Thursday, June 27, 2013

Fed President Bill Dudley Says Markets Misinterpret Fed

When the market began its summer swoon, we posted about the disconnect between what the Fed Chairman said and the market reaction. Today, the Wall Street Journal reports a statement by NY Fed President Bill Dudley saying,

"A top U.S. central bank official warned financial markets Thursday they’re reading the Federal Reserve wrong if they think a tightening in monetary policy has gotten closer.  “A rise in short-term rates is very likely to be a long way off” even as it’s possible that the central bank may slow the pace of its bond-buying program later this year, Federal Reserve Bank of New York President William Dudley said in a press briefing."
There you have it: official confirmation of our thesis.  Speaking about communications, it is clear that this press briefing and comments by other Fed Presidents are part of the Fed's communications strategy to undo the panic caused by the market's knee-jerk reactions earlier.  Nicely done. 
What makes Mr. Dudley's comments doubly interesting is that he was for many years a Managing Director and Chief U.S. Economist for Goldman Sachs.  He certainly understands how Wall Street works and how delicate and volatile market psyches can be. 

Monday, June 24, 2013

Latvia Readies to Adopt the Euro

Recent 2013 convergence reports by the European Commission and the European Central Bank on Latvia point strongly to the country's being ready to adopt the euro to replace the lat as the national currency by January 2014.

Overall, for a small country, Latvia seems to have recovered very quickly from the impact of the global financial crisis and its own housing market bubble in 2008-2009.  A reason cited is a rapid pace of "fiscal consolidation," code word for austerity.  Inflation, measured by the EU's Harmonised Index of Consumer Prices (HICP), hit 15.3% during 2008, and the latest twelve month average reading is around 1.3%, well below the reference target of 2.7%.

In the near term, the inflation pressure in Latvia will be to the upside, as deregulation in markets like retail electricity will provide one-time shocks to the twelve-month average inflation rates.  As the labour market has tightened and if export prospects improve, then wage pressures will probably increase too.  Politically, these inflationary pressures are being laid at the doorstep of choosing to adopt the euro, but really they are part of the normal economic adjustments caused by austerity and then a rebound when market prospects improve.

On many other measures, including gross government debt to GDP, Latvia's ratios are all favorably aligned to the convergence target values required by the EC, EMU, and ECB.  The government is strongly behind adopting the euro, but many of the reasons are philosophical in nature. The desire to put behind it the country's history with Russia is openly cited as a positive for the euro.  From the EMU side, they are very happy to see new countries eager to join the EMU and adopt the euro.  From the EMU side, they cite the reduced exposure to systemic risks which they say comes for the euro.

The improvement in legal, regulatory, business environment and fiscal management has led to improvements in Latvia's international credit rating,with a positive outlook going forward.  Since the lat and contracts are pegged to the euro anyway, the incremental benefits from adopting the euro will be convenience-related for business, tourism and trade.

The Latvian government has done an excellent job, according to the numbers in the reports.  The question is now what is being given up and what will be gained from adopting the euro?  According to the ECB report,
"All in all, although Latvia is within the reference values of the convergence criteria, the longer-term sustainability of Latvia’s economic convergence is of concern. Indeed, in the past, Latvia has experienced major boom-bust episodes and high macroeconomic volatility, which were also visible inter alia in domestic prices and long-term interest rates. More recently, Latvia has introduced a number of policy measures to enhance the domestic framework for counter-cyclical policies. Joining a currency union entails foregoing monetary and exchange rate instruments and implies an increased importance of internal flexibility and resilience. Economic sustainability is thus conditional on a permanent willingness, on the part of both the authorities and the public at large, to adjust and to introduce the necessary reforms and policy measures to safeguard macroeconomic stability and the competitiveness of the economy."
There are lots of Eurocratic code words in the text, but loss of flexibility and the exposure to the political whims of Brussels will be the price to be paid.  To counteract the examples of Greece and Cyprus, the EU needs Latvia's adoption of the euro to be a long-term success.

