Investcafe.org

I’ve been tossing a notion around for some time now and it is something that comes up in the public discussion every now and then.  Up until this point I had really limited it to the food industry but after reading an article about small local banks experiencing very healthy increases in deposit customers I realized that there must be something more profound going on.

Big business, big risks
For decades we have talked about the impact globalization has had on society, political affairs and economics around the globe.  The range of opinions about this phenomenon are as varied and numbered as the impacts.  Often Globalization gets tied to outsourcing and, depending on whether you are a savvy business person or an ambitious politician, it signifies the creation of competitive advantage or the loss of many jobs. 

It has also found itself as the centerpiece of a merger or acquisition strategy for a large business that needs to ‘compete on a global scale’.  Globalization also receives credit, rightfully so, for the creation of a new more advanced global economy where integration and a shared sense of fate are its underpinning.  But there is something else that Globalization has done which may bring with it a new set of risks.

Only as strong as the weakest link
Globalization has, at least in the public discussion, subordinated the importance of the local economy and small business to macroeconomic initiatives and large enterprises.  I have no intention of meaning this as a blanket statement but only to describe the extent to which we have operationalized globalization into our social, political and economic models.  The risk of glazing over the details and focusing on the forest is that we are unable to see if the trees are rotting from within.

Take our current situation, where one large institution after another has failed, gone under or is in the process of going under.  We can also ponder over the real estate crisis and whether California, Florida and Nevada where signs of a distressed forest.  The inherent risk of this flawed perspective is that risk itself is magnified.  Whereas mergers and consolidations were viewed as positives for the customer and business the unintended consequence and therefore risk to society was that a failure would sting that much more. 

All economics is local
I think ‘Tip’ O’Neill was onto something when he said that “all politics is local”.  That statement could easily be tweaked to say the same for economics and evolution - I will get back to the evolution part later.  There are some products and services that just have no business being brought in from anywhere other than the local community. 

Take for example food from the grocery store.  With the exception of those foods that require specific geographic characteristics most fresh foods could be produced within close proximity to its customer base.  There are several advantages to the customer, business and economy from maintaining a close relationship between the food we eat and our community.  This form of food patriotism is among other ways to achieve better sustainability. 

Another trend that is becoming prevalent in today’s economic climate and ties back to the local economy is community banking.  Local banks are benefiting directly from the lack of confidence in large banking institutions.  In fact many are seeing double digit increases in new deposit accounts as a result.  Local banks, which tend to have more established and personal relationships with their customers, have the advantage of knowing their customer and what their needs are.  The risk of lending can be further reduced because the banker has a more intimate knowledge of the business, its risks and, most importantly, the principal asking for the money. 

Survival of the fittest
This is an aside but I mentioned evolution earlier and wanted to take this opportunity to throw organized labor under the bus.  The fundamental idea behind organized labor has always irked me, as it seems to fly in the face of evolution.  There are some things in life that we simply cannot control and must either adapt to or die from it.  Organized labor, for the most part, has fought progress only to stave off the inevitable.  Not only does this intransigence make it difficult for a business to operate competitively but it poses a significant risk to a community when this mentality pervades its labor force.

Some communities in Michigan are looking how to offset the effect of job lossess as a result of failing auto companies.  In deed some of these small cities face serious problems as their largest employer is on the brink of failure.  Their precarious situation presents an opportunity for adaptation to the reality of the marketplace for labor.  While some communities are working to bring other major employers to the area they will face a major obstacle.  Until the business community sees a fundamental capitulation in the trend for labor to organize these communities will face an uphill battle - let me rephrase that, they will have to scale a near vertical mountain on a rainy day with only a tattered old 1/4 inch nylon rope.  Good luck, I am sure that you all can organize into a tall human chain with the prospect of getting at least one of you to the top, but then you will spend an eternity arguing why YOU should not be the one on the bottom.

I am sure others have noticed by now that the discussion about bailing out our Big 3 auto firms reliably ends up with GM being the focus of attention.  I think there is something to be said about this.

It has always been my opinion that GM is the embodiment of poor management, lack of vision and a stubborn proclivity to rely on excuses in the face of adversity.  The public apprehension towards bailing out the Big 3 seems to be a manifestation of the same sentiment.

What I find unfortunate is that Ford, while equally responsible for its current situation, has been more responsive to the realities of the marketplace and yet seems to be getting dragged down with GM’s bad reputation.  Ford has brought in a new CEO, it has been in the process of painful but necessary steps to restructure and it has quickly begun to adapt.  If any of these firms should be bailed out it should be Ford.  GM should be forced to restructure under Chapter 11.

