Percentage change: -9.92

About the crash: Just a week after the height of the 1929 Stock Market Crash, investors saw another dip.

What were they saying back then?

We were wondering what parallels exist today, not only from an economic standpoint, but also from a human behavioural one. What were they saying back then that we could expect today?

We looked back at a Nightly News Broadcast of that time in order to gain a better understanding of the mindset of the time. You would be advised to watch the broadcast because in the words of philosopher George Santayana, “Those who cannot remember the past are condemned to repeat it.” (See The Nightly News Broadcast October 19, 1987 at the bottom of the post)

The 1987 crash lost much more than the crash of 1929, and although (as they said at the time), “Conditions today are much better than they were then.” According to the broadcast, the sudden sell orders stemmed from big institutional investors to private investors all worried about, “Inflation, rising rates, a declining dollar, and huge budget and trade deficits.”

Because consumption makes up a big chunk of the US GDP, they worried that the market plunge at the time could impact the psychology of even those that didn’t own stocks. They worried the consumer would stop borrowing and spending which could grind the economy to a halt. The difference is that today by comparison, consumers are much more heavily indebted. They are carrying mortgage debts, auto loan debts, student loan debts and credit card debts that are far higher than they were in 1987.

The Reagan administration at the time tried to blame congress for scaring big business by proposing higher taxes. There was also concern about needing to cut the deficit. However, one of the big criticism of the time where directed at Treasury Secretary James Baker for hinting that the US would not defend the decline of the US dollar.

Curiously absent from any of the stock market crash discussion of the time was the elephant in the room, the Federal Reserve Bank of the US. How times have changed, as they have now become the only voice that seems to matter anymore and the last line of defence. They have become the backstop for stock market for the past 20 years, gaining influence with every crisis. Only time will tell what happens when they lose their ability to keep everything a float.

All in all, it is a fascinating 9 minutes to watch. It should give you a pretty good idea of what to expect in the future.

The Hutch Report

The science of why we repeat mistakes

By | Economics, Finance, Psychology

History has shown us that we have made many, many mistakes as a society. It has also demonstrated that we tend to repeat previous mistakes made, despite our better judgement. “But why do so many people make the same errors over and over again?” This was the question asked in an article published in The Atlantic.

Procedural memory or Process memory is a part of your long-term memory. It is responsible for knowing how to do things. It is considered a subset of, what is sometimes referred to as, your subconscious memory. Memory is basically nothing more than the record left by a learning process. Thus, memory depends on learning. But learning also depends on memory.  The knowledge stored in your memory provides the framework to which you link new knowledge by association.

When we do something repetitively it gets recorded into our neural pathways. The brain is not able to tell whether or not we are forming a good habit or a bad habit. Our neural pathways are therefore created for both positive and negative behaviours, depending on where you place your focus. Our brains see a repeated action, whatever it may be,  and creates a pattern. It automates that action appropriately for the next time. This allows us to save energy. 

A study by Johns Hopkins, published in the Journal of Current Biology, showed that a subject’s attention towards a previously reward-associated stimuli was positively correlated with the release of dopamine. “Dopamine released within the caudate and putamen is known to underlie habit learning and the expression of habitual behaviours.” This means that there is evidence that our brains are wired to pay attention to things that were once rewarding, even if they aren’t anymore.

We tend to fall victim to a number of human biases that dominate the direction of our thinking. The Ego Effect, or Egocentric Bias can lead us to keep making the same mistakes over and over again. Example, someone who is highly skilled in a certain expertise may struggle to imagine the perspective of others who are more unfamiliar with it. 

In 1987 we experienced Black Monday in the US as the stock market fell precipitously. As Investopedia recounts, “There were some warning signs of excesses that were similar to excesses at previous inflection points. Economic growth had slowed while inflation was rearing its head. The strong dollar was putting pressure on U.S. exports. The stock market and economy were diverging for the first time in the bull market, and, as a result, valuations climbed to excessive levels, with the overall market’s price-earnings ratio climbing above 20. Future estimates for earnings were trending lower, but stocks were unaffected.”

During the savings and loan crisis, the US experienced the failure of 1,043 out of the 3,234 S&L banks from 1986 to 1995. It is believed that the failure began with inflation that started in the 1960s, which led to Paul Volker, U.S. Central Bank Chairman at the time, to raise interest rates. Mortgage rates evenutally topped out at 18.45%. This helped bring on a recession which saw the beginning of the S&L crisis. Deregulation of the industry, combined with regulatory tolerance, and fraud worsened the crisis.

During the 1990s, we experienced a Finnish, Swedish and British banking crisis. In 1997, we experienced the Asian financial crisis. 1998 saw the Russian financial crisis, followed by the Ecuador and Argentinian financial crises in 1998-1999. 

In 2008, we experienced a financial crisis that ravaged the economy and engulfed the country and the world. The government and the Central Bank intervened with a number of bailout programs, which saved the banks, stabilised the financial system and corporate America. Not surprisingly, the combination of regulatory tolerance and fraud allowed the banks freedom to do as they wished, and worsened the crisis…..once again.

Having the Central Banks and Governments backstop every poor practice perpetrated by financial institutions has, time and time again, created a situation of “moral hazard.” This essentially means that if you are confident somebody will bail you out, you will have a tendency to risk as much as you possible can. 

