Editor’s Letter Welcome to the CEO Q Magazine CEO Quarterly is a global executive magazine. Our mission is to encourage management best practices research and dissemination. We pursue this mission by publishing the work of top business experts in a format targeting business and government leaders. Every quarter, the editorial team identifies best business practices and lessons from the world’s most successful CEOs and their teams. The goal is to provide C-level readers with new perspectives, insights, intelligence reports, expert opinions, objective analysis, case studies, white papers, and decision-making tools to help them address emerging opportunities and challenges. The CEO Q editorial philosophy is to focus on breakthroughs in management thought and practice. The authors are required to frame their findings in a format that saves the CEO’s valuable time and effort in developing and aligning their executive teams. CEO Q is a continuing executive education and organizational development tool. CEOs can share the magazine articles with their teams to promote best practices, with the board of directors to advocate new strategies and with their clients to promote new products or services. Special Editions - The Global Investment Outlook In addition to the regular quarterly executive editions, we occasionally publish special reports on major global and regional business issues. In this edition we focus on the global investment outlook. CEO Q conducted an exclusive interview with Med Jones, one of the world’s leading investment strategy experts. He is well known for accurately predicting the US financial crisis of 2007 followed by the global economic crisis of 2008. Jones reveals his views on the emerging global investment opportunities and risks. He also shares with our readers the most important economic and investment lessons learned from the events in the past two years. CEO Q Sponsorship This free edition of CEO Q magazine is sponsored by the International Institute of Management (www.iim-edu.org) and the Annual Investment Meeting in Dubai 2011 (www.aim2011.com) We encourage you to learn more about the sponsors who made this special edition possible.
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CEO Quarterly Magazine Web site www.ceoqmagazine.com Editor Rohan Kumar editor@ceoqmagazine.com Research & Editorial Assistants Alexandra Tkatch Bohdana Hevierova Helle Lauritzen Lena Dietrich Lena Jost Linda Kimeisa Manuela Moeller Advertising & Sales Maria Netsveta ads@ceoqmagazine.com Art Director Mireille Mod art@ceoqmagazine.com Webmaster tech@ceoqmagazine.com Legal Alina Sviderskaja legal@ceoqmagazine.com Contact Us 10161 Park Run Dr. # 100 Las Vegas, NV 89145, USA Tel: (+1) 702. 516. 4368 Fax: (+1) 702. 982. 2746
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Content Report
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Global Economic Outlook 2011 Opportunities and Risks
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US Economic Outlook 2011 Economic Risks & Strategies
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Global Investment Outlook 2011 Global Opportunities and Risks
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Lesson from the Financial Crisis Policy and Investment Lessons
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GCC Economic Outlook 2011 GCC Investment Sectors
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Middle East Analysis The Changing Political Landscape
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How to Evaluate a CEO? Top CEO Questions
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CEO School Lessons from the Most Respected CEOs
Special Edition
www.aim2011.com P 46
Sponsored By
www.iim-edu.org 04
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www.tharaaholding.com
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Global Economic Outlook 2011 Opportunities and Risks On January 3, 2011 CEO Q interviewed Med Jones, the president of International Institute of Management. Jones is recognized as one of the few experts who predicted the US financial crisis. In his seminal research paper, titled “US Economic Risks and Strategies”, he warned about the housing bubble, the subprime mortgages and the rising national debt. In January of 2007 he challenged the US President’s State of the Union Address, the Federal Reserve Chairman and Wall St. Economists. He warned about the US financial crisis of 2008 followed by global socioeconomic policy challenges driven by sovereign debt, inflation and currency crises for the next decade. His statements and predictions are followed by investment advisors and researchers around the world. Jones provides strategy consulting and education to governments and the global Fortune 1000 companies. He can be reached at www.medjones.com Q: What is the status of the global economic recovery? 2010 was a year of uneven global recovery. The good news is that the global trade has recovered, and will likely continue to do so. The bad news is that the real estate, consumer credit and sovereign debt problems in the world’s largest economies are yet to be solved. About 22 countries, including several EU-member states, requested IMF’s help in 2010. As expected, technically, the recession has ended in the US and we saw a modest GDP growth, however, in my opinion, real economic recovery is measured along with a growth of employment. The good news is that the rate of unemployment has slowed down significantly, but it will take a long
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to recover to the pre-crisis levels. My concern is that this growth was fueled mainly by government debt spending, bailouts, banking accounting manipulations and massive money printing. The price of such recovery will have to be paid in the coming years with interest putting more pressure on higher taxes and inflation, thus reducing the budget for socioeconomic development and real economic growth and potentially creating new asset bubbles. Economies that have high Debt-to-GDP ratio with high budget, trade and investment deficits will continue to struggle and will suffer even more if they do not reform soon. The list of economies includes the US, UK, Spain, Italy, Portugal, Ireland, Greece, Iceland, Latvia and others. On the other hand, China, India, Australia, Brazil, and the GCC weathered the storm much better than the US and Europe. The question for 2011 is how resilient is the recovery? In general, I believe it is positive, but not without geopolitical and domestic policy risks. There are more default and currency risks in US and Europe and more asset bubbles and inflation risks in emerging economies. In general, I see the world economy growing 1 to 2% from about USD 62 Trillion in 2010 to USD 64 Trillion in 2011. However, the distribution of that growth will be uneven; the emerging economies, which represent about 30% of the global GDP, will contribute about 70% of that growth. Oil exporting countries, China, India and most of Asian countries are set to experience strong domestic demand in 2011, driven by private consumption and infrastructure spending. I’m more optimistic about eastern economies and less about the West. Q1 / 2011
The solution to the global economic crisis is a global reset. The IMF can establish a new international trade currency along with a global debt forgivness program for all nations. Fiscally responsible countries could be compensated with a fair ratio of international currency reserves. The IMF can manage the reset. If done early, many of the emerging global socioeconomic and political conflicts can be mitigated.
Q: Why have some countries recovered faster than others? There are several factors, but the most important is that countries that have strong pre-crisis macroeconomic metrics, rich natural resources and export-based industries have stronger recovery prospects. Strong budgets allow the government to stimulate the economy with less debt burden. Exports play a significant role in supporting a stable interest rate and exchange rates, thus renewing investors’ confidence and recovery. The main difference in the speed of recovery between Argentina in post-2001 and Thailand in post-1997 crises is the exports. Fiscal discipline is necessary, but not sufficient without export-driven economic growth. Too much debt can result in prolonged stagnation similar to the Japanese lost-decade of 1990s. With inflation risk on the rise, we could see more socioeconomic troubles and political unrest in economies with thin middle class. 2011-2012 will be challenging for many policy makers. Q: What is your economic outlook for China and India? 2011 will be a year of continued growth. China continues to lead the global market in outsourced manufacturing, while India leads in outsourced services and both are working hard on closing the innovation gap with the US and Europe. Soon China will replace the US as the world’s leading manufacturer. After surpassing Japan as the world’s second largest economy. The pool of low-cost English speaking and educated talent has proven and will continue to prove as the most valuable asset of India. It is also a valuable asset for global businesses and investors. There is still long way to go to become on par with the US standards of living, but I’m positive about their future. Chinese and Indian expats in the US, EU and GCC are effective socioeconomic ambassadors promoting the interests of their countries. The rise of the middle class will help lift more people from the poverty layer.
