The Long Term, Historical Context for Running Your Business- This Time Is Not Different.  Probably.

Is this a business article?  Yes.  But politics, economics and history are going to rear their ugly heads.  Let’s put things in the context of history none of us were around to experience, because you’re going to live this context for some years to come.

In some number of months things are going to begin to normalize- covid wise at least.  The catch is that I have no idea what that normal will look like.  I do know that we need all of you to run your businesses well to provide employment and stability and be part of your communities.

You have all known for years that we were over retailed.  Too many stores and too many brands selling too many similar products.  You also know that consolidation began in earnest around 2008.  The pandemic “merely” accelerated it.  With a vengeance.

I hypothesize and want to believe that small brands and retailers are still important.  They are a source of surprise- experiences if you will- and new ideas.  In the pandemic mess access to capital and greater ability to manage their supply chains favors big companies.  But those who saw the consolidation and impact of ecommerce coming- not the pandemic which we can say caught us all by surprise- were positioned to react whether they were large or small.

You should have said, “Uh-oh, it ain’t business as usual,” no later than 2009.  If you did, you embraced ecommerce and tied it to your brick and mortar (even if you’re one store), You upgraded and evolved your systems to improve inventory management, customer service, and data quality and, at least if you listened to me, shifted some focus from sales to operating income growth.  Granted, back in 2009 some of that was easier for big players, but by 2012 or so, you just didn’t have an excuse.  Or a choice.

If you’re still here, you’ve got fewer competitors.  Yes, I know- Amazon!  Amazon!! Amazon!!!  My take is that you’ve become more thoughtful in how you work with it that must not be named.

I’m watching more product being thoughtfully carried over and fewer SKUs being produced.  That’s a healthy sign of focusing on what your customer wants rather than what your competitor is doing.  Years ago when I said, “Brands are becoming retailers and retailers, brands,” I had no idea how important that would be.  If you’re around, regardless of your size, you’re embraced that.

I started this Thursday morning after the events at the U.S. Capitol the previous day.  I suppose I should tell you that I’m a financial conservative and a social liberal.  I voted for Biden, though I think he’s too old to be president.  I am disgusted by Trump’s personal behavior and don’t want to have him over for dinner.  But if I had agreed with his policy choices and the way he ran the government, I would have voted for him.  It’s not a personality contest.  And if I’d seen credible evidence that the election was stolen from him, I’d be out there campaigning to get him a second term.  Because I value and want to respect the process.  It’s literally all we’ve got.  I’ll explain that in a bit.

With that positioning statement, I guess I’ll call it, behind me let’s talk about keeping our perspective and objectivity as we live through events none of us have seen or imagined.

Our perception of events is largely based on what we’ve experienced.  There’s way more to the history of a country than what we’ve lived through.  Perspective and objectivity require you know that history.

I try to question my own assumptions- harder to do than it sounds.  Sometimes I recognize what I’m assuming but often I fear I don’t know the implicit assumptions I’m making.

Recently, in a conversation with a friend (actually not recently, as it took place across a table in a bar) the subject of climate change came up.  My friend, an intelligent guy I respect, exclaimed, “I don’t believe it!”

I stopped him and said, “No- you don’t get to do that.  Your belief doesn’t make you right- or wrong.”  Have you noticed it?  People believing that their hard held beliefs must be true.  Almost literally that if you believe something that makes it true.  To understand how we got there, I recommend the book Fantasyland- How America Went Haywire: A 500 Year History.  You’ll be amused and distressed by what people have been willing to believe.  It helped give me the self-awareness to minimize how often I’m guilty of it-because we all are.  Useful business skill by the way.  Improves your perspective and objectivity.  The link is to Amazon, but you can find it online to read for free.

How do I try to avoid “magical thinking?” I tend to disregard both the extreme left and the extreme right.  They are almost two sides of the same coin in the sense that neither has realistic programs that will solve our problems.  As always, we will end up (eventually) somewhere between “the government should do everything” and “the government should do nothing,” which is probably where we should be.

But not quickly.  Winston Churchill is alleged to have said, “Americans can always be trusted to do the right thing, once all other possibilities have been exhausted.”

Social media are for entertainment only.  My TV remote rarely finds its way to CNN, Fox, or any nightly news programs.  The popular print (more online now I guess) media has become more about expressing a point of review and refuting the other side, rather than reporting the news.  Sure, I see articles from a variety of sources but the only digital mainstream subscription I have is to the Seattle Times- got to see the comics and sports somewhere.  I never- never, ever, no way- consider credible any article or statement from somebody who doesn’t identify themselves.

