Blog block–guilty as charged. Too many things going on in the past several weeks to figure out how to write them down. I apologize to my loyal blog readers.
Here’s a summary of the things I forgot to write about. 20 lectures at a dozen universities, policy discussion meetings with 2 countries, 4 states, and 3 mayors, 12 conferences, 2 trips to China in 3 weeks (I’m too old for this), one election, 27 TV shows, 11 radio interviews, 3 op-eds, meetings with lots of newspaper and magazine editors, meetings with 2 dozen companies and a load of investors, 5 board meetings, 4 family birthdays, one runaway cat (Lily, the nasty one that everybody liked best), and 37 trades in the portfolio.
During this period we had one election, one “extremely lame” duck Congress, a weak State of the Union address, and a hundred hours of hubris. Wall Street hyperventilated through a recession scare, an inflation scare, falling rates, rising rates, a housing bubble, bird flu, global warming, and the end of the Internet as we know it–none of which proved to be true. In spite of all this we finished the year with good growth, huge profits, moderate inflation, low interest rates, and 15-20% stock market gains.
There, now we are all caught up. Now we can move on to the things I am thinking about today.
1. Technology–we’re blowing it. After huffing and puffing for more than 2 years, Congress failed to pass the telecom reform legislation that we need to support the massive sustained investments in the new, high-speed communication networks that we need to compete with China, India, and other countries who are getting it right.
2. A dysfunctional political system. Politics in America today are more divisive than at any time since the Vietnam War. Class warfare is back. That makes it almost impossible for anyone, Republican or Democrat, to put in place the long-term policies we need to compete in the world. That’s why social security reform died even though everyone knows the current structure is busted. That’s why small single-interest groups, like the textile workers, can swing enough power to push American trade policy off a protectionist cliff.
3. Energy. Iraq is not about democracy; it’s not about WMD. Iraq is about oil. The world economy won’t go around unless the oil keeps flowing, and the oil is in the Persian Gulf. Peace is not going to break out in the Middle East. Global supplies are getting tighter every year. It is paramount that we develop more energy supplies and increase energy efficiency, but our politics are keeping us from drilling in Alaska and off the Florida coast, we are not building nuclear plants, and we burn fuel as if it were free. Long-term, the answer to both problems is technology, which means educating our kids in math and science.
Fighting over trade–whose workers will operate the sewing machines—is yesterday’s war. Today’s war is energy. Tomorrow’s is technology. More to come on all these issues.
JR
Dr. Rutledge:
On an unrelated matter, what are your thoughts on the FCC classifying wireless broadband services as information services?
Richard
Hi Dr. Rutledge…A quick question…do you think that there is any way other countries with worse political leadership can catch up to China? I am thinking in particular about Mexico and Brasil, two large Latin American economies that have been losing the “capital market share” battle for the last fifteen years. For all the inherent benefits that these countries pose, I sometimes wonder why they are faltering…
Mark
Hi Mark, thanks for writing.
I have wondered about the same question. There is no reason the countries in South America can’t reproduce the Asian growth if they do the things to make global capital owners have confidence. But there is a lot of history going the other way. Welcome anyone’s thoughts.
Readers-Mark has a book coming out soon that is a very valuable tool for sales teams and others who want to grow their businesses. I will make sure to let you know when itis available.
JR
Great to have you back John, I know you have been in Asia soaking up what is to become the Asian Century. Welcome Back
Lawrence
Thanks Lawrence, will write about some recent China stories later today.
John
Dear John,
It’s been a while since we met regarding one of your portfolio companies, but it is fun to receive your blog comments. Provocative and entertaining, just as you were in person.
