Pre-Suasion

The subtitle is A Revolutionary Way to Influence and Persuade and the author is Robert Cialdini (2016).

I got turned on to this one by reading Win Bigly by Scott Adams, as he refenced it several times and suggested that the writer is one of the real greats of the persuasion game.

The book’s focus is on the preliminary steps and efforts that one can make in trying to convince someone to buy your product or accept your view or comply with your request – before you actually make the pitch.  And in many respects it is about pre-disposing someone to turn his attention to where you want it to be.  Leading questions that get people to think about acting in a way that is consistent with a stated answer of the type person she is.  Creating a dynamic of trust and sense that the person you are talking with feels liked and appreciated.

“Do you consider yourself a helpful person? Yes? Well then here’s a survey that I need your help with.”

When you want someone to really focus on what you’re saying, start to talk more quietly, forcing her to lean in and concentrate.

People are more likely to say yes to people they owe, out of a sense of reciprocity.

Highlight similarities and provide compliments.

Address weakness before strength as a tactic to come across as more honest.

The author goes into a lot of interesting examples of how principle can be executed upon, and how people really can be manipulated to look where you want to them to look.  It is a power that can clearly be used for good or evil.

Trend Changes

I revisited an interview with Harris Kupperman on Real Vision from November.  His comments on interest rates were not news (if you have been paying attention), but his delivery did a good job of succinctly clarifying the risk:

“I think the number one big-picture view right now is interest rates. If you look around the world, every currency, every yield curve, every duration component, they're all breaking out. There's a 30-year chart in the US it just broke out of. You look at shorter term charts, there are basically inverse head and shoulders everywhere. It's all breaking out.

And when you have so many different breakouts at the same time, it's probably a trend change. Interest rates go in generational cycles, 30-year cycles, and we just ended a 30-year cycle. No one in the markets right now, or almost no one, has invested during a time when rates go up. They've only seen rates go down.

I think you're going to see a huge change in what's happening in the markets. When rates go up, the value of everything else, every asset goes down because it's all value on cash flows. At the same time, cash flows go down because interest rate coverage goes up.

And I think you to see a loss situation where companies today look conservatively leveraged at 100 and 200 basis points more interest rate will actually lead to them being highly leveraged from a cash flow coverage side, that buybacks and dividends are going to end. Debt pay down is going to begin. And I think you will see a lot situations today where you have reasonably good businesses, where two, three years from now, what's to be left is an equity sliver on the enterprise value and a huge debt component…

I think it's a lot like the '70s when rates go up and values keep going down. And increasingly cash flow goes to interest service. And you're coming at this from such low interest rates that you don't need interest rates to go to 10%, 15%. To move from 0 to 300 BPS right now is an extreme. But you have interest rate floors in place, so you haven't really seen it companies.

The move from 300 to 500 BPS, that's going to go to stretch a lot of companies. And you don't really need the rates to go up that much. And yes, I think it's going to be a dramatic repricing because right now, equities price in the future, so equities are pricing in future earnings growth often funded by buybacks. And suddenly they're going to be pricing in earnings declines as everything goes to interest coverage. And when that repricing happens, it's going to be very dramatic.”

Financial Shenanigans

The subtitle is How to Detect Accounting Gimmicks & Fraud in Financial Reports and the author is Howard M. Schilit (2010, Third Edition).

You may have noticed that I have been a more active reader lately, after some time off.  In fact, I have a new and longer commute to work, and the obvious way to pass the time has been to revisit an old friend.

The latest choice in literature is also a manifestation of re-engaging a formerly strong interest.  I have been a bit disconnected from thinking about stocks and the economy and how to interpret those topics in tandem.  The most recent book is an effort to reawaken that part of the brain and to think about public companies and accounting, and how those forces work together.

Accordingly, as the title should suggest, this read is largely an exercise in understanding the tricks that companies will play to hit the quarterly number and goose revenues and profits.  And the tricks, they are a plenty.  They include…

-Recording core business purchases as capex, so as to include the expense on the investing section of the Cash Flow statement, thereby lowering operational expenses and juicing revenues and cash flow from operations.

-Speeding up the recognition of revenue on long-term contracts, well in advance of the scheduled installments.

-Recognizing revenue before a customer’s right of return has expired.

-Improperly allocating proceeds from a sale (which are one-time in nature) from product sales (which are above-the-line and correlate to revenues earned).

