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GP18Feb04: Mailbag and Just Plain Bagged

We're likely to miss out on Smithfield's Ham and Yam Festival on May 1 and 2 (www.downtownsmithfield.com/events.html).  Fortunately the mails are keeping us pretty amused these days, so we don't have to go out for entertainment. 

Global Readers.  Our Letter from the Global Province now sails out to several thousand people around the globe, including business executives, journalists, investors, academics, and a resplendent assortment of cosmopolitans who are just plain curious.  We receive abstruse questions about the quirks of the nervous system from readers of Brain Stem, books running the gamut from American colonial biography to aesthetic marketing that the senders hope we will review in our Infinite Bookstore section, and investment hints (e.g., “there’s gold for the asking in China”) from those who look at our Investor Digest.  Wit, wordplay, and wayward thoughts get the biggest rise out of us. 

We have picked out 4 missives that came in from the United States last week.  Taken as a whole, they wryly suggest that our economy has all sorts of glitches in it, putting the nation at a competitive disadvantage to more tightly integrated countries.  We have previously commented on the arterial blockage clogging our markets, as in our Letter of December 10, 3003, “Adventures in the Wine Trade: Chez Noir.” 

Chickens Come Home to Roost.  Scott McMurray, a Chicago business writer, was quite taken with our letter, “One of a Kind," and has passed on to us one of his personal favorites. As he says, Cousin Murray perseveres in his small, grand egg-layin’ business even though freight carriers have devised new tariffs that have made it a much harder slog: 

On the subject of one-of-a-kinds, don't forget Murray McMurray Hatchery, www.mcmurrayhatchery.com, the one-of-a-kind purveyor of rare breed chickens in the US, still family-owned (by my cousin Murray, named after our grandfather and founder, who built the business up after losing his father's Iowa bank in the ag depression that preceded the Great Depression by a few years).  He also has two partners, both also from our hometown of Webster City, Iowa.  

Chinese Currency Gaming and the U.S. Currency Dive.  Ernst Rothe of New York talks turkey about the Chinese currency peg, the U.S. currency dive, and the insidious costs to us of imported energy.  Do you remember when we used to say, “What has all that to do with price of tea in China?”  As it turns out, the price of anything in China has a lot to do with life here.  Reading Ernst and others, one might surmise that our Washington lobbyists have created truly zany national policies in respect to China, energy, etc., making us look like bush league imperialists:

1. The Yuan would probably have to increase 25-30% in value before the U.S. trade deficit would be reduced, in part.  It would take at least a year, possibly two, before the impact would be felt.
2. Some imports would not be affected simply because we no longer manufacture the goods (textiles) in the US.  Their prices would simply increase, increasing inflationary pressures and thereby possibly causing the Fed to raise interest rates.
3. China has been "getting a free ride" by pegging the Yuan at an artificially low rate to the USD, allowing it to grow its domestic economy by artificially increasing its exports, which would not have increased so markedly had their value also increased, as denominated in USD, the international trading currency. This growth, which is good for China and promotes global stability, has reduced its average manufacturing costs thereby raising its domestic living standards and attracting foreign capital to build the factories that raise its living standards.
4. Schumer is generally right.
5. Blackwell is right.
6. Weinberg is (several expletives deleted). 

7. I normally admire Stephen Roach, whose analyses I have followed for decades, but I am astounded by his elementary economic analysis error.  Namely, he fails to realize that all of the Chinese economic factors mentioned are valued in international markets precisely by the exchange rate (!) and therefore China's present competitive advantage is derived from the artificially low FX rate.  He is right, however, that the U.S. is importing too much, and hence its currency is sinking.  My contention that a large part of the deficit is due to energy (oil) imports.
8. Any protective tariffs would probably be illegal under the terms of the World Trade Organization (WTO) of which the U.S. is a member.  For example, recently, we implemented protective tariffs on steel recently and had to rescind them after a year.
Some aspects to ponder:  So, how will this growing situation (crisis) affect international trade, including oil?  If the USD falls further, will OPEC try to maintain the same effective level of income by cutting supply to raise oil prices? 
What about OPEC's pricing oil in terms of a basket of currencies?  Increased political strains with China, including relations with Taiwan, with resultant international tensions?

Something to Whine About.  Gene Bem, a management consultant who has spent too much time in Dallas and Miami, has a deep personal and business interest in wines.  He tells us that anybody in the outback is doomed to drink ghastly plonk perhaps forever: 

Quote from Michael Aaron of Sherry Lehmann: ”The thing  that is holding this country back from seeing its wine sales triple is that, outside of major urban centers like New York or Chicago, it is very very hard for people to get diversity, to get interesting wines.”  

That is to say, there are all sorts of impediments to doing business within these United States, and the state wine and liquor laws are equivalent to all the silly barriers to national commerce that existed in Germany before Bismarck pulled it together.  Local hawks guard their small town monopolies very jealously.     

