Central Bank Follies - QE, Negative Interest Rates and Regulatory Capital

This post is long.  It is a compilation of posts on each topic. I'll get to the bottom line up front.

• Quantitative Easing (QE) keeps banks liquid, but does little else for the broad economy. If anything, it incentivises banks to buy government bonds (and soon to be high grade corporates) rather than focus on core lending activity.  

• Sub-normal and now negative interest rates distort asset prices.  Investors are crowded out of low-risk assets and crowded in to higher risk assets, all the while reducing their reward / risk ratio.

• Faced with compressed interest rate spreads banks resort to broad based fees. This is a regressive tax on people and businesses who can least afford it and have little or no alternative.

• Continual rounds of QE and interest rate cuts undermine the economy by transmitting negativity and pessimism.  If people and businesses are continually afraid of the next looming financial crises they are more likely to reduce spending and reduce investment.

• Increased drive on the part of central banks to raise banking capital adequacy ratios reduces the overall capital available for banks to lend encourages banks to lend to an increasingly narrow segment of businesses and consumers, ironically, those who need credit least.

• Risk weighting capital toward collateralised and secured loans forces banks to focus on the credit backstop rather than credit fundamental. Any smart lender should put the ability and willingness of a borrower to pay ahead of the collateral the lender offers.  Collateral is merely a backstop and when projects fail, the collateral is often a poor backstop at best.

• Reduction in risk taking by banks must be accompanied by support and encouragement for the emergence of alternative lenders - i.e. the P2P lending industry ( sorry if that's a self-interested view, but even if I weren't a P2P lender and if I didn't run a P2P lending fund I'd still feel the same....really!).

Now for the Meat and Potatoes

I'm not a macro economist by training, so take what I say here with a grain of salt.  Still, you don't have to be a rocket scientist to realise that something is wrong in Frankfurt, Washington, Tokyo and London.
They say the road to hell is paved with good intentions.  Central bankers in fact have good intentions.  They see themselves as the guardians of the stability and security of our financial system and in this respect they are not far from the truth.

Mark Carney, governor of the Bank of England, recently remarked that monetary policy has certain limitations.  Central banks can help economies cope with economic shocks that disrupt the financial system.  By adopting sound monetary policies Central Banks create the foundation that underpins money as a medium of exchange.

So why is it that central bankers around the world seem to be continuously inventing new tools and techniques to jump start the world's economies?  Is it possible that we've reached the point where the doctors are over-medicating the patient?

Is it not possible that in their rush to help central banks are now doing more harm than good?  Have we reached the point where monetary policy is producing absurd and perverse outcomes?

It's harder to be the player than the fan, but the more I look at the direction central bank policy around the world has taken, the more I fear the policy ship has gone dangerously off course.

The trends I find most worrying are zero and sub-zero interest rates, the constant effort to push liquidity into the financial markets and the obsession with bank capital requirements.  Let's take them one at a time.

The Obsession with Bank Capital

We are nearly a decade after the onset of the sub-prime mortgage sector that is commonly looked upon as the trigger for one of the world's greatest banking crises since the Great Depression of the 1930s.

Policy makers around the world had little choice but to bailout the banking system. The bailouts meant firstly that banks received infusions of fresh capital. Secondly the inherent riskiness of banking generally was subjected to intense scrutiny.  The conclusion of policy makers was that banks should be significantly deleveraged.  Third, the overall riskiness of bank lending came into question and the inescapable answer was that banks should redefine the way they look at risk so that going forward they make less risky loans.

Of course, with more capital and less leverage banks are much more resilient in the face of loan losses.  But at the same time the emphasis on reducing the perceived riskiness of bank lending actually undermines efforts to reignite global economic growth.

The relentless focus on bank capital has has changed the character of bank lending and in ways detrimental to the global economic recovery.  Risk weighted capital requirements set out by regulators force banks to emphasise relatively low interest rate secured loans in their product mix at the expense of higher interest rate unsecured loans.  Also what's changed is loan to value rates.  Regulations and capital requirements have reduced the amount of bank lending available on a project by project basis.

In principle there is nothing wrong with a lender preferring to make one type of loan over another.  But systematically, in their rush to improve the stated financial condition of the banking sector central banks have given banks incentives to turn a blind eye to credit worthy projects and left wide swatches of the economy underfunded and underleveraged. Ironically, the losers are companies that operate in some of the world's fastest growing and most profitable sectors. Let's look at some examples before we move on.

The software, retail, engineering and design sectors share one thing in common.  Mostly they are asset poor and hence collateral poor.  They require capital to fund inventory and labor for a period until they receive full value for the goods and services they sell.  The faster the sales growth, the more capital they need.  When sales turn down the cycle works in reverse.  They reduce inventory and labor purchases so working capital needs decline and for a period of time they become highly cash generative.  They may be strong companies, well run, highly cash generative.  Yet systematically their access to bank capital is constrained.  The result is that many companies are less profitable than they could be and many banks leave profitable lending opportunities on the table.

Many SME's fall into the same credit trap.  SME's are the back bone of the global economy.  SME's are owned by small groups of private shareholders, often families.  They live from their businesses, so they draw income, leaving little in the way of retained earnings.  We can see many examples of highly credit worthy, cash generating businesses whose access to bank lending is constrained only because bank lending models focus on balance sheet metrics rather than cash generation.  The result again is that many SME's are capital constrained and underfunded and banks leave profit opportunities on the table.

Ironically, many SME's fail not because they have bad businesses, but because they don't have the working capital to meet demands of growth nor the working capital to whether cyclical fluctuations.  But for access to more credit when they most need it, otherwise good businesses with good prospects are forced to shutter their doors.  Who suffers?  Their trade creditors, many of whom may depend on bank financing and their owners, many of whom are the retail mortgage customers banks so happily accept.

So when business turns down the so-called safe mortgage backed loans central bankers seem to relish turn unexpectedly bad. The banking sector can whether the storm, perhaps.  But the real economy, where real people put real bread on their tables each day, is far from secure.

I'll leave the topic of bank capital and and secured lending with one more thought.  Collateral and credit quality don't go hand in hand.  We can find many examples of asset rich companies whose cash flows dry up either because business turned down or the project just didn't work out.  When this happens banks are stuck with assets that are not working, not productive and worth not nearly as much as they would be otherwise.

The Myth of Quantitative Easing

The purpose of quantitative easing is to enable the financial sector to withstand the impact of economic downturn by ensuring banks have ample liquidity to service their creditors.  Let's not forget that banks are creditors far more than equity holders.  They live and die from their ability to borrow money.

Quantitative easing means the Central Banks put cheap money into the hands of banks.  In exchange they pledge or give securities to the Central Banks, depending on whether the Central Bank is buying the security outright or just lending money to the banks.

It's not practical for banks to transfer loans made to borrowers to the Central Bank, so banks instead give government bonds, and now corporate bonds to the Central Bank.  Really all that is happening is a transfer of the balance sheet from the banking sector to the Central Bank.

