Capitalism Failure?

Link para versão em Português

"Capitalism" is an economic system in which privately owned capital is invested, traded and in which the owners decide how to best invest it.

As a comparison, it is attributed to Former UK Prime Minister Margaret Thatcher the quote that “the problem with Socialism is that eventually you will run out of other people's money", in a reference to the inefficiency of the State in managing enterprises or every major economic sector.

Such comment pointed out that it is not capitalism, but a distorted economic model – allow me to qualify it as “semi socialist” – that has been causing recent crises and that needs to be reformed.

“Semi Socialist” not in above quoted sense of the public sector owning and managing enterprises. Not so much either by the major government intervention with tax payer money to save the big banks and corporations in 2008 and now, with the unlimited access to credit being offered to European banks.

But in the sense of an economic model in which the capital holders, those who actually fund the system and have their assets at risk - shareholders, depositors and investors - are too far apart from the control of their companies or financial investments. And in which, such as in socialist regimes, an "elite" has been disastrously managing the society's (other people's) money.

In corporations, for example, the capital owners have delegated control to asset managers (investment or pension funds, among other), which in turn delegate to boards of directors – usually with no quota holders presence - and executives. These have their own interests, much to gain if successfully incurring large risks and disproportionally less to lose from failure.

The control and delegation structure for asset management in the banking system is very similar. To make matters worse, in an environment of low transparency and poor risk disclosure. The consequences have been dramatic!

Has the recent crisis shown that the free market is not efficient? This has been known since the dawn of capitalism, when society understood that it was necessary to establish limits to human ambition, for example, through labor right laws or antitrust systems.

The required adjustment is not abolishing capitalism, but incentives for responsible management of capital and better governance, with visibility and control of risks that managers and executives are incurring with other people’s assets - including appropriate compensation systems.

The role of government in this field is of minimal regulation, but with strict limits to avoid systemic risks, particularly in the financial system, preservation of free competition, protection of the environment and humane working conditions, in a regime of transparency, free press and right of speech.

And a legislative and judicial system that penalizes, even criminally, managers who do not properly disclose risks, who violate their limits of authonomy or who fail in their fiduciary responsibilities.

Capitalism needs some regulation. But in its origins, in which the entrepreneur, motivated by the prospect of profit, uses its capital and other partners to innovate and build a product that generates value for society, is still the best-known economic model.

Is the World facing a dead end?

(Para Versão em Português, clique aqui)

The challenges before humanity seem so insuperable and there is such a lack of confidence in our political leaders that the world seems to have encountered a dead end.

We are experiencing serious socioeconomic problems (see my post "our society needs more entrepreneurs"). There is a live debate about the need for a new economic model and even about the failure of capitalism.


Governments have been unable to resolve such issues. Instead, they are co-responsible for the recent crises. Political interests seem to be above social demands, and popular manifestations arise in the four corners of the world. There are no leaders with relevant support and there seems to be no political will to implement the due reforms.

Developed countries are in a period of stagnation in the midst of unsustainable debts carried by government and by individuals. There is no consensus on whether the solution is stimulating consumption to generate growth or promoting austerity to reduce debt.

There is still a lack of transparency and a systemic risk in the financial markets. So far the response has been to "provide banks with unlimited access to credit", without seriously addressing required regulations and restrictions.

Our societies are still disregarding the lack of resources to pay for health and social security costs of a growing elderly majority, a certain future crisis for several countries, even some with lower debt.

The growing consumption from the emerging societies, added to the major economies’, pushes our planet to its ecological and energy limits, causing pollution, global warming, shortages of water and other natural resources, negative economic consequences and danger for our lives and health.

Energy is competing with food, causing cost increase and contributing to world hunger. Or leading to unacceptable environmental risks to extract oil and generate nuclear power, with potential damage costs not accounted for nor charged to producers and consumers (the economic impact of the Gulf oil spill was estimated at US$15 billion, according to a Canadian Journal of Aquatic Sciences study).