-With unconsolidated joint ventures, playing games with whether requisite control exists (usually 20%) such that results should show up as revenue on the income statement or as fair value on the balance sheet.

-Depreciating assets too slowly.

-Playing around with reserves and allowances, so as to have a goody bag to smooth out earnings from quarter to quarter.

-Messing around with the interest rate on pensions so as to reduce the associated pension expense.

-Increasing the residual value on depreciable assets to lower the expense.

-Showing restructuring events every quarter, even though it is an event that should not be recurring.

-Improperly treating certain events as sales of receivables rather than as borrowings.

-Using acquisitions to boost cash flow from operations without any outflows (albeit the purchase itself is an outflow, but can be excluded from the operations ledger).

As they say, use it or lose it.  I’m trying to get my brain to think and go in many different directions, as the next phase of my life proceeds.

Win Bigly

The subtitle is Persuasion in a World Where Facts Don’t Matter and the author is Scott Adams (2017, with 2018 update).

As the creator of the syndicated comic Dilbert, Adams is also known for being a “trained hypnotist” and one of the first people who came out (during the primaries) to predict that Trump would be the next president.  He based his forecast on an assessment that Trump was a master persuader, arguably the best he had even seen.  To that end, while the book is about what makes Trump persuasive (including his analysis of key moments during the election cycle), it is more generally an overview of the art of persuasion.

On to the meat and potatoes.

What does powerful persuasion look like?  To wit, Trump was commonly hyperbolic in his initial comments about a particular policy issue (such as immigration, where he started out by advocating for mass deportations) – but, in reality, he was verbalizing a view that was directionally accurate and favorable (both sides of the political aisle believe in border security) and anchoring himself as the main voice for strategies to deal with the perceived problem.  So, once having that anchor set, he left himself plenty of room to negotiate back to a more moderate policy position, that would both allow him to pick up new supporters as the election approached, and that could still work for his original base.  Even if his facts and details were off – and his critics went to town on trying to refute them – he still won the conversation by focusing people where he wanted them to focus and gaining the benefits of setting the course for debate.  Because, cognitively, the more people think about something, the more important they consider that topic to be.  As a corollary to that point, he took attention off other policy issues where he was less equipped and did not have a depth of knowledge to engage his opponents.  Adams calls all of it “weapons grade persuasion”.

Adams also addresses Trump’s tendency to counter-attack aggressively.  His critics commonly suggested it happened because he is thin-skinned.  In fact, the author believes that it is good persuasion.  Both because it tells people that it is better to be his friend than his enemy, but also his reluctance to back down proved that he was hardened from a lifetime of dealing with criticisms.  Associated with that point, he brought new language to the game of political attacks.  So, on some level, his claim that he has the “best language ever” actually rung true – you remembered all the nicknames that he came up with for his opponents: “Crooked Hillary”, “Lyin’ Ted”, “Pocahontas”, etc.  Despite repeated efforts, none of his opponents had the same success with labelling him.

The author also believes that his simplicity of speech – a feature mocked by his opponents – allowed him to connect with voters.  Because, let’s be honest, “deplorables” as a label is bad politics, but most voters on both sides really are largely underinformed and simpleminded.  His style helped him to relate, even though he is a billionaire from New York.

Anyway, I am not trying to moralize, but I think Adams is largely correct.  And his non-Trump specific explorations on persuasion, which I did not dwell on in this post, are interesting subject matter that I plan to read and learn more about.  I guess he did a good job of persuading me.

More Perspective

Apropos the book that I just finished, I re-visited an interview from September with Kyle Bass, where he examines many of the same themes about China.  To that end, he offers a view on the trade hostilities between the U.S. and China that I think helps to support President Trump’s position and actions.  Caveat emptor (“KB” is Kyle Bass, “GW” is Grant Williams).

“KB: And whether you like the current administration or not actually doesn't matter. You need to look at what they're doing, right? Not what they're saying, what they're doing. Our administration, whether you voted for President Trump or not-- I didn't vote for him. I don't like the guy. I think he's got some real personal issues, just like everyone does. But if you look at what he's done with NAFTA, with China, with Canada and Mexico, he's done more than the last 15 presidents combined in kind of trying to push back and level the playing field.

GW: But it's interesting that that is couched as Trump getting tough on trade. Do you think-- I know you speak to the higher ups in government. You have good lines of communication open with those guys. Do they get this, or is this-- are they sleepwalked into a really crucial area here?