Banks might make more loans with all the cash they get from the Central Bank except for the fact the Central Bank demands banks have more capital and demands banks put constraints on the types of loans they make.  I've yet to see hard evidence that quantitative easing translates into real growth in bank lending.
Much of the benefit from quantitative easing in terms of liquidity to lend is offset by the loss of lending capital brought about by the relentless drive to shore up bank capital bases and shift risk weighted capital toward collateral based lending.

There's another distortion brought about by quantitative easing in the form of the impact on bank profitability.  Banks used to make money by borrowing from depositors and lending out to borrowers.  Banks made money obviously by making good loans first and foremost.  Second, when loans turned sour, banks protected their investment by actually helping their borrowers through a difficult time if that was what was called for.  Regulation around non-performing loans and the implication off non-performing loans on bank balance sheets has changed this dynamic.  Banks are far less willing and far less able to restructure loans, either proactively or reactively.

So how do banks make money now?  First, they make only the so-called safe, collateralised, low risk loans.  Interest spread compression drives a big hole through bank profitability, especially when banks are blessed with all the brick and mortar and legacy infrastructure.

Faced with the double whammy of interest spread compression and overall loan volume banks charge depositors and borrowers higher fixed fees.  Depositors bear an increasingly big fee burden for the fact they have no choice but to keep their money in the banking system.  They pay transaction fees, account fees, overdraft fees, and any other fee banks can dream up.  Inevitably the people that are burdened with those fees are the people who can least afford to pay those fees.  Bigger customers get fee discounts.  Bigger customers don't go overdrawn. Bigger customers transact larger amounts of money so fees are minimal in comparison to their transaction size.

The second way banks make money is by investing in assets they can readily sell to the Central Banks.  Many of the losses from the Greek debt crisis were avoided within the banking sector because the Central Bank and the European Investment Fund became the last resort buyer of all that Greek debt.  The ECB balance sheet is awash with Italian, Spanish, Portugese debt and French debt.  This is not because Italy, Spain, Portugal and France are bad countries, but rather because it just so happens their is more of their debt available for the ECB to buy than say Czech or Slovak or even German debt.

Without challenging their skills and knowledge as a central banker, is it not ironic the most recent ECB presidents were from Italy and France, two of the European countries with the highest amount of government debt outstanding relative to GDP?

Whether it's Washington, Tokyo, London or Frankfurt the story is the same.  The banking sector's profitability is inexctricably tied to its ability to buy government bonds and sell them or pledge them to the central bank.

We are coming to the end of this rope.  Interest rates on most government debt in Europe is near zero or sub-zero.  Think about that!  It cost an investor money to loan buy government debt.  The ECB is losing money every time it buys another Bund.  Who is on the other side of that transaction?  The man in the street?  The average ordinary citizen?  A hedge fund?

Look again.  The other side of that transaction is filled with banks that survived because they were too big to fail so the taxpayers bailed them out.  The other side of that transaction is filled with banks under marching orders to build or rebuild their equity bases.  The other side of that transaction is filled with banks that make more and more money charging fees rather than making as many loans to as many good borrowers as they can find, collateral or no collateral.

So where do we go next?  Many central banks are running out of government debt to buy.  So now they start with corporate debt.  Of course, the corporate debt they buy will be only investment grade rated, at least for now.  This is nothing short of a transfer of wealth from the high yield borrowers to the investment grade borrowers.  Again, another swath of the economy is left wanting while banks service an increasingly narrow segment of the economy.

What's really worrisome is that when economies turn down investment grade debt often becomes high yield or junk debt.  Corporates have gone bankrupt simply because rating changes collapsed their capital structures.  Enron was investment grade debt until....Lehman was A rated until...AIG was A rated until....And yet, central bankers around that world have brought us to the point where all this A rated paper will find its way to the central bank balance sheet and long before the wheels come off.

The inescapable conclusion here is that QE does far less for the economy than central bankers tell us it will do.  Furthermore, QE is fundamentally distorting risk and capital market pricing.

Negative Interest Rates - The Ultimate Perversion

We've reached the realm of absurdity.  Negative interest rates means savers get penalised and borrowers get paid.  Yet that is what is happening.  Bank fees are a form of negative interest rates  Banks charge their depositors for opening and maintaining bank accounts.  Who pays this tax?  The smallest savers of course!  The people who can least afford this cost.  Yet this is where the world has come to.

When I was growing up many many moons ago interest rates were double digits and banks faced regulations capping the interest rate they could pay for deposits.  Banks were tripping over themselves to get depositors.  Practically every month my parents got a toaster or a clock, a microwave oven or any other kind of appliance simply because they took a maturing certificate of deposit and moved it from one bank to another.  If you walked into a bank to open a deposit you were greeted as if you'd just gave life to the dead.
Today?  You open an account and the first thing you are presented with is all of the money you will pay to the bank who is borrowing your money so that it can buy government bonds that yield next to nothing and place them with the central bank.

The ECB was the first Central Bank to setup this distortion.  Tokyo followed suit.  London and Washington wonder if they are next and say they hope not.  Yet if things keep going the way they are going, we will see negative rates in the US and the UK.

The second distortion created by sub-normal and negative rates is the price of risk.  Faced with essentially a worthless risk-free asset class investors extend inevitably into more riskier instruments than they might otherwise.  As the hunt for yield feeds on itself yield curves compress.  Investors move further out into commodities and equities and the relationship between volatility, return and yield unravels.  Projects that might otherwise offer high returns that reflect their genuine risk offer returns that hide the true inherent riskiness.  This leads to sub-par investment returns in the medium term and is effectively a tax on the economy.

What of the equity markets?  They continue to hit all time highs.  But this too is an illusion at best.  Asset prices are driven by money supply.  In a world of quantitative easing and sub-normal central risk, money supply increases, forcing asset prices higher.  When interest rates start their inevitable march to higher level inflated asset prices will of course collapse.

The Conundrum of Low Inflation

Central banks point to low inflation and low GDP growth and say that as a consequence monetary policy will remain relatively loose.   The argument they put forth is that by lowering interest rates they will encourage businesses to borrow and generate savings for existing borrowers.

The benefit of interest saved, they argue, will be plowed back into the economy in the form of either further investment or consumption.

What central bankers seem to forget is that borrowing for business and consumer mortgage is more like a step function than a question of 0.25%.  The base rate can be zero or 1 or 2 or even 5 and so long as there are profitable projects, business will borrow.  Of course there comes a point where the marginal increase in borrowing rates results in a sharp fall-off in borrowing.  Call that the elasticity of demand for borrowing.
The second issue central bankers don't often recognise is the impact of their actions on consumer and business confidence in the economy.  We are trained to think that hikes in interest rates occur because the economy is strong and perhaps at risk of overheating, and declines in interest rates occur because the economy is getting worse.

The paradox is that the more central bankers lower rates, the more they transmit pessimism and distorted asset prices into the economy. Central bankers - if you are listening - here is the message:

• Business want to borrow and often pay in excess of 10% even when base rates are zero!

• The lower rates go, the more pessimism there is in the economy, the more frightened business become, the more risk averse banks become.

• Low interest rates compress bank earnings and force them to charge higher fees, which is a regressive tax on consumers and businesses.

