Life Lessons from the World’s Most Successful People

Posted on June 5th, 2014 in Uncategorized by Karl

In 30 years at Fortune, I’ve interviewed CEOs and billionaires and other titans about what makes them succeed. Here are 10 things I’ve learned, plus wisdom from Warren Buffett.

The best career advice is universal. It applies to a CEO of a Fortune 500 company and to a kid aspiring to make it through college.

I tried to keep this in mind last week when I spoke at Allentown Central Catholic High School, which in 1978 sent me on my way from Pennsylvania to what has turned out to be a thrilling and very satisfying life and career. I told the CCHS students, who packed Rockne Hall for inductions of their new Student Council and class officers, that I’ve spent the past 30 years at Fortune ”going to school on success.” That is, my job profiling some of the world’s most successful people–fromOprah Winfrey to Yahoo (YHOO) CEO Marissa Mayer to Rupert Murdoch (NWS) to Melinda Gates–is to learn and explain what makes these extraordinary people win and adapt to all sorts of challenges. I pared my message to 10 pieces of advice, which include a few obvious truths and, I hope, some enlightening points that are universal.

1. Don’t plan your career.  Most of the really successful people I’ve met and interviewed these past 30 years at Fortune had no clue what they wanted to do when they were in high school or even in college. They stayed flexible and open to possibilities.

2. Forget the career ladder; climb the jungle gym. In a world that’s unpredictable and changing faster than ever, who knows what tomorrow’s ideal jobs will be? Think of your career as a jungle gym. Sharpen your peripheral vision and look for opportunities over here or over there, and swing to them. Facebook (FB) COO Sheryl Sandberg kindly credits me in Chapter 3 of her best-seller, Lean In, for introducing the concept of the jungle gym.

3. Pick people over pay. Work with good people who are smarter than you are, so you can stay stimulated and learn everyday.

4. Do every job as if you were going to be doing it for the rest of your life. If you spend your time thinking about what you want to do next, you’re not fully focused on your current assignment. And unless you focus, you won’t compete successfully with people who are “all in.”

5. Do the job that you’re supposed to do, but think: What’s not getting done? Always consider how you can contribute to the bigger whole — and don’t be afraid to stumble. I wrote a 1995 cover story called “So you fail, so what!” Today, recovering from failure is a badge of honor that bosses want to see in people they hire.

6. Be curious. Everyone you meet is worth learning from. People derail in their careers, studies show, when they stop learning. Yes, continual learning matters more than where you go to school or how many degrees you rack up.

7. Be nice to everyone. As you get older, you’ll have fewer degrees of separation with more and more people. Who knows how someone who doesn’t matter to you today might matter critically tomorrow? Don’t burn any bridges. Build your bridges now to last forever.

8. Listen. Listen more than you talk. I was shy in high school. I’m still a closet introvert, but I’m a good conversationalist because I’m extraordinarily interested in people, I ask questions (sometimes too many) and I listen carefully. Listening to someone carefully is giving them a gift.

9. To lead, line up your followers. Leadership has no long-term value without followers on track to become as strong as you are. Show a generosity of spirit that makes people want to work with you, because they know you’ll make them better.

10. Be honest and true. If people are in a foxhole with you, do they trust you to protect and help them? Make sure they do completely, by doing what you say you’re going to do, always.

I closed my talk with wisdom from Warren Buffett, who told me during an interview last year how he defines success. The Berkshire Hathaway (BRKA) chief actually has two definitions: 1. Success is having what you want and wanting what you have. 2. Success is having the people whom you love love you.  Isn’t it reassuring that one of the wealthiest men in the universe doesn’t equate success with money?

Post by: Patricia Sellers

Oncology Pathways – Good Idea. Ain’t Working.

Posted on May 28th, 2014 in Uncategorized by Karl

The attached WSJ article describes yet another push for oncology pathways from the payers in their effort to reduce the oncology drug spend.

What I found interesting is that docs are effectively using the precision medicine argument to counter the payers’ insistence that providers adhere to therapeutic pathways for most of their cancer patients.  Docs have always been successful in waving the clinical card when payers have attempted to restrict the way they practice.  However, using precision medicine and molecular sequencing against any payer mandated oversight is pure genius.  The payer will lose this fight.