Only about one-third of Latvia's population is said to support joining the euro, but the die is cast and let's hope that the government and the Latvian people benefit from this process.

Sunday, June 23, 2013

Eric Cantona's Kung Fu Kick

Here it is.  I believe his anger was directed to a Leeds fan yelling racist chants towards a United player, perhaps Andy Cole. A beautiful madness. Or, as the British say, a red mist descending.

The kick has become known as the "kung fu kick," but in the terminology of Japanese karate, it looks like tobi yoko geri for purists out there.

Passion, Joy and Joga Bonito

To clarify the last post, here is part of a memorable series of commercials by Nike which spawned a whole movement around Joga Bonito. (There is a video interspersed of two boys playing soccer in the street--not very interesting. Just move the dial past it.) Eric Cantona, the former French international, Manchester United captain, and beach footballer speaks about the joy, passion and beauty of the game.  All of these qualities were part of his game too, but he also added a little muscle and sometimes the passion went over the top, as with his his famous Kung Fu kick directed at a noisy English fan in the stands. Of course if passion doesn't go over the top from time to time, it's probably not really passion anyway.

Brazilian Demonstrations and Joga Bonito

For every football fan around the world the whole idea of the FIFA  2014 World Cup in Brazil is a dream come true.  Brazil is the home of Joga Bonito, "the beautiful game."  The World Cup is the biggest sporting event in the world.  715 million people watched the 2006 World Cup final in Germany, and in the 2010 World Cup in South Africa, 3.2 million spectators watched the 64 matches in stadia all around the country.

For Brazil as a rising emerging market economy, with aspirations on the international political stage, the World Cup is much more important than the sporting event itself.  So, what is going on with the increasingly chaotic and violent protests in Brazil?

For all its successful industrialization and modernization of agriculture for export, Brazil's political, economic and social failures are always simmering under the surface. In 2007, President Lula's "Growth Acceleration Plan," conceived by his successor and current President Rousseff, allocated an initial $5 billion to building infrastructure like roads, sewers, and sea ports to facilitate trade.  No government or private entity can give a plausible accounting of what was accomplished for how much spending in Phase I, and yet in March 2010, an additional $880 billion in spending was announced for airport construction and building up of the energy grid.

Much of this announcement was aimed at winning the bid for FIFA World Cup 2014, Phase II will probably be shown in the future to have been another sham.  In Sao Paolo, which is to be one of the biggest venues for 2014, it still takes three hours or more by taxi from the airport to the business district from Terminal 1.  A brand new Terminals 3 was supposed to be built for the World Cup, and it is barely under construction, while Terminals 1 and 2 have not had the promised major renovations.  Sao Paolo is the busiest airport in Brazil.

Outside Rio and Sao Paolo, away from the luxury condos on the beach, are the favelas, the totally autonomous slums, which are violent and dangerous.  There is nothing romantic about them, and they are certainly not for tourists.  The government, according to the British soccer press, was supposed to allocate 550 million pounds for increased security for tourists and to control potential kidnappings from the gangs in the favelas. Most of this effort has been cosmetic and ineffective, since there are probably more guns and weapons in the favelas than are in the hands of the metropolitan and state police forces.

Despite all the income created from the export of commodities and oil production, Brazil spends too much from a budget that relies much more on taxation than do other emerging market countries.  Brazil is legendary for corruption in every walk of life.  Brazilian professional football is so corrupt that even the iconic Pele as Sports Minister could not clean it up; the Brazilian league makes its money by exporting its best players to foreign leagues in England, Italy, Germany, and France.

Even corporate icons like Petrobras are hopelessly inefficient organizations when measured against the best of their global peers.  Being a state-sanctioned monopoly gives them a lot of room to puff their chest, but the private corporate sector insulates itself from the social tensions.

In the country's vast interior, the government's reach is limited and resources are plundered like in the Old West, and the Indian population neither knows or cares who the Prime Minister is.  The educational system, if one could call it that, is a sham.  The elite can send their children to lycées in Switzerland and France, so they have no stake in what goes on for children of the favelas.