• The small extra savings consumers and businesses make when rates go down doesn't get pumped back into spending and investment, especially when the savings occur amid bearish economy outlook and the negative signal of a rate cut.

• The appetite of consumers and businesses to spend and invest at any given moment or any given short interval in time is finite. It is, in fact, a step function driven by the lifespan of the acquired asset and purchasing power. The interest cost, if any, attached to the purchase is marginal.

The Take Aways

Years from now economists will look back and marvel at the tendency of central bankers to over-medicate in the wake of the financial crises that began in 2008.  In fact, they will blame central bank policy for delaying the recovery.  Why?

• The obsession with bank capital requirements has reduced the overall level of capital available for lending.

• The obsession with bank capital requirements and the concept of risk weighting loans skews bank lending to a narrow segment of businesses and consumers.

• The window of opportunity is to expand capital availability by encouraging the development of alternative P2P lenders.  Governments around the world should be doing everything they can to encourage and foster the development of P2P lending as an asset class.  Britain does this successfully, and this is one reason why the British economy was doing relatively well prior to the idiocy of Brexit.

• Quantitative easing furthers distortions in asset prices.  Natural investor for safe, long term, fixed rate assets are crowded out of safe assets and crowded into risky assets by  the ever expanding balance sheet of the central bank.  When that bubble burst, the results will be ugly.

• Quantitative easing It doesn't necessarily increase the appetite of banks to lend.  In fact, it gives the banks overweighted incentive to invest in only those assets they can sell or pledge to the central bank.

• Interest rate cuts have only marginal impact on real economic activity.  In fact, each successive encourages businesses and consumers to delay purchase decisions, either out of fear that things will get or worse or out of the expectation that interest rates will fall further.

• Interest rate cuts encourage lenders to look for floating rate rather than fixed rate loans.  The lack of supply of long term fixed rate loans means when interest rates begin to rise wealth is transferred from borrower to lender or in the case of banks - from borrower to equity holder of a large borrower.

• If central banks want to encourage economic growth then they need to lead a return to normalcy with a signal of confidence.  They need to start raising interest rates.  This will start a virtuous cycle of increasing bank profitability  and give savers more incentive and more confidence to invest.

• An environment of rising rates will encourage businesses to invest.  First they will be encouraged by the optimism and confidence of the central bank.  Second, amid expectations that rates will continue rising they will want to capture the benefit of low interest rates.  Finally, rising interest rates will feed into rising output prices, which will in turn generate increased profitability and therefore higher government tax revenues.  Rising output prices and risking profitability will encourage hiring and raise labor prices, which obviously will help consumers.

• Rising interest rates will reduce the banks' incentive to rely on fee income and therefore remove essentially a regressive tax.

Bottom line:  For years central banks have been over-medicating.  Improved bank capital adequacy must be accompanied by the robust development of alternative lending solutions that are not constrained by need for collateral but focus instead on fundamental credit worthiness - willingness and ability to pay.  The trend toward lower interest rates clearly is unsustainable. Quantitative easing is creating asset bubbles and further exacerbating distortion of bank incentive to make real loans rather than buy securities. The longer this goes on, the harder it will be for all of us.
 
Michael Sonenshine is CEO of Symfonie Capital.  He runs the Symfonie Angel Fund,  the Symfonie P2P Lending Fund and the SymCredit P2P lending platform.  For more info contact msonenshine@symfoniecapital.com.

Trump's Nomination is Not a Done Deal

I'm not a political pundit.  I'm an investment manager.  Don't take what I say here as anything more than one man's view. As always, I welcome comments and criticism.

Let's get a few things straight.  First, I'm not a supporter of Donald Trump.  Second, I'm still eating a piece of humble pie after my post earlier this year when I said I didn't think he would win the nomination.  Third, I continue to believe that even if he really gets the nomination, he won't win the general election.

Let's leave the general election to one side.  There is about a six week window between now and the Republican convention.  A lot can happen now and then. Even so, I'll stick my neck out a bit further and say here that much can go wrong for Mr. Trump when delegates assemble in late July.  Here's what to look for.

A Chorus of Un-Endorsements
Senator Mark Kirk, a Republican from Illinois, was one of the first, if not the first, to step forward and say that after reconsidering his view, he's come to the conclusion that Mr. Trump is unfit to be President.  Take that in context, however.  Mr. Kirk is from a state that tends to vote for Democrats.  He holds the Senate seat that was vacated by Barrack Obama.

Still, Mr. Kirk is not alone.  More than a dozen Senate Republican's have been critical of Mr. Trump especially after last week.  Mr. Trump came under heavy fire after criticising a Federal Court judge on the basis of the judge's Mexican heritage.

While we're on the subject of judges, let's get one thing straight.  Judges don't just make up rules arbitrarily.  They don't run cases on whim or by the seat of their pants.  Being a judge is serious business.  I know this because I come from a family of lawyers and because the course of an international career has introduced me to legal systems not only the US but in several European countries.

In any functioning democratic system Judges are guided by a set of clearly written rules and legal precedents. Judges write lengthy comments that cite the legal reasoning behind their opinions.  Potentially any ruling they make can be questioned an appealed in a higher court.  Mr. Trump's comment about the judge serves only to show how little respect Mr. Trump has for the judicial system and the intellect and professional quality it takes to become a judge, especially a federal court judge.  That alone makes me wonder how good a job Mr. Trump will do when it comes to interviewing and selecting future Federal Court judges.

Senator Kirk is hardly alone in retreating from his pledge to support Mr. Trump if he eventually wins the nomination.  In the wake of Mr. Trump's criticism of the judge, Republican Senator Lindsey Graham of South Carolina said "This is the most un-American thing from a politician since Joe McCarthy. If anybody was looking for an off-ramp, this is probably it. There’ll come a time when the love of country will trump hatred of Hillary.”

Politicians Running for Cover

In presidential elections the "coat-tail" effect is often talked about.  The coat-tail refers to the tendency of voters to vote for an entire slate of candidates, including the presidential candidate and all those in the same party.  When a candidate has long coat tails the slate of candidates tends to do well.

Judging by the number of Republicans either speaking out against Mr. Trump or distancing themselves from him there is evidently a strong feeling among Republican that Mr. Trump will have difficulty at the ballot box.  Particularly those Republicans who are at risk of losing in the general election want to avoid the possibility that Mr. Trump will be a liability rather than an asset.

The Labyrinth of Convention Rules

A few days before the Republican convention starts 112 delegates will gather to determine the final rules for how the convention will operate.  Literally, they set the rules of the game.   The rules must then be approved by the full convention before the nominating process can begin.

Donald Trump's first problem actually began long before he even declared himself a candidate.  The delegates to the convention are largely composed of party leaders, many of whom worked tirelessly for other candidates.  These delegates are bound to support Mr. Trump on the first round of balloting, but they aren't bound to select a package of rules that will not allow at least a challenge to the first round of balloting.

Mr. Trump's second problem began when he started winning primaries with his populist rhetoric and divisive language he created plenty of enemies within his own party.  He may have won the popular votes, but he is far from popular within the party. Many senior and influential Republicans have said they would not attend the convention.  That might be their publicly stated stance, but that doesn't mean these people won't be working behind to scenes to set the stage for a convention that does not finally approve Mr. Trump's nomination.

