One of the experimental techniques included in the U.S.A. Trilogy by John Dos Passos involves sketches of influential people. These sketches offer a deeper look into character and behavior, focusing on the paradoxes in life that nearly all people of influence exhibit.
The Big Money, the last of the U.S.A. Trilogy, features an excellent examination of Thorstein Veblen the American economist who developed an entirely new look at many aspects of industrial society. Veblen conceptualized various ideas such as conspicuous consumption and pecuniary emulation. His insights were novel and probably represent the base of modern economies.
By all accounts, Veblen was an extremely complex man with many eccentricities. However, his methods of thinking and contributions to intellectualism are unparalleled in my opinion.
Some time ago, I read Veblen's most famous book titled The Theory of the Leisure Class. He uses a unique writing style. None-the-less for those who have the patience to digest the intricate phrases, the book represents innovation on a broad scale and humor that economists seldom deliver in writing.
"The Big Money" by John Dos Passos has a section titled The American Plan (p. 15), which is a summary of the life of Frederick Winslow Taylor (1856 - 1915) the founder of Scientific Management in the United States.
According to Dos Passos, the last act of Taylor before he died at 59 years of age was to check his watch.
For more information about the controversial life of Taylor, see the following link.
When I began my career in food manufacturing, Scientific Management was still practiced. I recall an industrial engineer with a special clipboard containing two stopwatches observing the workers in the act of doing a job. He made all sorts of notes.
In spite of this work, things did not speed up and productivity in the plant continued to suffer. The plant manager discontinued the "time study program" after several months. It was a ridiculous effort.
There was a time when most of Industrial Engineering and virtually all of Industrial Management, an academic program taught as a hybrid of engineering and management, concentrated on the work of Taylor. Eventually, Just-In-Time manufacturing from Japan replaced Scientific Management and many university Departments of Industrial Engineering began to shift focus toward computer simulation and operations research.
One of the interesting aspects of Taylor's work involved a focus on standards for industrial practice. The standards caught on quickly with senior managers and the ideas were taught at Harvard Business School among others.
By looking at the close of European markets, there appears to be another round of concern about the ability of several small countries within the EU to pay off their government debts. Ireland had a big drop in stock prices of almost 6%.
Japanese equity markets appear to be set for a significant drop on Tues. At open there is a 1% loss. With the strong Yen and weaker economic growth in Europe, it might be a difficult week for global stock markets.
On Fri., the US Commerce Department's Bureau of Economic Analysis will release the first revision to Q2 GDP. By all accounts, the revision will be significant. Some of this news is already priced into the market, however the publication of the official revision might cause additional concern among investors.
In observing the stock market activity today, I think the emphasis on merger and acquisitions is way overdone.
While companies might use surplus cash for acquisitions because this approach is a sure way to increase revenue, there are additional risks in that the vast majority of mergers never live up to initial expectations. The synergies between two merged companies are always slow to develop.
The following WSJ article hints at the downside of M&A:
Yesalavich, Donna Kardos (2010), "Stocks Drop As Deal Euphoria Fades," The Wall Street Journal, Aug. 23.
For example, the following quote:
"'You had this marginal euphoria, and now people are saying [M&A activity is] very specific and has nothing to do with core earnings and economic fundamentals,' said Barry Knapp, managing director of equity research at Barclays Capital. 'The macro economic outlook has deteriorated significantly.'"
I view the development that major corporations might consider M&A as a way of using surplus cash to be an indication of a weak global economy. Firms have decided that revenue will not expand through direct investment thus M&A is the only alternative. This is not a positive thing.
This quote from the above article supports my view:
"At a time when economic data have been disappointing, the unexpected pop in deals gave investors some hope that U.S. public companies were finally getting confident enough to start putting their $2.03 trillion in cash and short-term investments to work. However, economic data have continued to come in weak."
The fact that about 4% of US total wealth is in cash held by corporations is a major story in of itself. This represents an extremely conservative corporate policy and reflects the structural weakness of the US economy and the uncertainty about global economic prospects.
The great recession and its aftermath will change the capital structure and the role of finance for American businesses.
Given the changing role of capital, I think the great recession will also cause changes to the practice of management.
The Wall Street Journal is featuring an excellent article that hints at some of the potential long-term changes in the way that large corporations are organized.