My comment is that I think you are a little too dismissive of the textile thing, casting that ancient industry and trade as yesterday’s mentality. In fact, textiles are the most globalized industries (except for agriculture, I suppose) and are a huge percentage of export earnings for many, many countries (India, Pakistan, Bangladesh, Sri Lanka, etc). Regarding Africa, it is the first rung on the economic ladder – observations with which you are familiar. My point is simply that globalization’s dysfunction is most apparent in the basic, low tech industries and so solving issues of equity and market access in that arena is required before traveling up the value chain to oil and technology. I believe the low tech and high tech sectors are related, and not a trade off of “yesterday” vs. today.
Not least, there are huge untapped economics in textiles, perhaps the world’s most complex and inefficient supply chain. Warren Hausman (Stanford Univ) and I have written a paper related to that topic for a book on state of the art supply chains, so the broad subject is on my radar when it also flies across your blog.
Just a thought to share – and an enjoyable excuse to renew greetings.
Best regards,
John
Readers-I have learned it’s a good idea to listen to what John Thorbeck has to say, especially regarding supply chain issues. Always good to hear from an old friend. Old friends are the only true measure of my net worth.
JR
It’s good to finally here from your blog again I really enjoy the read! Keep it up…please.
John:
You do more in one week than most people accomplish in a lifetime! Keep plugging. Happy New Year!
Jim
Richard,
Thanks for your thoughtful comment. This is a very important question.
The fact that Verizon and Comcast are competing for your business is great news for both service quality and prices. It shows that markets for voice, data, Internet, and television services have all merged into one, increasingly competitive, market for communication s services. The reason that is happening is that Verizon made the decision to make the investment to lay the fiber to your neighborhood. It costs roughly $1500 per house to run optical fiber for most customers, which means Verizon made a muti-billion dollar bet when they made the decision.
What were they betting on? Telecom reform, to clarify the property rights to the network, the ability to deliver services across the network, and the freedom to set prices. Until 2 months ago nearly everyone in Washington believed that Congress would pass telecom reform legislation in 2006. In the end it was killed by greedy politicians, who dragged their feet all year to milk the lobbyists on all sides of the issues, and a small number of companies (Google, EBay, and Yahoo among them) who used their enormous political influence in an attempt to get Congress to impose price controls on telecom networks under the misleading name of net neutrality. In the end they won and Congress failed to pass broad-based telecom reform.
In the interim, the FCC made several decisions that helped to clarify the issues, which encouraged telecom companies to invest in new networks. But these rules may change now that the FCC is reporting to a new Congress.
Under today’s conditions, I would find it difficult to approve big investments in new networks if I were one of the directors voting on the decision. That won’t hurt your neighborhood, at lest not for several years, because the costs of laying fiber have already been sunk. But it is sure to reduce investments that have not yet been made.
Meanwhile, overseas, Asian countries have discovered that building optical fiber neetworks allows their people to compete for business all over the world. They are wasting no time doing so.
I appreciate your taking the time to write and thank you for reading the blog.
JR
Dear Mr. Rutledge:
First, I always enjoy reading your commentary on the world situation in general and on the markets in particular.
With respect to telecom, I am somewhat confused by what you write and what I see happening on the street. I have followed the telecom evolution and was, like you, hopeful of telecom reform last year. It’s really a shame that our government gets caught up in matters that will do no harm to society. Network neutrality seems to be one of them. My confusion arises from the fact that our local Bell, Verizon, has spent a fortune on laying fiber throughout our community and they are now banging down my door to get me to subscribe to their FiOS service. On the other hand, Comcast is soliciting me to provide telephone service. So it appears to this telecom layman that these companies are spending the money anyway, notwithstanding Washington’s blather on the matter.
If they are spending the money to upgrade their systems without telecom reform, what, in your opinion, are they not doing that they need to do to be competitive in the world market?
Cordially,
Richard L. Feron
JR,
This is one of the rare times I agree with you. We are blowing it in our schools. Almost no one wants to take the math and science curriculums. You and Thomas Friedman ought to collaborate on a op ed piece pointing out what should be done by the nation’s leadership to get our focus back on technology and the educations that fuel it.