As the commodity cycle has slowed, the economy slows down, tax receipts fall, social programs don't grow as they have, and the people who have become accustomed to fare subsidies, food subsidies and generous social programs are angry.  They are especially irritated when they read about billions being spent for new stadia which will have no conceivable economic function after the World Cup.

The Wall Street Journal reports on what's happening to the common citizen now, before the influx of at least 5-6 million international visitors for the World Cup,
"You can't go to work, you leave home and you don't know if you're coming back," said Carlos Garcia, 50, a taxi driver (in Sao Paolo). Mr. Garcia said that in the last month alone, his girlfriend's cousin had been shot dead while being robbed, he had been held up at gunpoint by a young boy, who stole a tablet computer, his cellphone and wallet, while his 25-year-old daughter had been mugged.""Can you imagine, it's a tragedy," Mr. Garcia said.
At this point in time, the Cup will probably be held in Brazil, even if it is not ready according to its contractual  obligations.  To switch venues--which could be done to Germany for example-- would be an unacceptable embarrassment for Brazil who would probably boycott the Cup and permanently damage the global brand of FIFA.  So, everybody is all in committed to Brazil 2014 at this point.

The professional agitators and outside influences know this too.

Saturday, June 22, 2013

Nice Call from McKinsey on China

Another post which continues to draw readers is one based on a McKinsey paper.  Among other things, they made a very timely comment on pork, well ahead of the proposed deal for Smithfield Foods.  Here's the relevant text from the post,
"China consumes 50% of all pork produced globally, and its internal food production, storage and distribution system is already pushed beyond its limits. Pork and chicken prices have risen 100%.  In July 2011, prices rose by 57% year-over-year driven by herd thinning due to high grain prices and by disease.  Foreign imports can't fill the gap, especially because of an "extremely rudimentary cold supply chain."  If the Chinese government wants to see a shift towards consumption, shortages of consumer electronics will not be the issue, but shortages of food and packaged food products may very well be the Achilles heel." 
They also comment about the banking system and the associated capital issues.  This issue is being pooh-poohed by the Chinese government, so far.  More to follow for sure.

I recently read an ambitious book by Heriberto Araujo, Jose Cardenal and Catherine Mansfield, "China's Silent Army." I was surprised at the wide range of sentiment about the book, much of it dismissive.  It was an ambitious project, and partly successful, mostly due to the lack of transparency when the authors looked to interview primary sources.  Nevertheless, it had an interesting overall theme.

In the seventies, the Hunt family tried to corner the silver market, which made news worldwide. A pillar of the Chinese government's long term strategy is to assure itself access to supplies of agricultural, ferrous and non-ferrous minerals, energy, basic and specialty chemicals deemed critical for a future of ultra-high growth.

By itself, this is unremarkable.  It sounds like long-term planning by the state.  The instruments include direct ownership, investment, joint ventures, and long-term contracts.  However, reading the book by Araujo et al., it seems to me that the model as it is being implemented is very much like that of the much maligned British East India Company.

I may write more about this later, but for those interested the book is a very interesting and provocative read.

Friday, June 21, 2013

More on Tapering

From widely read blogger Bill McBride, 27 minutes ago:

"My view is the Fed will be data driven - as opposed to calendar driven - and will only taper in December if there is a clear pickup in the economy during the 2nd half."
Before coming to this conclusion, which we posted earlier, he raises a notion put forward by others that Chairman Bernanke might have been suggesting that he just wants out of QE altogether, data be damned.  This would really be a big, fat ugly black swan!

Politicians think about their legacy in their final term. Chairman Bernanke's last term will see the December meeting as the last he chairs.  To do an about face like this as his term ends would call his legacy and that of his entire board into question, as their conviction and motives for QE would be suspect for being perhaps politically motivated.  It is also highly unlikely that he would do this as his hand picked successor waits in the wings.  This would place his successor in a very untenable position coming into a situation in which the world will be looking for continuity and stability, not fire fighting. 