So Where Do We Go From Here?

The next few weeks will be critical for Mr. Trump.  The party can be as much his friend as it can be his undoing.  Mr. Trump needs to mend fences and adopt a tone and protocol that demonstrates he will not be a liability in the general election.  In short, he needs to lose his ego. He needs to usher in an era of good will, make policy concessions and adopt a tone and style that convinces the political establishment he can be counted on and that he won't jeopardise their interests and their candidacies in other elections.

Mr. Trump should think seriously about having not just a slice of humble pie, but a meal full of humble pie. If, in the coming weeks, if Mr. Trump rebrands, himself, ingratiates himself, takes on a more politically acceptable tone, and makes a bridges a serious set of policy differences he has a good chance of sailing through even choppy waters at the convention.

If not, he will most certainly face a serious challenge at the convention.  Even if he manages to overcome that challenge, the damage done would probably ruin his chance to win the general election.  The Republican party line will read something like "Vote Republican even if you don't vote for Trump."

For those of you who want to read more, here's a selection of articles I found interesting.

http://www.msnbc.com/msnbc/some-republicans-discuss-anti-trump-convention-coup
 
http://www.vox.com/2016/3/24/11295380/republican-convention-rules-trump-delegates

http://www.usnews.com/opinion/articles/2016-05-09/republicans-opposed-to-trump-should-skip-the-gop-convention-in-cleveland
 
http://www.nytimes.com/2016/03/20/us/politics/donald-trump-republican-party.html?_r=0
 
http://www.politicususa.com/2016/06/07/one-republicans-slowly-lining-opposition-donald-trump.html
http://www.wnd.com/2016/05/see-list-of-98-top-republicans-who-refuse-to-back-trump/
 
http://www.theguardian.com/us-news/2016/may/08/republican-party-unity-donald-trump-paul-ryan
 
Questions?  Comments?  Write to me at msonenshine@symfoniecapital.com

Why Donald Trump Will Not Be the Next US President

If you like maps, stick with me!  The maps in this post tell nearly the whole story.


Donald Trump continues to make headlines as the Republic front runner for the nomination.  It's still early days, however and headlines don't say much about the real picture.  So let's look at the detail.

About 35% of the delegate count has been awarded.  Mr. Trump has not won a majority in any state so far.  Therefore the delegates are being awarded proportionally.

Mr. Trump has won 331 delegates as at 4 March. Marco Rubio and Ted Cruz combined have 348 delegates (231 and 116 respectively).  Another 38 have gone to Ohio Governor John Kasich (27),  and Dr. Ben Carson (8) and former Florida Governor Jeb Bush (3).

So the headlines call Mr. Trump the front runner.  But the detail is that he has less than the najority.  Mr. Trump is far from the winning the nomination by that count.  Moreover, a tide of opposition to him from within the Republican party is rising.

If things continue to unfold like this, the winner will be determined in August at the convention.  With more than half the delegates pledged to other candidates and the anti-Trump lobby building, Mr. Trump is not likely to get the nomination.

The second reason Mr. Trump won't be the next president is that even if he captured the Republican nomination he still has to contend with Hillary Clinton or Bernie Sanders and political realities underlying the electoral map of the US.

For those of you unfamiliar with the US election system it's worth noting that the US President is not elected simply by majority across the country.  We have an electoral college system in which each state has a certain number of votes, based on population.  In theory a candidate can win with a minority of the general population, but a majority in enough of the large states.

The electoral pattern in the US is that there are a core of Western and Mid-Western states that practically always vote Republican.  There is also core of Eastern  and Western States that have been Democratic strongholds in the recent years.  Then there are a few swing states.  Each of these is small on its own. Collectively they add up to about 20% of the electoral vote.

The plain truth is that in the absence of widespread dissatisfaction with the current state of affairs, the electorate generally prefers to stay the course.  The rider may change but the horse is the same.
That's pretty much the case in the US today.  If anything the overall economy is improved from where we were in 2012. The US dollar buys far more across the globe than it did a few years ago.  More people have jobs today than in 2012. Socially we've seen a general relaxation of attitudes on issues.  All of this favors Democratic candidates.

Since 1936 in the general election many of the largest states have voted Democrat, except for years where there was widespread dissatisfaction with the status quo.  President Eisenhower a Republican, won the 1952 and 1958 elections in nearly every state.

In 1960 young John F. Kennedy narrowly won the election by swinging a few of the the larger states to his side, including Texas, Pennsylvania and New York (together these 3 states are 25% of the electoral college)  Much of the country was behind Richard Nixon at the time.

In 1964 Lyndon Johnson, building on the legacy an President Kennedy won practically every state across the country. Note however, that Johnson lost 4 States in the South that had gone to Kennedy in 1960.

In 1968, with widespread social discontent and a deeply unpopular Vietnam war Richard Nixon swept the nation with a landslide election.  The solidly Republican states swung back to Nixon.

It was no surprise, however, after his presidency ended in shame and scandal that Jimmy Carter was elected in 1976.  His victory came in a way similar to that of Kennedy, with about 15 states swinging out of Republican hands.  Those states were mainly in the South  (Mr. Carter was governor of Georgia) and the industrial Mid-West.

The Republicans regained control in 1980 and held the White House with solid support across the entire country until 1992.  The discontent was so great after the Carter years that even the bulwark Democratic states of the upper North-East swung into Republican hands. In the 1984 general election Democratic nominee Walter Mondale won only his home state of Minnesota.  The Democratic victory in 1964 paled in comparison to the Republic victory 20 years later.

This was the situation until 1992, when President Bill Clinton swung several of the large states back into the Democratic camp.  He even won in California and some Mid-Western States which had historically voted Republican. Part of this result can be credited to the migration of many people from the east coast to California.  By 1992 California had grown to 54 electoral votes from just 32 in 1960. Importantly, Bill Clinton, former Governor of Arkansas, carried some of the key swing states in the South and the mid-West.

The White House changed hands in 2000, when the younger George Bush beat Massachusetts Governor Michael Dukakis. That election was hardly decisive.  Simply a handful of states swung back into the Republic court.  The Democrats carried the bulk of the North-East, the upper Mid-West industrial belt and California.  What changed were the South and South-Eastern states that President Clinton had in his camp.

So what does the landscape look like now?  Well, firstly, the 2012 elections came out pretty much the same as the 2008 election. President Obama lost only the state of North Carolina. This pattern is typical for an incumbent president, providing that president hasn't done anything to alienate the population and provided the over economic and social situation has not changed dramatically.

It's hard to imagine that were Mr. Trump the Republican nominee he would win over the states that in the most recent elections supported Mr. Obama and the Democrats.

Judging by the evidence thus far much of the Republican party overwhelmingly prefers other candidates.  If Mr. Trump managed to gain enough supporters going into the convention, his majority would be at best slim.  Many Republicans who dislike Mr. Trump and hold relatively moderate views would be likely to select the Democratic candidate, providing that candidate's platform and policies were also centrist. This works well for Hillary Clinton, who has a strong base of support in southern states.