The only real solution to our uncontrollable (and unsustainable) healthcare spend (and oncology is up there as one of the worst offenders) is to include healthcare providers in the solution by encouraging them to take on financial risk of treating patients.

Hot Spotters in Healthcare

Posted on April 30th, 2014 in Uncategorized by Karl

The Intermountain Health, the largest health system in Utah and Idaho, just wrote a Harvard Business Review Blog that stated alarming numbers on their “hot spotter” patients.  Hot spotters are the most expensive healthcare consumers (ie. the sickest patient population).  At Intermountain, the top 1% (or bottom 1%, depending on how you view it) of patients consume 28% of overall healthcare dollars.  Moreover, the top 5% consume 50% of the expense.  Wow!  Thus, if Intermountain focused on the sickest 5% of patients, it could reduce 50% of its healthcare expense.

To date, these top 5% were HUGE revenue generators.  In a fee-for-service environment, these “frequent-flier” patients should have been given red carpet treatment as they generated a lot of revenue for the hospital.

However, the reimbursement world is changing.  In an ACO environment, Intermountain and other health systems need to thoughtfully care for these patients and focus on both quality and COST of care.  Additionally, Intermountain needs to solve one of the biggest problems:  coordination of care.  Hot spotters typically have 3-4 comorbidities and, thus, see several medical specialists.  The traditional problem is that no one healthcare provider (doctor or nurse) is coordinating/quarterbacking all of these specialists for the benefit of the patient.  So the end result is that the right hand often doesn’t know what the left hand is doing (or what they have prescribed).  This results in a big, fat waste of money and crappy results.

A link to Intermountain’s HBR Blog can be found here.


Even Steve Jobs suffered from “Uncoordinated Care”

Posted on April 30th, 2014 in Uncategorized by Karl

I was rereading the biography of Steve Jobs by Walter Isaacson over the weekend and was struck by the following passage on page 549.  It essentially describes how Steve Jobs’ care was uncoordinated among his oncologist, pain specialist, nutritionist, hepatologist and hematologist.

This was one of the most famous people in America—a VIP of VIPs—being treated at one of the most famous medical centers in America and even he had uncoordinated care.  If Steve Jobs couldn’t get coordinated care, then, if you are an employer, you can almost guarantee that your employees are not getting coordinated care.  Tests and even medications are either being duplicated or ‘not ordered’ because each doctor assumes that the other doctor is ‘taking care of it.’

Specific examples of uncoordinated care that may affect healthcare consumers are:

1) Cardiovascular care–patient has a PCP and a cardiologist and each doctor assumes the other doctor is managing the patient’s high blood pressure and as a result the patient is ‘compliant’ with their doctors orders, but new medication or higher dosages are never prescribed.  RESULT—the patient has uncontrolled hypertension and is at higher risk of heart attack and stroke.

2) Arthritis pain—patient has an orthopedist and a rheumatologist and both doctors prescribe anti-inflammatory pain medications in a class called NSAIDS: the orthopedist prescribes Naproxen and the rheumatologist prescribes Diclofenac.  Both medications don’t ‘interact,’ but they are duplicative and can damage the lining of the stomach and impair kidney function—especially if both are taken at the same time.  RESULT—when the  patient gets the stomach flu and becomes mildly dehydrated it results in temporary kidney failure and a 5 day hospital stay.

The list could go on and on.

What does this mean for employee benefits professionals and healthcare consumers?

  • For every employee that has multiple doctors, it should be assumed that their care is uncoordinated until proven otherwise.  Think Steve Jobs.
  • You as an employer and healthcare consumers themselves must play an active role in coordinating their own care.  Take ownership.  You are not necessarily an expert, but you will ‘care’ more than anyone else.  In Steve Jobs’ case, it was his wife that took ownership and got all of his doctors in a room together to talk—they had never done that before!

