But that was nine years (and two brutal recessions) ago. Then, shortly after the Iraq War started, he was forced back to the drawing boards, and wrote How the Mighty Fall. Why? His summary in BusinessWeek explains: “Some of the great companies we’d profiled … had subsequently lost their positions of prominence,” including the Bank of America.

Why do “The Mighty” fall? “If some of the greatest companies in history can go from iconic to irrelevant, what might we learn by studying their demise, and how can others avoid their fate?” Then fate did intervene, a call came that for the adrenaline flowing master than hanging high on rocky cliff: “Would like you to come to West Point to lead a discussion with some great students?” A seminar for cadets? No, “12 generals, 12 CEOs, and 12 social sector leaders … and they’ll really want to dialogue about the topic.”

What topic? “America!” America? “What could I possibly teach this esteemed group about America?” A lot. The core issue became clear when the CEO of one of America’s top companies pulled him aside: “We’ve had tremendous success in recent years,” but “when you are at the top of the world … the most powerful nation on Earth … the most successful company in your industry … the best player in your game … your very power and success might cover up the fact that you’re already on the path of decline?”

The 5 danger signals planting the dark seeds of failure

Yes, success is blinding. When everyone says you’re the best, the leader, the most powerful player, when the press, your competition and your enemies all put you on a pedestal: “How would you know you’re not already on the path of decline?” That CEO’s questions inspired the new research, into what Collins calls “the silent creep of doom.” The problem: “Institutional decline is like a disease: harder to detect but easier to cure in the early stages; easier to detect but harder to cure in the later stages. An institution can look strong on the outside but already be sick on the inside, dangerously on the cusp of a precipitous fall.” Happens to the best on Wall Street, Washington Corporate America CEOs: You’re on top, but “sick on the inside, dangerously on the cusp of a precipitous fall” … but you don’t even know it.

The wake-up call: “If a company as powerful and well-positioned as Bank of America in the late 1970s could fall so far, so hard, so quickly, then any company can,” Collins discovered. “Every institution is vulnerable, no matter how great. There is no law of nature that the most powerful will inevitably remain at the top. Anyone can fall, and most eventually do.”

Collins sounds like anthropologist Jared Diamond in Collapse: “One of the disturbing facts of history is that so many civilizations collapse,” sharing “a sharp curve of decline” that “may begin only a decade or two after it reaches its peak population, wealth and power.” Yes, if it happened to Bank of America, why not America? Collins research exposed the “Five Stages of Decline.” Knowing them can help business, banking and government leaders “substantially increase the odds of reversing decline before it is too late—or even better, stave off decline in the first place.” Morover, “decline can be reversed … the mighty can fall, but they can often rise again.” Here are his warning signs, diagnostic clues along the five steps of declining:

Stage 1: “Hubris Born of Success”
Imagine Collins as a psychiatrist diagnosing a patient on his couch: “Great enterprises can become insulated by success … momentum can carry an enterprise forward for a while, even if its leaders make poor decisions … Stage 1 kicks in when people become arrogant” … insiders see “success virtually as an entitlement” … like Wall Street banks today … they “lose sight of the true underlying factors that created success in the first place” … they “overestimate their own merit and capabilities … The best leaders we’ve studied never presume they’ve reached ultimate understanding of all the factors that brought them success.” … If they do, “you just might find yourself surprised and unprepared when you wake up to discover your vulnerabilities too late.”

Stage 2: “Undisciplined Pursuit of ‘More’ ”
The belief “we’re so great, we can do anything” … drives many to “more scale, more growth, more acclaim, more of whatever those in power see as success” and justify mega-bonuses … they make “leaps into areas where they cannot be great or growing faster than they can achieve with excellence … investing heavily in new arenas where you cannot attain distinctive capability … launching headlong into activities that do not fit with your economic or resource engine … use the organization primarily as a vehicle to increase your own personal success—more wealth, more fame, more power—at the expense of its long-term success” … and you’ll “compromise your values or lose sight of your core purpose in pursuit of growth and expansion.” Sounds like Wall Street 2010, a community of addicts who pledge of allegiance begins, “Greed is Good” … amoral robots driven by a relentless commitment to the pseudo-capitalism of Reaganomics, blind to the impact on America’s democracy.

