WASHINGTON, Oct. 15 (UPI) -- It was a period of youth and excess, when 20-somethings became billionaires, dress became casual, profits became unnecessary and accounting principles became infinitely flexible. It has ended, and a very different world is taking its place.
This is no normal stock market and economic downturn. The Standard and Poor's 500 Index is now down from its March 2000 peak almost as much as in the 1972-74 bear market, the deepest since World War II.
The length of the downturn, too, is extraordinary. This is currently the longest bear market since World War II; in December it will pass the record of the infamous 1929-32 market, which although of unparalleled severity, lasted only 33 months from its peak in September 1929 to the trough, down 88 percent, in June 1932.
European stock markets are in some cases worse affected -- the German market is already down two-thirds from its high. And of course the Japanese market is down by three-quarters from its 1990 level, and appears to be sinking further.
Economically, mildly positive gross domestic product figures in the United States in 2002 have been produced by an infusion of money from the Federal Reserve and a tax cut, mitigating the immediate severity of the downturn, at the cost of prolonging it and removing tools that could be used to emerge from it -- not a good trade-off in my view, as pointed out in this column in January 2001, when the policy was instituted.
Outside the United States, the current picture is even grimmer. Japan remains mired deep in recession, and Germany seems to have entirely lost the economic dynamism that fueled the post-war witschaftswunder economic miracle. Latin America too, while a small player in the world economy as a whole, is an important trading partner for the United States, and appears headed down an economic black hole with no sign of a bottom. This deep synchronized down turn has not happened in 70 years; it's bad news.
The U.S. stock market has further to drop, with equilibrium likely only when the Dow Jones Index reaches 5,000, and a big chance of "overshoot" beyond that level, because of the negative confidence and wealth effect of such a drop. Economically, a moderate housing bubble, accompanied by huge mortgage refinancing, seems on the point of bursting, which, together with the consumer's over-indebtedness, will exacerbate and prolong the economic gloom.
Economically then the future, for the next several years, will be very unlike the immediate past. Politically, too, it is likely that shenanigans that passed unnoticed in the '90s will be the object of intense scrutiny, public obloquy and legal harassment. Accordingly, top management will require talents very different from those that succeeded in the '90s.
An ability to handle rapid change will no longer be necessary, or even desirable. The merger and acquisition market will be closed because of low stock market values, and new capital will be scarce. Consequently, bold leaps into new business areas, requiring large outside financing and involving high risks, will be undesirable. Flat, flexible empowering organization structures will go out of fashion, in favor of sparse "do-it-by-the-book" structures with few autocratic top managers and many obedient workers.
The ability to work 80-hour weeks will also be superfluous. Whereas tech-savvy staff was scarce in the boom years, they will be plentiful once growth and change have vanished. In some areas, similar to automobiles or movies in the 1930s, innovation will continue, since it will form an important competitive weapon by which strong companies will increase market share at the expense of the weak. In other areas, such as financial services and consulting, the demand for the service will run at a fraction of the peak level, with companies repeatedly downsizing to match revenues and outgoings. In such sectors, the supply of skilled labor will be far greater than the demand for it, causing a collapse in salaries from their current inflated levels.
With labor easily available and much cheaper, companies will increase efficiency by employing more staff, who work normal hours and follow instructions, giving great attention to detail and quality, crucial in a stagnant market, with clients that can choose their suppliers carefully.
Ethical standards will be set on a top-down basis, with management watched carefully by stockholders. The "get rich quick" approach to business will be out of fashion. Many of its prominent practitioners, who cut too many corners in the boom years, will be in jail, or at least in disgrace. More important, the opportunities to "get rich quick" will be minimal -- if profit margins are squeezed, and the stock market is dull, there is neither the need nor the ability to pay CEOs or top producers lavishly. Thus the aggressive will be unable to make "drop dead" money quickly, and so will need to be much more careful with customers and colleagues.
