It’s good to be king…while it lasts.
When you’re king, people do what you tell them to. Every time you tell them to… They know what’s coming if they go against you.
Out of reverence, or fear, you get your way. And the way you use power determines how long you’ll be king. Nobody holds on to the throne forever.
The problem is, life on the throne leads to restricted vision. You stop listening to advice that goes against your view of things. It makes you angry. When you get angry, people cower, and learn not to do it again.
You no longer look at the landscape and decide how to lead. Instead, you focus within, blaming doubters and heretics for any trouble. You tighten your grip inside, ignoring the changing world outside your kingdom.
Your wisest henchmen retire to the forest. Only sycophants and opportunists stick around. Eventually, the castle walls show cracks of vulnerability. An aspiring king makes a move.
At best, a threatened king absconds. At worst, his last mortal image might be of his own head rolling across the floor.
It’s All About Philosophy
Time and time again, this is how empires end.
Wikipedia has a list of coup attempts too long to count. In every case, the sitting leader seized the throne, and later lost it. The cycle continues century after century.
From countries to companies, it’s all the same. It comes down to the philosophy guiding a leader.
We all have a philosophy. Even people who say they don’t indulge in such thoughts still operate on one. The issue is, most people never take the time to define what drives them. Much less, question it.
Lazy corporate kings who ditched humility long ago lead some of the largest companies. They have soulless opportunists as henchmen. These leaders take the reins of innovative companies from founding entrepreneurs. They slowly turn them into sluggish bureaucracies. And the purpose of all bureaucracies is to serve the administrators who run them.
For a while they can overpower new ideas using cash and connections. The once innovative company becomes a hallow shell of its former self. Only a name remains. Eventually, a new idea strong enough to take the throne emerges.
The cycles of king to coup go a lot faster in the business world. We can learn from them. It’s less dangerous, and more fun for us as investors.
Corporate Kings Fall Hard
Take Jim Balsillie for instance.
Short, bald, and pugnacious, he’s exactly what you’d expect in a corporate warrior. Obsessed with seizing control, he’s the kind of guy who’d explode if someone parked in his reserved spot.
In a recently released film documenting his downfall, Balsillie made almost unimaginable calls from the throne. He sat in a corporate jet, on the tarmac, steering the company off a cliff, by force.
Force for this little man meant shouting, swearing, and threatening his employees, rivals, and even his pilots. At least, that’s how the film tells it…
Years earlier, he met a couple of nerds with a wild idea. They’d deliver email to a computer people carried in their pocket. The big companies of the day thought nobody would want such a service.
Balsillie didn’t either. After being fired from a company in an entirely different industry, he needed a new one to control. He thought he could overpower the nerds, take control of their idea, and do what they couldn’t. He was largely right.
Using mostly force, he quickly built the company into the most dominant product name in technology, Blackberry. Everyone had one.
In 2006, if you rode the subway to work on Wall St, you’d see a Blackberry in every hand. One person might have a Palm Pilot. That person was uncool. You had to have a Blackberry.
Where just a few years earlier nobody imagined you’d do anything on a phone other than talk, Blackberry redefined communication. It controlled over 50% of the new market it created. It invented the smartphone.
They Forget Who They Serve…
A king who puts the empire before himself has a chance. If you notice the opposite, watch out.
Instead of running the business, Balsillie focused on what he wanted most, a professional hockey team. Not for the company, for himself.
He tried to buy several teams. Each bid failed in a different way. He ran into forces he couldn’t bully. Screaming, swearing, and demanding only work on the first few rungs of the success ladder.
The pinnacle of hubris was in his attempt to purchase the Nashville Predators in the summer of 2007.
Prior to striking a deal, he bragged of how he’d relocate the team to his home town in Ontario. He even started selling tickets in advance taking 12,000 deposits. Keep in mind, he didn’t own the team. NHL team owners blocked the deal.
Flagrant, brazen, and self-serving, a king with a bad philosophy can’t hold on to power.
Luckily, we don’t have to suffer these tyrants for long. Nature has a way of taking care of them.
When it becomes clear the king is wildly off kilter, it’s a matter of time before he loses his head.
In the case of Balsillie, he missed a massive change in the market he created.
“Nobody Wants a Touchscreen”
While nobody got behind Blackberry the first time they heard the idea, Balsillie used the same denial to avoid reality in 2007. He heard about a computer company set to unveil a touchscreen phone. As the king of the smartphone market, he dismissed the idea.
Market dominance went to his head. When Apple unveiled the first iPhone in 2007, denial was the wrong response. Balsillie doubled down on his demise spending most of the year fighting with NHL team owners. The result was Blackberry (BB) shares fell more than 98% from high to low.
In the end, he absconded, settled an SEC suit, and now appears to hop around Canada trying to retell the story.
The biggest winner was one of the two nerds. He sold his stock in disgust, before the peak. He preserved a mountain of wealth. And he got away from the wayward king before the coup.
Signs of Decay
We’re not picking on Jim Balsillie. He’s no different from tens of thousands of corporate climbers stuffed into offices across the western business world. In fact, I’ve seen far worse.