In addition, financial institutions are looking for that dopamine hit. As we previously described from the Johns Hopkins study, our brains are wired to pay attention to things that were once rewarding to us. It is then understandable how greedy bankers will keep trying to identify those high risk, high payoff investments despite the risk and dangers.  

Government, Central Banks and Regulatory authorities tend to fall prey to the Ego Effect bias. They believe that they are smarter than everyone else, and have a hard time to understand how the general population would not see things the way they do. It is all under their control!

So, we can see how not only have we not learned from our past mistakes, we continue to make them. Looking at the present economic situation, the level of asset prices and the bravado of the current Central Bankers, you can expect another crisis to arise, which will most likely be more severe than the last. Why? Simply because they have shown us that they are not capable of learning from past mistakes. 

Does this mean that humans are not capable of learning from their mistakes? No, we certainly are.  It just takes effort and a large amount of humility. 

It may not seem that way at the moment, but in an increasingly complex and uncertain world which we live, people and organizations that embrace failure and create a strong culture around learning from their mistakes will ultimately thrive. Hopefully we’ll learn from our mistakes following the next once-in-a-lifetime crisis!

The Hutch Report

Breaking News – “The news isn’t really breaking!”

By | Media

There is a furious battle going on these days. That battle is for your attention. The media is fighting to attract and retain your attention every minute of the day, regardless of where you are or what you are doing. Their goal is to disrupt your focus, stop what you are doing and pay attention to what they have to say. It takes you away from doing important work. It takes you away from engaging in an interesting conversation with a friend, but most importantly it uses up a commodity that you can’t get back, your time. Consciously or unconsciously you are fighting to not be sucked in by all the props and attention grabbing tricks the media uses to reel you in. 

At one time, while watching TV, a station would interrupt programming to provide a special news bulletin. It may have been an exceptional event such as planes hitting the World Trade Center Towers, or the 6.9 magnitude San Francisco earthquake of 1989, or the 2004 Indian Ocean earthquake and tsunami that hit Indonesia. These were events that required your attention for any number of reasons, one being, knowing a loved one that may have been directly affected by the event allowing you to reach out to them in a timely manner. 

However, now days you may have realised that there is an incredible amount of “Breaking News.” The news is often hours old, has been on loop or just an insignificant tidbit to many who are watching. The “Breaking News” banner hits the screen with a swash of colour accompanied by dramatic music, and bang, your reaction is always the same, “What happened that I need to know about?” 

Focus group research shows that generally, the station or network that is considered the best at covering breaking news can expect to be number one in the Nielsen ratings. So, rather than devoting their efforts to deep reporting, in an effort to uncover the truth, these networks have opted for the easy way out. They take one story and beat it to death on loop over a 24 hour period in order to keep you engaged and entertained. 

The payoff to the media is additional ad revenue. The loser; however, is you, the viewer. Just ask yourself how many important breaking news stories happened over the past week that you most likely spent everyday all week reading or hearing about. By spending 10 minutes on one well written article, you would have learned all you needed or wanted to learn about the event.

It is not 24 hour news anymore, it is 10 seconds of news and 23 hours 59 minutes and 50 seconds of opinion. The truth is, there is actually a financial benefit to investigations, but it is a longer-term investment. Readers appreciate when their newspapers ask tough questions in a fight to uncover the truth. They like corruption to be exposed, abuse of power to be challenged, and serious scandals to be unearthed. It reminds them what journalism is for. They admire it. They are even willing to pay for it.

Unfortunately, as long as people keep getting sucked into the attention traps that the media creates, journalism is not coming back. So how can you fight against it? There are some simple changes you can make. 

  • Pick one or two “reputable sources” of news
  • Choose a few minutes at the end of the day to review it
  • Ask yourself, “Is this news or is this opinion?” If it is opinion turn it off (unless of course it is an individual’s opinion that you value highly). 

That’s it, there is nothing more to do. I can guarantee by making these slight changes in your viewing habits that you will be no less wiser about what is going on, but will have gained a large chunk of time to make better use of, and you will also find that you feel less anxious about the world. 

The Hutch Report

Your financial illiteracy is good for banks

By | Education, Finance

One of the fallacies of education is that if somebody has a list of impressive academic achievements, they are highly knowledgeable and intelligent. Yet knowledge does not equate to intelligence. Knowledge is the collection of skills and information a person has acquired through education and experience. Intelligence is the ability to apply that knowledge. Equally, just because someone lacks knowledge of a particular subject doesn’t mean they can’t apply their intelligence to help solve problems.

The chasm that exists between knowledge and intelligence is no clearer than in the field of personal finance, as Americans face a record $13 trillion in debt. Although the current Covid pandemic did take many by surprise, a recent article in Time magazine highlights: 

“While some face new challenges resulting from loss of income or uncertainty for the future, for many the current economic crisis only exacerbates already present stressors related to monthly bill payments, consumer debt balances, lack of emergency savings, or even just putting food on the table.”

Basic math skills is a requirement for all public schooling, yet the ability to use standard addition, subtraction, multiplication and division to solve problems seems to be lost when it comes to dealing with money. Colleges may make students take biology, history, and other classes as general education requirements, but learning anything about saving, investing, and how financial markets work is purely an option.