The salesmen, financiers, consultants and top management with this new skill set will come from one major source, neglected during the boom: the old. Younger people, who have worked only in the frenetic '90s, will lack experience of operating in the new environment, and will often have work habits and ethics that make them incapable of doing so. Older people, with experience of the sclerotic U.S. economy between 1970 and 1982, will be better able to adapt, and more likely to accept quietly the slower pace and lower pay levels that the new environment will provide. To have such experience at a senior level, they must currently be 50 or more. During the long downturn, the business playing field will thus be tilted heavily in favor of people born in 1952 or earlier. Paul Volcker, currently 75, epitomizes the qualities needed in the new era.
What happens then depends on how long the downturn lasts. If, as in the 1970s, the malaise is brief, with growth re-emerging after a few years, then the effect will be modest: the average age of top salesmen and managers will rise for a few years and then fall back, as growth resumes, younger people are once again drawn into the workforce, and older managers are pensioned off.
Since the Bush administration has fired off both its strongest weapons, of fiscal and monetary stimulus, before the correction has bottomed, such an outcome is unlikely. The overvaluation in markets was much more extreme than in the late-'60s/early-'70s, and the correction is likely to be correspondingly more severe and prolonged. The examples to look at are Japan, 1990-2002 (which tells us little in this area, since Japan has always been something of a gerontocracy) and the United States and Britain, 1929-41 and 1929-51 (Britain's mid-'30s economic recovery was disrupted by war, which was not followed by post-war boom.)
The Great Depression evidence is unambiguous. Management turnover, which had risen in the United States 1920s, dropped sharply and top management's average age, which had dropped, rose throughout the period. In Britain, the 1920s were already a period of slow growth and sclerotic, aging management, but the tendency grew much more marked.
In U.S. banking, for example, the 1920's leaders were Albert Wiggin, of the Chase National and Charles Mitchell, of the National City Bank. Thomas W. Lamont, chief executive officer of J.P. Morgan from 1923, was outshone by competitors because of the bank's conservatism.
After 1929, Mitchell and Wiggin lost their jobs, amid Enron-style investigations and scandals. In the 1930s, Morgan (from 1935, Morgan Guaranty) became the one safe haven in international banking, and Lamont became the world's leading banker, playing a key role in the Republican presidential nomination of Wendell Willkie in 1940, and dying in harness at 75, in 1948.
In automobiles Alfred P. Sloan emerged as CEO of General Motors in 1920, at 47. Sloan built up GM's business in competition with Ford in the 1920s, forming the world's first modern corporate bureaucracy, but then went on and on, increasing GM's market dominance in the difficult years of the 1930s and 1940s. Sloan retired as CEO in 1946, after a 26 year run, but carried on as chairman, playing a role in the company's 1950's successes, finally retiring to publish a best selling memoir in 1963, as he turned 90.
In Britain, William Morris, Lord Nuffield, was already well established as a leading manufacturer by 1929, when he was 52, but continued to build Morris Motors' position, helped by friendly Imperial tariff policy, through the 1930s. In 1946, he re-emerged from war production, and was portrayed by Fortune in July of that year, with a new model line-up, ready to introduce the U.S. market 30 years early to the joys of cramped, underpowered automobiles. Sadly, British economic policy, which had favored his growth in the 1930s, was detrimental to it post-war, as the sterling/dollar exchange rate was maintained consistently overvalued, while steel nationalization prevented the cost cutting which that sector desperately needed. Nuffield nevertheless carried on as Chairman of Morris Motors until his death in 1960; his final triumph was the Mini, Britain's last really successful mass-market car, introduced in 1959.
Probably the most celebrated manager in the United States in the late 1930s and 1940s was Sewell Avery, CEO of the leading retailer Montgomery Ward. Avery had a considerable career at U.S. Gypsum in the 20 years to 1929, ending as chairman. In 1931, aged 58, he was brought in to save Montgomery Ward, which was teetering close to bankruptcy because of over-expansion.