So my guess is that Mr. Trump will not make it as far as the Republican nomination to begin with, which is one of the reasons why I ignore almost anything he says.

Just for the record, I'm a registered Democrat, though I don't always vote along party lines.  If Mr. Trump were the Republican nominee I would most certainly not vote for him and if I were a Republican I would not be among those voting for him.

I hold no ill will toward Mr. Trump.  He's made himself a brilliant career in the real estate business. He is clearly savy  and smart. He understands well how to use the media to his advantage.  He's funded his campaign from his own pocket, which, of course, is his democratic right and something to be respected.

It's a good thing that this large, colorful figure has come into the fray.  He's made people start seriously thinking about who should be the next president and why.  But at the end of the day, I think he won't win the election.  Frankly speaking, I find that a rather comforting thought.

Note - the maps above were selected from http://www.270towin.com/historical-presidential-elections/.  Thank goodness for the internet!  You can find practically anything for the asking.

One Small Step for Every Working Parent in 2016

Around this time of the year lots of people write about New Year's resolutions.  I also notice a heavy dose of investment blogs about what to do in the coming year.

I'm not a parent, so take what I say here with a grain of salt and accept my apologies if I am speaking out of line.  On other hand, take what I say here and generalise it.  Cross out children and insert wife, husband, partner, dog or goldfish and the same point comes across.
Take some time in the January quiet days and think about how you can arrange your schedule so that you can make the space that you want to make for your family, but especially the children. 

Taking stock is a natural and important thing to do in this life.  How can you possibly go where you want to go if you don't first answer two questions - where do you want to go and what is the plan for getting there.

Steven Covey, author of 7 Habits of Highly Effective People, put this concept across very well.  He compared planning for the future to building a garden shed or a house.  A well constructed building must start with a blue print or a drawing that serves as a reference point or road map.

In life you often get what you pay for.  If you walk out into the back yard with a hammer and nails and start putting pieces of wood together ad-hoc, more than likely you'll wind up and a shed that looks ad-hoc. If, on the other hand, you start with a basic concept and create some plan, chances are you'll think a little more about intended use, form, and features and you'll buy the right amount of wood and the right number of screws (I recommend screws when working with wood, not nails) and you'll have a well proportioned, well built shed.

Life is not so straight forward as Steven seems to say, but his points are well taken and one of them stands out in my mind as being really appropriate and important to reflect on at the start of the New Year.

Steven talks a lot about setting priorities and putting the things you are most about at the top of list.  He continues to say that when you set certain priorities and make an effort consistently to conduct your life accordingly you'll wind up more in control about what you are doing when and you'll generally command more respect in the process and you'll naturally do more to organise yourself around these priorities.

Facebook is one of the tools I use to keep track of what my friends and stay in touch.  The internet made social networking possible and created a paradigm shift in our fundamental ability to communicate (and mis-communicate) with people.  If used well it can enrich our lives dramatically, especially when it makes sharing our experience and maintaining contact with people we care about.

I notice on Facebook how many of my friends post pictures of their children and their wives and husbands and their dogs and cats.  This is a big contrast to Linkedin, where it seems nobody talks about anything other than economics, finance, marketing and business. Often I look at a person's profile on Facebook on that person's LinkedIn page and I wonder if they really are the same person.

First weekend in January is an excellent time for sitting down to do at least some short term planing.  Hence, its a good time for setting or re-setting priorities.  For many of us our family is among the highest priorities.
It may often seem like family has to take a back seat to career.  But in fact, family need not take a back seat.  For that matter, career need not take a back seat.  Each must be balanced and taken into the planning.

So far all the working parents I have a suggestion.  Use the quiet time during then first few weeks in January to take a look at your children's calendars.  Remind yourself just when is the next school play or concerts, when are baseball games and soccer games, when are the important exams they need to be prepared for and what else is coming up in the coming months that is important in their lives and by extension, in your life.
Then have a look at your work calendar, the business trips you may have to take, the important presentations you need to deliver, the marketing events or financial conferences you need to attend to and the things you need to be prepared for.

Finally, look at the intersections and identify things you can do so that you can be at the school play or the baseball game or at home to help your son or daughter prepare for the exam.  Don't expect you'll be able to arrange everything the way you want.  Don't set high expectations.  Find just one or two events that you and your family consider important and do everything you can to plan around those events.
Knowing what is important in life is just one part of what it takes to create a good life.  Another important part is organising yourself so that you can experience, share and enjoy as much of what is important as you can.

Click here to see my State of Affairs column if you want to read some more of what I write about how I see the world around us.

I normally write about Angel Investing and P2P Lending.  To learn more about my Angel Investment Fund click here.  To learn more about our P2P Lending Fund click here.   

Who's In Charge of Pricing the Coffee???

Pricing goods on the supermarket shelves is as much an art as it is a science.  More often than not the end result - a price, reflects the logical outcome of all the input factors.  From time to time, however we get an output - a price that seems to defy logic.  We can only conclude one of two things - either our assumptions about the way the world works need to be revisited or - there is just a quirk, an oddity, an outlier.

As an investment manager I'm trained to look for the outliers.  Buying or selling an outlier can make the difference between having average performance and having above average or below average performance.
Finding the outlier makes a trip to the supermarket or shopping mall more interesting and more fun.  It's a bit of a hobby for me.  Some people spot planes and trains.  Some people follow the minute details of sports statistics. I follow prices.

Our journey in search of the pricing outliers begins of course at the manufacturer on the desk of the Product Manager. The Product Manager is in charge of practically every element of brand and product development, from the look and feel of the packaging, timing and delivery of advertisements, wholesale pricing, promotional pricing and finally, MSRP or manufacturer's suggested retail price.

Whenever I go to the supermarket I pay attention to prices, in part because, like every consumer, I want my hard earned dollars, koruna, pounds, rubles and yen to go as far as they can.   Aside from the practical implications of smary buying, I'm always interested to finding what I call pricing idiosyncrasies  - the quirks or departures from would seem to be the norm or logical progression.

Lately the biggest quirk I've seen is in the instant coffee aisle.  I happen to shop in Prague very often.  The local currency is the Czech Koruna, so I'll reference my local currency.  Also to be consistent we will talk about 200g packages. Those of you in other countries can substitute numbers proportionally.  Makes no difference.
 
When I am in the US I drink Taster's Choice.  Here in the Czech Republic we don't have that brand.  We have NesCafe, which it so happens is a product of the same fine company that makes Taster's Choice.


Pricing in the instant coffee aisle works something like this:  the stuff that tries to be something reminiscent of coffee sells for Kc 60.  Then the store brands sell for somewhere between Kc 75 and Kc 99.  Lidl, a local supermarket I shop in, sells a private label brand called Green Eclipse which is just wonderful.  It sells for Kc 79 and sometimes it's on sale for Kc 69.

I buy Green Eclipse because I like the taste, but also I especially like the price. I the taste were lousy I wouldn't buy it.  Life is too short to drink bad coffee at any price. 
Between Kc79 and Kc 160, there is nearly nothing to speak of.  It's what I call the DMZ - the de-militarized zone.  It is practically an empty, barren wasteland.
After that the mainline brands start.  The major brands include Jacobs, Douwe Egberts,  Tchibo and Nescafe, with prices ranging from 159 to 259.  Premium coffees, including the "Gold" versions of the mainline brands, cost usually between 199 and 259.  The very top of line is Davidoff, which prices at 390.  It's sold in 100g packs at 199.