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As for the economic risks, inflation, currency wars, and geopolitical conflicts are the risks to watch. The most important policy issue is not to get distracted by conflicts with neighboring countries and instead focus on domestic economic development and global competitiveness. Higher energy costs and food inflation can be very challenging to China, India and other emerging economies. Q: What are the risks for the global economic recovery? The US economy is the number one risk for the global economy. Since it is the world’s largest economy and investment fund, any setback in its recovery will affect the rest of the world. The current recovery is linked to a host of challenges, including a fragile state of the banks, poor public finances, the impact of fiscal tightening on growth, wrong tax policies and the negative consequences of policy-making driven by populist domestic agendas, such as the voting blocs protecting social security and medicare, as well as certain lobbies pushing for policies at the expense of the rest of the population. EU debt crisis has not been resolved yet. I would also watch for wrong monetary policies leading to currency wars and political unrest in weaker economies due to rising inflation. Exact timing depends on policies but interesting to watch in the next five years. Other risks include geopolitical events such as a US or Israeli war with Iran that could damage oil production facilities in GCC countries, thus limiting the global oil supply and raising energy prices. A significant hike in energy prices could send the US and the world into a deep recession. War with North Korea could also hurt the Asian economies significantly. While these risks can be mitigated, one can never rule them out. When one tries to forecast the future, one cannot underestimate the impact of policy decisions. With this disclaimer in mind, all key decisions and trends remain the same and with the absence of any major negative event, the outcome is as follows:
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US, UK, and Europe will continue to go through a period of a correction and at some point these countries will have to go through austerity and/or higher taxation. Risks are not limited to the West. Excessive capital inflows plus domestic inflation pressures are already creating policy challenges across some emerging economies. Inflation could lead to unrest in many countries, but it would be felt the most in emerging countries. China and Asia will have to act to prevent the emerging financial bubbles. Overheating investments, prices and fears will test policy makers in each country. My view is that mistakes will be made, but the global economy will overcome these challenges and the recovery will continue over the next five years. Q: Do you still foresee another global economic crisis to follow the 2008-2009 crisis? Unfortunately, the answer is yes. It might not be in the short term, but macroeconomic indicators and trends show that we are heading in that direction. All things remaining the same, we could see another crisis within the next five years or so. I’m especially concerned about the US and the EU. Debt-laden countries such as Greece, UK and Ireland and Latvia started to suffer, other countries could follow soon. A crisis in Spain would constitute a greater challenge for EU policy makers because the Spanish economy makes up 12% of euro-area GDP, which is close to double of Greece, Ireland and Portugal combined. In addition to debt, tax and inflation problems, the EU still has challenges with aging and lower population growth. The ongoing costs of supporting an aging population and the law of diminishing returns will cause more burdens on the EU. There is a real risk that the US economy could enter another crisis driven by the cost of the bailout and the misallocated stimulus funds, the continued deficit spending and the much less publicized social security, public pensions, Medicaid and Medicare debts that place the real uncalculated Debt-to-GDP ratio at about 700% as opposed to the official debt number of about 90%, and that is not counting the individual states’ debt. The impact of the upcoming
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increase in direct and indirect taxes to fund wrong economic policies will result in reduced disposable income and consumer spending; add to that the existing large consumer debt, the burden of aging baby boomers and increased welfare spending combined with new bubble creation and unregulated speculative financial instruments. All of these issues pose a real risk for another economic or financial crisis. Q: Seems that the US government cannot fight the current economic crisis. Is that correct? The US government alone cannot get us out of this crisis. It appears to me that the current policy makers are suffering from the gambler’s syndrome. They keep spending more money hoping that they will eventually win. More debt spending is a receipt for bankruptcy. Real economic growth comes from government and private sector investments, not from massive debt spending followed by tax increases or currency devaluation. The problem is that current GDP recovery numbers are driven primarily by government debt-funded spending rather than by private sector productivity improvements and exports. The other problem is that Government spending is more than 40% of US GDP. When government spending slows down (and it will) to try to balance the budget, the private sector and the economy will be impacted significantly. Unfortunately, what hits the US economy will impact the world and we could experience another global crisis. With all policies remaining the same, there are two main scenarios: either another sharp correction (crisis) with quick recovery or articial economic pumping followed by a prolonged stagnation period similar to Japan’s lost decade. Countries that have high Debt-to-GDP ratios and follow the same policies will be hurt the most. This includes Japan and some EU countries in particular Italy, Spain, Portugal, Greece, Ireland, Latvia and some other countries. In Latin America, Mexico and Central America are more vulnerable. www.ceoquarterly.com
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Add to that the long-term negative demographic trend. Over the next 50 years, the US labor force is projected to grow at a slower rate. As a result, there are concerns about the future growth of the U.S. economy. Despite the aging of the baby-boomers, the U.S. labor force is in a better position than most countries in Europe and East Asia. Japan, for example, is projected to see a 6% drop in its labor force by 2020. Q: This looks very bad for the US economy. Is there a way out of the crisis? It is not all bad news, on the upside, the factors that are in favor of the US economy include the private sector innovations that brings export revenues, attracting foreign investments to undervalued assets, and the lack of governance and transparency in emerging markets makes US a safer investment destination. One main reason the US has been able to prevent the currency and the economy from collapsing, despite the latest wars, huge debt and massive currency printing, is because the dollar is the defacto standard for international trade and reserve currency. Despite recent proposals to establish an alternative international currency by the IMF and World Bank, and despite the support for the proposal by China, Brazil, and Russia, not many politicians have the will to push harder for an alternative international currency. The US is running on the goodwill of the previous decades. Once the dollar is replaced with a basket of international currencies, the US economy could crash, especially if the government does not stop its debt spending or fails to go back to healthy production-based growth and investments. What scares me the most is the unpublicized rising level of stress and distrust in the relationship between US and other countries. If China decides not to invest in US treasury debt or if the GCC countries demand another currency to pay for their oil, or if more politicians push for the implementation
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of an alternative international currency, we could see the collapse of the US dollar and experience a larger economic crisis similar to that of Argentina in 2000-2001. Luckily, globalization had all us invested in each other, therefore it is unlikely that we will see any drastic decisions that could result in a global economic disaster. Any push and pull will be done gradually and hopefully diplomatically. Therefore, in the short term there is less risk of another crisis, but the US leadership should not forget that global competition is growing. Manufacturing, services, knowledge and innovation leadership gap is diminishing. In the long term, the dollar will eventually be replaced as the international trade and reserve currency. We should not push our luck. If the US does not fix the national economic problems in the short term, we will all face a bigger crisis in the longer term. I know this sounds gloomy, but I do not agree with the prophets of doom who are predicting the socioeconomic collapse of the United States. Make no mistake, the US will recover. The road to recovery is rocky with potential setbacks, and we have to pay for our mistakes like everyone else. Q: What is the new economic growth model for the next decade? Innovation in products, services, value chains and business models is the only sustainable growth strategy. New knowledge and business networks will shape the new global economy. Entrepreneurs should shift their thinking from “How can I make successful products to sell to my clients?” to “How can I create products and services that can compete globally?”. Your local products and services now have to compete with products from China, India, US and Europe. They all compete on price and quality. Politicians should shift their thinking from “How can I balance the budget?” to “How can I attract top global talents, businesses and investments to compete in a global economy?”. For more information, please visit medjones.com
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US Economic Outlook 2011 Economic Risks & Strategies Q: What is your short and long-term outlook for the US economy? While in the short term the US will continue to recover, I’m not fully optimistic about the longterm yet. A change in my outlook depends the US government policies, global competition and private sector variables. My main concern is that the recovery was created by an accounting trick; they took the bad assets off Wall Street and put them on the government balance sheet. It is merely a psychological trick to rebuild confidence in the financial markets. It worked! Wall Street recovered, but the US tax payers and main street businesses will have to pay for it through higher taxes, higher interest rates, inflation or a combination that will eat future profits and consumer spending power, thus hindering growth rates for a long period of time. Q: What are your views on the current US economic policies to overcome the crisis? Many economists believe that the US government can jump-start the economy by an additional stimulus package that later can be paid for with increased tax revenues. I believe such policies are counter productive. The causes of past recoveries are misattributed to government policies, real recovery comes from the private sector. In 2006, I published a paper outlining US economic risks and warned against deficit spending and tax increases. If we continue on the same path we could enter a vicious economic cycle. To understand the impact of current government policies on the economic health, you have to understand the theory of virtuous and vicious economic cycles.
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Over the long term, if government revenues continue to be more than expenditures (surplus), then the economic health of the country improves, because the government can afford to invest in development projects such as research and development, education and infrastructure. With more income, the government can also afford to lower taxes, which increases corporate profits and attracts more foreign investors, resulting in more economic activities, creating more jobs and enlarging consumer spending and government revenues despite income tax cuts. It is what I call a virtuous economic cycle. Over the long term, if government revenues continue to be less than the expenditures (deficit), then the economic health of the country worsens because this will result in accumulated debt. An increasing government debt will result in higher interest payments, and less money available for socioeconomic development. To pay for the debt, the government will have to raise taxes, which will reduce the competitive position of the country in the global economy and chase investors away resulting in less economic activities and more job losses. In order to avoid higher unemployment and social instability, the government has to raise more debt to fund spending and welfare support by raising the interest rate which will increase the cost of money, reduce corporate profits and slow economic investments, thus resulting in more job losses and reduced government revenues, despite income tax increases. It is what I call a vicious economic cycle. From an economic point of view, the best action a government can take during an economic crisis is to reduce taxes by reducing its spending budget. Q1 / 2011
That is easier said than done. Leaders tend to resist budget cuts to avoid alienating voting blocs and sometime they have to increase welfare spending to reduce the social suffering resulting from the economic downturn. It is a very delicate balancing act and can be easily missed. Such actions in the long term will accelerate the vicious economic cycle and the entire country will suffer.
In the long terms, currency wars and the momentum to replace the US dollar with a basket of international currencies as the international trade and reserve currency can result in the decline of the dollar and the US economy.
The only hope for a real US recovery is from the private sector. US companies selling new innovations globally in industries such as nano-tech, bio-tech, ICT and converged media.