In a previous article (Are you educated?) we highlighted the current weaknesses in the education system and the need to rethink methods and curruculum that may be more suited and effective in today’s fast changing world. It maybe important to now ask, “Should financial literacy be an educational requirement?”

You would think the answer would be a resounding “yes” but this is not the case. There are a large number of businesses that thrive on keeping the population financially illiterate. In their book: Simple: Conquering the Crisis of Complexity, Irene Etzkorn and Alan Siegel point out that “banks, credit card companies, insurers and other types of businesses find ways to make money from the fine print nobody can read or understand,” and that “lawyers have inundated us with mind-numbing disclaimers, disclosures, terms, instructions, amendments and amendments to amendments” to “avoid lawsuits or other potential problems.”

Every time a bank’s client uses their debit card, write a check or withdraw funds, the balance in their bank account goes down. According to the Center for Responsible Lending, “Banks collected more than $11.68 billion in 2019 through abusive overdraft practices that drain consumers’ checking accounts.” 

Not understanding personal finance means that most clients don’t understand the fees they are charged, how credit card interest charges accumulate, how to construct or stick to a budget, and so many more facets of basic money management. Some are lacking in knowledge, some in intelligence and those that lack in both are a windfall for financial institutions.  In finance, as in healthcare, when people don’t know what they are paying, service providers have no real incentive to lower costs.

The financial industry has made it a practice to make sure that investing is very complicated. They have a tendency and flair for developing the most complex names possible (even the guys selling these products are not entirely sure of what they mean), examples such as collateralised mortgage obligations, leveraged index funds, credit default swaps, or synthetic CDOs. As Mark Hanna put it in The Wolf of Wall Street, “The name of the game: moving the money from your client’s pocket to your pocket.”

Boris Vallée, a PhD in Finance from HEC Paris, points out that, “The fact that banks use persuasion techniques, by giving products magical names such as ‘Unicorn’ or ‘Elixir’ in an environment where we should be thinking rationally is illustrative of their targeted strategy.”

Banks are a business and expect to make profits but there is a good argument to show that they have taken this way too far. They don’t call them “predatory banks” for nothing. 

The growing wealth inequality gap and the increasing level of personal debt may have some ringing the alarm bells to make some changes. 

A new report from the Council for Economic Education found that the number of states that require a high school student to take a personal finance course — either a standalone class or integrated into other coursework — in order to graduate has risen to 21.

According to a 2019 report by Montana State University researchers Carly Urban and Christiana Stoddard, financial education decreases the likelihood of holding credit card balances, and the education reduces higher-cost private loan amounts for borrowers. 

This bodes well for future generations, however, what is the solution for the current portion of the population that left school years ago, financially illiterate and mired in debt? That is not immediately clear as household debt surged in 2019, marking the biggest annual increase since just before the financial crisis, according to the New York Federal Reserve. 

The Hutch Report

Are you educated?

By | Education

Today’s general consensus seems to be that the current western education system is broken. The argument is basically that the system used to work, but now it doesn’t. 

This frustration towards the current mechanics of the system does not only come from disgruntled parents and uninterested students, it also comes from some very intellectual and successful personalities. Physicist Michio Kaku believes that today’s system of education, where exams are based on grades and memorisation, is crushing curiosity. American astrophysicist, cosmologist, and planetary scientist Neil deGrasse Tyson thinks that in order to achieve the highest grades, students will simply choose what is easy. He says that today’s education structure rewards high GPAs, in a world that rewards tenacity. Entrepreneur Elon Musk feels that the fact that curriculums are forced on students is an issue. Teachers don’t explain to students why they are being taught a certain subject. He believes that rather than just learning math, taking a problem and using math to solve it is a much more engaging prospect. The list of reasons is long and getting longer each year. To add some clarity, it may be worth first asking the question, “What does it mean to be educated?”

The latin word “educare” is the etymological root of the modern word ‘education and it means “to bring up, rear, train, raise, support”. Educare is related with “ducere,”which means, “to lead, conduct, guide”. To be educated means to be “guided” or “brought up” or “trained” by other persons. Education is the act of another person, the trainer, the educator, the guide, while the educated is the receiver of the training and guidance.

So being educated or well educated simply implies that you have been guided or trained and does not really indicate the level of knowledge someone has attained. You can be well educated but very knowledgeable. Equally, you could be extremely knowledgeable but not very well educated. Throughout history, we have seen a number of examples. The Wright Brothers never finished high school yet became knowledgeable enough about aerodynamics to invent the airplane. Steve Jobs completed only one year of college yet is now recognised as one of the pioneers of the computer revolution. Thomas Edison spent 3 months in high school yet went on to invent the light bulb, the motion picture camera, telephone, phonograph, and has over 1,000 patents to his name. 

Where was our current education system adopted from?

It is believed that our current education system was derived from the Prussian factory-style schools that caught on across the West as the spread of industrialisation created a need for compliant, literate factory workers. Industrialists led the charge to adopt universal education in the US, UK, and elsewhere in Europe. Factory owners were among the biggest champions for the Elementary Education Act 1870, which made education universally available in England. 