I saw you on Kudlow last week and that’s where I disagree with you. Kudlow continues to talk about “the greatest story never told.” Our economy is strong for some. I am on the receiving in so I should know. I am the first member of my family to experience the wealth of America so, while there is some pride here, I am never far removed from seeing my poorer relatives scrape by in this great economy.
Unemployment is listed at 4.8% and that is a spectacular number but it does not include a large quantity of Americans. Those that have long been unemployed are not in the number, nor are the ones who have given up the search for jobs and unemployment compensation has run out. I would like the people releasing these reports to comment on the unemployment number in the Black and Latino populations. These numbers are very bad I believe and will get worse as only a third of Black and Latino youth entering high schools graduate in our large urban areas. The long term effect of this is frightening.
We focus on the current state of the economy as if it will last forever. As individuals we are always told to put something away for the future. Save for a rainy day. I ask how is the government doing this? We know there is a coming wave of costs from what you conservatives glibly call entitlements. These entitlements are promises we made to many millions of Americans who are not leeches but citizens that have worked hard, probably haven’t saved enough, but have been told by their government that money will be there when they retire. Now that the government has overspent on pork and more pork, in many cases to enrich special interest groups represented by lobbyists, we feel we need to cut back on the promises made and not the largesse of the corporations and very wealthy families.
You railed against the death tax. This tax was the invention of the founders you guys like to quote. The reason this tax existed in the first place is so that we would not have aristocracies like the country we fought against for our freedom. I ask you why should we allow families to accumulate massive wealth so that their children can be Paris Hilton. I know members of wealthy families that have never worked a day in their lives. Talk about entitlements. To listen to you on Kudlow, we are taxing success if we roll back the Bush tax cuts. I ask you how do some of these successes happen. The system is jury rigged for some entities to make money. Watching Haliburton and others benefit from no bid contracts during Iraq war and Katrina is sickening. Watching CEO’s get bonuses for performance that doesn’t benefit shareholders drives me crazy. Seeing CEO’s benefit for employee downsizing and benefit slashing also drives me nuts. These are the tactics of the unimaginative CEO. Private equity, hedge funds and venture capitalists only care about a fast buck. They have no interest in creating value as business operators used to and some still do. In this environment is there any reason to question why no one wants to invest in future technology solutions for energy or to protect against global warming? Is there any reason to believe we will invest more in education in our schools? Is there any reason to believe we will invest more in education of workers so that they may embrace new technologies?
I don’t have many heroes but Warren Buffett comes to mind as he gives a huge portion of his wealth to charity. I admired Hewlett and Packard because, like Buffett, they had the good sense to recognize the formula for their success was hard work, luck, timing and living in the greatest nation in the world. Without living in America it would have been near impossible to amass such a fortune. They knew this and gave back 95% of their fortune to charity.
To be clear, I am not your typical bleeding heart liberal. I have been successful in business. I have run companies. I spent 38 years working for one firm, starting as a laborer at seventeen years of age and retiring as president. I went on to be CEO of another company. Along the way I went to night school and completed a BA and MBA. Also along the way I experienced the greed, waste and arrogance of corporate America. No one feels more entitled than your senior corporate executive. If you want to squeeze out waste, this would be a good place to look. But we won’t because we have deluded ourselves into believing that the only way to encourage growth is to allow the people in front of the troops get bloody rich and screw the workers in the process. The American worker can be invigorated. Providing the worker incentives for performance, continuing education, and the proper leadership, there is nothing he/she cannot do. I fault the lack of leadership in our government, unions and corporate America for worker problems.
Before I forget, Iraq certainly is not about democracy. You are right; it’s about oil. Thanks for listening.
Ron
Dear Ron,
I want to thank you for taking the time to write such a thoughtful response to my piece. I respect your views and your passion for ideas. And I think we both are grateful to live in a country where we feel free to air our views, and our diffrences, freely.