Posted by Dr. Eric Bricker, April 14, 2014

ACOs Explained – article by Kaiser Foundation

Posted on April 28th, 2014 in Uncategorized by Karl

The Kaiser Foundation just published a good (and balanced) background piece on what Accountable Care Organizations (ACOs) are and the challenges that exist today.  The best line in the article is:

“Some people say ACOs are HMOs in drag,” says Kelly Devers. But there are some critical differences – notably, an ACO patient is not required to stay in the network.




Meaning of a Successful, Fulfilling Life

Posted on April 28th, 2014 in Uncategorized by Karl

When I heard this week that Michael Phelps was planning to return to competitive swimming, my first reaction was to feel a little sad for him. I honor Mr. Phelps for the discipline, grit and passion he needed to win a record 18 gold medals. But I also sense that he’s going back to swimming because he’s chasing a high that hasn’t held up.

In the same way, I respect Michael Jordan for all he achieved in basketball. But after reading Wright Thompson’s brilliant article about him in ESPN Magazine, I was struck by the emptiness of his life since he retired as a player 11 years ago.

We celebrate and envy people’s extraordinary individual accomplishments and successes, but the pleasure they derive from their efforts is often surprisingly fleeting. And there is a reason for that. What generates an enduring experience of meaning and satisfaction in our work is the sense that what we’re doing really matters — that we’re truly adding value in the world.

Or as Viktor Frankl put it so eloquently: “Don’t aim at success. The more you aim at it and make it a target, the more you are going to miss it. For success, like happiness, cannot be pursued, it must ensue, and it only does so as the unintended side effect of one’s personal dedication to a cause greater than one’s self.”

For me, the threshold question is this: In the service of what?

It’s the question I find myself asking when I read about the amazing wealth being accrued by hedge fund managers. I respect the financial acumen of someone like David Tepper, who earned $3.5 billion last year or John Paulson, who earned $1.9 billion, or Carl C. Icahn, who earned $1.7 billion. But ought we to revere these investors simply for accumulating ever more wealth? Building one’s own value to feel more valuable is ultimately a losing game.

Imagine instead that Mr. Tepper decided he had enough money for himself and his family, and truly dedicated himself instead to a greater cause. Mr. Tepper could use the $3.5 billion he earned in 2013 — or even just keep $100 million — and hire 75,000 people at $40,000 each over the next year to create his own Works Projects Administration and take on our crumbling infrastructure. Or he could use that money to support tens of thousands of passionate but struggling artists, or give generous grants to thousands of worthy scientists whose critical research isn’t funded sufficiently, if at all.

It’s great that a group of billionaires, led by Warren E. Buffett and Bill Gates, have pledged to give away half of their fortunes when they die. But why wait? Why not right now?

Of course, “In the service of what?” isn’t just a question for billionaires. It’s one we all need to be asking ourselves.

I’ve long been haunted by an article called “The Tragedy of the Commons” written by the ecologist Garrett Hardin for the magazine Science in 1968. The article focuses on the dangers of overpopulation, but Mr. Hardin’s broader argument is about how individuals, acting from their rational but narrow self-interest, can collectively destroy something they all need to survive and prosper. He uses the example of an open pasture to which struggling herdsmen are invited to bring their cattle to feed. Eager to improve their economic circumstances, the herdsmen naturally want to feed as many cattle as possible. The problem is that over time, overgrazing takes a progressive toll on the commons, and, ultimately, it’s destroyed for everyone.

We need to redefine self-interest to recognize that it requires serving the commons — even if only for the selfish reason that our survival, and the survival of our children, depends on protecting our shared planet.

The answer to “In the service of what?” is to add more value to the commons than we take out, and not to discount any good that we can do.

“We must not, in trying to think about how we can make a big difference,” said the children’s rights advocate Marian Wright Edelman, “ignore the small daily differences we can make, which, over time, add up to big differences that we cannot foresee.”

Personal accomplishments make us feel good. Adding value to other people’s lives makes us feel good about ourselves. But there is a difference. The good feelings we get from serving others are deeper and last longer. Think for a moment about what you want your children to remember about you after you’re gone. Do more of that.

NYT, April 28, 2014

Biotech Stocks – Where to from here?