Murray, Alan (2010), "The End of Management," The Wall Street Journal, Aug. 21.
From my own experience as a corporate manager, I think many changes to the approach to management are inevitable.
This is a trend that investors need to watch closely because it will influence the ability of large corporations to generate profits for shareholders.
Yesterday I watched the movie titled "The Age of Innocence" based on the novel by Edith Wharton (1920). Martin Scorsese directed the movie. It is about high society in New York during the 1870's and focuses on human relationships. It is very good. The novel won the 1921 Pulitzer Prize.
This is definitely a novel on my reading list. Wharton's style and use of English is very good. She writes in a descriptive way and the voice of her work is clear.
The movie was a bit slow in parts, however I very much enjoyed watching.
In past posts to this blog, I have expressed concerns that China's policies are not only creating imbalances in global currency markets and trade, but also in their own real estate market.
This a recent post on the topic (July 18):
Another interesting article on the same topic appeared in the WSJ today.
A quote from the article:
"Despite the global downturn, China's economic growth rate remains above 10%. But there is mounting evidence that Beijing has misallocated vast amounts of capital, touching off a real-estate crisis that could yet drag the world's second-largest economy down to earth."
Dalmia, Shikha and Anthony Randazzo (2010), "China's Looming Real-Estate Bubble," The Wall Street Journal, Aug. 21.
I think the important word in the above quote is "misallocated." With a huge stimulus program in relation to the size of China’s economy, it is almost certain that the money will be misallocated. Further, the remnants of a command economy will make the situation worse.
Some believe a wave of under performing loans will result with a corresponding drop in housing prices. It is hard to argue against this outcome.
I began my trip on Sun., traveling West via the Mass Pike and New York State Thruway, and lodging in Williamsville, NY (near Buffalo) at a Microtel.
It is always an interesting experience to travel on the NYS Thruway. The small towns along the way show the signs of economic decline, evident to the point that the streetlights are dimmed with energy efficient bulbs and in many cases completely turned off. During the night, I traveled past many once familiar landmarks without notice.
In Williamsville, there was a spectacular thunderstorm over Lake Erie. The extremely high humidity caused conditions for all types of lightning displays; bright flashes diffused by the clouds along with direct strikes to the ground and even cloud to cloud jumps of lightening. The storms lingered over the lake. It was impressive to see.
In spite of the storms there was not much rain. However, when the rain began it pored as hard as I ever recall experiencing, coming strait down in large drops. The Japanese call this "gorilla rain." It lasted only 10 minutes just as I entered the motel parking lot.
On Mon. I arrived in Avon Lake. At first notice, the area is extremely dry with many lawns showing few green blades of grass. The roads and remaining open spaces around the Interstate 90 S.R. 83 interchange seem in perpetual construction. It is incredible that this retail center continues to expand when the prospects for sales are so low.
In both Avon and Avon Lake there are many signs indicating open land for sale. It is hard to believe that any of this land will sell soon. There seems to be as much competition to sell open land as to sell homes.
As I understand from conversations with a banker, many homes in Avon Lake are selling well below expected value. In one case a home thought to be worth $600k sold for around $450k. In another case, a home valued at $200k sold for $150k.
I visited with family and friends for a short time. Everyone is doing ok.
It is evident that business conditions in Avon Lake, a city of 18,000 people, are well below the pre recession peak. At the center of the city, a strip mall has many open storefronts. The anchor store remains empty.
The City of Avon Lake has refurbished the outdoor municipal swimming pool. It has water slides and a section with a simulated current. The High School football stadium added 1,800 new seats and artificial turf. The football coach stated that this is the best artificial turf in the state. There was much talk about the prospects for the football team.
I saw the team practice on Tues. morning. A wide receiver made a spectacular catch. Maybe A.L. will pass more than they run this year.
I began my return trip to NH on Tues., staying overnight in Syracuse.
During three days, I drove 1,500 miles.
In reading the financial news today and for the past week, there is not much worthy for comment except that trading volume was low for stocks and there are few if any positive signs for the US economy. Many people are on vacation.
Sept. probably will be a difficult time for the US stock market as investors begin to assess the full force of the extremely weak labor market and related issues.