I think the biggest indication that product managers are getting nervous is when they develop brand line extensions and odd pack sizes.  For example, a number of brands have introduced "velvet" or finely ground variations, are lower priced.  Also some of the brands have pack sizes of 95g, 180g and 190g.  This makes direct price comparisons hard to make and also enables them to meet price point targets.

Pricing Quirk Number 1 - A Range Big Enough to Drive a Truck Through
Pricing variations in the coffee aisle are among the widest I can find in the supermarket.  Producers seem to believe that once the consumer finds the right taste price sensitivity ends.  What producers seem to miss is propensity among consumers to substitute.

I find it hard to believe I am really very different from the average consumer.  I like the taste of NesCafe.  It's my favorite coffee except for Taster's Choice. But it's not my favorite coffee at any price.
For every jar of NesCafe or I can have at least two jars of the Eclipse.  NesCafe is among the less expensive of the mainline bands. For some of the other brands the ratio is more like 3 jars of Eclipse or 1 and a half jars of NesCafe for 1 jar of the main brand.

I just don't understand this pricing case.  If coffees like Eclipse are readily available, why should mainline brands be two, three, four times more expensive.  And why should such large price dispersions occur within the mainline brands. Do people care so much about taste? Shouldn't propensity to substitute be greater or is there something else I am missing here? Consumers respond to the weekly supermarket sales circulars and switch supermarkets at the drop of  hat when they see laundry detergent on sale.  But once inside the market they don't care about what they pay for coffee?

Pricing Quirk Number 2 - The De-militarised Zone in Pricing
Between Kc 79 and Kc 159 the pickings are few and far between. My guess is that the product manager doesn't have a lot of influence at this level and the pricing battle shifts to the supermarkets.  Pricing managers in supermarkets well understand the behavior of consumers and where the elasticity of demand can vary.  Pricing managers also look at gross margin - the the difference between what the price at the cash register and the price from the manufacturer.  Still - why should there be this big gap in pricing  50% - 100% between the bargain  brand and the mainstream brands?

Pricing Quirk Number 3  - Putting the best value for money on sale
Why should something that's already priced well go on sale? This coffee is the best value for money!  I hardly think the sales will change much when it goes on sale.  Demand is probably pretty inelastic at that level.  Makes no sense to me!

And yet - incredible as it may seem, Eclipse sometimes goes on sale, with a big red sign pointing out the 10% discount.

Pricing Quirk Number 4 - Putting the Brands on Sale

From time to time NesCafe runs a promotion.  They price the 200g bottle down to 119.  This is still a hefty 50% premium to Eclipse, but a is a healthy discount to the other main line brands.  At that price my price sensitivity goes out the window and the taste devil drives my decision.  I stock up.  I'll by three or four at that price and keep them in my pantry and draw down the stash until next sale comes around.  Judging by what I observe at the cash register, many other consumers are doing the exact same as I do. When NesCafe is on sale it seems to just fly off the shelves.
I wonder - if NesCafe decided to change it's strategy to everyday low pricing - say the Kc 129 level instead of the 179 or 199 level would NesCafe's revenues go up or down?

Pricing Quirk 5 - Deep Discount Overkill
This week and next NesCafe they are pricing at 79.   They've actually gone through the pricing DMZ and are going head to head with Green Eclipse.  I'm stocking up and how and judging by what I see in the stores, even the twenty-four/seven neighborhood convenience store owners are doing the same.
I don't like to look a gift horse in the mouth.  But I don't understand why NesCafe felt the need go through the DMZ and go head to head with the bargain brand.  Leaving aside the velvet finely ground products, The mainstream brand pricing starts at about 159 and the bargain pricing ends at 99. A price point around 119 for the sale should be more than sufficient to pick up market share from the main competitors.

I Have More Questions than Answers - Don't You?
I'll be interested to hear what my product manager and supermarket executive friends have to say about the enigmas of coffee pricing.  I also will be interested to hear about other pricing idiosyncracies away from the coffee aisle.  E-mail me at msonenshine@symfoniecapital.com if you have suggestions or comments.
I normally write about Angel Investing and P2P Lending.  To learn more about my Angel Investment Fund click here.  To learn more about our P2P Lending Fund click here. 

Franta, the Other Dog and Me

Warning! If you don't like dogs, I'm not sure you'll like what I write here.  If you are a dog lover, as I am, you'll understand where I am coming from and where I am heading almost immediately.

The dog is a natural companion for the human race.  I'm convinced that for as long a humans live on this planet, dogs will live side by side with them.

I'm also convinced that dogs reflect our hearts and minds. When we are nervous our dogs are nervous.  When we are relaxed our dogs are are relaxed.  They instinctively like some people more than other people.

Much has been written on the subject of dog behavior and in fact the school of thought on dog training has undergone a remarkable evolution.  The old school of thought was based on negative ereinforcement.  One example is the use of the choke chain collar.  Pull the choke collar often and hard enough and the dog will start to behave differently so as to avoid the unpleasantry of the choke. 

Nowadays training is based on positive reinforcement and the dynamics of the relationship between the dog and the owner.  The system is reward based.  Reward desirable behavior with treats and praise. Save the special treats your dog loves only for special occasions and especially good behavior.

Training also focuses on the handler. If you are nervous your dog will be nervous.  If your dog runs on the neighbor's grass and barks at every passer-by on the street it's most certainly because the owner never taught the dog to do differently. I can't count the number of books I've read and TV shows I've watched where the lesson of the day was - "If you want to change the dog's behavior you must start with your own behavior."

The other modern wisdom is that dogs are inherently pack animals.  They look to us as our leaders and the will follow our cues. I think this is also true. But that theory has certain limits, and this is where my story begins and ends.

Well - OK.  Enough with training theories. I have a nasty habit when I write of leading my reader on a long and winding road until I reach the conclusion.  This time I will do differently!  I'll start with the end, go in a circle.

The End

My dog Franta was attacked! The other dog meant business.  He was seriously angry.  The story might have ended very badly. The other owner and I pulled the dogs apart. Both dogs walked away, largely unhurt.

Franta was certainly the loser.  I knew it and he knew it. But I kept a stiff upper lip.  I remained calm and steadfast with an almost matter of fact, business as usual demeanor.  I worried that if started coddling him and comforting him I would re-enforce Franta's feelings of nervousness and insecurity.  The sooner we returned to business as usual, the better, I felt.  I wanted him to just put it behind and move on.

I didn't realise it until I got home, but he had five bites along his back and hind quarters. Poor Franta!  When we got home he crawled under the table and basically stayed there for the rest of the day.

