I was listening yesterday to one of my favorite people, Mohamed el-Erian, chief economic adviser to Allianz and former CEO of Pimco, among other distinguished roles. For insight into economics and finance, plus an ability to communicate it clearly and memorably, he is hard to beat. Yesterday he told a story that leaders of all kinds should ponder.
People often congratulate him on navigating Pimco through the financial crisis so successfully and ask, “How did you know what would happen?” His answer: We didn’t know. On the Friday before the weekend when Lehman Brothers failed, Pimco’s top managers went home leaving three scenarios on the whiteboard:
- Lehman gets rescued. They considered this by far the likeliest outcome.
- Lehman fails in an orderly manner, with thorough plans for unwinding its positions.
- Lehman fails in a disorderly manner. They believed the chance of this was less than 5%.
Pimco developed detailed plans for what to do in each scenario. So when the least likely scenario happened, the company responded confidently and quickly, including sending a lawyer to Lehman’s offices in person Monday morning to deliver critical instructions and documents.
Pimco didn’t try to predict the future; had it done so, it would have been wrong. Instead it imagined different futures and prepared for each one. People often object that this is wasteful, since most of the plans will never be used. But, says el-Erian, “it’s a lot less expensive to prepare plans for events that never happen than to have no plans for events that do happen.”
His larger point is that today’s environment is in many ways as crazy and unpredictable as the environment of September 2008, and we must prepare in the same way. “Secular stagnation” isn’t secular, he argues – it can’t last. Looking across the developed world, he believes the financial system is broken; “negative rates don’t work forever.” Politics are broken; fringe parties and movements can influence but can’t govern. And social systems are broken, as the widespread revolt against immigration shows. Today’s stagnation will end in the next two to three years, he says. But how?
Economists agree on the broad outline of what should be done. The prescription includes comprehensive reform of taxation, immigration, and social insurance across developed economies plus specific steps in particular countries, which together should spark a return to strong growth and more normal interest rates. But maybe none of that will happen, in which case “low growth becomes recession and artificial financial stability [maintained by aggressively easy monetary policy] becomes financial instability.”
If el-Erian is right, we’re headed for one of two starkly different futures, and soon. Which will it be? He has learned not to guess. “Our only hope,” he says, is to “think in scenarios, get cognitive diversity” into our discussions, and plan now for multiple futures – even the ones we think are highly unlikely.
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What We’re Reading Today
Viacom interim CEO steps down
CEO Tom Dooley took the helm of the company four weeks ago, after former CEO Philippe Dauman agreed to step down, ending his battle with Sumner Redstone. But Dooley’s tenure will come to a close November 15; Viacom does not have a replacement ready and will begin a search. Los Angeles Times
Fortune‘s 40 Under 40
Coming in as the top disruptor among the younger generation is CEO of the Bechtel Group Brendan Bechtel. He helms his family’s engineering and construction company as it battles weak commodity prices and competition from China. Also making the list, Cruise Automation founders Daniel Kan and Kyle Vogt and Stitch Fix’s Katrina Lake. Fortune
Ahmad Rahami flagged twice
The FBI and other agencies are having to respond to the fact suspected New York City bomber Rahami was flagged multiple times over concerns of terrorist ties. First incident came in March 2014, when Rahami returned from Pakistan after traveling for nearly a year. The second, five months later, Rahami’s father warned officials that he was concerned his son had terrorist sympathies. NYT
North Carolina governor declares state of emergency for Charlotte
Gov. Pat McCrory made the declaration yesterday, after a new wave of protests erupted at a prayer vigil for Keith Lamont Scott, who was killed from shots fired by a police officer. The National Guard has moved in to help end the protests. One person was in critical condition after being shot by another civilian, according to authorities. ABC News
Building a Better Leader
In order to measure leadership potential…
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In order for companies to want to tackle a social problem…
…there must be a business incentive as well. If they recognize new market opportunities, then they will provide resources to improve the situation. Fortune
To prevent overworking…
…make a plan to discourage you from tackling email on weekends or forgetting lunch. Using your staff or company resources can help you stick to the plan. Inc.
Chipotle makes push to woo back customers
In a marketing campaign focused on print and digital ads, Chipotle is outlining what it will do to protect its food, including highlighting eight food safety changes. It’s an attempt by the fast food chain to encourage customers to return since the E. Coli scares late last year kept many away. Co-CEO Steve Ells says, “in 2015 we failed to live up to our own food safety standards, and in so doing we let our customers down.” Yahoo
Leon Cooperman responds to insider trading allegations
The SEC charged Cooperman and his hedge fund, Omega Advisors, with insider trading yesterday morning. Shortly after, Cooperman told investors that he will fight the charges. He said the energy company in which the case centers around was one that the fund had already invested over $100 million in prior to receiving the information. And he continued to buy the company after the information became public, according to a letter to investors. Fortune
Mylan CEO faces a heated House
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Up or Out
David Hoffmann, a former McDonald’s executive, has become Dunkin’ Donuts’ president of U.S. and Canada. WSJ
Rolls-Royce has hired Stephen Daintith as CFO. Reuters
Fortune Reads and Videos
The amount Donald Trump might pay the IRS…
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A power plant fire in Puerto Rico…
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Twitter receives 2% more requests…
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Can ‘clean bacon’ become a thing?
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Quote of the Day
“We have done nothing improper and categorically deny the Commission’s allegations. As I wrote last year when we first received the subpoenas, I have throughout my fifty-year career in the securities business firmly believed in detailed, fundamental research. As I explained then, that approach has long contemplated direct, face-to-face interactions with company management. Such exchanges of information with company management are appropriate, well-established in the industry, and even necessary. As a Wall Street Journal op-ed put it just last year, “information is not a crime.” — Leon Cooperman, head of Omega Advisors, discussing with investors the insider information charges against him and his firm. Fortune