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“It’s what you learn after you know everything that counts.”



This axiom hung on the wall above John Wooden’s desk at UCLA. You don’t have to be a college basketball fan to appreciate this quiet, infinitely humble man. By his own admission coaching college basketball was less important to him than his wife, family and faith. But to know of his accomplishments helps us to understand what is possible when a human being is passionately immersed in life every single day.

Prior to Wooden’s coaching debut UCLA basketball was mediocre. Under Wooden the UCLA basketball program had four perfect 30-0 seasons, won 620 games, set records for the most consecutive wins (88), the most consecutive home wins (98) and won national championships in 10 of his last 12 seasons, seven consecutively. John Wooden was the first to be honored by selection to the Hall of Fame as a player and a coach. Wooden never made more than $35k, never asked for a raise and turned down professional coaching opportunities with the Lakers and baseball’s Pittsburg Pirates for ten times the money. He coached young men from the four corners of the nation, rich and poor, black and white, during the age of the Viet Nam War and the Civil Rights movement. During the turbulent 1960’s and ‘70’s he forged teams with a singular focus- SUCCESS. Wooden coached for 17 years before securing UCLA’s first championship and then went on a winning streak that will not likely be matched.  America could use a few leaders like John Wooden.

I am tapping out the 50th Quarterly Commentary in the twelve plus year history of ICM, trying to add clarity to these murky times. I have written and spoken passionately of the perils and promise facing America , its markets and economy. You have indulged me and endured the rants dating back to 1997. Thank you for your patience and endurance. With the economy apparently downshifting despite massive stimulus spending my displeasure is tempered by advancing age and true concern for the short term outlook for the USA . I will recall the words that guided John Wooden through his passionate, long life and remember there are always lessons to be learned.



The Techno-Global Revolution


ICM introduced the idea of the “Techno-Global Revolution” a bit over six years ago to provide a concise set of principles to help investors understand the formidable change that is hurtling toward us all. The technology boom and bust at the turn of the millennium left smoldering embers in the ash of market ruin and recession. In an increasingly competitive global economy companies began substituting technology for labor where possible and outsourcing jobs to low cost markets when it was not. New technologies including digital standardization helped promote international modes of production. The demand for low cost labor met the nearly unlimited supply of workers in Asia . It became clear that the marriage of technology and low cost labor could boost profits. Soon the venture capitalists fanned the embers of the dot com disaster with some hot air and investment dollars. As cost saving and money making opportunities became harder to ignore capital began to flow to manufacturing companies with a “China Plan”. The relationship between capital and labor was dramatically altered. Investment capital recognized that technology and labor had become fungible and began encouraging free substitution to maximize profits while minimizing costs. A competitive advantage belonged to companies that shifted production away from America . The vortex of price competition is relentless and engulfs all in its path. Manufacturing became a free for all where only the nimble would survive. What followed was America ’s introduction to the “jobless recovery”.

American consumers reveled in the new low cost goods and dropped any pretence of buying American. The economy grew stronger for most and credit was abundant. The Techno-Global Revolution was gaining traction and acceptance.

Two themes of the Revolution rumbled quietly beneath the surface. First, the global economy was splitting into two spheres, the consumers and spenders vs. the producers and savers. The second theme drawing little attention was that the Revolution began leveling wages around the globe pressuring the manufacturing class in America to match production costs with Asia . In pockets of America wages stagnated and jobs migrated, following capital to new low cost factories abroad. A new breed of shortsighted economists pronounced that as long as the “knowledge work” stayed here and we lost only production jobs America was dollars ahead.

As capital, jobs and production facilities moved from America to Asia a third and more insidious trend was developing. The US balance of trade and current account deficits began to deteriorate mirroring the path of money and jobs, economic power was shifting east on the globe. The same economists argued that trade and current account balances mattered little in the new global economy. America had evolved into a nation driven by a financed based economy. Manufacturing could be left to developing nations. America would prosper as a service provider and financier to the world. This mentality can be summed up by the words of former vice chairman of the Federal Reserve and current Princeton economist, Alan Blinder. “The TV manufacturing industry really started here, and at one point employed many workers. But as the TV set became just a commodity, their production moved offshore to locations with much lower wages. And now the number of television sets manufactured in the US is zero. A failure? No, a success.”  One might ask Mr. Blinder, “a success for whom?”