Times have changed. More and more factory workers are being replaced by robots. A nalysis firm Oxford Economics found the more repetitive the job, the greater the risk of its being wiped out. Industrial robots offer manufacturers greater consistency and better quality when performing repetitive tasks. This means they are able to produce high quality products with little variation and greater consistency than their human counterparts. Up to 20 million manufacturing jobs around the world could be replaced by robots by 2030, according to Oxford Economics. However, jobs which require more compassion, creativity or social intelligence are more likely to continue to be carried out by humans “for decades to come.” Our education system should be reflecting this. 

It should be understood that collectively, a well educated population brings economic wealth, social prosperity, and political stability to a nation. More importantly, the role of education is inevitable in producing a new generation capable of solving the real problems in our society. 

What can be done?

The current education system does not necessarily have to be dismantled, just re-configured. We need to rethink the curriculum and decide what is necessary to be taught. At what point do mathematical equations become useless to a student that chooses to enter psychology studies?   We should also start to rethink our methods, as methods of teaching play a large role in shaping the education system. Memorisation has not worked. Memorisation stops the student from thinking critically about the topic, and that is not actual learning.

Are exams and grades really the best incentives? We need to replace the current system of judging our intelligence by a traditional grading system and start looking for ways to nurture creativity, activism, originality and critical thought. The current grading system sees failure as an end and something to avoid at all costs, yet we learn from our failures. The great physicist Richard Feynman saw failure as a beginning and an important part of the learning process. 

The Hutch Report

Richard Feynman Lecture

Not everybody learns at the same rhythm or has the same aptitude for every skill set. The system should therefore be adjusted to accomodate this. New technologies and initiatives such as Coursera, the Khan Academy, Udemy, Code Academy or Pluralsight are all attempting to provide alternatives. They simplify access to educational resources, improve many aspects of the learning experience, and allow students to learn at their own pace. As a caveat, new technologies are also responsible for making students lazy and not think for themselves. Easy access to technology has made it easier for students to cheat and can negatively impact learning when applied to the old system. 

Although the system has evolved, there are still many aspects of it that remain and many criticisms. Philosopher, mathematician, and Nobel laureate Bertrand Russell was educated at Cambridge and led a rather academic life. However, he believed that schools emphasised obedience and duty at the expense of free-thinking and spiritually enriched students. Russell was a defender of teachers who were truly sensitive to their students, and of an education system that asserted education as a gateway to knowledge, not to a particular income or status. Albert Einstein was quoted as saying, “The only thing that interferes with my learning is my education.” Indian yogi and author Sadhguru states that today’s education system is telling you to serve others when education and the search for knowledge should be there to serve an individual’s life. 

So, are you educated? If you are, you may want to reflect on how much of your knowledge base is serving you well in life and to not forget that knowledge is something you acquire throughout your life, not just once you leave school.

The Narratives That Drive Bubbles

By | Economics, Psychology

Tesla recently cut the price of its sport utility vehicle Model Y by $3,000, just four months after its launch, in an effort to maintain sales momentum during the COVID-19 pandemic. This reduction follows price cuts in May on Tesla’s Model 3, Model X and Model S.

Tesla has seen its value skyrocket in recent quarters, rising from a 52-week low share price of $211 to a high of $1,794.99 made on July 13, 2020. That figure, however, is low in the eyes of some. According to a recent report by Piper Sandler, they cite two key factors for their new Tesla price target of $2,322: The company’s edge in manufacturing and resulting unit volume, and the “possibility” that software will allow the company to “eventually” generate operating margins in the mid-20s, currently at 4.7%!

When valuations are so removed from the fundamental value of assets they are considered in a bubble. The hysteria and destruction created by asset bubbles should be something that people have come to be familiar with. In the past twenty years we have experienced the large boom bust bubble of the dot com era and then again in 2008 with the subprime mortgage crisis.

There are many possible causes of these bubbles such as; moral hazard, herding, greater fool theory, extrapolation, or liquidity, but once they expand they are driven by narratives because it is the narrative that infects and influences investors. Economist Robert Shiller once said that the stories investors tell themselves drive their investment thesis, which drives their reason for putting money to work in an economy. They are usually not making rational, cool-headed decisions based upon careful and cautious fundamental analysis. 

The larger theme narratives that seem to be prevailing and driving markets are the Federal Reserve, US/China relations and trade, the pandemic (with its alternating themes of lockdown and vaccines), and the coming US elections. You would think just one of those narratives to be highly influential but you get the full force of the four.

Sometimes a sector is a narrative. Think cannabis stocks or tech stocks in the 1990s — one of the most inflated and irrational bubbles the market has ever seen. Companies with no profits and high expenses were going public. Of course, the bubble burst spectacularly in 2000. The poster child of the promise of growth was pets.com, an online pet food and pet care product retailer. The company lasted about a year. The more product it sold, the more money it lost. We could equate that with today’s gig economy and stock sector. Do you know any stocks like this? (cough – UBER)

There are also individual stock narratives that are just as powerful. Fitbit jumped out to an early lead in the wearable fitness market, an area that many experts believe would see explosive growth in coming years. However, Fitbit’s share price dropped from its IPO price of $20 back in 2015, to shares that now trade at around $6.8. 

Like Fitbit, GoPro is another example of how the narrative drives a company’s stocks to heights that don’t reflect reality.  GoPro’s IPO priced at $24 back in 2014. Today, shares trade at around $4.83.