Posted on April 23rd, 2014 in Uncategorized by Karl

Last month’s 10% drop in the Nasdaq iShares’ Biotechnology Index — not to mention the fact that biotech stocks, after a torrid two years, are up less than 4%  year-to-date — has investors worrying that the sector’s two-year boom is over.

We’re living through major changes in how medicines are developed that will improve our lives for the better. But that doesn’t meant biotech stocks won’t retreat. Quite the opposite: Biotech innovation is funded in great part by investors whose timing is wrong, and who get left holding the bag at the end of the sector’s inevitable boom cycles, only to have some of the companies, products, and technologies they bet on succeed later on. The biotech boom has been fueled in part by fundamentals: stunningly lucrative new drug launches and research breakthroughs. But some investors seem to be seeing rainbows and missing the rain. Here are three things I’ve heard from investors and executives, or seen in the invaluable polls of buy siders run by ISI Group’s Mark Schoenebaum, that I think are misplaced optimism.

1. We have not reversed the decline in R&D productivity. We probably haven’t even slowed it. Back in 2009, investors seemed to believe that no experimental medicine would ever succeed again. Now it seems we’ve forgotten that more than 90% of the drugs that start clinical trials fail.

The whole drug industry — and biotech companies are separated from larger drug companies by distinctions of business model, not fundamental science — has been caught up in what has coyly been termed “Eroom’s law”: the amount of R&D money sunk per molecule is rising exponentially. There’s no proof that this multi-decade trend has abated.

Geoffrey Porges, an analyst at Bernstein research, recently looked at the drugs in development at large biotechnology companies such as Celgene CELG -1.24% (the best-performer over the past year), Gilead, and Biogen Idec BIIB -0.34%. He points out that many of these firm’s R&D successes have actually been “derivative” products based on approaches that were already known to work. Celgene’s success has come through drugs derived from its original success, repurposing thalidomide as a treatment for multiple myeloma and from Abraxane, an improved version of the 1990s cancer drug Taxol. Biogen’s big hit, Tecfidera for multiple sclerosis, is a new formulation of a drug that had been used to treat psoriasis in Germany. 

Porges points out that Celgene is now betting on a new first-in-class molecule, sotatercept. And Biogen’s big event this year will be data for its anti-LINGO program, which is a brand new way to treat multiple sclerosis. He says Alexion and Vertex are likely facing longer odds than they have in the past. Drug research: it’s really, really hard.

2. The FDA is not fundamentally friendlier to companies than it was in the past. Another trope that’s gotten passed around a lot is the idea that the Food and Drug Administration is friendlier to companies, better at communicating, and more likely to approve drugs than it used to be. This kind of thinking is dangerous, and I say that having fallen into the FDA-got-easier-trap several times myself — and been wrong.

There was a period, starting a decade ago, when the FDA, normally relatively friendly to industry, became unusually negative because there were a lot of drug safety controversies, including those over the pain medicine Vioxx and the antidepressant Paxil. Regulators who were afraid Congress would go after them were noticeably more reticent to approve drugs. And there has been movement to make the FDA bureaucracy easier to manage, particularly with the creation of the “breakthrough” designation for important drugs. And in cancer, in particular, where there are more drugs in development than in any other disease area, the FDA does seem to be working more closely with companies.

Look at how the FDA publicly (justifiably) took down Aveo Pharmaceuticals when patients on its drug survived less long than those in the control group. Novo Nordisk found itself years behind competitors because the FDA insists on a heart safety study of its new insulin. Amarin and Omthera, both makers of fish oil pills, both told investors the FDA said it would allow them to market their products to a broader population if they started big studies to prove the pills prevent heart attacks and strokes; then the FDA apparently changed its mind. The bull case for Sarepta Therapeutics SRPT +0.49% was that the need for its drug for muscular dystrophy was so great that the FDA would allow it to file to be approved on a study so small it would have been unprecedented. That didn’t happen. Nice friend, biotech.