No one can know with certainty, but the risks are high and that is what worries me. Despite of my disapproval of Obama’s bailouts and tax policies, I believe that his foreign policy is less confrontational and we are less likely to have a tit-for-tat or strong conflicts with China, Russia, North Korea or Iran. However, things can change. For example, if Israel pulls the US into a war with Iran in 2011 or the war lobby has its way in 2012 elections, then the risk of another global crisis is very real. WikiLeaks has revealed that Israel and some of the US Arab allies are secretly pushing the US to strike against Iran. This is a gross miscalculation. What they do not realize is that a strike on Iran will do more damage to the region and the world economy than most analysts foresee.
Clinton’s budget surplus and recent US wealth was built by entrepreneurs and companies such as Apple, Google, Boeing, and GE. The future will not be different, only an innovation-driven economic growth can attract foreign investments, generate enough revenues to pay the debt and re-energize the growth again. Q: What are the risks for the US economic recovery? The financial sector is still a drain on the US and the global economy. When it comes to the US, the media focuses on the accounting profits of the bailed out mega banks, but less attention is given to the medium and smaller banks that are in trouble. I believe the de-leveraging process of the banks is still not completed. Unfortunately, more banks could fail. Many states and municipalities are also in deep debt and there is a high risk of defaults. Unlike the Federal Reserve, states cannot print money to pay their debt, so either they will impose higher taxes or significantly cut spending or ask for another bailout.
Q: What is the likelihood of those risks materializing?
Q: Is there a solution to this global economic crisis? Yes, global economic and political reset. However, this requires a strong global leadership action. Unfortunately, the US leadership is limited by many conflicting private interest groups and is buried in domestic politics, ideological conflicts, and security issues.
It is expected from the government officials and the financial sector to selectively report on the good news to avoid investors’ panic and maintain confidence in the economy. Unfortunately, building confidence has been the name of the game since the beginning of the crisis rather than real financial and economic reforms. Wall St. loves bubbles and crises, they can make money betting on both events.
A global economic reset means that the world can come together to agree on debt forgiveness to all nations and restructuring of the global economy. To be fair to nations with lesser debts, they could be compensated on a fair ratio basis to enjoy a treasury surplus. A new international reserve and trade currency will probably be established to create a new and fair global economic system. This is a much better alternative than currency wars and continuous risks of economic shocks.
Other risks include US foreign policy. The spread of popular unrest in the Middle East could align those countries with US rivals. A US or Israeli strike against Iran can bring the world recovery to halt and drive the US into an economic depression.
On the political front, the US could reset its foreign policy and stop burdening its economy and its people by allowing some lobbies to change the US role from the leading global trading nation to that of world police. US government could allow
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international justice courts to resolve international conflicts and the UN to enforce them. Countries that are busy conducting wars do not have enough time and resources to develop their economies and will eventually lose their leadership. Q: Should the world de-couple from everything American particularly the dollar peg? Many countries peg their currency to the US dollar. While this was beneficial in the past, it is not beneficial for the future. Brazil, China, Russia, India, South Korea, South Africa, Iran and other countries are in favor of using the International Monetary Fund’s own currency - called special depository receipts (SDRs) as an international trade and reserve currency. With the US dollar coming under pressure, there are concerns about inflation in emerging markets. My advice is not to blindly imitate the US economic and financial policies or any other policies for that matter; leaders should analyze and customize them to their own economic conditions. You cut the jacket to fit the person; you do not cut the person to fit the jacket. Other countries do not need to decouple from everything American. America’s economy and businesses are still the largest in the world. We always managed to recover from past crises and will recover from this one. We are simply paying the price for our mistakes and I see no nation without mistakes. I would not bet against US innovation, entrepreneurship and business culture - The trinity that drives economic growth and recovery. Yes, we do face a major crisis, but we also do have a proven track record of recovery. Q: Is it over for the US as the world’s super power? After the collapse of the USSR, we became the world’s sole superpower both militarily and economically. The mistakes of our elite led us to where we are today. I do believe we will continue
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to recover from this crisis. The US will not turn into a third world country. However, it is unlikely that we will be the only superpower or be as rich as we used to. Wealth is being distributed globally and the world is becoming multi-polar. This is evident by the expansion of G-7 to G-20. Over the next decade or two, if the US macroeconomic trends remain in the same direction, while other countries are growing in power and wealth, we will lose our leadership. We will become like the UK, an influential political and economic player, but not the only global economic empire. This is inevitable; it is part of what I call the inescapable “Power Cycles”. The forces of the Power Cycles work over time to distribute the power and wealth among nations. Every nation and every political party must go through the cycles of expansion and contraction. This is true for all past, current and future powers. The only difference is that this power cycle got accelerated tremendously with the introduction of the Internet and global communications. The knowledge, wealth, and development gaps among nations are reducing and the reign of superpowers is shortening. Just look at the history of the Roman, Islamic, Russian and British empires: the newer the power the shorter the reign. In the economic and business worlds the same power cycles apply. Ford, IBM, Nokia and other companies lost their leadership position to newer companies faster than their predecessors The globalization of trade, knowledge, innovation, industrialization and entrepreneurial culture is increasing at a rapid rate and the net result is more distribution of wealth and power. A new world order is imminent. The countries that succeed will be those with better socioeconomic policies, more cash, natural resources and creativity. The US can embrace this change and compete or we can resist it and lose. For more information, please visit medjones.com
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Global Investment Outlook 2011 Global Opportunities and Risks Q: Where are the highest growth economies for 2011? High growth countries include BRIC countries (Brazil, Russia, India, and China), GCC countries especially Qatar and Saudi Arabia, the Asian Tigers and Australia. China and Africa have strong growing relationship; as China continues to grow, we will see the Chinese offer more infrastructure development to African governments in return for natural resources and farmland to support its vast population. It is a natural and mutually beneficial relationship. Q: Where are the highest growth sectors? Global stocks and commodities including oil, gas, metals and agricultural products. Although we are likely to see periods of volatility, I see a bull market trend overall. In particular, the growth is tied into the emerging markets with strong supply and demand factors. As the emerging nations develop their economies, they have an enormous demand for better food, more fuel, better housing, infrastructure, and telecommunications. Commodities have shown a high correlation to inflation, especially in high inflation periods. In addition to diversification, the commodities asset class may also protect investment portfolios against an expected inflation or a declining local currency. Let me be clear, at International Institute of Management we do not sell investments or investment advice; we sell knowledge to help our clients make better investment decisions, thus it is always important to fully understand the performance variables, benefits, and risks of each investment and why you’d want to add each investment to your
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portfolio in amounts that fit your risk appetite. Despite my bullish overall outlook, there are several risks to commodities. The number one investment risk variable is Mother Nature. Long term risks include weak recovery and commodities over-supply. In the US, the risks are the failure of the new round of quantitative easing, and spending cuts by US state and local governments. Crude oil could easily hit 3 digits. Its price can increase by 50% to 100% if the war lobby has its way in US foreign policy. In the EU, there is a risk for the re-emergence of a debt crisis. Add to that the dangers of domestic policymaking errors that could allow protectionism or price controls to infringe on the marketplace. Unlike many in the investment community, I classify these high volatility assets as speculative investments. Although I would invest in them, I would keep their share of the portfolio to minimum and would monitor them closely. Q: What do you think of gold and other metals as investments? Lately, everywhere I travel, I get asked about gold and gold equities. This has the same eerie feeling of the real estate bubble in 2006 & 2007. In my opinion, there is still room for growth in Gold prices in 2011. Only about 1% of all global assets are in gold, and gold is trading right in line relative to its historical relationship with other industrial commodities and precious metals. The important thing about gold is that it is the only commodity that is a currency. Gold is likely to become an even more important part of an international currency. Although the US took the