So, if the conclusion is as we wrote about before, and the global economic issues are the real problem, where do the markets go from here?  Stay tuned over the next weeks for a barrage of damage control from euro politicians, think tanks and others.  

The Market Swoon: It's Not About Fed Tapering.

Some of my good friends and former colleagues, like Ward McCarthy, are Fed watchers and fixed income market analysts who command the attention of traders and investors worldwide.  I had to go back through my notes about what they've been saying about Fed tapering of the bond buying program.  Here's what I came up with months back as their consensus view.

Given their forecasts for the U.S. economy made in the fourth quarter of 2012, the Fed was not likely to consider tapering before the first half of 2013, and more likely to consider doing so between September and December 2013, assuming that the economy started showing signs of sustained recovery in GNP.  Comments about changes in the unemployment rate being a trigger divided some of the forecasts.

If the economy didn't improve, then this scenario got pushed back into the spring of 2014, on the same basis of GNP sustainable improvement.  An end to the program?  Don't even think about this until 2015.  This is the educated layman's summary of mountains of text and charts.  So where are we today after the dust has settled and markets all went down with high correlations?

Nothing the Fed Chairman actually said, even with the reinterpretations of his statement, contradicts the consensus outlook.  He even said that if the Fed began tapering and the economic conditions reversed themselves, then the Fed might reinstitute the bond purchase program.  So what gives?

Fundamentals around the world suddenly seem to cast doubts on the investment shibboleths spouted by investment strategists from all the major brokerage houses.

1. Diversify your portfolio away from the U.S. markets, particularly equities.  Recommended: European equities.

  • The relatively few, larger high quality, global Western European companies, e.g. Nestle, are probably overowned in most institutional portfolios already.  Mid and small cap companies might offer possibilities.
  • European bank balance sheets are weaker than their own published numbers and fudged stress tests show.  Of course everybody know this, but the issue was papered over by discussions about Greece and Cyprus.  Some of the larger Italian and French banks may be accidents waiting to happen.
  • The issues with the Eurozone itself and the common currency remain as they were, although they have been out of the news.
  • If an investor has made money in developed European equities or corporate bonds, why not take a profit and get out? Putting money in at this point seems problematical, despite what the brokers have been saying until this week.
2. If you're looking for a big score, think Emerging Market equities.  
  • The only problem: the emperor has no clothes.
  • China's fundamental issues with its economic model of state managed capitalism and unlimited funding of state and local governments is showing cracks in the monolith.
  • Brazil and Australia's booms were largely driven by commodity cycles, which are now receding, mainly because of China's slowing growth.  Brazil's social problems and its dependence on government largesse and subsidies is now evident in the World Cup protests.  The Australian currency's rise against the dollar since 2010 has been driven by the metals boom, which is receding. These don't seem like places to put fresh money or to leave money at risk.
  • Russia?  India?  Not necessary to discuss these as choices for an investor who wants returns, liquidity, transparency, and governance. 
3. The U.S. markets may be in Bill Gross' terminology, the "cleanest dirty shirt" among tainted economies around the world.  What are our issues, apart from valuations?
  • An amateurish and self-referential foreign policy which only exacerbates potential damage from hot spots around the world.
  • Obamacare
  • Dodd Frank's costly apparatus which is not even rolled out, while "Too Big to Fail" is still in place.
  • Both political parties pandering to their small, overly influential radical wings.  
Take all these issues, add a few more, and there you have the backdrop for market pessimism.  It's much, much easier for our New Normal model of causality to use a short phrase, like "the Fed," or "Ben Bernanke" to explain changes in sentiment about the fundamental, global economic landscape. 

Relatively speaking though, the U.S. markets, both equities and fixed income, may still represent a good, safe haven with modest returns for both asset classes. Maybe our markets stabilize and come back? Who knows?  I'll watch for Cramer's latest rant to find out.  

Wednesday, June 19, 2013

Green Energy: A "Boom" We Can't Afford

Chancellor Angela Merkel has done a yeoman's job navigating an almost impossible position regarding the euro,  Here's a fair historical record of the stages of the crisis. In the final analysis, she is a savvy politician with an overriding interest in getting reelected, which seems a foregone conclusion.