I’d interpreted the FDA’s decision to let Avandia back on the market as a sign that it was becoming more friendly to industry. I now think Steven Nissen was right when he wrote that the FDA’s goal was to “avoid accountability for its role in the Avandia tragedy.”

Sure, there has been a bump in the number of new drugs approved, perhaps in part because of a slight easing at the FDA and a slight improvement in R&D productivity from its nadir earlier this decade. Or maybe it’s just that bugaboo of investors in any time period: random chance changes that don’t mean anything.

3. Pricing Power May Not Last Forever The most important question for biotechnology and drug companies isn’t how many new drugs they can invent but how much they can charge for them. Fears surrounding Congressional noise about the high price of Gilead’s Sovaldi for hepatitis C seem to have started the current drop in stock prices.

And here the news is pretty good. In the U.S. in particular companies seem to be able to command huge premiums for important drugs. Canada is playing hardball over the cystic fibrosis drug Kalydeco, saying it won’t pay the full price of $307,000 per patient per year. But even if it gets a discount, the cost is likely to be fairly close to that sum.

None of this is a reason to abandon biotechnology stocks en masse. Plenty of companies are likely to be launching promising new drugs and racking up impressive sales on those they have already launched. Wall Street is justifiably worried that Gilead’s Sovaldi is not going to be able to maintain its sales, but a medicine that seems likely to have some of the best annual sales ever has got to be worth something. Regeneron and partner Sanofi have several potential blockbusters in their shared pipeline, including not only their PCSK9 cholesterol drug but medicines for rheumatoid arthritis and asthma. Personally, I think Vertex’s combination therapy for cystic fibrosis could show positive results later this year. There are always going to be good biotech stocks to pick, even in the worst market. A breakthrough drug remains one of the most profitable products you can ever sell, and it will for the foreseeable future — maybe as long as there are sick people.

But investors should avoid thinking that the drug business has undergone a fundamental change in the past few years. It hasn’t.

Forbes, 3/27/2014

US Healthcare is the Most Expensive by a Mile!

Posted on April 22nd, 2014 in Uncategorized by Karl

We probably didn’t need another study to tell us that health care is the U.S. is expensive. But we may not have realized just how expensive until now.

Data released Thursday by the International Federation of Health Plans points out it costs more — way more — in the U.S. for common drugs and procedures than in eight other developed nations around the world. According to the report, the average cost of one night’s hospital stay is $4,293 in the U.S., nearly double New Zealand’s $2,491 and more than triple Australia’s $1,308.

Argentina and Spain were the other two countries highlighted in that one-day hospital cost comparison with respective prices of $702 and $481.

Among the study’s other  findings:

  • A heart bypass in the States is a whopping $75,345, compared with $42,130 in Australia, $40,368 in New Zealand and $15,742 in the Netherlands.
  • A normal baby delivery in the U.S. costs on average about $10,000 while it’s $8,307 in Switzerland and $2,251 in Spain. If that delivery becomes a C-section, the cost in the U.S. increases to $15,240 on average, but would cost $5,492 in the Netherlands.
  • Drug costs can also be quite different. Celebrex, used for pain relief, might cost $225 in the U.S. — and $51 in Canada. Cymbalta, commonly used for depression, anxiety and fibromyalgia, costs $194 in the U.S., but it’s $46 in England. Industry publication Vox presented some of the findings in an interesting way, pointing out the acid reflux prescription drug Nexium costs $215 on average in the U.S., more than 3.5 times the cost in Switzerland and almost 10 times more than what Dutch people pay.

The price comparisons are interesting in light of new recommendations released Wednesday from industry stakeholders pushing for health care price transparency, as The Washington Post reported. The group’s recommendations call for specifying who should be responsible for providing pricing information to patients, they said.

Though, that’s if we want to know how much it’s costing us.

(Article from Washington Business Journal, April 19, 2014)

What is driving healthcare costs? JAMA is pointing fingers at docs (not patients).

Posted on April 22nd, 2014 in Uncategorized by Karl

The simple equation for rising healthcare costs is:

Healthcare cost = (number of units of healthcare consumed) X (price per unit).