Blinder and others echoed what they had learned in classrooms. Adam Smith’s Wealth of Nations explained that a technological spark could transform business models and the economic and social fabric of a nation. Further they ascribed to Schumpeter’s theory of creative destruction. In short economists and politicos believed that America had evolved beyond the factory and that we would create wealth with our brains rather than brawn. Because of America ’s impressive record as the leader in innovation and finance after the Second World War, the economic handicappers undervalued manufacturing jobs. They made the assumption that technology and creative destruction had made manufacturing disposable. This perspective failed to make a couple of important observations about the true implications of Smith and Schumpeter’s teachings. Lost jobs mean lost wages and consumption for an American economy still dominated by consumer spending. Smith measured economic health not by the enrichment of the wealthy but by the health of the laboring consumer. The technological spark that would make globalization the world’s defining system created new employment opportunities abroad but did little for American industrial workers. This represented a crucial misunderstanding of Schumpeter’s theory.

Running with the assumption that manufacturing jobs were expendable opened the door for additional critical errors. We overestimated the number of “knowledge jobs” available and that these jobs were the exclusive domain of America . Next we wrongly identified finance and service industries as the engines of long term growth. The allocation of capital moved sharply away from domestic manufacturing, training and infrastructure development to financing greater wealth on Wall Street. There has been much written on the topics of moral hazard, avarice and arrogance that caused the titans of finance to come begging. For a brief moment the millionaires and billionaires stood naked before us and were indiscernible from the down and out tool and dye man from Detroit save the calluses earned from an honest days work. The shine has since returned to the banker’s shoes, his creases are sharp and his collar starched. A limo waits curbside to whisk him away to a private jet. The memory of secret deals cut in Washington ’s back rooms, with so little public disclosure, lingers in the minds of those outside the bubble of wealth and influence. For those inside the bubble so little has really changed. For many outside the bubble everything has changed.



“Failing to prepare is preparing to fail.”


Coach Wooden



Outsourcing the manufacturing sector of the American economy created an employment void we are ill prepared to fill. We failed to prepare for the creative destruction that threatens our social fabric. Our safety nets are inadequate and a drag on a struggling economy and weary citizens. The depth and duration of unemployment is a sign of profound economic trouble and a symptom of poor preparation for the change that beckons. We have heard for decades that America ’s education system was failing to prepare our students for the future, falling behind their ambitious global counterparts. As is the American way we had partisan debates driven more by ideology than pragmatism. We funded studies and in the end threw money at the problem with little gained. We failed to lay the educational foundation to produce the math and science wizards prepared to lead us into the next phase of technological advancement and economic expansion. America continues to lag and now faces budget deficits that bring funding cuts for education as competitors in the global arena are increasing their expenditures and raising the bar. Even more disturbing is the trend that outsources the production of American discoveries.


Reframing the Challenge


The concepts expressed in our definition of the Techno-Global Revolution have been useful in providing digestible substance to readers about a nebulous set of global economic circumstances. The world’s economies are at once intertwined, interdependent and fierce rivals. An honest look in the mirror has exposed the soft underbelly of America and some hard work and tough choices are in order. Past success has bred complacency and dulled our introspection leaving us vulnerable and playing catch-up in a game with new rules.

The markets and the nation are crying out for a credible comprehensive strategy that reduces debt and deficits. Equally important and an immediate priority is the need for a growth strategy that produces jobs. Jobs lead to confidence and confidence will generate corporate and consumer spending and free up credit for worthy borrowers.  We must re-examine some of our most deeply held beliefs. Our trust in the unfailing wisdom of free markets and the self regulating genius of capitalism has been laid bare before us in one hell of a financial disaster. And now we must ask if the free market model of capitalism that has served America so well and that we have served so poorly is performing as well in the era of the Techno-Global Revolution. In a world where capital and labor are free to wander the globe in search of the most profitable environment we inadvertently strengthen our competitors and weaken ourselves.

Certainly we lie in the messy bed we have made for ourselves. We strayed far from the meritocracy of Adam Smith and rewarded mediocrity and even failure with coddling support, much to our own detriment. Free markets punish the profligate debtor and the imprudent lender. Speculators soar to great heights and like the phoenix may also crash in flames. Free market capitalism is beautiful in its simplicity and unforgiving in its retribution. The bounty of natural resources and outsized wealth that bless America have shielded us from the truisms of the free market and quite literally allowed us to paper over our worst mistakes. After many years of compromise and manipulation we have squandered a great gift. The bill collector is at the door. We are hoping for an extension.