As a final note, the bull market for bonds means that many view debt as a safe haven and a better investment as compared to stocks. In theory, using bonds as a means of business financing is less flexible. The poor returns of the past decade for long-term stock investors is part of the reason bond demand remains high in the face of new issues to finance the budget deficit.
Overall, I think American business productivity will suffer if investors undergo a shift in psychology and prefer bonds. The never-ending supply from the US government also helps to shift thinking about investments in debt rather than equity.
Finally, a shift to the debt market might result in a structural change in P/E expectations for stocks. This is not good for equity prices!
Around 61 AD the Roman Governor of Roman Britain, Gaius Suetonius Paulinus, sought to attack fugitives and Druids located on the island of Anglesesy, which is close to the coast of Wales.
As the Romans looked across the straits separating Anglesesy from the mainland, they saw something amazing as recounted by David Hume:
"The women and priests were intermingled with the soldiers upon the shore ; and running about with flaming torches in their hands, and tossing their disheveled hair, they struck greater terror into the astonished Romans by their howlings, cries, and execrations, then the real danger from the armed forces was able to inspire."
Hume, David (1856), The History of England from the Invasion of Julius Caesar to the Abdication of James The Second, Boston: Phillips Samson, and Company, p. 6.
The behavior of these early people of Britain, and the Gothic tribes of N. Europe several centuries later, presented the Roman Legions with many spectacular experiences locked away in the writings of history. Hume's account is frightening!
This article written by Ken Gordon and published in The Columbus Dispatch is amazing:
OSU Football: Berry joins crowded backfield
I find it hard to believe that spinal "adjustments" are a cure for a college football player who takes ferocious hits on every carry!
Probably one of the best talk shows on radio is Tom Ashbrook's "On Point." I always try to listen when time allows.
On Thurs. this program was produced:
Deflation Fears: U.S. as Japan?
With guests:
David Wessel, economics editor at the Wall Street Journal.
Frederic Mishkin, professor of banking and financial institutions at Columbia’s Graduate School of Business. From 2006 to 2008, he was a member of the Board of Governors for the Federal Reserve System.
David Resler, chief U.S. economist at the Nomura Group, a global investment firm founded in Japan.
Dave Scott, chief investment officer at Sunrise Advisors, a financial planning and asset management firm based in Leawood, Kansas.
I found the program interesting, however, there was a statement made by one of the guests that was not correct.
A caller asked about the affect of outsourcing and the decrease in American manufacturing jobs.
One of the guests responded with the standard economic answer that economies become more efficient as employment shifts to higher value activities. In general, specialization and division of labor across boarders is a good thing.
However, the commentary went further by using agriculture as an example in comparison to the current loss of manufacturing jobs.
While it is true that there was a drastic reduction in agricultural workers during the 20th century, domestic agricultural output continued to increase contributing to GDP growth. The jobs simply shifted from agriculture to manufacturing.
In current times, manufacturing employment continues to go down and with it GDP from the segment as production shifts to other countries.
I can make a strong argument that comparing changes in agricultural employment is not the same as the current changes in manufacturing employment.
Reflecting on the Fed's decision to re-cycle some the proceeds from its portfolio back into the money supply by purchasing government bonds, I think there was perhaps no other choice but to do so. If the Fed had allowed these securities to mature through early payoff, the aggregate money supply would have decreased slightly. Given the ongoing difficulties in banking, any further reduction of the money supply would be a bad thing.
The recent actions by the Fed are certainly not bold in any way. The general consensus within the Fed and among private economists is that it is best to hold off any intervention efforts for a while. Given that the stimulus program has not achieved sustainable economic growth or a reduction in unemployment, it is probably best to do nothing and let the US economy heal itself. Further intervention will continue to distort important economic signals. This has already happened to a large extent in the housing industry where various government programs have had no effect whatsoever.
I am of the opinion that Sept. might prove to be a time of severe selling pressure for stocks because there is little if any strength in the US economy. By recent estimates, Q2 GDP growth will be around 1%. This is a big downshift from Q1. If a weak back-to-school and holiday selling season happens, growth for Q3 and Q4 will experience additional downward pressure. This sets things up or a poor start to 2011.
I think it is time to begin thinking about systemic and structural causes for the extremely slow recovery. These might represent long-term changes to the US economy and social structure that are hard to measure in current time. I will have more to write about this topic in future posts.