A November 2013 article the Journal of American Medical Association (JAMA) states that the top four drivers for rising healthcare costs are all on the cost side (as opposed to the demand side).  JAMA says the cost drivers are:

1) Admin costs – 5.6% per year.  Mainly derived from health insurance costs

2) The price of healthcare services (4.2% per year, especially hospital charges)

3) Price of drugs and medical devices (4% per year)

4) Price of professional services (3.6% per year, comprised of doctor fees and other healthcare professional fees)

JAMA goes on to say that DEMAND for healthcare services are NOT the root cause of increased healthcare expenditures.  It’s the cost side of the equation that is out of control.  I have stated many times in my blog posts that healthcare pricing is broken and lacks any real transparency.  In the US a patient does not know the price of a healthcare service prior to consuming it.  Next time you enter a doctor’s office or hospital, try asking…”before we get started on _____ procedure, what’s this going to cost me?”  Then, sit back and watch everyone in the doctor’s office or hospital start squirming since they have no way of giving you an answer.

You can link to the JAMA article at:


Market Bubble or Bull Market – You decide.

Posted on April 16th, 2014 in Uncategorized by Karl

Excerpted from Baupost Group’s Seth Klarman letter,

“Born Bulls”

In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test. What investors see in the inkblots says considerably more about them than it does about the market.

If you were born bullish, if you’ve never met a market you didn’t like, if you have a consistently short memory, then stock probably look attractive, even compelling. Price-earnings ratios, while elevated, are not in the stratosphere. Deficits are shrinking at the federal and state levels. The consumer balance sheet is on the mend. U.S. housing is recovering, and in some markets, prices have surpassed the prior peak. The nation is on the road to energy independence. With bonds yielding so little, equities appear to be the only game in town. The Fed will continue to hold interest rates extremely low, leaving investors no choice but to buy stocks it doesn’t matter that the S&P has almost tripled from its spring 2009 lows, or that the Fed has begun to taper purchases and interest rates have spiked. Indeed, the stock rally on December’s taper announcement is, for this contingent, confirmation of the strength of this bull market. The picture is unmistakably favorable. QE has worked. If the economy or markets should backslide, the Fed undoubtedly stands ready to once again ride to the rescue. The Bernanke/Yellen put is intact. For now, there are no bubbles, either in sight or over the horizon.

But if you have the worry gene, if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about. A policy of near-zero short-term interest rates continues to distort reality with unknown but worrisome long-term consequences. Even as the Fed begins to taper, the announced plan is so mild and contingent – one pundit called it “taper-lite” – that we can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences. Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings? Pretty clearly, lower than otherwise. Yet Robert Schiller’s cyclically adjusted P/E valuation is over 25, a level exceeded only three times before – prior to the 1929, 2000 and 2007 market crashes. Indeed, on almost any metric, the U.S. equity market is historically quite expensive.

A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla. The overall picture is one of growing risk and inadequate potential return almost everywhere one looks.

There is a growing gap between the financial markets and the real economy.

“Flash-Mob Speculation”

When it comes to stock market speculation, it’s never hard to build a “coalition of willing.” A flash mob of day traders, momentum investors, and the usual hot money crowd drove one of the best years in decades for U.S., Japanese, and European equities. Even with the ranks of the unemployed and underemployed still bloated and the economy barely improved from a year ago, the S&P 500, Dow Jones Industrial Average, and Russell 2000 regularly posted new record highs (45 for the S&P, 52 for the Dow, and 66 for the Russell) while gaining a remarkable 32.4%, 29.7%, and 38.8% including dividend reinvestment, respectively, in 2013. It was the best year for the S&P 500 since 1997… In the closing weeks of 2013, it was as if the strong gravitational pull of valuation had been temporarily suspended and stock prices had been launched by a booster rocket, allowing them to reach escape velocity. As with bull markets past, favored stocks started to become unmoored and unbounded.

“Speculative Froth” and Dot-Com 2.0

Whether you see today’s investment glass as half full or half empty depends on your age and personality type, as well as your “lifetime” of experiences in the markets and how you interpret them. Our assessment is that the Fed’s continuing stimulus and suppression of volatility has triggered a resurgence of speculative froth. Margin debt measured as a percentage of GDP recently neared an all-time high. IPO activity in 2013 was greater than it has been in years, with 230 offerings taking place, 59% more than last year and approaching 2007’s record of 288 transactions.