I pay for a few online sources that I consider more or less objective, whatever that means, with a longer term perspective.    I have people I get free, insightful newsletters from.  You can get them too.

I read books.  History, politics. Economics, diplomacy and some science fiction.  I curate what I see to give me perspective and time to think.  You have noted, perhaps, that I’ll write about something a while after it’s happened.  I am pretty much convinced it’s a good idea to think before forming an opinion.

That’s a rather good idea in business too.  Create your own way to fight off potential distractions so you can be thoughtful and analytical- not reactive.

Let’s get back to “the process is all we’ve got.” Our country and government didn’t evolve over thousands of years like in China, or France or lots of others.  It’s a construct invented by a small group of white guys less than 250 years ago.  They literally tried to figure out what would work and credited a structure for it.  Consider the enormity of that.  Go read The Federalist Papers for a solid understanding of what was involved.

Obviously, you might think, our founding fathers really screwed up because the Federal government works so badly and can’t get anything done.  Except that they did that on purpose.  It reacts only when it really needs to.  The balance between state and federal powers, and among the legislative, executive and judicial branches keeps it from going off the deep end.  May have occurred to you that you’ve watched that constructive tension over the last two plus months.  Among their goals (perhaps their main goal) was to keep an authoritarian figure from taking control.  No more kings for the United States.

My brother in law used to say, “Wherever you go, there you’ll be.”  Usually after a few drinks, but he was right.  As a country we are experiencing two generational crises.  We’ve regularly had both of them before but never at the same time.

The first is the end of the long term debt cycle.  It’s happened every 80 years or so.  Last time one ended we got ourselves the Great Depression and World War II.  I think maybe the pandemic is our world war.

This is how I’ve recently and briefly described where we (as well as other countries) are financially.

Let me see if I’ve got this right.  The Fed has to keep rates low because it’s the only way the government can afford its debt and the benefits its promised people [When I say debt, I include unfunded liabilities like social security, Medicare, pensions, and not just government debt).  But they need higher inflation because that’s the only way to manage the debt- reduce it by devaluing it.  But at some point, higher inflation will lead to at least higher long term rates, which the Fed needs to avoid.  Meanwhile, something like 90% of the people in this country (maybe I mean 98%) aren’t in a position to buy gold, other commodities, real estate (though many already own houses), to hedge against that inflation and will be hammered by the rising cost of living.  But the debt has to go away because as long as it’s this high, getting any meaningful GDP growth is probably impossible.  Meanwhile, the Fed has spent all this time failing to get inflation to 2% (who knows why they want to) but are confident that once they get it to accelerate, they can control it.  They can’t get it to go up but are confident they can keep it from going up too much, whatever that means.

What could go wrong?

For a rigorous look at the impact of debt, I’ll remind you of a book I’ve previously recommended; This Time is Different: Eight Centuries of Financial Follies.  

We are between the proverbial rock and hard place and it’s not likely to end well.  Here’s what former Federal Reserve Governor Larry Lindsay said in 2015, referring to too much debt.  It’s gotten way worse since then.

By the way, this always ends this way – Rome, the Ming Dynasty, Zimbabwe…it’s so depressing. It always, always, always ends this way, this end game we’re all talking about…The financial arrangements of the state are no longer sustainable…it is not a pretty change if we get there, and it is a matter of political liberty because government will NOT voluntarily let itself go out of business…it will use all its powers available to government to fund itself.

The eminently successful hedge fund manager Ray Dalio did a study that led to his book, Principals for Navigating Big Debt Crises.  As I haven’t gotten through the whole thing either, I won’t be critical if you aren’t interested in 480 pages on the subject.  But if you go to this link, you can download a PDF of the book for free (you have to sign up for his mailing list but can unsubscribe).  The summary in the first sixty pages tell you everything you want to know.

If you spend time understanding how bad the debt crisis is becoming, you will be flummoxed that you haven’t really heard much about it, and certainly not from most politicians who figure (probably correctly) that it’s not a winning issue if you want to be reelected.

The business implications?  Maximize your flexibility and willingness to be surprised and (wait for it, I’m going to say it again) have a rock solid balance sheet.  And maybe keep some cash in currencies besides the dollar.  I know that’s not an option for many of you.

How’d we get here?  I’ll keep a long story short.  Inevitably, after the second world war, the rest of the world recovered their industrial capacity.  We’d got maybe a little fat and lazy- let’s say overconfident- and other countries became competitive with us. With the U. S. dollar as the world’s unchallengeable reserve currency, and countries willing to hold our debt in return for our buying their less expensive products, things worked out for a while.