The growing concentration of wealth in the big Western economies and the resulting social unrest – in the 2008 crisis, financial executives were still getting their high salaries and bonuses, while the middle class were losing their homes, jobs and even pension funds.

In our democracies, the population is upset with the corruption in the developing countries’ governments or with the action of lobbies in the Congress - oligopolies, oil companies, big banks and other corporations influencing law makers and making the political system inefficient even in the most stable democracies.

In the Middle East and North Africa some dictatorships were overthrown, but uncertainty and political tensions are accentuated. The risk of a nuclear bomb is back to the headlines.

"Where are our governments? We want change!" - Protests, such as "Occupy Wall Street" or the so-called Arab Spring are becoming frequent.

How to overcome this dead end? As previously stated, there are no clear solutions or political system with credibility and popular support to define and implement the effective and imperative changes.

But this is not Apocalypse. Economic crises, social differences, wars and bad governments are constant throughout our history. Sometimes fatigue and rupture are necessary for breakthroughs to occur. And there is much value being generated in the current model.

I will return to these topics in upcoming posts.

Our society needs more entrepreneurs

Link para Versão em Português

The world is undergoing a radical transformation. Not only due to the technology revolution, particularly the Internet disseminating information, changing “traditional” business models, destroying companies considered icons, and reducing the life cycle of products and companies.

But also caused by serious socio-economic factors impacting the majority of the world population:

• The Debt of developed countries and societies, reaching unsustainable levels - some now being considered of “high risk” - and the related crisis of social democracy (the model of some Western European countries)

• The financial system of these large economies, its lack of appropriate regulation, uncontrolled and excessive leverage that caused the 2008 crisis and contributes to the uncertainty that we still live today, with risks of a new recession, its social costs, government intervention and other consequences

• The tens of million people from emerging countries that get in the consumer market each year - in China, for the first time in history, the urban population exceeded the rural contingent and, less publicized, the industrial workers of that country are beginning to demand for "social benefits"

• The aging world population, caused by better living standards and medical developments, such as the relevant genetic medicine cycle and, soon, applied nanotechnology

• The growing need for agricultural products for food production, and competing with that, to meet the demand for the also necessary biofuels

• The ecological and environmental impact of such increased consumption (and disposal), putting the planet close to its sustainability limits

• The geo-political changes, the new balances of power being established. The risks and costs of security caused by war and by fundamentalists on both sides of the world.

It is not the first time. Social and economic revolutions have always occurred in human history. From fire and wheel to the industrial revolution. Whether in ancient Egypt, Eastern empires or new Western powers - greed, the exploitation of other humans, political corruption ... our ability to create crises, for self-destruction in wars and also to adapt / overcome is huge! The human being is the same, since the dawn of history.

What's different about this cycle? For sure, the extent and speed that we are impacted, given the size of the world population (the planet itself has not grown) and the "distance and time" reduction, caused by technology.

 Where are we heading? Where will we be in 10, 20, 50 years (yes, I count on being here by then!)? It would be interesting, but I will not try to speculate. However, some elements are important, particularly for people just starting their careers.

• The last century models, the security and stability of ("for life") employment in government agencies or large companies seem to be vanishing. Planning retirement based on pension from these companies became riskier

• The ability to keep a growing debt, whether by governments or individuals, is reaching its limit. People should not take a loan just to spend in consumption. The deleveraging of some major economies has already begun and is extremely costly. It should lead to periods of recession and/or high volatility

• Countries cannot afford the social demands of an aging population that stops working when reaching 60-70 years old. It is no longer safe to rely on government pensions or healthcare system

• Brazil still has a reasonable debt level. But also an aging population and a social security budget deficit that, such as public spending, keeps increasing despite already having one of the largest tax burden, worldwide

• The global demand for agricultural commodities should keep rising. And it is unknown what will happen to food supply (volumes, production costs and prices).

More than ever we must find innovative solutions to these challenges.

Unveiled the "false sense of security" from governments and large companies, when faced with such crises and need for changes, it should become more apparent that each individual is an entity that needs to innovate, realize, seek self-sufficiency to survive and differentiate him/herself.

