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The Deeper Message of Financial Markets’ Volatility

The Dow swung 600 points (high to low) in two days this week—and the week’s not over.

Key stock market indices in Indonesia and South Korea lost over 6% of their total value yesterday alone. Seoul’s Kospi Index had its biggest point drop ever

Katie Couric leads the CBS evening news with tales of homeowners who can’t find lenders to refinance massively increasing adjustable rate mortgages they (stupidly) assumed.

What’s it all mean?

The short story is the same as the long story—but the long story is much more interesting.

The short story starts with a classic housing bubble. People start borrowing to buy real estate. It becomes musical chairs, flip the property, sell to the greater fool. And use leverage.  Better yet, OPM (other people’s money).  Best—use both.

Lenders, like good drug pushers anywhere, develop new products and pitches.  Finance the first mortgage with the second; “liar’s” loans, no proof of income required. Wall Street packages loans, slices and repackages them and resells them. No one is left holding the bag—-everyone is left holding the bag.

National Public Radio reports that you can purchase complete lies about your income and employment history at sites like verifyemployment.net  to help fuel the game.

The short story is that the world has become so connected financially that a housing bubble in the US can decimate the stock market in Djakarta.  Everything is linked to everything.  This isn’t like 1929, where wealthy people lost money in the crash and soon couldn’t pay their employees.  This is far more integrated, international, intertwined, interdependent—and fast.  Butterflies flapping wings and all that.

True enough. But the financial markets are just a piece of a bigger puzzle. 

In the long story, the growth in connectedness of all things  exceeds the wildest dreams of rabid conspiracy theorists from just a few decades ago.

Tom Friedman’s The World is Flat is, at root, about how the world has become interconnected.  Time and space are being obliterated by always-on, high-bandwidth,  voice, data and video connections.  Capital flows easily around the world. The internet’s inherent freedom runs roughshod over the desires of industries and nations alike to maintain boundaries.  Even labor becomes mobile—if not through immigration, then through outsourcing.

Six degrees of separation has for some time now begun to look like an overstatement.

The first level of business implications is clear.  Pick one thing and do it the best in the world; outsource everything else to whomever is doing those things the best in the world.

But even that is old paradigm stuff—competing in a global world and all that. Increasingly, that’s so five minutes ago.

The really, really big lesson is this.

The game of competition is over. It’s not about vertical corporations competing against each other anymore.  It’s about collaboration and connectivity—with everyone. He who can get along with everyone better than everyone else will succeed.

Not “win”—succeed.

In a massively connected world, corporate strategy is less relevant than customer strategy.  It’s your ability to cut agreements with customers and suppliers that helps you—not your ability to squeeze pennies out of them.

This is a huge shift for people raised in business in the last 50 years, weaned on concepts like sustainable competitive advantage and shareholder wealth creation.

The business-strategic value of trust was always high.  It’s about to get far, far higher.  Those stuck with mental models built on inter-corporate competition are going to get left behind those who "get" the simple idea of service to customers, employees, and partners.