Twitter, for example, surged from $26 to almost $45 on day one, and closed the year around $64. It was priced, after all, at only twenty times its projected 2015 revenue. One analyst suggests the profitless company might achieve $50 million of “adjusted” cash earnings this year, giving it a P/E of over 500. Some hedge and mutual funds are again investing in late-stage, pre-IPO financing rounds for hot Internet companies at valuations that only seem reasonable if the companies go public, soon, and at astronomical prices., with a market cap of $180 billion, trades at about 15 times estimated 2013 earnings, Netflix at about 181 times. Tesla Motors’ P/E is about 279; LinkedIn’s is 145. Even though Netflix now carries some original programming, we’re pretty sure we’ve seen this movie before. Some 23-year-olds have sold their startup internet companies for hundreds of millions of dollars, while the profitless privately-held Snapchat has turned down a $3 billion buyout offer.

In Silicon Valley, it seems that business plans – a narrative of how one intends to make money – are once again far more valuable than many actual businesses engaged in real world commerce and whose revenues exceed expenses.

Ominous Signs

In an ominous sign, a recent survey of U.S. investment newsletters by Investors Intelligence found the lowest proportion of bears since the ill-fated year of 1987. A paucity of bears is one of the most reliable reverse indicators of market psychology. In the financial world, things are hunky dory; in the real world, not so much. Is the feel-good upward march of people’s 401(k)s, mutual fund balances, CNBC hype, and hedge fund bonuses eroding the objectivity of their assessments of the real world? We can say with some conviction that it almost always does.

Frankly, wouldn’t it be easier if the Fed would just announce the proper level for the S&P, and spare us all the policy announcements and market gyrations?

Europe Isn’t Fixed

Europe isn’t fixed either, but you wouldn’t be able to tell that from investor sentiment. One sell-side analyst recently declared that ‘the recovery is here,’ a sharp reversal from his view in July 2012 that Greece had a 90% chance of leaving the Euro by the end of 2013. Greek government bond prices have nearly quintupled in price from the mid-2012 lows. Yet, despite six years of painful structural adjustments, Greece’s government debt-to-GDP ratio currently stands at 157%, up from 105% in 2008. Germany’s own government debt-to-GDP ratio stands at 81%, up from 65% in 2008. That doesn’t look fixed to us. The EU credit rating was recently reduced by S&P. European unemployment remains stubbornly above 12%. Not fixed.

Various other risks lurk on the periphery: bank deposits remain frozen in Cyprus, Catalonia seems to be forging ahead with an independence referendum in 2014, and social unrest continues to escalate in Ukraine and Turkey. And all this in a region that remains saddled with deep structural imbalances. As Angela Merkel recently noted, Europe has 7% of the world’s population, 25% of its output, and 50% of its social spending. Again, not fixed.

Bitcoin And Gold

Only in a bull market could an online “currency” dubbed bitcoin surge 100-fold in one year, as it did in 2013. The phenomenon spurred The Wall Street Journal to call it a “cryptocurrency” craze, with dozens of entrants. Bitcoin now has an estimated market “value” in excess of $6 billion, leaving alphacoin, fastcoin, gridcoin, peercoin, and Zeuscoin in its wake. Now most sell-side firms are rushing to provide research on this latest fad, while “bitcoin funds” are being formed. Recent recruitment e-mails to staff such a platform reassure that even though experience is preferred, it is not required.

While bitcoin is yet another bandwagon we are happy to let pass us by, the thinking behind cryptocurrencies may contain a kernel of rationality.

If paper currencies – dollars and yen – can be printed in essentially unlimited volumes, and just as with all currencies are only worth what recipients on any given day will exchange in goods or services, then what makes them any better than the “crypto” kind of money? The dollars and yen are, of course, legal tender issued by governments, but in an era in which governments are neither popular nor trusted, that is not necessarily a big plus.