What we did, unfortunately, was fail to invest in making our economy more competitive.  Infrastructure, our education system, and fundamental research come to mind.  I believe in a safety net but giving people money provides only a short term boost to GDP.  It does nothing to improve productivity, which has a longer term, positive impact on competitiveness.  And the more debt there is, the less boost you get.

Am I the only one bothered by Intel announcing it is a couple of years behind Taiwan Semiconductor in making the next generation of chips?

Stock buybacks, illegal before 1982, are one of the things that really annoy me.  I bet Boeing, the airlines, and other companies really, really wish they had all that money now that they spent on buybacks to no affect except to make management and shareholders wealthy with financial engineering.  Wouldn’t it have been nice if they’d invested it on improving their competitiveness?  No worries though- we taxpayers got their back and will bail them out.

I could go on, but the outcome of our economic decline is that we’ve got tens of millions of citizens who are scared and angry in case you haven’t noticed.  Real wages haven’t been rising for decades and the jobs they can get now- if any- don’t begin to replace the income they lost.  They are slipping, or have slipped, out of the middle class.  The obvious disparity in wealth between the top 1-5-10% and the rest hasn’t improved how they feel.

In The Storm Before the Calm: America’s Discord, the Coming Crisis of the 2020s, and the Triumph Beyond, George Friedman talks about what he calls the socio-economic cycles.  We’re in the 5^th such cycle in our history he says and it began around 1980.  “The dislocation of industrial workers, coupled with the damage done to prudent savers by low interest rates, has begun to generate an economic crisis.  Inevitably, there follows a social crisis.”

The good news is that George says we’re going to get through this and come out the other side in great shape- because that’s what happened five times before.  The bad news is that the decade of the 20s is going to suck.  He’s got that right so far.  And he didn’t even know that the pandemic was coming (published in February 2020).

For a different perspective on the same issue, I recommend (again) The Fourth Turning: An American Prophecy – What the Cycles of History Tell Us About America’s Next Rendezvous with Destiny.  We’re in the fourth turning phase right now, and it’s just not a fun place to be though, and perhaps this is helpful, it seems to result in an institutional cleansing, something Friedman sees coming too.

And lord knows those institutions need cleansing.  Not that the politicians or the people who provide them with most of their money think that.  Thanks to gerrymandering (the practice of drawing the boundaries of electoral districts in a way that gives one political party an unfair advantage over its rivals) and our political contribution laws, the politicians who have an easy time keeping their jobs and their contributing constituents who have lots of access and influence are perfectly comfortable with the situation.

We’re going to have to fix it ourselves, and that’s happened before.  You’ll be happy to know that the last reading assignment I’m going to suggest is The Politics Industry: How Political Innovation Can Break Partisan Gridlock and Save Our Democracy.  

I especially liked the section called, “The Gilded Age: Political Dysfunction Spurs Americans to Take Back Their Democracy.”  To quote the book, “Inequality soared, as did polarization.  Corruption and gridlock defined Washington.  The very survivability of democracy seemed to be on the line.”

Sound familiar?

And then the citizens, over a period of years, fixed it.  Not by voting, not by making contributions, writing their congressman, not by demonstrating.  “From 1890 to 1920, reformers across America mobilized, devoting the time and resources necessary to change how politics worked and its results.  The resulting major shift in political competition was powerful in the same way it would be today.”  The result would be/has been in the past that it’s easier to elect people who are responsive to all their constituents.  Stuff starts to get done.

The book outlines what has to happen.  It’s already happening in some states as described.  Here’s the related web site.  If you won’t read the book, might you have five or ten minutes to watch one of their presentations?

This kind of reform should be something- maybe the only thing- that the left and right can get together on.   It was in the past, and will be again, fiercely resisted by the political establishment.  You want to keep our Republic?  You want a responsive government that actually solves problems?  You have some work to do.

Well, this has gotten a little out of control.  From a business perspective, I thought a broad overview of the social/political/economic/institutional issues we’re dealing with might be useful.  I especially wanted you to think not in quarters but at least in years.  This is the high stress and uncertain environment you’re going to be dealing with for a while.  That, I think, is important business knowledge.

Trump didn’t cause our problems and couldn’t solve them.  The same is true for Biden.  Funny, but they have a common interest in not wanted to change the system the way it needs to change.  Perhaps they don’t even recognize the need.

I’m afraid it’s up to us and there’s no choice.  We can either get busy or we can get what we deserve.  I wonder if there isn’t a space for a brand to adopt a positioning that supports the coming together of our Right and Left to take back our government.

“A republic, if you can keep it,” Ben Franklin is supposed to have responded when asked as he walked out of the constitutional convention what kind of government they’d given the people.