When the economy flagged and sunk into recessions we boosted aggregate demand not through innovative growth strategies and enhanced real net worth but through easier credit. We somehow convinced ourselves that complex derivatives could change the mathematics of consumer balance sheets and wealth accumulation. Inflated home values substituted false equity for income in a charade doomed by the laws of the free markets we worship but clearly don’t comprehend. Consumers looked away from the creeping job losses spreading across America on their way to Best Buy and Circuit City to purchase the latest incarnation of TV sets that used to be made by their neighbors. Now the loss of 8 million jobs and the debts accumulated to rescue America from itself loom over us like a dark cloud.

Companies and households hoard cash today, uncertain about the future and unwilling to risk their diminished wealth. Companies don’t hire, consumers don’t spend, banks don’t lend and economies don’t grow without a restoration of confidence. It is time for America to build things again. Our assumptions about manufacturing and knowledge based jobs have proven incorrect. Reliance on a finance based economy has proven to be our Achilles heel. We need to capitalize on our innovation by building products here, supplying jobs, 

rebuilding net worth in real terms through income and savings not smoke and mirrors.

Smart businessmen and women are becoming increasingly concerned and vocal about the outlook for America . John Lechleiter, the CEO of drug maker Eli Lilly and Company offered up his opinion in the Wall Street Journal on July 9, 2010, entitled America ’s Growing Innovation Gap. “Unfortunately, America is in danger of losing what has always been our greatest competitive advantage: our genius for innovation.” Mr. Lechleiter shares the results of a study performed by the Information Technology and Innovation Foundation which ranked the US 40th out the top 40 industrialized nations in improving innovation capacity over the past decade. The study measured what countries are doing in higher education, investment in R&D, corporate tax rates and more. “The US is not the only country looking to Life Sciences to drive economic growth and the very qualities that brought much of the world’s research capacity to our shores could just as easily attract that work to Asia or elsewhere.” said the CEO.

Lechleiter speaks of maintaining a healthy Ecosystem for science and technology to flourish. A restructuring of the corporate tax code that incents research and development in the life sciences would put US companies on a level field with foreign competitors. Incentivize the teaching of math and science in America ’s public schools. Consistent long term funding for a broad and basic research infrastructure will attract the best scientists and lock them into innovation throughout their careers. Our immigration laws need to be honed to get the world’s most brilliant scientists in our labs and university classrooms.

Andy Grove, one of the founders and former CEO and Chairman of Intel reminds us that it isn’t enough to develop the science and technology here in America . We must produce the goods here too. He attacks the ideas recently expressed by Tom Friedman in a New York Times article entitled Start-Ups Not Bailouts. Friedman echoed Princeton ’s Blinder arguing that companies that do commodity manufacturing should die if they must and the government should target funding to start-ups if it wants to create jobs. Grove rightly points out that Friedman is wrong on many levels. Grove like Lechleiter speaks of maintaining the “complex technology ecosystem”.  Start ups may innovate but that is only part of the equation for success. Economic growth occurs in the scale up from prototype to mass production with the building of factories and hiring of thousands of employees. It’s the “scaling” that no longer occurs in America . Grove says,” as long as that’s the case, plowing capital into companies that build factories elsewhere will continue to yield a bad return in terms of American jobs. Blinder, Friedman and others fail to recognize the value in the ecosystem, its people have institutional memories and skill sets, factories and infrastructure have value and the networks of both should not be considered disposable. Here’s why.

Today there are fewer US computer industry employees than in 1975. 1.5 million are employed in the computer industry in Asia including engineers, managers and assembly workers. The largest company, Foxconn employs 800,000 and generates over $60 billion

in revenue, more than Apple, Microsoft, HP, Dell or Intel. 250,000 Foxcomm employees in China produce Apple products, ten times the number of Apple employees in the US . Forty-nine micro-chip factories have closed in North America since 2000; China and Taiwan have built dozens of mega-facilities in the same period.

The value potential of technological development is largely imbedded in the scaling and production phase. It’s great that a few scientists, venture capitalists and entrepreneurs get wealthy after a meaningful discovery. But the nation’s investment in R&D, education and infrastructure is diluted when billions in revenue is realized in an overseas factory. This happens not only in the computer business. The alternative energy industry that appears to be in its infancy in the US is a growing brute in Asia . Photovoltaic’s was invented and pioneered in the US . The technology is critical to solar powered alternative energy. Production of goods using this science occurs in China at a rate 10 times greater than in the US . Lithium-ion batteries provide the power source for the electric cars of the present and future. The industry is predicted to grow from $200 million to perhaps $25 billion in the next five years. In 2008 Asia had 98% of the market share. Examples like these are, unfortunately, too numerous to list. This strategy puts America on the fast track to a lower standard of living. It’s time to change strategy.