Gold, at least, has been regarded as “money,” for thousands of years, and it is relatively stable and widely accepted store of value and medium of exchange. It’s a well-known monetary “brand.” It doesn’t exist only (or at all) in cyberspace, and it cannot be printed on the whim of authorities.Ironically and perplexingly, while gold, the hard money alternative to the printing press kind of money, dropped 28% in 2013, the untested and highly speculative bitcoin went completely through the roof.

“The Truman Show” Market

Welcome to “The Truman Show” market. In the 1998 film by that name, actor Jim Carrey is ignorant of the fact that his life is a hugely popular reality show. His every action, unbeknownst to him, is manipulated while being broadcast to millions of TV viewers worldwide. He seemingly lives in an idyllic seaside community where the manicured lawns are always green and the citizens are always happy. These people are, of course, actors. The world Truman inhabits turns out to be phony: a gigantic sound stage created for a manufactured “reality.” As Truman starts to unravel the truth, his anger erupts and chaos ensues.

Ben Bernanke and Mario Draghi, as in the movie, are the “creators” who have manufactured a similarly idyllic, if artificial, environment for today’s investors. They were the executive producers of “The Truman Show” of 2013. A global audience sat in rapt attention before this wildly popular production. Given the U.S. stock market’s continuing upsurge, Bernanke is almost certain to snag yet another People’s Choice Award for this psychological “thriller.” Even in “The Truman Show,” life was not as good as this for investors.

But there is one fly in the ointment: in Bernanke’s production, all the Trumans – the economists, fund managers, traders, market pundits – know at some level that the environment in which they operate is not what it seems on the surface. The Fed and the Treasury openly discuss the aim of their policies: to manipulate financial markets higher and to generate reported economic “growth” and a “wealth effect.” Inside the giant Plexiglas dome of modern capital markets, just about everyone is happy, the few doubters are mocked and jeered, bad news is increasingly ignored, and markets go asymptotic. The longer QE continues, the more bloated the Fed balance sheet and the greater the risk from any unwinding. The artificiality of today’s markets is pure Truman Show. According to the Wall Street Journal (12/20/13), the Federal Reserve purchased about 90% of all the eligible mortgage bonds issued in November.

Like a few glasses of wine with dinner, the usual short-term performance pressures on most investors to keep up with the market serve to dull their senses, which makes it a bit easier to forget that they are being manipulated. But what is fake cannot be made real. As Jim Grant recently noted on CNBC, the problem is that “the Fed can change how things look, it cannot change what things are.” According to John Phelan, a fellow at the Cobden Centre in the U.K., “the Federal Reserve has become an enabler of the financial havoc it was designed (a century ago) to prevent.”

Every Truman under Bernanke’s dome knows the environment is phony. But the zeitgeist so so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end, and no one wants to exit the dome until they’re sure everyone else won’t stay on forever.

A marketplace of knowing Trumans seems even more unstable than the movie sound stage character slowly awakening to reality. Can the clued-in Trumans be counted on to maintain their complicity or will they go off-script? Will Fed actions reliably be met with the desired response? Will the program remain popular? Could “The Truman Show” be running out of material? After all, even Seinfeld ended.

Someday, the Fed’s show will be off the air and new programming will take its place. And people will debate just how good it really was. When the show ends, those self-deluded Trumans will be mad as hell and probably broke as well. Hopefully there will be no sequels.


Someday, financial markets will again decline. Someday, rising stock and bond markets will no longer be government policy – maybe not today or tomorrow, but someday. Someday, QE will end and money won’t be free. Someday, corporate failure will be permitted. Someday, the economy will turn down again, and someday, somewhere, somehow, investors will lose money and once again come to favor capital preservation over speculation. Someday, interest rates will be higher, bond prices lower, and the prospective return from owning fixed-income instruments will again be roughly commensurate with the risk.

Someday, professional investors will come to work and fear will have come to the markets and that fear will spread like wildfire. The news flow will be bad, and the markets will be tumbling.

Six years ago, many investors were way out over their skis. Giant financial institutions were brought to their knees…

The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.

But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.

Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.