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dollar off the gold standard in 1971, it remains the largest owner of gold in the world for a good reason. This also explains the support behind the US dollar. Most other central banks hold gold in their foreign exchange reserves. One reason that led to the spike in gold prices over the past two years is that the central banks of countries such as China, Russia and India, have all increased gold as a component of their foreign exchange reserves. Add to that the consumer and investment demands driven by gold traders and the media blitz exaggerating the impact of the crises and prophesying the demise of the US dollar soon. Since gold is one of the most volatile asset classes, keeping it to minimum in your portfolio is likely to shield you from its volatility. To me, gold belongs with a class of speculative investments and should be kept to a minimum in long-term investment portfolios. This statement is valid until the world adopts gold as the main component of a new international currency. I will share with you an unscientific tip that works for me. Whenever several ordinary individuals start giving me investment tips about real estate, stocks or gold, it is a sign that I already missed the right entry point and the asset is hot. Although there could still be room for growth in the price of that asset, the rate of upside growth is limited compared to the downside. The trick to making money in investments is to buy an asset before it becomes too popular. You buy low and sell high, you do not buy high and hope you will sell higher. So, if I’m a passive investor, I would not favor buying gold at this time, however if I’m an active trader who monitors the price of gold in real time, then it does make sense to add it to my trading portfolio in 2011. As for other metals, I like silver and platinum. Copper is likely to outperform aluminum, but like other commodities I’d keep them to minimum in my portfolio, especially for the long-term. Q: In this uncertain economic climate, in which assets would you invest? In general, I would look at the stocks of industrials, materials, trucking, machinery, oil and coal. They could benefit substantially with the global economic recovery. However, I do not invest in indexes or sectors funds, I would only invest in specific Q1 / 2011
companies subject to good valuation. Selecting the right company after detailed research is the only valid investment strategy; the rest is more speculation than investment. Over the last two years, many companies have improved their cost structures and maximized their manufacturing and operational efficiencies that resulted in higher profit margins, healthier balance sheets, and more cash flow. Many of these companies have depressed valuations because of the investor’s flight to bonds and gold. When the investment rotation cycle comes back to stocks, the shares of these firms will rocket upwards. I prefer multinational companies with more diversified sources of income and who can benefit from the higher growth of the emerging markets. With the growth of China and India and their resulting demand on the energy supply, a new demand will be created for energy efficient products all over the spectrum including lighting, air-conditioning, power plants, and engines. As for transportation, I see an increased demand all over the world, especially in China and India. The Indian’s Tata’s Nano car, the cheapest car in the world priced at less than $3,000 will affect not only transportation and infrastructure, but could send oil prices higher, if there is no overproduction. Not to forget agriculture companies in emerging markets, with growing populations and development there is higher demand to improve their diet (mainly protein). These are good investment hedges against inflation. In the US, agriculture demand is also increasing due to the mandate to use cornbased ethanol in gasoline. As farmers plant more corn, supply for soy and wheat can get tighter, thus raising the prices further. With increasing trend towards green energy, more corn will be produced. In the short term, I expect to see rising wheat prices and instability in many countries that consume bread as part of their daily diet. I also like some of the undervalued secular (longterm) stocks; that are experiencing structural changes in demand for their products and services that will allow them to grow at rates faster than the broader technology sector. I like the LCD glass manufacturing, smart mobile and multimedia companies. The popularity of smart mobiles and internet videos will increase the demand for higher telecom bandwidth and networking www.ceoquarterly.com
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gear investments. I look for relatively undervalued companies with early product penetration that will result in a superior growth. It is important to remember that the only valid investment strategy is to be highly selective about your target markets and companies. For example, investment in large IT and software businesses in US is less likely to provide higher returns because the market has entered the maturity stage, on the other hand, investment in banking software in China can make you rich, considering that in less developed cities they do not have automated software and they rely on manual processes and calculators, consequently there is a huge demand for IT automations. As for oil, I would not be surprised if the price of oil crosses the $100 mark. This will reflect well on the oil stocks and oil producing economies. Oil prices will keep breaking new records until other countries move to nuclear and alternative energy sources or we discover massive new reserves and increase production dramatically over the next few years. The same assumptions apply to natural gas, but again you have to be selective about where to invest. Unfortunately in US we do not have enough production facilities for natural gas liquefaction plants, and producers need liquid natural gas (LNG) facilities to put it on boats and export it, so Qatar and other natural gas exporters will benefit from the growth in the global demand. Coal prices will also move up with more global development. As for alternative energy investments, I’m monitoring nuclear, wind and solar energy technologies. They could pick up steam when the price of oil rises above $150 and/or they manage to develop new technological innovations that make them commercially viable alternatives to traditional energy plants. Government’s investment and funding of R&D can accelerate the development and commercialization of these technologies. When it comes to currencies, I like the Australian
Dollar (AUD), Malaysian Ringgit (MYR) and Korean won (KRW) against the US dollar (USD) on strong growth, healthy balances, and attractive valuations. The main risk for KRW is a war with North Korea. I’m also bullish on Indian Rupee and Chinese Yuan, despite their volatility in the short term. That being said, currency trading is highly speculative and requires real time monitoring. Therefore, Forex trading should be kept to minimum in investment portfolios. Q: What countries are you optimistic about? From a long term point of view, in addition to the BRICs, in Asia, I’m optimistic about South Korea, Indonesia, Vietnam Philippines, Bangladesh, and Pakistan. In the Middle East, Egypt, Iran, and Turkey. In Latin America, I like Mexico and Argentina. In Africa, I like Nigeria, Ghana and South Africa Q: Why these countries? These economies are sleeping giants. Some of them are burdened by lack of political stability and immature economic development policies, but these conditions will not continue for long. There are three major global trends that are working in their favor. The first is a freer flow of global capital and the rise of microfinance. The second is the reduction of global knowledge gap with the rise of the internet, open source software, open content, and online education. The third is the rise of India and China manufacturing providing cheaper access to production, telecom and transportation technologies thus making capital goods more accessible for these economies. When you take these economic production factors and combine them with their large populations, they translate into massive national consumer and production labor forces. You can see they are poised to ride a virtuous socioeconomic development cycle. It is only a matter of time for their economic
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development policies to evolve and provide more stability, globalization, governance, and investment promotion. As their middle class grows bigger and stronger, you will see more accelerated development like the BRICs. Their economic growth rates will be much faster than those of the developed countries. The only caution I have is that on the path of growth, there will stock commodities and real estate be bubbles and investors have to be careful of them. Some will bet on their failure as the bubbles bursts, but they will eventually recover. Innovation and good economic policies are not limited to US & Europe. We have seen shining examples with the BRICs and smaller economies like Singapore, UAE and Qatar. These countries are part of the emerging New World Order. I would not be surprised if we count some of them among the leading economic powers in the next two decade. In about two decades China could take over the US as the world leading economy and India could be ranked third or fourth. That is assuming that they do not suffer from slowing economic events such as war with Pakistan or internal instability with China or other major natural disasters. Russia has great potential, their human capital is among the best and they have rich natural resources, if they improve their governance, they can attract significant global capital and accelerate their economic development. The main risks are corruption and politics. What is good about this trend is the reduction in global inequality in wealth and the rise of the global middle class. This will also reflect positively for major US and European multinational companies with branded consumer products and branded tourism destinations. All in all these trends are leading to a virtuous global socioeconomic development cycle. I hope it is not interrupted or slowed down by wrong policies or other negative events. For more information, please visit medjones.com Q1 / 2011
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GCC Economic Outlook 2011 GCC Opportunities and Risks Q: Can you give an overall assessment and outlook for the GCC region? 2010 was challenging for the GCC and especially for the UAE, but it was nevertheless a year of economic recovery. I estimate 2010 growth at about 3 to 4% and expect a growth rate of 4 to 5% for 2011 as a whole. Growth in the GCC in 2011 will be driven by energy, infrastructure, private sector investments and trading. A global recovery will drive the oil prices higher, thus having positive impact on the region. However, oil production in most of the GCC is unlikely to increase significantly, as they are bound by OPEC quotas. The two exceptions are Oman and Bahrain who are non-members. One cannot predict long term OPEC policies. There is an undercurrent of cultural changes in the Middle East region in general driven by the globalization of media and the Internet. So, the GCC region could see more demands to move faster into more democratic forms of governments. Like all countries before them, they will have to go through a learning curve and experience periods of political challenges before their socioeconomic system stabilizes. Smart leaders will anticipate these changes and initiate gradual reforms to avoid political instability and economic problems. Geopolitically, the region should work with the US to avoid war with Iran. The damage to the population of the region, oil production and the world economy cannot be controlled.