That entity must develop its individual practice on how to generate value to society (its sustainable source of income), build its "client base" (even if this "client" happens to be the current employer)! And earn its remuneration from that value.

Income not only for the active and professional life period, but invest to put together a net worth from which he/she will live in times of crisis and in the possible 30-40 years that most of us may well live after retirement.

Our society needs this entrepreneurial attitude and innovation capacity. The crisis shall encourage such attitude. From such model, solutions to current challenges will emerge. And from this path, identifying opportunities to start your own business, to build a larger base of customers and to accumulate wealth, becomes more feasible.

The number of entrepreneurs should increase. The article in the attached link indicates that we may be moving in that direction http://www.ft.com/cms/s/0/a910938a-42b7-11e1-b756-00144feab49a.html

Is it Worth the Investment on a Full Time MBA?

(Link to version in Portuguese)

It is worth quitting a good job and investing 1-2 years of your life, plus all the financial cost, on a full time MBA?

Even for those that pursue a top management position in an organization, the answer is no longer automatic as it used to be 10 or 20 years ago. However, if meeting certain conditions, I am confident that the answer is still an imperative Yes!

The decision should take into consideration several elements, some relatively recent, such as the large number and the relative commoditization of the MBA programs, the competition from Executive and Fully Employed MBAs and the high tuition costs, now at levels similar to the average annual salary of an MBA graduate.

Adding to the tuition expense the opportunity cost of a 1-2 year “no pay” period, the equivalent disbursement reaches 3 years of the graduate future compensation!

Given the risk of not getting a good and well paid job afterwards and of losing your space at your present employer, why not just attending an Executive or Fully Employed MBA (often financed by such employer), thus avoiding most of that cost?

And for a future Entrepreneur, does it make sense to get a full time MBA or is this degree more appropriate for those who want to pursue a career in a large corporation?

Obviously, if you cannot get access to financing, or are in a more advanced stage of life, career or family, putting everything on hold for a full-time MBA, specially if in another country, may not be the best decision. However, for the generation around 30 years of age, some elements can turn this project into a unique opportunity for personal and professional development!

The most critical factor is the selection of (and getting accepted by) one of the best 20-30 full time MBA programs in the world, where you will have access to, among other things, a top quality structure and intense academic program.

At such Business Schools, given the attendees’ relative work experience and maturity, they are able to learn in more depth and achieve mastery in Marketing, Finance, Accounting, Operations, Micro / Macroeconomics, Entrepreneurship and other subjects.

Frankly, how to read and study all the books, prepare the various cases required each quarter and necessary to learn well about such themes, when you have to reconcile that effort with a full time job?

The MBA program complements and enriches the education of BS or BA degree holders (on a lower scale for Business undergraduates), and the analytical background of engineers, for instance, permits an easier and deeper absorption of those subjects.

For entrepreneurs, such knowledge will bring significant benefits for the management of their company and of the different functional areas, as they will be able to “speak in the language” of CFOs, accountants, bankers and lawyers.

Financially, MBA graduates from the top Schools obtain initial compensation levels 60 to 80% higher than before the MBA, much better off than those graduating from programs placed at other layers in the ranking.

The network and friendships that can be developed during this period is a relevant factor. When you commit to a project with so much interpersonal interaction, such as a full time MBA, chances are that you will develop longer-lasting and deeper relationships. From a personal or professional perspective, the value of these friendships and network is high and that return is likely to be leveraged in the relationships developed at the top Business Schools.

And there is the life experience and international exposure, should you decide to study abroad. This is hard to quantify, even to describe. Only living! It is a period to reflect about what you want for your future, about your career, or projects for your possible start-up. To explore ideas and get advice from the faculty, peers, entrepreneurs and successful professionals. Time to make changes, or to meet your future partners.

For all those reasons, I strongly recommend the effort of applying and attending a top School full time MBA program, in a foreign country. It is an opportunity for a valuable, “once in a lifetime” experience!