To be on the safe side I took him to Vetpoint, our local vet.  They give fantastic basic care at reasonable prices and are open long hours. Franta knows them well and stops there willingly during our daily walks.  But still, a visit to the vet is not his favorite activity and this particular trip added immensely to his trauma.  The vet took out an electric razor and removed some hair around each bite found.  Franta was shaking with fear.  Each bite was cleaned with topical disinfectant and that was clearly painless, for which I am thankful.  Finally, Franta got an injection of a form of enroxcil,  a broad spectrum antibiotic.  He had an allergic reaction to that and within an hour we were back at the vet to get an antihistimine. Again, more trauma for all concerned.  My wife and I sat with Franta for the better part of 3 hours while the reaction subsided.

Warning!!! Don't treat allergic reactions to antibiotics lightly. They can in fact be fatal both in animals and in humans if you don't respond quickly enough with the right treatment.  Never lose sight of this fact.

Conventional wisdom is that when you start administering antibiotics you should continue the full course of dosage. If there is an infection the infection may return if the antibiotics are discontinued.  If there is no infection, then no harm done by stopping the antibiotics.  In Franta's case the topical areas around the bites looked kind of nasty.  The vet suggested we return in 24 hours to reasses the situation.

The next day Franta was looking and feeling better. We, did a bunch of our own independent research and called Vet|Nemo, a specialist vet we go to when we need higher level care. The doctors at VetNemo invested in state-of-the-art technology.  Once they treated a scratched cornea and removed a dirt particle on Franta's eye with a laser pen.  Then they fitted him with a contact lens that we wore for two weeks without a problem. He was in and out the clinic in 15 minutes we paid something on the order of $100, which was a fraction of the the cost we would have paid had had we opted for anesthesia and a dull blade.

We returned to our local vet for the followup the next day and opted to continue a course of antibiotics and this time the vet used a form of amoxicillin. Franta tolerated that well and we continued a program of daily visits for the next seven days.  Each visit set us back a whopping $5 and with each day Franta was better.

All's Well that Ends Well

Today Franta is right as rain.  He still has a few of the battle scars, but pretty much they are healed.  He is his normal, happy go lucky self.  He's no less confident around other dogs, though he's a bit more...shall we say....respectful and even perhaps aloof.


Franta and I are certainly wiser and more experienced.  A lesson or two was learned the hard way.  Are you curious?  Read on!

The Beginning

This is Franta. He's a mut from the shelter, about 7 years old.  I say he closest in appearance and temperment to a Small Munsterlander.

I'm not sure what the attacking dog is.  It's not so relevant.  On the other hand, this is not the first time another dog took a stab at Franta.  Therefore, Franta tends to be careful around other dogs.

He developed a strategy, thanks to my good training, I must say.  If he encounters another dog on the street and it looks like the meeting will not go well he keeps a safe distance from the other dog.  I also taught Franta the command -  "Ignore" or "Run Away."  When I tell Franta to Ignore and he is on leash he knows to quickly pass the other dog by and move on.   If he is off leash and I tell him to Ignore or Run Away he keeps a safe distance from the other dog. Mostly he uses his own good instinct.  I only give him the command if I want to express to him my own personal doubts.

I also taught him the command "Kamaradit" or "Say Hello!"  That tells Franta the other dog looks pretty harmless and he should greet nicely.

Maybe it's not so important to me what kind of breed the attacking dog is, but Franta takes no chances.  Like many other dogs he's had some unpleasant encounters along the way.  In Franta's mind all brown labrador retrievers are to be avoided.  Also on Franta's bad list are  large black furry dogs and rotweiler/doberman combinations.

Franta likes to create his own brand of mischief that in fact I have tried hard to deter him from. He has a game I call "fence chase."  The game goes something like this.  Find a dog minding his own business in his own front yard.  The fence of course is a safe barrier for both dogs, which is what Franta wants.  I think usually Franta initiates the ensuing game of chase back and forth along the fence. I know it's a game for Franta, but I don't think the other dog always knows it's a game and certainly it's not a good recipe for a quiet peaceful day in the neighborhood.

I've worked hard to get Franta to kick the fence chase habit.  He's getting the message, but he is mischievious and OK I admit it....I have not trained him well enough.

Once Franta and I were out walking in the neighborhood and he spotted one of his supposed fence chase playmates.  Franta and I were out on a Sunday stroll and this dog, a German Shepherd, was, to Franta's surprise, not behind the fence, but also out on his Sunday afternoon stroll and also, I believe, off leash.

Franta froze stifff and went into his hunting dog poise.  He saw this dog maybe twenty or thirty meters away and Franta was staring in disbelief, tail up, body stretch out, focused on what lay ahead.

Then Franta looked at me and started wimpering and took an immediate left up a side street.  No doubt about it.  Franta was not going to press his luck. Clearly, Franta had no interest in meeting this dog without the presence of a fence.

The Middle

Prague is full of dog lovers.  They go to the park, their dogs meet, run around a play happily.  Rarely if ever there is a bad outcome.  One dog will growl or snarl at another and both will immediately keep their respectful distances.  That's what the professionals call - socialisation.  Dogs learn how to behave around other dogs by simply being around other dogs in an open space like a park.  Often they develop a sort of commraderie, with one dog leading the way, sniffing out a trail, writing and reading what some people I know call p-mail and the other dog determined to sniff  a p-mail or anything and everything that interested the first dog.

This is not the case in many other Czech towns, however.  Brno, a city to the south of Prague, has leash laws.  Dog owners are expected to keep their dog on a leash.  A dog may roam freely provided the dog wears a cage over the snout.  This way nobody's dog will bite someone or someone else's dog.

The unfortunate result is that dogs are poorly socialised.  They are nervous whenever they approach another dog.  The cage over their snout clearly doesn't boost their sense of security. I won't put a cage on Franta's snout if I let him walk free.  I know Franta well enough to know he won't attack. If Franta were attacked I want Franta to be able to defend himself.

If you walk your dog without a leash and snout cage and another dog owner sees you the person looks at you like you are some kind of anti-social, misbehaved outlaw.  Which, in fact, in that situation you are.

So What Happened?

I think the the attaching dog looked something like this:

Franta and I were having a pleasant, uneventful walk, when we spotted a newly built dog park.  The soon to be attacker and his owner were enjoying the obstacle course. The dog was gleefully running up and down the ramp, jumping through the tire, following his owner's lead. Franta watched, seemingly fascinated.

Franta looked at me as he approached the fence.  "No," I told him. "Let's go."  But by then it was too late.  The other dog saw Franta and approached the fence, quite cautiously, in fact.  From my point about five meters away, I saw what looked to be a polite, uneventful greeting any two dogs meeting outdoors might have.

Then, suddenly, things took a big turn for the worse.  Both dogs were barking and growling.  And then it happened.  The dog that looked so happy and care free in the park was practically drooling.  He was barking ferociously and baring his teeth.  Then, suddenly, he found the gap between the gate and the ground just large enough to crawl through.

Before I could get there, he pounced on Franta.  He was angry and Franta was clearly frightened. Franta didn't even try and engage the other dog.  He turned an ran.  And every time he ran the other dog ran after him and pounced on top of him.

It's all sort of a blur now.  I remember running toward the two dogs.  I saw Franta running certainly toward me, then away from me, then toward me.  And then the next thing I know both dogs were right in front of me.  By that time the other owner had also joined the fray. He couldn't seem to catch either dog.  Luckily I managed to  grab the attacker by the scruff of his neck and pulled him off Franta, long enough for the other owner to take control off his dog.