Sometimes, investors don’t even take the time to develop the full narrative. In 2016, Pokemon GO conquered the world and sent Nintendo’s stock surging. Their stock price rose by over 50 percent, gaining over a billion dollars a day. It totaled over $10 billion in less than a week. There was one problem, Nintendo didn’t actually make Pokemon GO. 

Once the Nintendo spokesperson publicly reminded everyone that the game is made by a different company, the stock price plummeted by more than 30 percent. This “discovery” could have been revealed by a simple Google search or a play-through of the first two seconds of the game. 

When valuations don’t make sense it is the narrative that drives the stock. Everyone loves a story that they can believe in. The fundamental problem with story stocks is their prices are typically bid up by investors who have gone ga-ga over the story. As a result, they often trade much higher than they should relative to their profits, given the financial fundamentals of these companies.

In 1999, Howard Marks of Oaktree Capital Management, wrote in his piece “bubble.com” that “tech stocks had benefited in 1999 from a boom of colossal proportions. They exhibited all of the elements of a market bubble, with an attractive story providing the foundation for a gravity-defying escalation of prices far beyond reason, and for manic behavior on the part of investors.” He urged readers to view the tech stocks skeptically, but also acknowledged that it’s possible for overpriced assets to remain so for a long time. However, at the time he said that he certainly had no idea that the excesses he saw in the market would be remedied as quickly as they did. He also  added that “analysts added little insight in terms of either fundamentals or valuation.”  

In 2019 Tesla sold 367,500 units. In comparison, Toyota sold 10.7 million units. Tesla now has a greater market value than Toyota. Fundamentals or Narrative driven? You be the judge. 

The Hutch Report

The Great Divide Between Cause and Effect

By | Economics, Psychology

Cause and effect is the principle of causality, establishing one event or action as the direct result of another or where the cause is partly responsible for the effect, and the effect is partly dependent on the cause. 

We often look towards correlations in order to identify and resolve cause and effect relationships and there are so many. Is obesity (the effect) directly related to the consumption of fast food (the cause)? Or is obesity related to the fact that people with limited disposable income can only afford to eat at fast food establishments? Or is obesity the result of poor education that leads to poor paying jobs that result in limited disposable income which provokes people to choose affordable fast food outlets?

There is a further complication in that, “Correlation does not imply causation.” Just because two trends seem to fluctuate in tandem, doesn’t prove that they are meaningfully related to one another. As an example we can look at the correlation between the per capita consumption of chicken to total US crude oil imports.  

The Hutch ReportCorrelation is something which we think, when we have limited information at our disposal. So the less the information we have the more we are forced to observe correlations. Similarly the more information we have the more transparent things will become and the more we will be able to see the actual casual relationships. 

As humans, we generate and evaluate explanations in a very spontaneous manner. In fact, to do so is fundamental to our sense of understanding. We don’t like uncertainty and ambiguity. From an early age we respond to issues of uncertainty by spontaneously generating plausible explanations. In our rush for an explanation, we tend to produce fewer hypotheses and search less thoroughly for information. We are more likely to form judgments out of first impressions and fail to account enough for situational variables. This happens very often amongst economists and “may” explain why they are so often wrong in their conclusions. 

As an example, central banks believed that accommodative monetary policies would encourage banks to extend credit to borrowers. Available information regarding lending decisions pre- and post- negative interest rate policy (NIRP), however, indicates that banks did not increase their marginal propensity to lend. Instead, the suppression of rates on behalf of the central banks narrowed banks’ net interest margins and thereby discouraged credit expansion. Loan growth in Europe and Japan has remained weak and, despite the significant rally in global equity markets, bank stocks did not fare better after the arrival of NIRP. This example in itself is vastly over simplified as there are a number of issues that may have played a part in coming to this conclusion. 

So if this is really the case where we, as individuals, tend to jump to conclusions, spontaneously generate plausible explanations or find correlations where there are none, how can we be certain that our leaders, bankers, managers, the media etc, are not doing the same thing?

The general public is provided little to no insight into the detailed thought processes that go into many governmental decisions. How do we know our officials have considered all the angles and come to the best decision possible? All we are given is their decision and a political sound bite designed to provide the appearance of an explanation. We buy into these explanations because they provide us with a sense of certainty. 

If we look towards current events, we see that we are now experiencing an unprecedented level of income inequality in the country but what is the cause of this effect? It forces us to go back into a vicious cycle of thought where we once again are prone to jump to conclusions, explanations with limited information etc. 

To better understand the complexity of these issues you can try coming to your own conclusion with the use of the Five Whys technique. The five whys is an iterative interrogative technique used to explore the cause-and-effect relationships underlying a particular problem. As an example we have taken the recent riots and just brainstormed through the exercise. This doesn’t mean to say we have come to the proper conclusion or have exhausted all the whys, but you can see how finding causality can quickly become a complex issue. 

Effect: Riots

Why? – People are frustrated and are lashing out

Why? – They lack opportunities, equal opportunities and income / they are drowning in debt / injustice

Why? – Available jobs pay low salaries / expenses are increasing / fewer job opportunities / people living beyond their means / inequalities within the justice system

Why? – Increased productivity through technology has led to layoffs / poor levels of education

Why? – Management compensation is linked to increased shareholder value / Decrease costs and increase profits anyway possible / broken education system

If anything, this should persuade you to look deeper into our current state of affairs, question everything you hear and not to assume the explanations that you are being fed are anymore accurate than what you could conclude on your own. The divide between cause and effect is greater than you can imagine. 