Facebook on the Streets

(Link to the Portuguese version)

The movement Occupy Wall Street, which spans throughout several American cities (it is happening in more than 20 cities as I write), although with some similarities with recent protests in other countries, is a new type of manifestation that I think may be here to stay.

Despite the publicity in the American media, it is being underestimated by a few TV channels and major newspapers, for its lack of leadership, of a unified speech or a specific proposal from the protesters (such as the goal for democracy of the Arab Spring movement, or for free education in recent Chilean manifestations).

I think this is a misunderstanding. It is true that, such as in Facebook posts, the speeches on the streets express different opinions on various topics, sometimes seeming unrelated, with no expected outcome from such comments.

But they all share one important element. The communication that people are not happy, that they are feeling imprisoned, within this "Oppressing Wall” – a system, where others make mistakes and they suffer the consequences. The speeches do not say what they want to reach. But they are crying out loud that things have to change.

Be it the worsening income distribution and the growing poverty in the US. Or the financial system and its lack of effective regulation to prevent bankers, in pursuit of their bonuses and interests, from helping governments to lie, concealing relevant information, selling junk bonds, etc., causing a credit crunch that disrupted the economy.

A Congress, heavily influenced by these same bankers, with several of its members preferring chaos to a serious negotiation with the government.

The perspective of a long recession. An environment where every American is born with a $50 000 public debt and growing, with no relevant measure to reverse the trend. Add to that the large number of young people leaving college unemployed and already with a bank debt of $ 50-100 thousand.

Perhaps Occupy Wall Street will have no serious consequence. But it is the dawn of a new type of manifestation, which I count will remain pacific and within the limits of law. The protesters just want to generate resonance. But this, in the right frequency and intensity, can put down any Wall.

I wish our leaders cared and changed a few things to start. But they seem too old to understand Facebook.

Renewal for Survival

(clique aqui para versão em Português)

When starting to prepare a presentation on "management of start-ups applied to large enterprises", I decided to support my view about the importance of them reinventing themselves, analyzing the recent evolution of some NYSE corporations.

To this end, I selected Apple, HP, IBM, Kodak and Microsoft - all well known, frequently mentioned in news and over 30 year old companies.

Through Yahoo Finance, I generated a chart displaying their stock price variation, as well as of the Nasdaq Composite Index, from September 30, 2009 until yesterday, September 30, 2011.

Obviously I expected some trend that could be used to support my thesis of their need to reinvent themselves to survive. But I was astonished by how direct and precise was the correlation between the stock price evolution and the market perception on such matter! See the chart below:

In the last two years, the Nasdaq appreciated approximately 20%. Apple, which revived after Steve Jobs' return, and kept evolving with its Ipod, Iphone and the new Ipad, has been the current big star and appreciated over 100% in the period.

At the other end of the chart is Kodak, which has just announced the hiring of restructuring attorneys. Who did not use Kodak's cameras and films? But despite a few attempts, it was unable to introduce new products that could invigorate the company, while demand for their products was smashed by digital media and smart phones.

Surprisingly close to Kodak in the chart, with 50% of depreciation (58% compared with the index), is the respected HP! In this case, the pain of its attempts to reinvent itself has been exposed in the media: the indecision about the future of its PC division, the $10 billion acquisition of Autonomy, the tablet business failure and its several CEO replacements. HP seems to be lost and the market is not complacent.

Placed in the the middle of the chart is Microsoft, with no stock price change in the last two years (negative return compared to the index). The message from the Market seems clear: despite high profits, the company needs to position itself in relation to the future - without a growth strategy, there may be negative surprises ahead. I think Microsoft knows this and the decision to pay US$ 8.5 billion for Skype, still an unprofitable business, may be related to such consideration.

Finally, with a relevant 50% valuation, there is IBM, a company that seems to really have reinvented itself. Known for its mainframes and portables (they were not called notebooks in the 80s), IBM sold its PC division to Lenovo a few years ago and decided it would become mainly a solutions company. Apparently, the strategy is working: IBM has just overtaken Microsoft to become the second largest technology company in the world, after Apple!