Disconnect.  Brian McBain of  Scottsdale, a corporate branding expert, shows us why telecommunication and  Internet providers experience such horrible customer churn (i.e., flight).  Incidentally, we can tell you many worse tales: 

I recently have begun paying all my bills on line.  I dutifully went to the GC WebSite, logged in, signed up and began filling in the required information to pay my bill when my screen ran out of space and could not show the next line that I was to fill in.  I called "customer service" and explained how I was trying my best not to be a Luddite.  The matter-of-fact voice asked, "What brand of computer are you using sir?"  I said, "A Mac G4."  I was flummoxed with her reply, "We are not compliant with MACs, sir."  Gathering my remaining wit, I replied.  "Oh, when will you be compliant?"  "We won't be , sir," she said.  I stammered lamely, "W-what do you mean?"  She said with detectable annoyance, "I don't know, they haven't told us anything, they just tell us to say that we will not be compliant with MACs."

I hung up and, in high dudgeon, called my computer whiz, relayed the story and asked how I could switch providers.  He informed me that since I was using Cox high speed internet, I already had an email account with them.  Hence the new account!

Shortly, having gathered a few more of my lost wits, I shall resign from Global Crossing utilizing some pithy observations in the letter of resignation.  The very idea that the biggest internet provider in the U.S. is not compliant with Macintosh smacks of vendetta if not evil doing, as Dubbya might say. 

Like the Rothchilds, he may soon rely on carrier pigeons to get his  essential business done. 

Rolling Rocks Uphill.  So the days are longer for Cousin Murray, who has a tough time getting his chickens to market.  Ernst’s oil bills are rising, his currency buys less when he goes overseas, and the better margin parts of his business have been snared away by fellows in India and China.  (Psst – If you did not know it, many houses in Wall Street are exporting research and number-crunching to India).  Brian labors to get connected to computer and telephone services that don’t even work right.  And Gene cannot get a decent bottle of wine in the sticks.  Some of the companies with which they deal are nominally more productive, but at tremendous cost to Murray, Brian, Gene, and Ernst who spend hours getting the simplest things accomplished.  In other words, certain of the large-scale enterprises in our society are raising productivity by making the customer do all the work and accept a lesser product.  It would be fair to say that we have seen a “hollowing out” of branded products and services. And that’s why you can never get anybody on the phone when you call a big business anymore.   

Mixed Bag on Productivity.  In coming weeks, we will be adding some notes about productivity  to our Big Ideas section.  Economists and others are wondering why productivity dipped so badly from 1974 to 1994 but then has doubled since.  Many want to tie the productivity miracle to better use of the computer.  But they can’t really explain the fall or the rise.  Is it any wonder economics is called the dismal science: It’s dismal because it explains almost nothing when you look hard at its puffery and preachings. That’s why, even today, we are still pondering the causes of the Great Depression. 

What’s most striking about the recent productivity miracle in America is that it seemed to get started (circa 1995) just when the country’s standard of living and quality of life began to descend to the lower depths.  In our opinion, this is the first time in history where a supposed burst in productivity has been tied to plummeting rather than rising wellbeing.   

Cousin Murray, Ernst, Gene, and Brian, who could all be called hardworking small businessmen, probably could tell us what’s happening better than the economists.  Large businesses with shrinking workforces are nominally achieving greater productivity.  But it’s coming out of the hides of small businesses (where the jobs are being created) that must reckon with the half a loaf offered by the big boys.  So the productivity numbers may look good, because the economists look at big aggregates instead of capturing the sagas of small business Don Quixotes who government statistics ignore at our peril.   

And it’s coming at the expense of family life: It takes now two adult paychecks instead of one to keep things going, and those two adults are working 10 and 12 hour days, with 9 to 5 having become just a memory.  The nest is getting kind of empty.  People are often bone tired.    

It seems pretty simple: Productivity has doubled, because Americans are working twice as hard, twice as long.  Stephen Roach, mentioned above, seems to think that productivity has doubled because our workday has quadrupled.  Whatever the size of your paycheck, aren’t you working non stop and aren’t you finding life twice as complicated?  Perhaps it’s time to change the rules of the road. 

P.S. Hedge your bets.  Gas prices are rising lately, and OPEC is cutting production if it can.  Consumer confidence just fell, after being on the rise for a few months.  Prices are creeping upwards, principally fueled by autos, where marketshare ambitions are giving way to a prayer for some profits.  We are now reworking our Global Province investment perspective to reflect a tepid recovery, and we will have something new on Investor’s Digest in the next 4 weeks to reflect unstable economic conditions.  Most worrying for the economy is the continuing prospect of second-rate political leadership on both sides of the aisle.  A lot of people have been doing badly on the short side of the market for quite a while: That probably means it’s time to go short.

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