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Q: What is your economic outlook for Qatar? In 2010 Qatar was the fastest growing economy in the world. Qatar’s oil and gas sectors are the largest contributors to its GDP, accounting for a total 50% in 2010. Government services made up about 11% of GDP, the construction sector accounted for about 10% and manufacturing made up 5%. Heavy investment in liquefied natural gas (LNG) production capacity and increases in LNG production over the last couple of years have been the main drivers Qatar’s robust growth. The private sector has limited scope to drive growth. Infrastructure and diversification spending will be keys over the next five years. The win of the world cup hosting bid for 2022 is a strategic event that can boost the inspiration and perspiration in Qatar’s economy and its standing in the world. Qatar is one of the few countries where the government is the main driver behind the economic growth, as opposed to the private sector. Q: What is your economic outlook for Bahrain? Bahrain is investing in its production capacity and can get benefits from higher production. Like Dubai, Bahrain has limited oil reserves and will be focusing on diversification of its economic development. Bahrain has positioned itself as a regional financial, business and tourism hub, but needs to invest more to compete with Dubai. The financial sector, which contributes about 25% of GDP, suffered a downturn during the crisis and is still on way the way to full recovery. However, confidence should pick up, and I expect the private sector to drive much of the recovery. On the labor front, Bahraini’s nationals hold about 15 to 20% of private-sector jobs versus Q1 / 2011
about 80% of public-sector jobs, but this imbalance will persist amid continuing mismatches in skills and type or quality of labor. An education policy to develop entrepreneurship and small business enterprises will lift the productivity of the economy and the standards of living of its population and solidify the country’s socioeconomic stability. Also, the policies of Bahrain as a business friendly destination that allows workers to move between companies without the employer’s consent will improve its position as a competitive regional services hub. Q: What is your economic outlook for Saudi Arabia? I expect Saudi Arabia’s economic growth to be at about 4% in 2011 driven by the growth in capital investments in infrastructure and hydrocarbon sector, both downstream and upstream, as well as by the development and diversification related spending. About $500 billion is earmarked for infrastructure investments by 2020. I expect a moderate growth in private credit boosting confidence in the private sector. Q: What is your economic outlook for Kuwait? Kuwait’s oil constitutes more than 90% of its total revenues. The $100 billion plan approved in February 2010 under Kuwait Vision 2035 program is a first step towards positioning Kuwait as a trade and financial hub. They are a bit late behind the UAE and Bahrain, but their rich oil resources can help them quantum leap the competition if they execute the plan properly. Their development budget can benefit from higher oil prices and at the same time is vulnerable to oil-price shocks. Diversification projects should be a more urgent priority. The achievement of their goals can be delayed because of political issues and budget waste. Kuwait Stock Exchange (KSE) needs better governance to boost trust and growth in private sector investments and businesses. Q: What is your economic outlook for UAE? The economy of the emirate of Abu Dhabi is highly dependent on hydrocarbon sector which makes about 60% of the GDP. According to Abu Dhabi’s development plans, their goal is to increase the GDP contribution of its non-oil sector to 64% by 2030. Investment in non-oil projects will be critical Q1 / 2011
to achieving this goal. Several projects were either delayed or cancelled in 2010. As for the emirate of Dubai, I expect the real estate sector to decline by another 20%. The disclosed Dubai and its state-owned companies carry about $130 billion of debt, of which $50 billion is owed by Dubai World and $30 billion by Dubai Government. ICD and Dubai Holding carry the remaining $50 billion. The government allocated about 20% of the budget to developing and completing previously approved infrastructure projects. Dubai faces about $30 billion of maturities in 2011-12; the agreement to restructure part of Dubai’s debt has allowed Dubai to regain access to international markets and eased liquidity pressures. In the medium term, the Dubai government will focus on debt management, not allowing it to support strong economic growth. I would not be surprised if Dubai issues bonds in the midterm. The economic recovery will be driven by logistics, retail and hospitality sectors. I expect US interest rates to remain low for the next two years, together with the Fed’s decision to proceed with further quantitative easing, which will improve the attractiveness of GCC bonds to investors looking for yield. Q: In the GCC, Dubai was hit the hardest by the global financial crisis. How can they recover? I visited Dubai last month and I saw the world’s most innovative real estate developments. They quantum leaped over the US, Europe and Asia in amazingly short period of five to ten years. There are many lessons to learn from Dubai in the field of real estate planning and development. However, when I drove on Sheik Zayed Road (the heart of the new real estate development) at night, I noticed the occupancy of many buildings was at about 30%. With more buildings being completed and more inventories coming to the market, the supply and demand mismatch will result in significant downward pressure on the real estate prices. The experimentation with labor and business laws and the rising cost of doing business in Dubai does not help the real estate sector or Dubai’s economic recovery. The best strategy to attract strong capital inflow, www.ceoquarterly.com
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accelerate the recovery, reverse the real estate decline, and supercharge the economy is to implement several new policies at the same time; (1) reduce the restrictions on foreign labor and movements; more population equals more occupied rental space (2) reduce business incorporation costs and cost of doing business thus attracting more investors and entrepreneurs (3) grant investors and rich expats permanent residence cards. Investors and rich expats are more likely to invest what they earn in places where they and their families can live (4) relax student and tourist visa requirements to bring in more people and more income (5) invest further in the quality of the financial institutions and improve governance standards and transparency. The establishment of Dubai International Finance Center (DIFC) and the Hawkamah (governance) Institute is a good step in the direction, but requires more support (6) create a government bank to lend to the distressed assets and real estate development at lower rates to reduce bankruptcies and if those investors fail to pay their loans, the property becomes owned by the government at a bargain. (7) do not participate or get dragged into regional political animosities that can escalate to physical conflicts threatening the existing real estate investments, trade, logistics and tourism that are at the heart of Dubai’s economy. As for the recovery time frame, the faster they implement these policies, the faster they will recover. If they wait, they will lose to other competing economies. Q: Should GCC member states think of an alternative or a euro-like common currency for the region? It would be one of the best things their leadership could do for their people. However, the common currency alone is not the answer to creating wealth, prosperity and power. There has to be significant reforms in labor and residency laws, taxes, capital, education, privatization, and corporate governance. The creation of a Gulf Union (GU) is even better than a common currency. While I understand the desire of the Gulf countries to keep their population small so they can have bigger share of oil revenues
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in the short term, it is in their best interest to think in long and global terms. The advantages of unification and expansion outweigh the advantages of separation and protection. The oil will not last forever, so policy makers must think about starting early to build a sustainable socioeconomic system based on diversified economic resources and human capital. Bahrain and Dubai’s leaderships are leading the GCC in that vision; their policies such as attracting foreign investments, allowing foreign ownerships and relaxing labor movement are steps in the right direction. Transcending the tribal and the geographic borders to establishing a Gulf Union is in the best interest of all of the involved states. UAE is one example of multiple states working together for the betterment of each other. Q: What is your forecast for oil prices in 2011? Oil prices could cross the $100 mark with increased demand driven by the global economic recovery. If there is a strike by Israel on Iran’s nuclear sites or a war between US and Iran, the prices could cross $150. This would not benefit the GCC, since the production facilities will be damaged. Q: What is the likelihood of a conflict with Iran? I’m an economic researcher not a political analyst. With that disclaimer in mind, from an economic perspective, a war with Iran could be devastating not only to the region but to the world causing a severe global recession. If Israel strikes Iran in 2011 or if the war lobby wins the US elections in 2012 this would be the catalyst for a global energy crisis followed by US economic depression and currency crisis. If you thought the economic crisis caused by the financial sector was hard on the world, you have not seen anything compared to the inflation pains and socioeconomic challenges caused by rising energy prices. The best way to get rid of the threat of a nuclear Iran is for Israel to make peace with its neighbors.