But the game never ends for those who are alive. Apple and its new leader have a challenge to continue innovating its product line, because commoditization is fast. IBM can not be complacent with its own success. HP must believe in its brand and culture and go all the way in the efforts to renew itself. Microsoft needs to position itself on the subject and act. And to Kodak I wish good luck and hope it's not a goodbye.

Let's see where we will stand in 2013!

Os termos do Brasil para ajuda a outros países

Alguns jornais nacionais e internacionais de ontem (15 de Setembro) noticiaram o apoio dos países conhecidos como Bric (Brasil, China, Índia e Rússia) para um possível pacote de ajuda na crise europeia.

Tal assunto foi gerado pela iniciativa da China em oferecer "ajuda"e propor adquirir um volume expressivo de debêntures e outros ativos de países da zona do Euro, e já em negociações mais avançadas com a Itália.

É conhecida a predisposição da China em diversificar seus US3,2 trilhōes de reservas em moedas internacionais, reduzindo sua exposição ao dólar americano. Assim, tal aquisição pode se considerada ajuda, mas é também necessidade derivada de uma gestão apropriada de riscos.

Nossa presidente, Dilma Rousseff, se manifestou com discurso apropriado, informando que o Brasil sempre estará disposto a apoiar esforços internacionais nesse sentido, neste caso dependente da Europa apresentar uma estrutura viável para um pacote de resgate e, ainda, sem se comprometer com qualquer proposta envolvendo apenas os Brics.

Em escala 10 vezes menor, temos o mesmo problema da China na gestão de nossas reservas. E tal postura do Brasil demonstra seu peso crescente no cenário global. O Financial Times reconhece que "qualquer esforço do Brasil de coordenar uma resposta dos Brics à crise da dívida europeia marcaria um grande passo nos esforços do país para aumentar sua influência em questões mundiais".

Mas daí vem minha preocupação. O que vamos demandar? Vamos tornar público? Aumentar a influência e receber o quê em troca?

A China, através de seu primeiro ministro Wen Jiabao, não teve problema em tornar público o que espera. Apesar do interesse chinês na operação, como acima mencionado, deu um puxão de orelhas nos países endividados, dizendo que os "países devem cumprir suas responsabilidades e colocar suas próprias casas em ordem" - repetindo o já dito aos EUA - e fez uma ligação direta entre tal apoio e a antecipação do reconhecimento da China como "plena economia de mercado", o que favoreceria algumas empresas chinesas envolvidas em disputas comerciais.

E o que o Brasil vai pedir? A única demanda internacional recente do Brasil que temos notícia é o tal assento permanente no Conselho de Segurança da ONU - tema que faz mais sentido tratar em particular com os 5 países com direito a veto em tal conselho. Ultimamente, temos visto o Ministro Mantega esbravejar a respeito dos programas conhecidos por "Quantitative Easing" dos EUA e da chamada "guerra cambial", ambos assuntos mais de economia doméstica - políticas monetárias, fiscais e cambiais - dos países ao tentar estimular suas economias, do que na esfera de política internacional.

Vejamos o exemplo no caso da desapropriação dos ativos da Petrobrás na Bolívia, alguns anos atrás. O que o Brasil recebeu como compensação, além dos elogios do presidente Evo Morales ao "amigo" Lula? Nada que tenha sido divulgado aos contribuintes.

Seria exemplar tornar público o que Brasil espera como contra partida para ajudar a Europa ou qualquer país/ organização internacional. Para não haver especulações de que continuamos sendo República de Bananas e chamados de bons amigos, enquanto nossos ativos são usados em troca de doações para campanha de partidos políticos, com possível sobra para fundações de senadores e outros "favores particulares".

Além dos clamores populares contra a corrupção, os quais endosso com fervor, precisamos e temos uma oportunidade de aumentar a transparência na gestão dos ativos públicos, e evoluirmos como sociedade e como país digno de respeito.