Stage 3: “Denial of Risk and Peril”
Here Collins warns of our natural tendency to self-deception: “Internal warning signs begin to mount, yet external results remain strong enough to ‘explain away’ disturbing data or to suggest that the difficulties are ‘temporary’ or ‘cyclic’ or ‘not that bad,’ and ‘nothing is fundamentally wrong.’… leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data … blame external factors for setbacks rather than accept responsibility” … slogans and ideologies beat out “vigorous, fact-based dialogue that characterizes high-performance teams … those in power begin to imperil the enterprise by taking outsize risks and acting in a way that denies the consequences” … much as did Paulson, Wall Street’s “too-stupid-to-fail’ CEOs, Bernanke, Geithner and the Fed’s toxic shadow banking system back in 2007-2008.

Stage 4: “Grasping for Salvation”
The earlier “cumulative peril and/or risks” now “assert themselves, throwing the enterprise into a sharp decline visible to all. The critical question is: How does its leadership respond?” Many make things worst. Instead of “getting back to the disciplines that brought about greatness” they “grasp for salvation:” Quick fixes … a charismatic visionary leader … a bold but untested strategy … a radical transformation … dramatic cultural revolution … hoped-for blockbuster product … game-changing acquisition … other silver-bullet solutions. Initial results … may appear positive … do not last.”

Next, a critical turning point: When “we find ourselves on the cusp of falling, our survival instinct and our fear can prompt lurching—reactive behavior absolutely contrary to survival … when we need to take calm, deliberate action, we run the risk of doing the exact opposite and bringing about the very outcomes we most fear … leaders atop companies in the late stages of decline need to get back to a calm, clear-headed, and focused approach. If you want to reverse decline, be rigorous about what not to do.”

America was at this critical historical turning point moment in the fall of 2008. We were not calm. The economy and markets were collapsing. Our leaders lost their cool. Former Goldman Sachs CEO, Hank Paulson, then Treasury Secretary, panicked like a frightened grad school kid, racing to Congress with a three-page demand that taxpayers bailout his old buddies, the same out-of-control greedy idiots who created the problem. Congress also panicked. In short, at that crucial historic moment in history, democracy failed us. Yes, democracy failed: Our elected representatives surrendered our great American democracy while also ending Adam Smith’s moral-capitalism, turning both along with the keys to the U.S. Treasury over to Wall Street’s new soulless pseudo-capitalism.

Stage 5: “Capitalization to Irrelevance … or death”
“The longer a company,” bank or nation “remains in Stage 4, repeatedly grasping for silver bullets, the more likely it will spiral downward. In Stage 5, accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future. In some cases the company’s leader just sells out; in other cases the institution atrophies into utter insignificance; and in the most extreme cases the enterprise simply dies outright.”

How can we return to “greatness?” What do the turnarounds have in common? “Each took at least one tremendous fall at some point in its history and recovered … but in every case, leaders emerged who broke the trajectory of decline and simply refused to give up on the idea of not only survival but ultimate triumph, despite the most extreme odds. The signature of the truly great vs. the merely successful is not the absence of difficulty. It’s the ability to come back from setbacks, even cataclysmic catastrophes, stronger than before … great companies …great social institutions … great individuals can fall and recover. As long as you never get entirely knocked out of the game, there remains hope.”

The key? Great leaders. New Churchill: Obama? Romney? Palin? Who?
Collins shines the light on several corporate revival journeys, ending with the familiar story of Churchill going from a 1930s “quagmire from which there seemed to be no rescue” to “Prime Minister at age 77, knighted by the Queen … Churchill’s simple mantra: Never give in—never, never, never, never.” Does America have a Churchill in the wings, a leader who knows “the path out of darkness begins with those exasperatingly persistent individuals who are constitutionally incapable of capitulation.” Many who thought it was Obama, but now question his “capitulation” to Wall Street, concluding that this final, total Wall Street takeover of Washington will ultimately kill America’s “financial strength and individual spirit to such an extent that leaders” whether Obama, Romney or Palin will abandon “all hope of building a great future, and just sell out,” as indeed Obama has … because we now have the answer to Collin’s core question, “How The Mighty Fall” … we see it unfolding rapidly every day on cable … game over.