The Calm After the Storm

Now apart, both dogs started to settle down almost immediately.  I stood between Franta and the other dog like the referee at a boxing match.  I created basically a no-dogs land - a buffer zone of about 3 meters between the two dogs.

It's amazing how quickly dogs become calm when there is a meter or two of distance between them.  The other owner apologised profusely.  He was quite angry at his dog.  He explained to me that his dog had been attacked in the past and was frightened and defensive around other dogs.  I suppose this dog's idea of a good defense is to strike pre-emptively.

I don't discount the possibility that Franta actually provoked the other dog through the fence. Franta may have thought his favorite fence chase game was about to start. He certainly hadn't expected the other dog  would crawl under the fence and attack.

Franta was visibly shaken but appeared otherwise unhurt.  I decided it was best we went home, which we did.  It was only after we got home that the reality of what happened began to set in.

Reality Sets In

Firstly I noticed Franta was bleeding - not a lot, but enough that I could find places where the other dog had gotten a hold of Franta and actually pierced the skin.  Second, I realised how traumatic the experience was for Franta.  He crawled under a table and wouldn't come out for the better part of the afternoon.

My wife was furious with me.  Franta means the world to her and I put her pride and joy, her friend, her good smart Franta into harms way. She tried to be as understanding and calm as possible, but I can tell she was seething. I think she'd be devastated if something terrible happened to him and I think she'd be even more devastated if that something were the direct result of my actions.

Finally, when I told my wife what happened I realised how preventable the whole situation in fact was. It was a disaster waiting to happen, I should have seen it coming, and I should have, could have, avoided it.

We were in Brno, a place where I know dogs generally are more nervous, less well socialised. There was Franta on one side of a fence and a nervous dog on the other side of the fence.  Whenever Franta and I go for a walk in our neighborhood I make a point of keeping Franta from playing his fence game.  Before he even can start to play that game I tell him No or a I walk him in a different direction.  So what went wrong this time?

Situational Awareness

First, I didn't generalise the problem of the fences.  In the neighborhood the fence is either accompanied by a hedge or constructed from wood planks that make it difficult for the dogs to actually see each other well. Also in the neighborhood there is no gap between the fence and the ground.  I can't recall seeing a dog in our neighborhood escape from the yard. Homeowners in our neighborhood are especially alert to the possibility their dog will find a gap so any gaps are quickly repaired. Third,  I didn't see the gap.  If I saw the gap, I didn't expect the other dog would go on the offensive.

In retrospect I now understand the problem. There's something that air-traffic controllers speak of called "situational awareness."  This is the ability to identify, process, and comprehend the critical elements of information about what is happening to the team with regards to the mission. More simply, it's knowing what is going on around you.

Air traffic controllers are trained to be alert to the relative positions of the aircraft in their space at all times.  They never ignore the aircraft in their sector.  They know where each aircraft is, but they are not tracking each and every aircraft per se.  Instead, they are watching gaps. When they look at their screens they instantly know if the gap between two points of light is closing too quickly or not.  In short, they understand and are sensitive to everything that is going on around them at all times.

I'm a credit manager.  I can spot a good credit from a bad credit a mile away.  That's my job.  That's what I do.  So naturally, when I am doing my job I'm watching every gap. My success as a bond manager depends vitally not so much on spotting what is going right, but rather on being vigilant for what can go wrong and making the appropriate change of course.

But when I go out with Franta I'm not so alert.  Going out with Franta is something I do to relax, unwind, and take a break from looking at what can go wrong. And therein lies the problem.

The Morals of the Story

When we take our blessings for granted, when we allow ourselves to become complacent, when we stop looking out at the world around us, we risk losing the things most dear to us and that make our lives most meaningful.

Franta seems to have put the tragedy behind him.  He's maybe a bit more careful around other dogs, but he enjoys meeting them - especially the females!

Franta passed by two fences in our neighborhood last week when we were out on our walk.  He didn't stop to play the chase game. Just goes to show you....

• Never reinforce a dog's sense of fear.

• A fearful dog becomes an attacking dog or a neurotic dog who can't enjoy the pleasures of relating to his or hear own kind.

• Don't get complacent or drop your guard when you are out walking with your dog! Enjoy the walk, yes, but don't lose sight of the situation around you.

•  Be proactive and present in life. Know where you are, what is happening around you and look out for what can happen next.

• Stay calm.  Use your head.  Ask questions.  Do some research.  We live in a world where answers are far more available to us than ever before.

• It's a dog eat dog world out there and we are all wearing dog biscuit underwear.....

• Experience is a great teacher AND.....

• You can teach an old dog new tricks.

A Marshall Plan is Needed to Stop ISIS

The crusade of tough talk from world leaders continues, backed up by air strikes and military advisors.  The best we can hope for from this fundamentally misguided and weak policy mix is illusory containment.

What's needed is serious commitment from the international community to restoring security and generating economic development in Syria, Iraq and Afghanistan.  Air strikes may be a good first step, but they offer no real hope for the future and can do more harm than good unless accompanied by real action on the ground.
Air strikes destroy infrastructure and disrupt the local economy.  People living in areas affected by air strikes suffer from shortages in food, electricity and running water.  Send in enough bombs and people eventually leave.  They become refugees.

Groups like ISIS thrive in the vacuum created by air strikes.  They prey on the fears and insecurities of the local population.  They profit from scarcity of basic goods leads to rationing and price gouging.  They are winners at the expense of the local population.

The longer peace and security in Syria, Afghanistan and Iraq remain elusive, the greater will be the cost to the rest of the world.  Groups such as ISIS are a cancer and a plague.  A parasite dies when its host dies.  On the other hand, ISIS feeds on the ruins of everything it destroys.

Internationalists argue that basic respect for sovereign borders and the rights of nations dictates that ground troops are not deployed. But we are not talking about thriving stable states when we speak of Syria, Iraq, Afghanistan and other countries in the middle-east.  We are talking about either failed states amid civil war or states existing with at best a tenuous peace.

The first step is to send in a large scalemultinational military presence wherever ISIS and groups like ISIS proliferate.  The multinational force will recapture the lost ground and then guarantee security.

The second order of business is to win over the hearts and minds of the population by investing the building and rebuilding of physical and economic infrastructure, just as was done after World War II.  This Marshall style plan is critical because it will rebuild the torn fabric of society and create a large base of the population with vested interest in developing and maintaining the new order.

We must not forget how much work indeed there is to be done. These are countries where many of the population are without electricity, running water, sewage treatment systems and reliable infrastructure.

Without real capital injection and development of broad based economic and political opportunity too many people are disenfranchised and without vested interest in the society.

Nobody can expect that capital and people will flow back into the region without the full support of the international community in assuring peace and stability and without economic programs that create jobs, training and education.

Nothing of any good in this world comes without hard work and meaningful commitment.  Air strikes tough talk and  a fragile peace are simply not a winning formula.  Until the world's leaders recognise this, take practical decisions and tackle the problem head on, little will change.