What many do not seem to understand is that allowing GM to fail could be a blessing in disguise.  With the anticipated growth of the alternative energy industry (wind, solar, etc…) we will need workers to man these jobs.  Where will they come from???  Look at the unemployment rate as it stands in the midst of a considerable economic  downturn – 6.5%.

Let’s look past the trees for a moment and see the forest.  The next decade will see baby boomers leaving the job market en masse – creating an industry that caters to them in the process.  Energy will be an ever increasingly important industry that will require imagination, talent and huge amounts of capital.  There is opportunity on the horizon, but we need to recognize it and prepare ourselves for it.  Americans have always shown their ability to take a bad situation and thrive on it.  Let’s keep that tradition alive.

Just pondering here… my ability to articulate these thoughts in a clear and comprehensive way are lacking right now but bear with me - these are interesting things to consider..

Let’s talk about the current financial situation going on globally – particularly this ‘credit crisis’.  Perhaps I am just too simple to understand the ‘complexities’ of the global financial markets and how credit is a fundamental component of it.  But perhaps I do.  Perhaps I do understand that credit is the grease that keeps the gears of our economy moving smoothly.  That credit is THE way in which risk is spread out among all of the market participants.  Perhaps it is the large banks and the Federal Reserve and our celebrity politicians who do not understand these complexities.  Robert Reich, a former Secretary of Labor, is on to something in one of his recent posts where he asks the question ‘maybe too big to fail is just too big’.

What I find interesting even now is how banks continue to make poor decisions that only seem to aggravate the current situation.  Only now are banks beginning to mobilize to keep families in their homes instead of putting them on the street.  Where was the foresight? Now of course we will get excuses about how much red tape must be navigated in order to take those steps, but I consider them just that - excuses.  Action requires only one real ingredient – a desire to make it so.

This ‘credit crisis’ is also a function of banks choosing to hide under a rock instead of taking a leadership role and managing the situation.  They are choosing to hoard their cash and refusing to lend it out and keep those ‘gears’ turning.  This morning I read another article showing banks’ counterproductive efforts, this time dealing with public transportation.  Banks are using technical legal language in their financial dealings with mass transit companies to require lump sum repayments – hundreds of millions of dollars – within weeks!

It feels like we are all stuck in a canoe paddling furiously against a current that is taking us directly towards a deadly waterfall.  The strongest and most capable paddlers are the banks, but unfortunately they are jumping ship en masse and forcing us to work ever harder.

Stiglitz offers a compelling account of his experiences with the IMF, the World Bank, and the U.S. Treasury. By combining his experiences with his economics background, he gives a vivid account of how globalization has been mired with failure after failure and economies in transition have suffered widely as a result of poor global economic policy. His first hand accounts are illustrated by evidence of how international institutions of global integration, like the IMF, the World Bank, and the WTO have pursued narrow interests at the expense of those who needed the most help. (more…)

I cannot help but notice the unending stream of repetitive news reports commenting about how housing prices are falling and sales are declining.  Every time I read one of these reports I find myself asking, “Who writes these things?  Are they serious? (more…)

I seem to be the odd one out on this one but I’m sticking to my guns… interest rates can only go up.  This week should be a defining moment in this subprime mess… just as soon as the Fed makes its decision.

I’m expecting the rates to be held while the market is doing otherwise.  Have you ever seen a spoiled child react when they get that rare rejection?  We might be seeing a market ‘fit’ sooner that later.

Back in the late 90’s and early 2000 the rage was making a quick buck in the stock market. You could throw a dart at a moving stock ticker and still make money. Authors, talk show hosts, and other ‘experts’ abounded in their availability and willingness to share their winning methods. Day trading became the new buzzword, as a new breed of its constituents threw caution to the wind and staked their fortunes on the concept that profit was just an abstract idea and that it created itself out of thin air. (more…)

President Truman must be rolling in his grave.  We have become a society enthralled with the notion that responsibility lies…… way over there.  Burn yourself on HOT coffee at McDonalds?  Easy, just sue them for serving you hot coffee.  Suffer hearing loss from listening to your iPod to loud?  No problem, stick it to Apple for creating ADJUSTABLE volume controls. (more…)

The Times reports in this article that you can now make an arbitrage profit off of all those pennies and nickels lying around… in theory that is. Increasing metals prices has driven the value of pennies and nickels to more than what you will get for them at the local washeteria. In fact, nickels can be worth up to 7 cents - that’s a 20% premium! (more…)

I’d like to begin a conversation about the outlook for global economic stability over the next decade. Specifically, I have in mind analyzing a group of individual countries and considering the possible outcomes that would result from a severe economic slowdown or failure of each - independently. What would happen if China ran into serious trouble? What impact might the negative national savings rate in the U.S. have on the global economy if it cripples the U.S. economy? (more…)