original: MarketWatch 4.6.10

Yes, I called the March ’09 bottom. Even beat “Dr. Doom” to the punch again (yes, again). Earlier we were predicting the recession. This time we were calling the market bottom and a new bull. “Dr. Doom?” Of course I’m referring to you-know-who, the infamous Nouriel Roubini, the notorious “party-boy economist,” as Portfolio magazine calls him, the ubiquitous New York University professor with his well-oiled PR hype machine (and bon vivant lifestyle) that’s made him the “go-to” media darling with endless economic predictions. Portfolio pinpoints Roubini’s claim-to-fame in his February 2008 blog, “The Rising Risk of Systemic Financial Meltdown: The 12 Steps,” where he announced the recession actually started in December 2007. We covered it as a 12-act Shakespearean tragedy. But in early 2009 Roubini had a huge problem, one that hurt his fans, investors, credibility.

Earlier, Newsweek reported Roubini was predicting “the recession will last until the end of 2009,” nine more months. He also boasted that “eventually, when we get out of this crisis, I’ll be the first one to call the recovery … Then maybe I’ll be called Dr. Boom.” He made the same boast in Portfolio. We detail 6 reasons why he’ll fail. Roubini a great showman. A century ago he’d outdo PT Barnum with his incredible boast, a prediction rivaling historic ones made by other well-known New Yorkers: Babe Ruth’s famous home run in the 1932 World Series after pointing his bat into the center field bleachers, and Joe Namath’s prediction of an upset win over the heavily favored Colts in the 1969 Superbowl.

Warning: Here are 6 reasons why Roubini can never fulfill his promise … why he may go down in history as Portfolio suggests, the designated “one-hit wonder” … but worse, any investor waiting for Roubini “call” is playing Russian Roulette, a loser’s game … you will miss the market’s real turning point:

First. The stock market turns before the economy bottoms

Regardless of what “Dr. Doom” or any economist boasts, the stock market has a separate mind of its own, it’s a leading indicator. Stocks historically kick into action earlier than the economy recovers, often six months ahead of the economy’s bottom. Witness March. So while economists’ predictions pinpointing a recession may appear earlier than bear market predictions by the notoriously optimistic Wall Street pundits, the cycles work the other way in a recovery: A stock market bottom and new bull may occur six months before the economists call the ending of a recession and an economic recovery. So Dr. Doom’s “call” will naturally come months after the stock market in fact turns.

Two. Stocks make big money sudden, fast, then go to “sleep”

Back in January, Journal columnist Jason Zweig reported on some fascinating research: “History shows that the vast majority of the time, the stock market does next to nothing. Then, when no one expects it, the market delivers a giant gain or loss – and promptly lapses back into its usual stupor.” And the numbers back it up: “Javier Estrada, a finance professor at IESE Business School in Barcelona, Spain, has studied the daily returns of the Dow Jones Industrial Average back to 1900.” He “found that if you took away the ‘10 best days,’ two-thirds of the cumulative gains produced by the Dow over the past 109 years would disappear. Conversely, had you sidestepped the market’s 10 worst days,’ you would have tripled the actual return of the Dow. … The moments that made all the difference were just 0.03% of history: 10 days out of 29,694.”

Three. No one can predict the next “big move”

Unfortunately, markets are notoriously unpredictable, ruled by mobs of irrational investors who are all bad guessers, No one can predict in advance when those “10 worst” or “10 best” days will actually occur. Not on Main Street. Certainly not on Wall Street. Why? In his classic, Stocks for the Long Run, Wharton economist professor Jeremy Siegel studied all the big market moves between 1801 to 2001. Two centuries of data. Siegel concluded that in 75% of the time there was no rational explanation for big moves up in stock prices or big moves down. Lesson: Market timing is a loser’s game.

Four. Famous “media darling” pundits inevitably “flameout”

A month ago Newsweek’s science columnist and former Wall Street Journal legend Sharon Begley wrote a fascinating piece, “Why Pundits Get Things Wrong.” Her opening: “Pointing out how often pundits’ predictions are not only wrong but egregiously wrong—a 36,000 Dow! euphoric Iraqis welcoming American soldiers with flowers!—is like shooting fish in a barrel, except in this case the fish refuse to die. No matter how often they miss the mark, pundits just won’t shut up.”