The Hutch Report

Where does the stock market and economy meet?

By | Economics, Markets, Psychology

This idea of buying and selling stock in a company was originated by the Dutch in 1602. As the practice spread to other countries the volume of shares increased.  At this point the need for an organized marketplace to exchange these shares became necessary. The modern concept of a stock market took hold in England where traders would meet at a London coffeehouse.  In 1773, the traders took over the coffee house and changed its name to the “stock exchange.” The first exchange, the London Stock Exchange, was thereby founded. The idea made its way to the American colonies with an exchange started in Philadelphia in 1790 and eventually the New York Stock Exchange in 1817. 

The term Stock is used to symbolize an investor’s ownership in a company. Upon purchase of the stock the investor theoretically owns a percentage of everything the company owns or owes. The company’s profitability, or lack thereof, determines whether its stock is traded at a higher or lower price. The practice began as many pioneer merchants wanted to start huge businesses. This required substantial amounts of capital. It was an amount of capital that no single merchant could raise alone. Therefore, groups of investors pooled their savings and became business partners and co-owners with individual shares in their businesses to form joint-stock companies.

Psychological effects

The US economy’s GDP is primarily driven by spending (70%) and investment (18%). The stock market affects gross domestic product primarily by influencing financial conditions and consumer confidence. This confidence spills over into increased spending, which can lead to major purchases, such as homes and automobiles and thereby increase the GDP.  So, when the value of stocks are increasing there tends to be a great deal of optimism surrounding the economy and the prospects of various stocks. In comparison, when the value of stocks are falling, it can have a negative effect on sentiment at which point investors rush to sell stocks to prevent losses on their investments. Those losses typically lead to a pullback in consumer spending, especially if there’s also the fear of a recession (two quarters of negative growth). When GDP rises, corporate earnings increase, which makes it bullish for stocks. The inverse occurs when GDP falls, leading to less spending by businesses and consumers, which drives the markets lower. At least that is the theory. 

Todays reality

Looking at the extraordinary events of today, the stock market looks increasingly divorced from economic reality. The United States is on the brink of the worst economic collapse since the Hoover administration. Corporate profits have crumbled. To date more than 1.8 million Americans have contracted the coronavirus, and hundreds are dying each day. Add to that the death of an unarmed man at the hands of a police officer which has led to daily and nightly protests, widespread anger and looting in cities across the country. You would think that would be enough to destroy consumer confidence. 

However, stocks keep climbing. The coronavirus crisis has cost some 36.5 million American jobs in two months with experts warning that figures could peak above the Great Depression in 1933, yet Nasdaq is less than 1% from its all time highs set back in February and the S&P 500 is down a mere 9 percent from its all time highs.

Economists who have studied the performance of stock markets over time say there’s relatively little evidence that economic growth matters to the outcome of the market at all. According to Ed Wolff, an economist at New York University who studies the net worth of American families, “Stock ownership among the middle class is pretty minimal.” He stated that “The fluctuations in the stock market don’t have much effect on the net worth of middle-class families.” A relatively small number of wealthy families own the vast majority of the shares controlled by U.S. households. According to an analysis by Wolff the most recent data from the Federal Reserve shows that the wealthiest top 10 percent of American households own about 84 percent of the value of all household stock ownership. The top 1 percent controlled 40 percent of household stock holdings.

Ok, this may be true but it still doesn’t take into account the psychological impact of the consumer previously presented. Even if US households own very little stock, the effects of the events we are currently experiencing are putting the brakes on consumer spending. This is already leading to a large number of insolvent businesses. This has a profound impact on GDP and will eventually impact the stock market. Or will it?

Much of the effect of the rising stock market has been explained as the effect of the money printing by the Fed. The theory is the Fed prints money, drives down interest rates which push investment into riskier assets thereby driving up the stock market. There is also the moral hazard effect whereby investors take on additional risk because they believe that no matter what happens the Fed will bailout the markets. 

The Federal Reserve President, Jerome Powell recently explained that in a liquidity crisis, otherwise healthy firms collapse because they can’t access credit. The Fed can resolve such a crisis because it can print and lend unlimited amounts of money. However, in a solvency crisis, companies can’t survive no matter how much they can borrow: they need more revenue. The Fed can’t solve that.

FEBRUARY 12: Federal Reserve chairman Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on the “Semiannual Monetary Policy Report”
on Wednesday, Feb. 12, 2020. (Photo by Caroline Brehmanl)

So, despite its critical role in the economy, the stock market is not the “same” as the economy. The stock market is driven by the emotions of investors. They can exhibit irrational exuberance which normally occurs during an asset bubble and the peak of the business cycle. Equally we have seen that consumer optimism or lack thereof can impact spending, which makes up 70% of GDP, and also has an effect on stock market performance. So what we essentially have is a situation where investor exuberance is battling underlying deteriorating fundamentals. So far investor exuberance is winning, up until they take Jerome Powell’s words of caution that the Fed has no solution for business insolvency. So the stock market is not the economy but it is influenced by the economy. 