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Lessons from the Financial Crisis Policy and Investment Lessons Q: What policy lessons can countries learn from the global economic crisis? For the political leadership, the lessons are: Lack of regulation is as bad as over-regulation. Although I believe governments should not regulate free market choices, I also believe they should regulate to protect investors against conflict of interests and negligence by investment bankers. Regulations should also ensure full transparency and disclosures and should effectively penalize violators. To be more specific, I mean investment banking firms who knowingly sold investments to their clients and later betted against them without informing the same clients; those who invested in fraudulent funds without proper due diligence on behalf of their clients; and rating agencies that misrated subprime junk derivatives as grade A assets. Short-term policy orientation can have adverse affect in the long-term with huge price to pay. The deficit spending, multiple stimulus and bailout programs fall into this category. The US and other political leaders should not allow private interest groups to dictate national economic policies and if they are too powerful and can influence their elections, leaders can mitigate the conflict of interest by including equal number of independent advisors and opposing schools of thought in the advisory and policy committees. Insanity is defined as doing the same thing and expecting different results. Hiring the same people who got us into the economic recession in the first place or hiring those who did not foresee the financial crisis to design the recovery policies is not the right
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solution. Most of the economic advisors of Bush and Obama did not see the crisis until it was too late and some of them championed in the policies that led to the crisis in the first place. Recently Obama was forced to change his economic advisors, but the question is whether the US can afford another trial and error approach to solving the crisis, be it the Democrats or the Republicans Countries that quit producing real products, spend more than they produce, lag in education, burden their middle class with higher taxes, and continue to import billions from other countries, bail out failed businesses and reward bad behavior instead of investing in good businesses, will eventually lose their leadership and wealth. Countries pay a big price not only for their wrong economic policies, but also for wrong foreign policies. Countries that allow foreign lobbies, special interest groups or extreme nationalist movements to dominate their foreign policies by becoming active participants in international conflicts will end up creating more enemies and wasting their valuable resources in defending their own security. Countries that try to spread their ideologies by force, be it religion, socialism, capitalism, democracy or something else, will be overwhelmed by the human and economic cost of conflicts. Those countries will lag behind other countries that are focusing on developing their economies and advancing their interests via global partnerships and trade. The global economic landscape is not like it was after World War II; at that time, the US had no real competition in rebuilding war-destroyed European and Asian countries. With the new global knowledge and global competition, if you take your eye off the economic ball someone else will pick it up. This
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lesson is not only for the Americans but also for the Chinese, Russians, Indians, Middle East and countries all over the world. Globalization of markets, competition, partnerships and risks should carry far more weight in the designing of strategic national development plans. It is not enough to think about government budgets anymore, you need to build your economy and businesses for global markets and competition. The challenge is that CEOs now think like global investors, while the political leadership thinks like local civil servants. A new model for socioeconomic development with global partnerships is emerging. Getting the right policies to attract and develop talented labor, capital and diversify the income sources will determine the prosperity and wealth of the people of each nation. Q: What lessons can investors learn from the global financial crisis? For the investors, the lessons are: Be careful of whose advice and what advice you buy, even if it is for free, my advice included. I was in Geneva in 2009 giving a keynote speech to a group of the some of the wealthiest families in the world along with their top investment bankers and advisors. Many of them lost money because they could not foresee the crisis. You will be more surprised to learn how many people lost money because they invested with fraudulent investment schemes, such as that of Bernard Madoff. Just Google the list of Madoff’s victims and you will see that the list includes the largest investment banks and funds around the globe. That should tell you a lot about the soundness of the current investment strategies and risk management practices in the industry. Most of them treated their investments as black box with no real due diligence. Madoff’s Ponzi scheme defrauded about $65 billion from top investment firms and lasted more than 15 years. Economists and financial analysts are not much better; most of them are academic experts, statisticians or quantitative analysts, with little or no real-life business experience. Very few have strong knowledge of the business drivers and qualitative forces that drive investment and operational decisions. Without that knowledge, you cannot accurately determine the performance of assets and markets Q1 / 2011
Investment by imitation is not an investment strategy. So do not invest in an asset just because everyone else is doing so or because the largest investment bank has invested in it. When you decide to buy the advice of anyone, buy it based on the merit of the advice not on who is the source. Those are the ABC of critical thinking and sound decision making. Informed investors can make money in any environment including recessions. More millionaires were made during the Great Depression in the US than any other time, and more millionaires will be made globally because of this crisis than ever before. In my opinion, the markets now are full of undervalued assets that can make you rich; but you have to be very careful of which ones to pick. The adage that knowledge is power is true. In the world of financial markets and investments, knowledge is the ultimate power. Educate yourself before you invest. If you know something that others don’t, you will make a lot of money. Success in the investment world is all about decision-making. Wrong decisions are based on lack of information or misinformation. If you are an investor or a CEO, try not to invest in an asset, a project or a product line, if you are not sure that the information is complete and accurate. Making the right investment decision requires a detailed set of information about macro and microeconomics conditions, markets, sectors, industries, companies, qualitative and quantitative analysis, fundamental and technical analysis, behavioral finance and risk management. Unfortunately, a substantial part of the information available in the media is just noise and the advice of many analysts is based on either incomplete decision-making frameworks or contaminated with biases and misinformation. The ability to distinguish between valid and invalid assumptions, more important vs. less important information, and to control the emotions of fear and greed during the ups and downs of markets are keys to the success of the investor. Because there are many uncontrollable variables, no one can forecast the future with 100% accuracy. However, by refining your investment decision-making framework and processes and by cleaning your information inputs, you can increase your success rate significantly. You only need to be right 70% of the time to be a very successful investor. For more information, please visit medjones.com www.ceoquarterly.com
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Middle East Analysis The Changing Political Landscape Interview Date: February 18, 2011 Q: What is your outlook for the Middle East? The Middle East will continue to go through socioeconomic reforms. The change in some countries will be faster than the others. The unrest has spread from Tunisia to Egypt, Jordan, Libya, Algeria, Bahrain, and Yemen. We also saw rising tensions in Kuwait between the parliament and the Prince and the civic movement by the stateless Arabs. Saudi Arabia’s king is old and the power transition period can be critical. There are deep social tensions in Saudi Arabia; they could be brought up to the surface by the high unemployment rate and widening gaps in wealth and power between the population groups. As for the two main non-Arab countries in the Middle East, Israel and Iran: Israel is under tremendous security, political and economic pressures caused by the loss of Turkey and its main Arab allies, the disillusionment of the Palestinians with the peace process, the increasing tensions with its neighbors, the diminishing power and influence of the US, and the increasing size of its own disenfranchised populations of African and Arab origins. All these factors present formidable challenges to Israeli policy makers. Iran has more than 30 million people living under the poverty line. The problem is exasperated by the enormous pressure imposed by the economic sanctions driven by the US and Israel. We saw the
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mass protests after the last elections and the recent demonstrations inspired by Egypt’s uprising. The region is under a pressure cooker. If cooler heads do not prevail, we could see a conflict that could damage the region and cause a global economic recession, especially if the oil production or transportation are affected. Q: What are the driving forces behind the Middle East unrest? Although the protesters in Egypt and neighboring countries are calling for democratic reforms, in reality they are calling for a better economic life. Democracy is only a means to an end. I believe the driving forces behind the Tunisian and Egyptian uprisings are economical. A chronic high unemployment rate combined with an inflation in food prices is a volatile mix that can lead to major civic outbursts. To understand what is happening and what is going to happen you need to look at inflation as a force of pressure. If the socioeconomic system of a country is open and democratic, the pressure will dissipate through elections and peaceful change of government. On the other hand, if the system is closed, it might be able to contain the pressure for a while, but the pressure will build up with time and at a certain point it will exceed the strength of the system causing it to crack. We saw it in Tunisia and Egypt. In other nations, this pressure release may take other forms such as racial, ethnic, or religious conflicts. Rulers who learn from history and create a
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socioeconomic system that is open will achieve stability and continuity. Those who fight against the socioeconomic laws may win some battles in the short term, but will lose the war.
state with an open socioeconomic system allowing equal access to jobs and economic opportunities to all the segments of its population.
From a global perspective, what is happening today is simply part of the process of moving towards the new world order and part of the shift of power from the West to the East. The Middle East is at the center of that change.
Sustainable prosperity and stability of the nations in the region cannot be realized without re-engineering their state models to more open socioeconomic systems allowing equal access to national resources and opportunities instead of the current closed systems based on tribal, ethnic, or religious quotas.
Q: Do you think the sectarian conflict in Bahrain could spread to neighboring GCC countries?
Q: How will the Middle East unrest affect the global economy?
On the surface, it appears that what is going in Bahrain is sectarian, in reality it is economic. Egypt’s ex-President, Hosni Mubarak, alleged that the unrest was incited by external forces and governments. He missed the real causes of the unrest and now he is out of power. Many analysts are confusing the cause with the effect. The cause is the economic conditions and the distribution of wealth; the effect is sectarian, political, national divisions and unrest.
Most analysts think this is a Middle East problem and the people of the region are demanding democratic reforms. I see it differently; I see it as a global problem requiring global monetary and economic reforms. This wave of unrest did not start with the Middle East and will not end there. The unrest could spread to other regions around the world, although at different pace and in different forms. The spread of the unrest is determined by the rate of the economic decline, unemployment and inflation in each country.