However, aside from the euro crisis, Chancellor Merkel made an uncharacteristically rash and politically motivated move to throw the Off switch on the German nuclear industry in March 2011; she also made commitments to the European Renewable Energy Directive which cannot be met.  What has been done to date is already distorting economic choices in Germany and driving some German companies to increase production in markets like the United States. Why?

According to a study done by GlobalData, cited in the Wall Street Journal, a German residential customer in 2012 paid 2.5x more for electricity than did the average residential customer in the United States.  Some of this difference comes from the absence of a 19% VAT tax which German retail customers pay and which is not a preferred means of taxation in the U.S.

Funding for renewables in the U.S. is provided by tax expenditures (subsidies), whereas in Germany they are billed directly to consumers.  U.S. consumers have benefited from relatively low wholesale prices of electricity due to low hydro prices and to the increased supplies of alternative gas which put downward pressure on natural gas prices.

Industrial customers in Germany pay more for their electricity, and their higher costs are threatening German competitiveness in export markets.  All of this is happening against a background of relatively stable wholesale prices for electricity.

How does this situation become more unstable?  According to the Wall Street Journal, coal and gas account for 62% of the energy used to produce electricity, while nuclear supplied about 25% in 2011; so 87% comes from fossil fuels and nuclear, leaving about 13% from other "renewables," like wind, solar and hydro.

This 13% share for German renewables in electricity production is slated to become 35% by 2020. By then the entire nuclear fleet is slated to be shut down, while subsidies for coal will be declining sharply.  No rational economic model, apart from growing taxpayer subsidies, can support this transition without severe dislocations and inefficiencies.  Even the German trade unions understand this.

No matter: for Germany, wind is their ethanol Gold Rush. Like ethanol, it won't end well.

Even the costs which are being subsidized underestimate the true costs of bringing renewables up to 35% of the inputs for electricity production.  According to the IEA,
"Furthermore, the costs of connecting (wind power) to, and reinforcing the grid, also need
to be taken into account in the process for connecting new capacity to the grid. Network
should provide an incentive for new capacity to connect where the system
needs it most."
These costs will only add to the costs passed on to German customers.  If wholesale prices start trending upward from here, expect the political backlash in German to get stronger.

Tuesday, June 18, 2013

Loch Erne Summit Whimpers To A Close

Credit: Agence France-Presse/Getty Images/WSJ

This picture tells more than a full page news story about the failure of the Loch Erne summit.  This is part of the classic end-of-event photo op, with the proud sponsor between the two contending sides of a Big Issue.  In this case, that would be Syria. Of course the sponsor would have ideally brought them together with joined hands.  Minimally, all three gentlemen should be looking forward, beaming at the world press for the consumption of their respective national constituencies.  

President Obama's whistle stop campaign wave looks wan and tired.  Prime Minister Cameron is in an unbalanced stance, clearly leaning into his erstwhile ally President Obama, and away from the prickly and taciturn President Putin.  Cameron also appears to be leaning forward with a firm jaw, looking out into the group of photographers; he seems to be thinking, "Bloody hell, there isn't one of this lot of press who's going to give me any kudos for this summit!"

President Putin looks quite comfortable in the solitary position away from the group.  The fact that he refuses to face forward communicates his disdain for the world press, the needs of his host, and for President Obama. He seems to be thinking, "Doesn't this man understand how I can turn the screws in Syria?"  

No doubt, the effects of recession on energy demand, cheap natural gas prices and proliferation of alternative supplies have taken the edge off Russia's energy cudgel on Europe, for the time being.  This, however, is not the same as suggesting that President Putin will allow Russia to be pushed aside from the Middle East table.  It would be foolish to believe anything like this.  

The rhetoric surrounding the end of Loch Erne is disconcerting.  No fly zones are a possibility.  Russia says that it will carry on with its plans to supply anti-aircraft weapons to the Assad regime.  To confound things, Israel says that it will not allow the introduction of any new weapons systems into the Middle East.  Which is the idle threat?  