Musical chairs

John Maynard Keynes probably explained it best. According to Keynes, the stock market is not simply an efficient way to raise capital and advance living standards, but can be likened to a casino or game of chance. “For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs–a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops.”

The Ticking Trust Bomb

By | Economics, Psychology

Of all the principle forces that hold our world together the one that acts as the glue of society is called trust. Trust is what keeps relationships in tact by allowing people to live together, work together, feel safe and belong to a group. Trust in our leaders allows organizations and communities to flourish, while the absence of trust can cause fragmentation, conflict and war.

Confidence is the feeling or belief that one can have trust in or rely on someone or something. When trust deteriorates so does confidence, and it is more prevalent in our functioning society than people realise.

Think about the simple act of driving a car. The reason why we even get in one at all is because we have a high level of confidence that the car driving towards us on the same road, at 100km an hour, will not suddenly cross over into our lane and cause a deadly head on collision. 

Think of airplane travel. Everytime we decide to fly we have confidence in the ability of the pilot to get us from point A to point B safetly. Yet on 24 March 2015 the passengers of a Germanwings aircraft were deceived. The Airbus A320-211, crashed 100 km (62 mi; 54 nmi) north-west of Nice in the French Alps. All 144 passengers and six crew members were killed. It was Germanwings’ first fatal crash in the 18-year history of the company. The investigation determined that the crash was caused deliberately by the co-pilot, Andreas Lubitz, who had previously been treated for suicidal tendencies and declared “unfit to work” by his doctor. Lubitz kept this information from his employer and instead reported for duty. Shortly after reaching cruise altitude and while the captain was out of the cockpit, he locked the cockpit door and initiated a controlled descent that continued until the aircraft impacted a mountainside.

Following the incident, Lufthansa and Germanwings said that the crash has not had an impact on booking numbers and many analysts expected only a brief short-term hit and then demand to recover quickly. 

So as catastrophic as this event was, it did not deter millions of passengers from taking a flight that same day or any other following day. So this prompts the question, “How much deception and mistrust does a person have to endure before they lose confidence in that something or someone?” 

We find ourselves in a situation where trust seems to be deteriorating on a number of levels. There is lack of trust in the government, news organizations, international organizations, science, banks, business leaders, health organizations and the list goes on. In fact, seeding distrust among the masses has proven to be an effective weapon against others. But we can’t identify the tipping point.

The financial crisis of 2008 battered the level of trust of the population in their financial system. That loss of confidence created a run on many banks and spawned “Occupy Wall Street.” Eventually the leaders managed to regain a certain amount of trust for the financial system to start working again. The anger dissipated and the Occupy Wall Street movement disappeared. However, confidence in the system was weakened and that distrust and skepticism in our leaders to do what is in the best interest of the population still remains today. 

Seeing bankrupt company leaders receive enormous bonuses, or watch the Federal Reserve state how strong the economy is while justifying printing trillions of dollars to support it are contradictions that are not going unnoticed. In fact, it just slowly adds to the current level of distrust in these institutions.

According to Edelman’s Trust Barometer, 66% of those surveyed do not have confidence that, “Our current leaders will be able to successfully address our country’s challenges.” 

The Hutch ReportWe began by saying that trust and confidence are essentially what keeps our society glued together. What we don’t know is how much confidence and trust has to be lost before society becomes unglued. That lack of information makes the potential for disaster that much greater. 

I was speaking with a fund manager recently about the current actions of the Federal Reserve, bankers and our leaders in general.  I asked him what worried him most. He told me his biggest fear was the next potential crisis which promises to be the greatest crisis of all…..a crisis of confidence. 

The Hutch Report

Boeing Brand Battered

By | Marketing

The Boeing saga is an excellent example of the essence of branding and marketing. Marketing is not simply coming up with clever ways for somebody to buy your product. It is much more than that. Marketing is about value and values. 

Within the sphere of marketing is branding. The history of branding dates back more than 4,000 years. The term is derived from the old Norse word “brandr” or “to burn”.  During times of moving cattle or selling livestock, cattle were branded, or marked with a branding iron, in order to identify their owners. 

In 1901, James Walter Thompson published a book called “The Thompson Blue and Red Books of Advertising. In it he explained the concept of trademark advertising, or an early definition of what became branding. 

Brand management was developed further around the 1950s, when companies such as Proctor and Gamble began to tell stories in their ads. It became more than just a logo or trademark. Companies began to create strategic personalities. Customers who never gave much thought to what kind of soap they were using suddenly became very brand conscious. 

Companies such as Nike and Apple pushed the idea of brand even further by asking “Who is Apple, who is Nike and what do we stand for?” It suddenly became more about values and core values. Apple did this with a bang when they presented their 1984 commercial. 

Today, companies communicate these core values in order to demonstrate social responsibility and emotional connections with their customers that in turn drive loyalty. Well-known marketing thinker Seth Godin expresses the idea by saying that, “People like us do things like this.”

Developing a brand is not an easy objective. Consumer perceptions about a company are based on experience, stories and memories. The company’s ability to deliver on its promises that represent its values is what creates trust and builds loyalty amongst its customers. 

In 2000, Boeing engaged Vivaldi to develop a unifying vision, brand identity and positioning strategy for the company that would help it move beyond the perception that it was a US-based airplane manufacturer and position it as a global aerospace company.

