Model Management: More market madness?

The Nasdaq index has spent a lot of time recently straddling the symbolic 2000 point mark. Cisco plans to shed 18 per cent of its workforce. Intel, Kodak and Phillips all look poorly. Germany is not growing as fast as was hoped, Japan stagnates, and the US wonder economy is tumbling fast. Where has it all gone wrong?

J K Galbraith said recently that his famous work The Great Crash may now have to be renamed The Great Correction, given today's volatility in the markets. Perhaps at the moment we are simply living through such a correction.

But participants and mere onlookers in business today must be bamboozled by the extraordinary ebbs and flows in the markets. Dave Barry, a columnist for the Miami Herald and one of FTdynamo's favourite people, put it this way last weekend: "No matter what the stock market does, the TV news always boils down to this:

Anchor: The stock market today went either up or down, and nobody on this earth knows why. For more, here's our financial expert.

Financial Expert: Analysts attributed the movement of the market to a market movement, in which the market moves either upward or downward, depending on the direction of the market, although sometimes it holds still.

Anchor: And is this expected to continue?

Financial Expert: It's too soon to tell.

Perhaps the irrational exuberance first identified by Alan Greenspan more than four (yes, four) years ago has finally come home to roost. But just as the improbable rise in asset values led to unreasonable and unjustifiable paper riches being created, so the opposite reaction causes excessive damage on the way down. The downturn is locked in and feeds on itself.

Business plans have been based on improbable forecasts (remember the time when investors were suspicious of dot-coms that weren't losing money?). Recruitment decisions have been taken based on these unlikely business plans. And companies in each other's supply chains are all equally disrupted. Overvalued share prices were used to finance acquisitions that were either over-ambitious or wrong in terms of strategy.

Because of all the business collapses some companies (Cisco for example) find themselves in competition with the grey market in their own distressed product line. There is no obvious end in sight to this downward spiral. In the US, at least, demand is imploding and business confidence is melting away. This is a man-made downturn, possibly exaggerated, but hard to stop. Europe and the rest of the world are bound to be affected.

John Chambers, Cisco CEO, said: "This may be the fastest any industry of our size has ever decelerated." The question is, if so many apparently smart senior managers can get their forecasts so badly wrong - both those running businesses and those investing in other people's - then what chance does anybody else stand? We will perhaps snap out of this state of mind eventually, but when?

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