The whole issue of chemical weapons has also been muddied beyond recognition by President Putin who suggests that he has evidence of chemical weapons construction/deployment by Syrian rebels using Iraq as a staging ground.  A full study of the evidence is needed, according to President Putin. There's no time for this, and neither side wants it.  So, he has effectively called the allied bluff.  

The trite and meaningless discussions about corporate transparency and the need for investors to know who owns their companies show how ineffective the G-8 mechanism has become.  

Monday, June 17, 2013

A Moderate Leader in Iran?

A "landslide" victory for a "moderate leader" as President of Iran means nothing in terms of American fantasies that democracy is just waiting to bust out in the Middle East and Central Asia.  The election of incoming President Hassan Rowhani is more a matter of style over substance.

However, a quote attributed to Mr. Rowhani seems like a clear public, diplomatic signal,
"The Iranian nation has done nothing to deserve sanctions. The works it has done has been within international frameworks. If sanctions have any benefits, it will only benefit Israel. It has no benefits for others," he said."
Leave aside that the first two statements are probably not true, and they merely represent the consistent Iranian position articulated in a more bellicose way, during the tenure of outgoing President Ahmadinejad.   What is important in this signal is that the issue of sanctions is of pre-eminent interest to Iran and they are back on the table for negotiation.

Sanctions have hamstrung the ambitions of clerical leaders and their civilian appointees.  They have also negatively impacted the general population, being a blunt instrument.  Having proven the point and taken their toll, any rational Iranian government would like to see sanctions loosened or abolished.

America, as some knowledgeable observers have noted, needs to sit down at the table for a long, protracted, frustrating, back and forth discussion about what we would trade for the removal of specific sanctions.  What exactly do are we willing to give in exchange for what from the Iranians?  An end to the enrichment program is really and truly off the table, from the Iranian perspective.  Can we live with this?

Thinking back to the Israeli Prime Minister's presenting of a comic poster of a ticking Wile E. Coyote bomb to the United Nations, it would seem unlikely that Israel would support any change to the current position that Iran's nuclear enrichment program must unilaterally end.  Are we still going to bind ourselves to this argument?

Something has been put on the table, and the incoming President doesn't take office until August.  There's plenty of time for some real hard, pragmatic thinking among America and its allies of how to perhaps begin meaningful negotiations with a new "moderate leader."

Late to the Party on Syria

This quote from British Prime Minister Cameron best sums up the reasons for the U.S. needing to take a leading role in Syria,
"If we leave Syria to be fought over by a murderous dictator and violent extremists, we will all pay the price," Mr. Cameron said, referring again to "evidence" that Mr. Assad's forces have been using chemical weapons, notably poison gas, against the opposition."
Vali Nasr of the School of Advanced International Studies at Johns Hopkins added a very good point on an interview with Charlie Rose, namely that the United States must articulate, for the benefit of all the actors, why the U.S. has a strategic interest in a peaceful, prosperous and more open Syria.

A "no fly" zone may have benefits in giving some protection to the large out migration of refugees into neighboring countries and even into Western Europe.  As we saw in Bosnia, the argument for "no fly" zones is that they may hasten then end to armed conflict faster than without them; by themselves, "no fly" zones cannot be shown to have prevented atrocities on the ground, as in Bosnia and Serbia.  If indeed chemical weapons have been used, the "evidence" needs to be amplified and widely broadcast.  If not, beating our breasts over this issue is not helpful now that Russian President Putin has dismissed the claims.

Dean Nasr of Johns Hopkins also points out that there is now a bitterly divisive battle between Saudi Arabia and Quatr over which country will lead the support to the Syrian rebels.  To the extent that we can take a leadership role, we could end this unproductive division.  I just don't think that our diplomatic and intelligence apparatus are up to the task.

The active leadership role for the U.S. efforts in Syria cannot rest with the personal efforts of the President, as good as he believes it could be for his polling numbers.  Yet, with the internal NSA and foreign policy staff Berlin Wall around the President, there is no candidate who has the full faith and currency of the President to take the lead beyond a G8 meeting.  Has anyone even seen Secretary of State Kerry?