The point is, maniacal CEOs are a lot like maniacal politicians, just without lethal weapons at their disposal. The philosophy guiding the two is what they share. We can learn a lot from watching how these executives build corporate empires. And even more from how they often destroy them.
The U.S. doesn’t operate under the control of a single person. That’s by design. Instead, we have a system where factions pull and tug for power. If enough of them work together, they get the reins for a while.
The issue today is, they increasingly use the system to benefit themselves at the expense of what made it all possible.
For its first two centuries, the U.S. market largely rewarded the best product or idea at the best price. That meant a U.S. product outperformed, outlasted, or at least best served the needs of the person paying for it.
This goes far beyond the production of quality household appliances. It’s a philosophy. The concept ran through physical products and into the souls of Americans. It rewarded quality, determination, and pursuit of outcomes that further strengthened the empire.
But the philosophy changed. At some point last century, we turned away when we saw graft. It’s sophisticated… We’re not talking about thugs looting the treasury. In the U.S., graft has a nice veneer.
Just visit Washington on a weekday. You’ll see a ~$4 trillion local economy that barely realizes there’s a country attached to it.
Cancel the Heretics
Power mad corporate titans slowly forget to focus on external challenges. Instead, they spend energy protecting the throne from internal threats. Eventually, they lose on both fronts.
I learned this the hard way in my early career. On several occasions, at different companies, I became the target of maniacal leadership. I couldn’t figure out why at first. They seemed hell-bent on eradicating me from their workforce.
I didn’t care about climbing the ladder, so I gladly moved on. When a ship is off course, let them kick you off at the next port.
What I later figured out is people don’t like change. Especially people who’ve outclimbed their natural ability. They resist change with immense force. Changing the status quo means losing their meal ticket. If they had to compete in a fresh contest, they know they’d struggle.
That’s why executives fiercely attack heretics. The same goes for governments.
Notice the way the U.S. mainstream treats differing opinions. Pick any topic. If you go against the narrative, you’re in trouble. If the mob doesn’t take you out, the censors will.
Down the road, you may be right. Too late. The trial happens in the digital realm now, not the court.
This has nothing to do with any one issue. It’s a culture change. And it’s one that leads to a weaker system over time.
People learn to keep their opinions to themselves. Even when they see something that needs attention, they’re smart enough to know it might upset the king. In our case, the ruling establishment.
Based on its history of free markets, the U.S. contributes ~25% of world GDP with merely ~5% of the world’s population. It got used to being king. However, it ran the engine too hot. Spending far more than it collects in tax revenue, it now faces an annual deficit of ~$2 trillion and counting.
To put that into context, the U.S. spent an amount over what it collected in taxes last year equal to ~18% of the value of all the gold ever produced in the history of the earth.
That’s not a problem if you have a growing, healthy tax base. However, decades of borrow and spend behavior has the U.S. system in a weak state.
Cheap debt fueled profits up and down the system, from poorly run businesses to individuals. Now it’s time to pay the bill.
This MarketWatch article goes on to say:
borrowers reported that the resumption of student-loan payments would push them to cut back by about $56 per month.
And
the payment pause afforded borrowers $260 billion over the past three years to save and spend.
It paints a picture of these borrowers saving the money not used to make payments over the three years. Somehow, I doubt it.
Leveraged buyout firm Apollo (APO) tallied US Census Bureau surveys to show ~36% of respondents reported difficulty paying expenses in October.
That’s a higher response rate than late 2020 when many people sat idled unable to work.
The U.S. can’t run a ~$2 trillion deficit, propose boosting taxes on its already beleaguered population, and fight wars in multiple parts of the world. It’s not possible, without sacrifice.
Two Critical Indicators
As investors, sacrifice means trouble. We need to keep our heads attached if the empire takes a body blow.
Earlier this year we drove home the point this is not a time to gamble. People comment about how they want more stock recommendations. We have nine. There are three on the watchlist I’d like to own. But there’s no point right now.
The nine stocks are businesses we’d own regardless of market conditions. That’s the way to stay exposed and survive a tough market. And the tough hasn’t even started.
When the U.S. abandoned free markets, it decided it could manage economic growth. This is centrally controlled capitalism. The idea is a sustained expansion. It comes with, occasional, brief panics. We’re due for one.
In 2020 we took the unprecedented step of mailing checks to people who largely don’t pay taxes. Anyone earning ~$80k or more didn’t get the candy.
That means most recipients immediately did crazy things with the free money. Crazy, means decisions they might not make with money they earned through personal sacrifice.
The result, a stock boom of epic proportions. We all know what happened.
The reason why it matters more today than during that boom is the carcasses still clutter the market. Wall St wisely gave the public what it wanted, more stocks to gamble on.
Slews of companies listed. Many had no business going public. After a fairly steady pace of annual IPO volume, 2020-2021 shows the public obsession with buying stock saw more than 5x the average.
That excess needs to unwind. As it does, the market struggles.
The Fed’s Next Move
The way this ends is obvious. Yield Curve Control. Here’s how it works.
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