And The Solution Is….

Cognitive dissonance is difficult to overcome and often a disaster is needed to open people’s minds to change. Asking Americans to reconsider the supremacy of lightly regulated free markets in favor of greater planning and prioritized funding and tax policy smacks of communist heresy. I am a coward so let me hide behind one of the great capitalists, Andy Grove as he continues his Bloomberg Businessweek article. Americans are “largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for modification that is even better.” It is no coincidence that Asian economies are growing faster than ours. A London School of Economics study of Asian industrial development concludes that the “precedent shattering economic performance” reflects effective government policies prioritizing manufacturing. The “Golden Projects” in China in the ‘80s and ‘90s gave priority funding to the development of electronic networks contributing, in time, to the information infrastructure and economic growth.

America needs leadership that realizes that job creation is the imperative. Economic theory needs tweaking to incorporate strategic prioritization. Free markets speak in the language of cash. We need look only to the imbalance of trade and national budgets to see who is winning the race of the Techno-Global Revolution. America needs enlightened policy to compete in the new game. We must recognize our weakened position and how to alleviate the problems. We must rethink where and how we spend and redirect our power and resources to promote sustained economic expansion, jobs growth and education. A credible deficit reduction plan means everything is on the table from social programs to the defense budget. Targeted tax increases may be necessary but would be premature today, adding to the risk of recurring recession. Only then will we see a gradual return of confidence and sustained economic recovery.


Take A Lesson


Coach Wooden rarely scouted the competition because he knew that if his boys executed a well designed game plan up to their capabilities they would rarely lose. Wooden’s UCLA teams were taught that five men working together could outperform five men working individually. He understood that the greatest enemy to a successful team was complacency. His disciplined humility was no mistake. It was part of the life code that guided a God fearing, family loving country boy to do his best every day and carried his teams to the loftiest of heights. American government and industry would do well to take a lesson from the “Wizard of Westwood”.


The Markets


Stocks, bonds and commodities markets are reflecting uncertainty. Stock market volatility, rock bottom bond yields and gyrating industrial raw materials tell us of the need for clear consistent guidance. Events in Greece, Portugal and Spain have shaken confidence in the EURO and the world economy. In America it’s hard not to focus on bloated debt and stubborn high unemployment. Even the success stories in Asia draw a jaundiced eye as we worry about property bubbles and inflation spillover.


As fixed income investors let us not forget the lessons of the past. The attached Two Year Treasury Yield History shows how interest rates have historically rebounded from cyclical lows. We cannot get caught up in chasing yield through duration extension or increased risk. When rates rebound the anemic yields of today will offer little cushion against price declines and will limit reinvestment options in the up cycle. Remember the lessons of the early days of the financial crisis. Money market funds that had offered enhanced yields were at the center of the breakdown requiring federal intervention. In the words of Yavapai County, Arizona Treasurer Ross Jacobs,” If it looks to good to be true….”  I’m not sure if that’s original but it sure is timely.


Bond market yields remind us of a bear trap set and ready to spring shut. It is easy to suffer from the same myopic tendencies as other investors that cause markets to overshoot on both the down and uptake. We humans project that whatever trend we are currently experiencing will continue indefinitely. The longer a trend remains in place the more certain we become that past is prologue. In times like these we need to take a deep breath and protect ourselves against the big mistakes. A tremendous amount of interest rate risk has been transferred from issuers of debt to investors. This is the dirty little secret of the bailout of the financial industry. Appreciating that fact is crucial to investment success in coming years.


At ICM we will keep credit quality high, duration controlled and focus on the cash flow needs of our clients. Our trading desk will fight for every basis point on every trade and we will not compromise our investment standards for any reason.

A Note To Local Government Clients

The economic conditions we address in this commentary reflect structural changes in the global economy that impact us all. Soft labor and housing markets are a fact of life and will be with us for years. The Federal deficits we dread are mirrored at the state level. Investors fear some desperate municipalities may choose default rather than austerity in select circumstances. This trepidation contributes to an air of uncertainty that has equity market volatility skyrocketing and put government bond yields in a crater. This ambiguity can pull liquidity from the Muni market and make issuance of new debt more costly and raising new funds more difficult. We urge local government clients to reflect the sentiments of banks, corporations and consumers who are hoarding cash as a form of self insurance against unpredictable financial markets and economic conditions. We respectfully suggest each client carefully consider decisions that trade fund balance for debt reduction. With debt service costs low and future revenue unsure a degree of tranquility may be obtained from a cash cushion stashed in a safe harbor until this storm blows out to sea.