Tuesday, June 11, 2013

Lululemon's Board Makes Lemons Out of Lemonade.

My familiarity with this story comes from a Peter Lynch-style research experience.  I passed a Lululemon store and had no idea what it was; my seventeen year old daughter said to me with some exasperation, "Dad, it's my favorite store."  I then had a cup of coffee while she went in and looked around with great enthusiasm.  Subsequent to that experience, taking yoga classes to help my soccer-strained low back, I noticed that every woman in the class seemed to have some piece of Lululemon gear.

So, here's the bottom line on this story of yet another CEO departure:
"Over her (CEO Christine Day) tenure, Lululemon's annual revenue more than quintupled to $1.37 billion, profits rose nearly nine times to $271 million, and the stock climbed more than five times higher."
So the company has a quality control snafu on one of their signature products, the yoga pant.  The CEO takes the fall?  Yes, here's a board that isn't afraid to act.  Is that true?  If what's published is accurate one can infer that they completely failed to proactively do their jobs during the period of explosive growth the Wall Street Journal describes.

The board is seemingly well populated by leaders who have track records with high quality, leading branded consumer products from premium coffee to nasal sprays.   But, how could they have let things come to this?

CEO Daly seems to have adopted the Mickey Drexler model used in his first tenure at The Gap. The Journal cites the CEO saying,
She told the board she had become exhausted working 18 to 20 hours a day and didn't want to commit to the three to four years of heavy business travel needed to implement international expansion plans, according to a person familiar with the matter."
Any board member who had a pulse during the years of Lululemon's growth under CEO Daly should have seen this and known that it was unsustainable personally and undesirable from a risk perspective.  Drexler's time-intensive, high mileage cross country store tours with his family led to a predictable burnout.  This problem is not new.  A passionate, committed leader, who perhaps doesn't know how to delegate, needs the proactive help and support of her board before things go wrong.

And, what exactly did go wrong?  A quality control failure from an overseas vendor, implying both a bad vendor monitoring system and too much risk.  Now, shareholders are told there will be more hires to beef up this function.  Really?  Now?  What about before this problem occurred?  Were staff additions to the organization sacrificed for a penny or two of additional EPS?

Imagine Starbucks announcing a recall of a Honduran High Mountain Super Preemo Blend because of a sharp edge on the aluminum foil package closure that cut a customer's hand.  All packages pulled from stores, refunds, apologies and life goes on.  Would the CEO be asked to resign?  Not hardly.  Would Apple's Tim Cook be asked to resign because of Dickensian sweat shop conditions in its top Chinese supplier?  Ridiculous.

There's more to this story than meets the eye.  As shareholders, they should (but won't) look to their elected board.  An expensive new CEO hire, a new, bigger executive team, and a larger quality control and vendor management organization.  Organizational development is not easy, but it is absolutely front and center for any fast growth company, especially in the fickle, fashion-driven business of Lululemon.

Boards can be asleep when the engine is humming and when it is throwing a rod.  This board needs to put on their yoga pants, and collectively get into some inverted postures to get their blood flowing and wake up.

Vali Nasr and Our Foreign Policy Failures

Vali Nasr's book, "The Dispensable Nation," is informative and thought provoking reading for anyone with a serious interest in how our country has come to the current situation, where we have minimal diplomatic credibility and influence, aside from projecting our military power.  Dr. Nasr is Dean of the Johns Hopkins School of International Studies and a senior fellow at the Brooking Institution.

The front part of the narrative is an encomium for his late mentor Richard Holbrooke, an advisor to President Clinton, Secretary of State Hillary Clinton, and Senator John Kerry.  Holbrooke's last role in public service was as Special Representative for Afghanistan and Pakistan (SRAP).  Holbrooke persuaded Dr. Nasr to join him and his team in forging a personal diplomatic web of communication with his counterparts which would serve to open doors for meaningful policy engagement by his bosses, Secretary of State Clinton and President Obama.

