- Smooth Sailing fallacy: The fallacy is the idea that you can predict disaster risk by looking at the bumps and wiggles in current results. Competent management always looks deeper than the numbers, deeper than the current numbers.
- This focus on meter readings rather than on a deeper understanding of the forces at work is what gets one into trouble. The Fed for eg, managed its policies around the Consumer Price Index (CPI). The CPI doesnt really measure inflation, it measures a bundle of prices. It doesnt measure wages, it doesnt measure asset prices. Of course if they took their eyes off the meter reading, they'd realize that they were creating a giant credit/asset bubble.
Policy response:
- We dont know whether the response is going to be effective or not. There's one of two outcomes for this: One is that the quick fix will work but not fix the fundamentals. In that case we wont have a foundation for good sound growth. The other result is, no matter what we do we'll have a deep recession, which will give us time to actually fix the problems. We will get leverage down to good levels.
- The real economy boils down to what work people do. We are now in a structural break and that mix of work being done has to change. The worst policy is to prop up people in jobs that are no longer necessary.
Corporate Strategy:
- What would be interesting coming out of this economic shock is that all the industry structures and rules and value chains and customer segments in industry after industry are in flux. And no one's yet figured out how to make money at it. That's the opportunity !
- Pinning these structural shifts down and seeing the second order effects - the second wave in each one of them - is the strategists job. The money is made in the second order effect. The money is made on the rebound from that inital proposition.
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