He did so superbly, ruling with a rod of iron; when the National Recovery Agency tried to impose government-mandated prices and wages codes for retailing in 1934, Avery stood alone in resistance, being forced to pay $30,000 for code administration and being banned from government contracts. He was vindicated the following year when the Supreme Court declared the NRA unconstitutional.
Later in the decade, he achieved a marketing coup with the invention of "Rudolph the Red-Nosed Reindeer" as a Christmas promotion. Avery not only opposed the New Deal, he opposed the Progressive Era's legislation as well; his apotheosis was to be carried bodily out of Montgomery Ward's offices by federal marshals in 1944, for resisting unionization.
Avery continued in office until 1955, when he was forced out at 82. After World War II, economic expansion resumed, and Avery missed expansion opportunities, but maintained Montgomery Ward as an effective and profitable organization, with $300 million in cash at his retirement -- its decline to bankruptcy in 2000 came later, when he was succeeded by lesser mortals, swayed by 20th century business fashions.
For an even more retrograde example of gerontocratic management in action, one returns to Britain, and the merchant bank Morgan Grenfell. Vivian Hugh Smith, a keen fox-hunter from a prominent banking family, was appointed partner at Morgan Grenfell in 1910, and took over the bank from "Teddy" Grenfell in the early 1930s, being created Lord Bicester by a grateful Neville Chamberlain in 1938.
Bicester continued as a staunchly tradition-upholding chairman through the 1930s, World War II, post-war austerity and the beginnings of recovery, handing over to his son only on his death at 89, in 1956 -- since he worked a 20-hour week, he saw no reason to retire. According to his New York Times obituary, he was famous for the "reasonable and fair-minded attitude with which he approached every problem" but even in his last years Bank of England governors trembled when Bicester dropped in for tea and an exposition of "fair-mindedness."
In choosing aged autocrats, and keeping them in office for decade after decade, U.S. and British businesses in the 1930s were rational. Such people had experience of difficult times, earlier in the century, and as the years wore on their long business experience, and ability to streamline decision-making, made them indispensable. The 1930s were a period of slow growth in the management cadre, even shrinkage in such areas as financial services, low capital investment and minimal corporate restructuring other than that forced through bankruptcy. Thus there was no pressure of young hotshots trying to move their seniors out of the way so they could have their turn.
By 1940, a typical large company management included a small top team who were well over 60, and had substantial pre-1914 experience, a downtrodden middle management cadre in their 40s, who were depressed by their 1930s failures and un-aggressive in seeking to move forward, and a few very young managers who would come to the fore after the old top management died off. The generation in its 50s had been in senior positions in the 1920s, was discredited by its failures after the 1929 Crash, and had retired early. The generation in its 30s had been fired in the downturn on the principle of "last in, first out" and had left the managerial ranks.
If, as I expect, the current recession is both deep and long-lasting, with low capital investment and a decade or more when the economy lacks Maynard Keynes' animal spirits, then top management in 2012 will by current standards be surprisingly old -- typically in their middle or late 60s, having started their career around 1965-70.
The middle generation, between 45 and 55 in 2012 will, if they were successful in the 1990s have retired, seeing no purpose in carrying on in a boring environment for far less money than they are used to. The unlucky ones, of course, will have been forced out by scandal and will be supporting themselves outside the business arena.
The 30-40 year olds will still be in the workforce, but will be generally soured and resentful at their low pay and lack of prospects.
Finally, those few below 30 who have landed managerial jobs will be trying to impress their aged seniors; it is they, not their middle-aged superiors tainted by failure and resentment, who will succeed to the top jobs as the gerontocrats retire and the economy begins to recover its full strength.
Disclosure: I was born in 1950, and was told I was "too old for investment banking" at the age of 36. It is now my ambition to become the 21st century's version of Lord Bicester!
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)