Vivaldi stated, “The leadership team recognised how a strong brand could improve sales, government relations, recruiting, employee retention and partner negotiations, and hence decided to invest in the strategic positioning of the Boeing brand for the future.”

This was done with much success as Boeing regained economic strength as a company and once again built up a loyal following.

On their website under vision statement they list their enduring values:

At Boeing, we are committed to a set of core values that not only define who we are, but also serve as guideposts to help us become the company we would like to be. And we aspire to live these values every day.

Integrity 

We take the high road by practicing the highest ethical standards and honouring our commitments.

We take personal responsibility for our own actions.

Quality 

We strive for first-time quality and continuous improvement in all that we do to meet or exceed the standards of excellence stakeholders expect of us.

Safety 

We value human life and well-being above all else and take action accordingly. We are personally accountable for our own safety and collectively responsible for the safety of our teammates and workplaces, our products and services, and the customers who depend on them. When it comes to safety, there are no competing priorities.

Diversity & Inclusion 

We value the skills, strengths and perspectives of our diverse team. We foster a collaborative workplace that engages all employees in finding solutions for our customers that advance our common business objectives.

Trust & Respect 

We act with integrity, consistency, and honesty in all that we do. We value a culture of openness and inclusion in which everyone is treated fairly and where everyone has an opportunity to contribute.

Corporate Citizenship 

We are a responsible partner, neighbour and citizen to the diverse communities and customers we serve. We promote the health and wellbeing of Boeing people, their families and our communities. We protect the environment. We volunteer and financially support education and other worthy causes.

Stakeholder Success 

By operating profitably and with integrity, we provide customers with best-value innovation and a competitive edge in their own markets; enable employees to work in a safe, ethical environment, with a highly attractive and competitive mix of pay and benefits, and the ability to further share in the company’s success; reward investors with increasing shareholder value; conduct business lawfully and ethically with our suppliers; and help to strengthen communities around the world.

In addition to these core values, Boeing also presents a list of behaviours with which they conduct themselves:

Boeing Behaviors

  • Lead with courage and passion
  • Make customer priorities our own
  • Invest in our team and empower each other
  • Win with speed, agility and scale
  • Collaborate with candor and honesty
  • Reach higher, embrace change and learn from failure
  • Deliver results with excellence – Live the Enduring Values

On October 29, 2018, Lion Air Flight 610, a 737 MAX 8, on a flight from Jakarta, Indonesia to Pangkal Pinang, Indonesia, crashed into the sea 13 minutes after takeoff. The crash killed all  189 aboard. It was the deadliest air accident involving all variants of the Boeing 737 and also the first accident involving the Boeing 737 MAX. On March 10, 2019, Ethiopian Airlines Flight 302, a 737 MAX 8, on a flight from Addis Ababa, Ethiopia to Nairobi, Kenya, crashed 6 minutes after takeoff, killing all 157 people aboard. The plane was only 4 months old at the time of the accident. 

In response, numerous aviation authorities around the world grounded the 737 MAX, and many airlines followed suit on a voluntary basis. On March 13, 2019, the FAA became the last authority to ground the aircraft, reversing its previous stance that the MAX was safe to fly. In the following months of investigation Boeing said it had no idea that a new automated system in the 737 Max jet, which played a role in two fatal crashes, was unsafe, until transcripts revealed that a senior Boeing Co. pilot raised concerns about a 737 MAX flight-control system three years previous. The company didn’t alert federal regulators until 2019, months after two deadly crashes involving the same system, according to the Federal Aviation Administration. The report essentially indicated that Boeing’s own employees lied and concealed the truth. 

As the company’s stock crashed and shareholder value evaporated the company was under tremendous pressure from Wall Street to just get the planes produced and not open the door to further pilot training.

Lawmakers, regulators and pilots responded with swift condemnation. “This is the smoking gun,” Representative Peter DeFazio, Democrat of Oregon, said in an interview. “This is no longer just a regulatory failure and a culture failure. It’s starting to look like criminal misconduct.”

CEO Dennis A. Muilenburg, nonetheless repeatedly made overly optimistic projections about how quickly the plane would be allowed to fly again in the face of all the current turmoil about the company. Trump called Mr. Muilenburg to discuss Boeing’s problems and the chief executive assured the president that a production shutdown would only be temporary, even though he was far from having a secure handle on the situation. 

As the company struggled to manage the worst crisis in the manufacturing giant’s 103-year history, Boeing said on Dec. 23 that it had fired its chief executive, Dennis A. Muilenburg, who was unable to stabilize the company. He walks away with an estimated $30-$40 million package and another supplementary executive pension worth $11 million according to statements. 

If you compare the previous few years of Boeing’s deliberate actions to their list of core values and behaviours it is clear that they have disregarded many of them. A brand is an intagible and can’t be valued in financial terms (those that try are working with purely subjective figures). However, a tarnished brand represents a loss of trust and is replaced with new negative perceptions and expectations. This translates to customers going elsewhere, which in turn translates to investors loss of confidence and liquidation of stock. Only time will tell how much true damage has been done. 

Companies have to start realising that values are not independent of their actions. They are not just feel good statements to keep others occupied while they concentrate on their principle objectives of maximising shareholder enrichment. Brand loyalty takes a long time to develop and a very short time to be destroyed, as Boeing has just learned.