From a psychological point of view, when people go under pressure in life, be it economic or otherwise, they seek support from the people closest to them, usually religious or ethnic groups. They also start blaming other groups who have more control over the national resources. If the gap of power is wide, this will eventually create deep divisions in the society. The divisions can take on new forms of conflict such as class warfare, ethnic, religious, political unrest and at times civil wars. The only effective protection against national divisions is an open socioeconomic system with a large and growing middle class. The same thing happened in Lebanon during the civil war in the 70s. The conflict was between the poor Muslims and the ruling Christians. People on both sides of the conflict used religious or sectarian slogans to amass support to win the fight. On the surface, the Lebanese civil war looked like a conflict between Christians and Muslims. Initially the people in power alleged that the Palestinians are the cause of the civil war in Lebanon, but when the Palestinian forces left the country, the war continued. By the end of the civil war Christians were fighting each other and Muslims were fighting each other. It is a classic struggle for power between different groups and factions of the society. A sustainable civil peace in Lebanon is not possible without creating a secular Q1 / 2011
Just look at what happened in Greece, we saw similar unrest by the citizens against their government. The country would have failed, if it was not for the massive bailout by the European Union (EU). Similar violent protests happened in the UK by students in response to the proposal of the government to increase tuitions. These events are simply the after effect of the global financial crisis and long term wrong economic policies. Q: How could the world leaders mitigate the contagion risks? If the global economic engine is restarted and inflation is controlled, the instability can be limited. If the recovery experiences new setbacks and inflation becomes hyperinflation, many countries could see civil unrest. We could also see more international conflicts. One quick and effective solution to the global economic crisis is a global economic and political reset. A global economic reset means that world leaders can come together to agree on debt forgiveness to all nations and restructuring of the global economy. Friends and enemies alike, no exceptions. To be fair to nations with lesser debts, www.ceoquarterly.com
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they could be compensated on a fair ratio basis to enjoy treasury surpluses. A new international trade and reserve currency will probably be established to create a fair global economic system and to implement the reset. This could usher a new era of global prosperity and socioeconomic exchange. This is a much better alternative than currency wars, international hostilities and continuous risks of global socioeconomic shocks. Without peaceful international relations, there could be no economic stability and prosperity. On the political front, world leaders and UN veto-holding members could reset their foreign policies and stop burdening their economies and their people with international conflicts. The UN international court of justice could be responsible for resolving international conflicts. The implementation of this solution requires a strong global leadership vision and action. Unfortunately the US leadership is limited by many conflicting private interest groups and is buried in domestic politics, ideological conflicts, and security issues. It is also unlikely that the global powers will let go of their power voluntarily and the situation will not get better before it gets worse. Q: The US was hit several times with recessions and inflation, why didn’t we see the similar unrest? In the US we had our share of civil conflicts driven by economic forces. The European immigrants brought slaves from Africa to use them as cheap labor for farming their lands. The color of the skin was only a rationalization for the continuation of the slavery system. All the segregation and discrimination rules against the blacks, at that time, were made to preserve the existing economic system and the interest of its beneficiaries. Although history books attribute the American civil war to states and civil rights, the driving force behind the war was the conflict of economic interests. American rulers learned their lessons early on and created a socioeconomic system that allowed
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a free distribution of wealth and power. Today, we have a black president, we have more people leave their parent’s economic class and become richer regardless of their religious, ethnic or national background. Despite having more diverse people in our society than any other nation, we have more stable national politics. If our elites try to limit the openness of the socioeconomic system, the system will be corrected in any number of forms including civic unrest. When Bush’s administration invaded Iraq and bailed out Wall Street, the people brought in Obama. When Obama bailed out Wall Street again and considered raising the tax on the people, the people brought the Tea Party into power and the ruling party lost control of the Congress. Corrections are made via peaceful elections. When people have hope that their economic conditions can improve by simply working harder, they care less about politics, race and religion. They may not like many things in their society but they are unlikely to get angry to a point of violent uprising or dividing the country. When people feel stuck or when they are poor and do not have much to lose, they are more likely to rise against the people in power, even if they belong to the same ethnic, religious or political group. Q: Is it safe to say that there is no risk to the US national integrity from high unemployment rates and rising inflation? The integrity of states is ruled by the socioeconomic integrity theory. The degree of the stability of any social system is proportional to the degree of its economic growth and vice versa. Stated differently, the risk to national integrity increases proportionally to the country’s economic decline. When the members of a sociopolitical system share the same economic interests and the existing system produces enough economic opportunities to meet the needs of the members, they are likely
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to tolerate existing differences and work together towards shared benefits. On the other hand, when the system fails to produce enough economic opportunities over a long period of time, the members of the system are likely to compete more aggressively for existing resources, causing divisions among the members to grow stronger. The degree of social cohesiveness will diminish and divisions could take different forms such as ethnic, religious and geographic conflicts and at times class warfare or civil wars. If not managed properly, such sociopolitical systems can become dysfunctional. If the dysfunction is left untreated, at a certain point it will take more energy to fix the system than to let it collapse. History teaches us that people from different religions and ethnic groups can be united around one shared economic goal; equality and prosperity for all. We saw that in the rise of the communist USSR. When the economic policies of the USSR failed, ethnic and national divisions took the forefront and the USSR was dissolved. That can happen to the US if we are hit hard enough by hyperinflation and currency collapse. How the divisions evolve and what forms they will take depend on the type and speed of the government’s reaction. It is too early to foresee such events. However, it is important to note that no country is above the socioeconomic laws, US included. Q: What is your economic outlook for Israel? Israel has the same problem as its neighbors, about 20% live under the poverty line, mostly marginalized Israelis of Arabic and African origin. The reason you do not hear about their problems, is because they are focused on an external enemy and they get very generous annual US economic support. However their socioeconomic system is unsustainable, especially with rising tensions with their neighbors
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and the decline of the US power. Like other countries, Israel’s economy was hit by the US financial crisis. Israel has a population of about 7.5 million. The country has limited natural resources and is in constant sate of conflict with its neighbors. Israel’s survival and economy are highly dependent on US support. Israel’s public debt is almost 80% of its GDP. Half of that is external debt owned mostly by the US. Israel is the top recipient of US foreign aid. Even the US economic aid to Egypt and neighboring countries is made to support the peace agreement with Israel. Israel’s supporters in the US Congress and the White House are pushing to increase US foreign aid to Israel, despite US plans to cut domestic spending. In 2010, President Obama’s budget appropriated $3 billion for Israel and gave another $3 billion of loan guarantees. There are more than 600 companies listed on Tel Aviv Stock Exchange and Israel has the most foreign stocks listed in New York. Based on the aforementioned data, it is unlikely that the country can survive without US support and is highly vulnerable to US economic shocks and geopolitical risks. From a long-term standpoint, if you consider the cycle of rise and decline of countries throughout history, Israel reached the height of its power cycle in the late 1990s. They missed two golden windows of opportunity to make peace with the neighbors and hold maximum gains by sacrificing some land for peace. The first opportunity was missed in 1995 with Rabin’s assassination by Jewish extremists. The second opportunity was missed by rejecting the Arab peace initiative in 2002. I see a rise in ethnic and religious fundamentalism in Israel and AntiIsraeli sentiment around the world. Traditionally, Israel used excessive power and fear as a strategy to ensure the security of the state. However, after their failure in 2006 war with Lebanon, it became clear that the barrier of fear has been broken and power gap has been reduced significantly. The dynamics of the conflict is entering a vicious cycle that can cause a lot of damage to the
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countries involved, US included. In the age of global knowledge and socioeconomic exchange, goodwill and trade relations are far important to national prosperity and security than land or military power. Socioeconomic systems that are built on exclusive ideologies, religious or ethnic purities are breeding grounds for extremism and will eventually lead to civil and international conflicts. Those countries must change or fail. If the Israeli elites are betting on the passage of time for the Arab people to get tired of the Palestinian cause, they just need to remember that the Moors occupied Spain for more than 700 years and they eventually were driven out by the Europeans. The only way for Israel to survive in a region surrounded by Arabic and Islamic countries is to make peace and integrate with their neighboring countries. The Israeli-Palestinian conflict is one main source of negative international politics, terrorism and tensions between the US and about two billion Muslims. By solving this conflict, a major part of national security problems, along with the human and economic costs of future wars can be avoided by the Israelis, Americans and Arabs alike. Without peace, Israel is increasingly becoming a financial and psychological burden on its allies and its own population. I foresee more bad news for the Israeli economy, unless they reach a peace agreement with their neighbors. Q: You mentioned that wrong economic policies can cause international conflicts, can you elaborate on your statement? The inflationary pressure forces and socioeconomic laws are also applicable to international relations. The historical crusades against Muslim lands, the colonization of Spain by the Moors and India by the British were all driven by economic interests, despite the advertised reasons that were used to mobilize their armies at the time.
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In my opinion, the invasion of Iraq was not about spreading democracy or weapons of mass destruction, it was about the oil. Iraq has one of the world’s largest proven oil reserves. Oil is a strategic US economic interest, especially with the rise of China and India, and rise of the global demand for energy resources. The division between the Kurds and the Arabs of Iraq is driven by oil. The division of Sudan between the north and the south is driven by the control of natural resources. Throughout history, national and international conflicts can be traced to economic reasons, they can be disguised under different propaganda and may take different forms as conflicts evolve, but these forms are the effect not the cause. Today, there is a lot of tension behind the scene between major powers on global economic and monetary policies. Currency wars could eventually lead to physical wars. International media must look beyond the declared reasons for international conflicts. It is the duty of journalists to explore all angles, so the attention of the people is not monopolized by any single point of view. Q: What is the likelihood of a conflict with Iran? From an economic perspective, a war with Iran could be devastating to the region and the world, causing a severe global recession. If Israel strikes Iran in 2011 or if the war lobby wins the US elections in 2012, the event would be a key catalyst for a global energy crisis followed by US economic depression and currency crisis. If you thought the economic crisis caused by the financial sector was hard on the world, you have not seen anything compared to the inflation pains and socioeconomic challenges caused by rising energy prices. The best way to get rid of the threat of a nuclear Iran is for Israel to make peace with its neighbors. To learn more, please visit medjones.com
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How to Evaluate a CEO? The proper evaluation of the CEO and the executive team is critical to the company’s performance. The evaluation framework of the CEO can be summarized into two major areas; business strategy formulation and execution.