I expect that if we had time to sit together we would find more agreement than disagreement about what you say. As you know, television is an extremely structured environment where the focus is on controversy and entertainment, not analysis. It does not give a full view of anyone’s views.
In the aggregate, the economy is very strong, with rising productivity and profits and low inflation and interest rates that continue to confound most analysts. I am usually positioned on the shows as the counterweight to someone claiming otherwise. My concern there is that investors don’t miss the market opportunities presented by these trends. In other venues, however, I speak and write about the same divergence of fortunes that you write about. Capital owning Americans are accumulating tremendous wealth. Capital using Americans are not. I think it is undermining our sense of ‘nation.’
Capital owners today can move their capital from anywhere in the world, to anywhere in the world, at virtually no cost, invisibly. This is largely a result of advances in communications technology, not policy, and largely unstoppable. Workers cannot relocate so easily. When the owners of a business move the capital to China or India, where returns are higher and wages are lower, their profits and market value go up. The workers who were using those tools in the US are left with an empty toolbox and diminished lives. This is great for investors but bad for the society, not to mention the people left out of the party. I agree that the only way to help is education and transition support. Our government has done a terrible job at both.
JR
JR
I truly enjoy reading Dr. Rutledge’s blog!
John H. Massey
I will do so sir, thank you.
No whining, no China bashing, no talking down our currency, just american ingenuity and hard work.
We’ll keep up the good fight.
John,
Class warfare has been DEFINED by the Bush administration, in my opinion – not by Democrats.
Drilling in Alaska and Florida will do nothing to solve the problem of oil dependency – cutting oil waste is the real answer for the US at this point.
Otherwise I find what you have to say quite interesting.
Bob
Dear Bob,
Thank you very much for writing. I believe the only way I can learn is to compare ideas with other thoughtful people who do not agree with me. I appreciate your taking the time to write.
John
Was the Second World War about democracy? Or was it about stopping tyranny and nationalism; I respectfully submit that all of the victories of America did not produce a worldwide acceptance of our values. However, it did establish the authority of our dollar and our influence. Yes Iraq is about oil and the strength of our dollar but the byproduct of a success in the region would be by default a victory for democracy.
Bret
Glad to see you’re back posting again! Long time, no post 🙂
Don
Thanks Don. I appreciate your note.
John
Dr. Rutledge,
I wanted to thank you for all that you do in your attempt to talk down some of the divisive rhetoric out of the current U.S. mantra. I especially enjoy your appearances on Larry Kudlow’s program as the sometimes sole voice of reason (besides Larry) in his panel discussions. To the point. I am a young CEO that owns a small business that has 150 employees and produced $185m in revenue in 2005. There is nothing that is more frustrating to myself and my colleagues than the the current class warfare uprising out of the newly elected democratic congress. With your influence if you could continue to remind those in power that companies our size and smaller have produced most of the new jobs in the last couple of decades. A tax hike on the “rich” is incrementally eliminating our ability to invest additional capital in our business and provide new jobs. Though this is obscenely obvious, the current conversation seems to have started to lose this fact. We are a culture of hard working innovative entrepeneurs where the sky is the limit. I would hate for us to edge toward a culture of old business, government regulated, safety net yerning, socialists. AKA France.
I work a great deal, but try and do some of my own blogging, though admittely I’m not an economist and don’t play one on TV, I dabble in common sense analysis.
http://www.drbrightside.blogspot.com/
Cheers to you and your success in the fight of prosperity and free market capitalism for all.
Dear Dr. Brightside,
Thank you very much for writing. It is so refreshing, in a world filled with whiners, to hear your perspective. The economy doesn’t just happen–it has to be built, every day, by people like you and your employees. And you’re right. Small companies are the principal souce of innovation and growth. Employment has increased by roughly 50 million people (or 50%) since 1980, but the total number of people employed by the Forrtune 500 companies is lower today than it was then. More than 100% of the job increases were in small companies like yours.
It’s an honor to know you. Please pass along my deep respect to your employees as well.
John