Referring to the foreign policy environment surrounding the SRAP, Holbrooke tells the newly recruited Nasr,
"This place is dead intellectually.  It does not produce any ideas; it is all about turf battles and checking the box."  Of course, to some extent, this is the permanent structure of our foreign policy apparatus: a White House hierarchy that changes every 4-8 years, inexperienced staffers looking to make names for themselves, and a permanent bureaucracy in both the State Department and the military high command.  The latter groups wearily put up with the changes, knowing that they will outlast every administration; their influence is pervasive and out of the public eye.

The best example of how Ambassador Holbrooke did his work and what it produced is the story of the 2010 trade agreement between Afghanistan and Pakistan.  A seemingly innocuous, photo opportunity in our press, it represented a significant breakthrough which meaningfully increased Afghan exports, increased trade between the two countries and represented a thaw in relations frozen since the mid-Sixties.  Holbrooke had the trust and respect of Secretary of State Clinton, who pushed the Holbrooke initiative over the finish line.  Clinton was able to have her voice heard in the Obama White House, but as Nasr recounts, it was never without major battles, particularly with White House staffers who distrusted her motives!

Holbrooke, unfortunately, didn't succeed in getting his voice heard, although when his risky initiatives bore fruit, they were played as good political theater.

Nasr writes, ' time in the Obama administration turned out to be a deeply disillusioning experience."  Where Candidate Obama promised to bring fresh thinking, better relations with foreign leaders and a high level of foreign policy expertise with his new administration, President Obama brought nothing new.

Fresh ideas, tactics and diplomatic initiatives met "a Berlin Wall of staffers."  Nasr concludes that the fundamental characteristics of our current foreign policy were profoundly influenced by the decision to funnel "major foreign policy decisions through a small cabal of relatively inexperienced White House advisors whose turf as strictly political."

Notions like "leading from behind" played well as a slogan in the domestic press, but they left our friends confused and our enemies emboldened.  Nasr writes that the Taliban were ready for talks with the U.S. in April 2009; after a two year initiative to bring them to the table, the initiative failed.  Part of the reason was the decision to accede to our military leaders for fear of being seen as soft on foreign policy.  The military had no truck with talking to our enemies.

Soon after our decision to withdraw from Afghanistan, all opportunity was lost.  Whereas our prior position had been "to fight and talk," it became "we're leaving" and not interested in talking.  Both the Afghans and Pakistanis were confused by our foreign policy maneuvering, driven by domestic political objectives.  Ironically, the U.S. warmed to a policy of negotiation and reconciliation with enemy forces after announcing the withdrawal.  Of course, our enemies have since launched their own initiatives of boldly attacking our forces in open, public places, which also serves to send a message to the remaining Afghan security forces.

The most interesting of the book for me is the series of chapters about the individual trouble spots around the world, from Pakistan to Afghanistan and the Middle East, Southeast Asia and China.   The depth and complexity of the Shia-Sunni enmity is something which Nasr has written about extensively, in another book. Here one sees that it makes for different sets of allies in each regional trouble spot.

Our woeful diplomatic effort and serial missteps will leave a difficult path for the U.S. to navigate in the future.  Foolish ideas like leading from behind and a foreign policy based on apologies and climate change will continue to weigh down our ability to influence events on the world stage.

The end to Nasr's book is extremely disappointing, as are the policy prescriptions by academics who understand the complexities and can articulate them, but who feel the need to come up with the magic policy bullet.  The Big Idea: a Marshall Plan for the Middle East.

The international community, working together can't implement a meaningful reconstruction effort in a small island like Haiti.  Billions are spent and little accomplished.  Imagine what would happen in the Middle East, fraught with Shia-Sunni tensions, an unstable situation in Syria, and a volatile face-off between Israel and Iran.  The kind of extended, in the trenches, consistent diplomacy exemplified by Holbrooke needs to rekindled.  It's not about a foreign policy savior, but about a consistent process which has the backing of our entire foreign policy apparatus.  It's always good to be hopeful.