8. How do we plan to achieve those targets? 9. How can we build a sustainable competitive advantage? 10. How can we improve governance, control and reporting functions?
According to a best practices study conducted by the International Institute of Management, the CEO’s key challenge in formulating and executing the business strategy is not in finding answers to the tough questions, the challenge is in asking the right questions. Asking the wrong questions will result in skewed operational or strategic plans.
The top 10 questions every CEO must ask her/ his executive team: 1. Do we have a big growth idea? 2. Do we have the right growth engine (business model, infrastructure, resources and network)? 3. Does our operations management efficiently and effectively support our performance targets? How do we know? 4. Which vendors, partners, clients and employees are delivering the real value? How do we get more out of the rest? 5. What are the key SWOTs in each function, and how do you manage them? 6. How can we build a sustainable competitive advantage in each function (Marketing, R&D, SCM, IT, etc)? 7. What initiatives/programs/projects are needed to execute our strategy? How do we ensure that they are aligned and executed with the right quality, on time and within budget? 8. What are the key performance targets and incentives for each executive (CMO, CFO, COO, CIO, and CHO)? 9. Do we have the appropriate organization in place to meet those targets? (IIM’s 5D strategy framework: budget, tools, products, processes and people)? 10. How can we communicate our plans better to our stakeholders in order to win their support and achieve our goals?
IIM developed a list of the top 100 Board and CEO questions called the IIM100 Test. These questions provide a 360 degree view of the business. IIM100 questions can be used as a self-assessment test, as a planning session tool or as a framework for evaluating potential CEO/CXO candidates for succession planning. In this article, IIM shares the top 10 questions that every board must ask its CEO and the top 10 questions that every CEO must ask his/her executive team. The top 10 questions every board must ask its CEO: 1. Are we in the right business and markets? What are the growth areas to invest in and declining areas to divest? 2. What are the economic and market research data that support our strategy? 3. What are our strengths, weaknesses, opportunities and threats (SWOTs)? 4. What are we doing to address each one of the SWOTs? 5. What are our core competencies? How we can leverage them? 6. What are the key strategic and operational risks? How do we manage them? 7. What are our key performance targets?
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If the executive team is not able to answer all of the preceding questions, then the leadership team suffers from management blind spots or a potential weakness. To learn more, please visit: www.iim-edu.org Q1 / 2011
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CEO School Lessons from the Most Respected CEOs Selecting the right executive is probably the single most important decision any company can make. While most companies have a formal list of CEO’s selection criteria, they often misplace the weight of each criterion when evaluating individual candidates. Typically, companies engage an executive search firm and rely on it to find the right person. Many times this does not result in the success that the company anticipates. Most executive search firms will send only what they consider “safe” candidates for the company to accept. Usually, the focus is placed on criteria such as cultural fit, years of industry experience and education. While these are helpful indicators of the candidate’s abilities, our research findings has taught us that many of the criteria used to qualify the candidates are less important than what the company or the recruiters think. Top CEOs come from many diverse personal, educational and professional backgrounds. After researching more than 1,000 CEOs of global companies, and looking at their educational and professional backgrounds, we came to the conclusion that selecting a successful CEO boils down to three criteria; the candidate’s decision-making abilities, leadership skills, and personality strengths. All other factors are less important and in some cases proven irrelevant, as demonstrated by the list. The CEO’s Critical Success Factors A strong multi-dimensional decision-making ability is critical to enable the CEO to navigate the continuously changing internal and external forces in a complex and uncertain competitive environment. The CEO constantly evaluates and chooses between alternative strategic and tactical courses of actions, while considering the decision constraints and potential risks. Our decade-long research is full of examples of CEOs who were brought from outside the company, outside the industry, and sometimes even outside the country. Their results were far superior to their predecessors, who had
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all the relevant business, operational and cultural information. Leadership ability is critical to the execution of the strategy. The CEO must be able to balance and influence the complex organizational relationships and sometimes conflicting stakeholders’ interests. Relationship management with the board, government, public, clients, employees and their power centers is a key difference between a successful and unsuccessful implementation of the business strategy. None of the researched CEOs could have succeeded or scaled their growth to a global level without acquiring and aligning the strong support of their professional networks, business partners and executive teams. Almost all CEOs attribute their success to hiring, developing or motivating top talents. Our research has examples of some of the most brilliant CEOs who failed due to their lack of relationship management skills or due to a strong opposing political environment. Personality strengths such as ambition, drive, resilience, and the ability of the executive candidate to manage extremely heavy workloads and stress are critical for the CEO success. Leading a business organization is a highly competitive and demanding race. The scope of work, scale of responsibility, information overload, and number of demanding relationships can be overwhelming. Most CEOs perform well during good business conditions. Few can do well in stressful times. Even less are able to shine during a crisis. The research of the “Most Respected CEOs” has taught us new and important lessons. The following is a partial list of the research findings that challenged the many common misconceptions about the ideal CEO’s personal and professional profiles. 1. Culture or social background does not matter as much as most companies think. Carlos Ghosn, CEO of Nissan Motor, and one of the most Q1 / 2011
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successful CEOs of all time, proved that you do not need to know the culture or speak the language to run one of the largest companies in the world. Possessing the right leadership skills can turn around a foreign company with a foreign culture in a foreign country. It is worth noting that when Ghosn took the CEO position at Nissan he did not even speak Japanese. The profile of David Blair, CEO of Catalyst Health Inc taught us that age and years of experience do not matter as much as most companies think. David is one of several examples of young CEOs who led their companies to very high growth levels. Catalyst is one of the fastest growing companies with 1,000 employees producing more than 3 billion dollars in revenues. Paul Diaz, CEO of Kindred Healthcare Inc, Robert Dutkowsky the CEO of Tech Data, and several others taught us that the CEO’s academic education does not matter as much as the recruiters think. On the other hand, the CEO’s professional training and experiential development is critical to the success of the CEO and the company. Contrary to popular views, most successful CEOs did not graduate from Ivy League universities; many of them do not have MBA degrees. Some of the most successful CEOs have law, technical, physics, or HR education. Christopher Connor, CEO of The SherwinWilliams Company, and John Wren, CEO of Omnicom, taught us that hiring top talent is the ultimate competitive advantage. John Stumpf, CEO of Wells Fargo & Company, taught us that a CEO who admits mistakes and does not sugarcoat or omit bad news is a CEO to trust. Joseph Saunders, CEO of Visa Inc., taught us that advocacy and lobbying are critical to the success of the company in a changing regulatory environment. Robert Dutkowsky, CEO of Tech Data Corporation, taught us that having good mentors at work is critical to the performance of the executive and the company. The success of David Simon, CEO of Simon Property Group, is attributed to his ability to identify and negotiate M&A opportunities as a growth strategy. Eric Schmidt, CEO of Google Inc, taught us that every day brings new challenges. The CEO’s job is to keep things focused.
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10. We believe the success of Tony F. Earley, CEO of DTE Energy, is attributed in a substantial part to his professional and government network. 11. Jeffrey Joerres, CEO of Manpower Inc, taught us that it is critical for the CEO to get out of his office and meet people face to face. The CEO must stay connected with his people so that they know where the challenges lie within the organization. 12. The lesson we learned from Matt Rubel, CEO of Collective Brands, Inc., is that the business strategy, regardless of the economic climate, is to remain focused on the consumers. They hold the key to any retailer or brand success. 13. Michael Dan, CEO of Brinks Inc, taught us that the three top skills needed for a CEO are focus, communication skills, and stress management. 14. The success of Timothy Manganello, CEO of BorgWarner Inc, is based on his strategy to seek technology as a competitive advantage and his ability to think and act in a global framework. This enabled him to diversify the company’s portfolio of investors, products and markets which was the key to overcome the worst U.S. economic crisis to hit the auto industry. 15. Mike Morris, CEO of American Electric Power (AEP), taught us that motivation and encouragement is the best way to get things done through your people. 16. The most important lesson any executive can learn from Steve Jobs, CEO of Apple Inc., is that innovation leadership is the best value creation strategy. He also taught us that the most successful CEO is not the one who makes fewer mistakes, but the one who quickly learns from them and moves on. 17. Muhammad Yunus, CEO of Grameen Bank, taught us that the greatest challenge of the CEO is to change the mindset of the stakeholders, because mindsets play strange tricks on people. About CEO School CEO School is a partnership project with the International Institute of Management. IIM is a management best practices research and education institute. IIM provides CEO and executive support services, strategic planning retreats and custom corporate training courses for the Global Fortune 1000 companies and governments. To learn more, please visit www.iim-edu.org www.ceoquarterly.com
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