Think of all the media darlings you know as Begley reviews the data: And “the fact that being chronically, 180-degrees wrong does not disqualify pundits is in large part the media’s fault: cable news, talk radio and the blogosphere need all the punditry they can rustle up, track records be damned.” The data comes from Philip Tetlock, a research psychologist at Stanford University: “Tetlock’s ongoing study of 82,361 predictions by 284 pundits” concludes that their accuracy has nothing to do with credentials such as a doctorate in economics or political science, nor on “policy experience, access to classified information, or being a realist or neocon, liberal or conservative.”

What matters? “The best predictor, in a backward sort of way, was fame: the more feted by the media, the worse a pundit’s accuracy. … The media’s preferred pundits are forceful, confident and decisive, not tentative and balanced. … Bold, decisive assertions make better sound bites; bombast, swagger and certainty make for better TV.” They can be totally wrong, so long as they’re assertive and entertaining. “The marketplace of ideas does not punish poor punditry. Few of us even remember who got what wrong. We are instead impressed by credentials, affiliation, fame and even looks—traits that have no bearing on a pundit’s accuracy.”

Five. Even the best economists make huge errors

Go back a decade to that classic article in BusinessWeek, “What Do You Call an Economist With a Prediction? Wrong.” Four years later in “So I Was Off by a Trillion” BusinessWeek punctuated the message, reporting on Gregory Boskin’s classic error. Boskin, a Stanford economist and former chairman of the Council of Economic Advisers under Bush 41 “circulated a startling paper to fellow economists. In it, he argued that the future tax payments on withdrawals from tax-deferred retirement accounts … were being drastically undercounted. That meant federal budget revenues could potentially be in for a huge, unforeseen windfall … of almost $12 trillion.”

That also meant a political boost for Bush 43: “Larger than the sum of the 75-year actuarial deficits in Social Security and Medicare plus the national debt.” Later, however, Boskin checked his numbers and “concluded that he had made a serious mistake: A key term had been left out … possibly wiping out most of the estimated $12 trillion in savings.” No surprise: Political ideologies often motivate “objective” economists.

Six. Will the real “Dr Doom” please stand up?

Roubini actually shares the “Dr. Doom” title with many others, including Hong Kong economist Marc Faber who publishes the “Gloom Boom Doom Report;” legendary Salomon Bros. strategist Henry Kaufman; and Houston billionaire Richard Rainwater, whom Fortune mentioned as “Dr. Doom.” In addition, in June last summer, we reported on many others whose predictions of a coming recession predated Roubini’s claim, though not called “Dr. Doom.” They include: Pete Peterson, a Blackstone Group founder; Pimco’s Bill Gross; Harvard financial historian Niall Ferguson; Warren Buffett; former SEC chairman Arthur Levitt; Jeremy Grantham whose GMO firm manages $100 billion; Black Swan author Nassim Nicholas Taleb; and long-time Forbes columnist, economist Gary Shilling.

Noteworthy, way back in 2004 Shilling specifically warned: “Subprime loans are probably the greatest financial problem facing the nation in the years ahead.” And later in June 2007 Shilling said: “Just as the U.S. housing bubble is bursting, speculation elsewhere will come to a violent end, if history is any guide. Some astute pioneers, including Richard Bookstaber, who designed various derivative-laden strategies over the years, now fear that financial derivatives and hedge funds – focal points of today’s huge leverage – will trigger financial meltdown.” Then in a November 2007 column “17 Reasons America needs a recession” Gross predicted a bailout of “Rooseveltian proportions” ahead. Yes, we were warned. In fact, seems everyone knew. But our denial was too powerful, hidden under our new culture of infectious greed.

The examples go on and on … strongly suggesting that the “Roubini Hype Machine” may well be the “one-hit wonder” Portfolio calls him … he was not ahead of the competition with his December 2007 recession call … so if you’re one of America’s 95 million investors waiting for Roubini to call a bottom before getting back in the market, you’ll miss the real turning point.

One final, crucial warning: This next bull will be short. First, it will suck money out of the mattresses of investors who are sitting on cash. Then Wall Street will recreate the insanity of the 90’s dotcoms and the recent subprime-credit mania. But underneath it all, Wall Street’s bulls will be setting the stage for yet another catastrophic bubble and meltdown … so please be careful when “Dr. Doom’s PR Hype Machine” proclaims that Roubini’s finally morphed into “Dr. Boom” later this year … it’ll be too late.

FirstPubDate: Mar’09