KB: No, they get it. It's the prior administration's, all the way back to Kissinger and Nixon. Kissinger and Nixon pivoted to China to counterbalance Russia's influence around the world. That was a strategic decision and we basically opened the kimono to China and prostrated ourselves, and we've never looked back, and we've never readjusted that relationship, and we allowed China to ascend in the WTO in 2001. We lost 4 million jobs in literally a nanosecond, as far as geopolitical time is concerned. And interestingly enough, that's what gave rise to President Trump. The Rust Belt flipped from blue to red, and that's why he got elected.

GW: Yeah.

KB: And it's interesting but the inaction with China is actually what produced this kind of president that I don't think many of us approve of. However, the people say Trump's starting a trade war. It's laughable, because there's been a trade war since 2001, and we haven't been fighting.

GW: Yeah, right.

KB: We've just been losing. And so the fact that he's leveling the playing field is the right thing to do.”

Separately, I started another book that deals extensively in the use and methods of persuasion, and how Trump is a master persuader in the author’s opinion.  So, as a postscript to my other post yesterday, where I made light of the President’s exaggerated trade deficit numbers with China, the author suggests that such behavior is entirely consistent with convincing people of your position.  The point is to be directionally accurate on the topic (i.e., “there is a major trade deficit between the U.S. and China that needs attention and response”), and even if your underlying details and facts are wrong, your opponents get bogged down in refuting you, which allows the subject matter to take on even more importance in everyone’s minds.  You have implicitly convinced people to make the topic a priority.  And, by extension, you/Trump position yourself as the strongest advocate for dealing with this now highly-important issue.

"Truth to Power!!!"

I am anything but a fan of Donald Trump, still I am among the few in my social circle who doesn’t suffer a level of derangement at the mere mention of his name.  Hence, the irony in my title to this post.  Nevertheless, I am happy to point out when he is lying or wrong.  In his pursuit of China, his consternation with their trade policies, IP theft, and other misgivings is justified.  But, his response is misguided, and, more specifically, his interpretation of the data is exaggerated.  In George Magnus’ book Red Flags, one particular data point often volleyed around is clarified to the President’s detriment:

“Yet, this $370 billion US trade deficit with China is not all strict bilateral trade, because China, as Asia’s prime supply chain hub, finishes off a lot of products shipped there by, say, Japan and South Korea.  According to the value-added trade data of the Organization for Economic Co-operation and Development (OECD), which allows for this sort of effect, the US trade deficit with China was just $150 billion in 2017, and once you allow for the US surplus in services, the total deficit was about $110-$120 billion.  This doesn’t mean the Americans don’t have legitimate arguments about Chinese trade and investment practices, but it is important to bear this in mind in assessing the bluster that often passes as trade policy.”

Red Flags

The subtitle is Why Xi’s China is in Jeopardy and the author is George Magnus (2018).

In the broad landscape of literature where analysts and economists opine in hyperbolic extremes about the future of China, Magnus tries to offer a balanced (tilting pessimistic) view of the country’s path forward.  And in erring to the negatives, his focus is primarily on the state-driven nature of the economy, which has led to feckless credit creation and rising credit intensity, weak institutions, and a risk-averse nature when it comes to truly disruptive experimentation that can trigger failure.

In looking at the meteoric economic rise of China over the past twenty or thirty years, Magnus points out that much of that growth stemmed from events that can only be booked once: joining the WTO, moving people from low-productivity rural life to high-productivity urban manufacturing, the massive real estate boom, the wave of globalization in the 1990s and 2000s, and enrolling all children in secondary schools.  All of those events are highly transformative, but not repeatable.

In addition, Magnus notes that much of that exponential advancement came under the relatively progressive and reformist leadership of Deng Xiaoping.  By contrast, the current leader, Xi Jinping, has shown a more autocratic and dictatorial tendency which hearkens back to Mao, where rules and processes become far less predictable.  Contributing to that, because it seemed that China was performing relatively well while the West struggled through the 2008 financial crisis, the continuing emphasis on reform was substituted with a misguided belief in the power and superiority of the Communist Party.  Thus, with more decisions and edicts made from up high, the underlying features which helped China to grow have become stifled.  None of which is promising as it tries to navigate its debt trap and still increase productivity.  And p.s., add to all of that, China is ageing more rapidly than any other large economy.

Still, in going through these realities, Magnus admits that the final story has not yet been written.  But, if we are honest, if China does manage to thread the needle and deal with these myriad issues in a way that avoids significant pain, their case study would be the first of its kind.  To be continued.