Financial Services

Saving the Middle Class: Josh Brown on Corporate Stupidity

As anyone who reads this blog or follows me on Twitter knows, I'm beyond being a fan of Josh Brown and his blog, The Reformed Broker.

I think he's a hero - particularly because the truths he's telling are about his own industry: Financial Services. Most important of all, he gives those of us not in the industry the information we need to make smart decisions, see charlatans for what they are and the knowledge of when to run like the wind.

Well, he did it again over the weekend with his piece: "Forget Fairness, Let's Talk About Stupidity."

Only this time, he takes on what the multi-year corporate decision to hold down wages really means. Not just the dismantling of the middle class - although that's definitely happening. It's that the companies are giving themselves a slow death by not ensuring that employees have enough money to buy the products and services the companies, themselves, are providing.

Short-sighted idiots.

Here's a taste:
The corporations are every bit as vulnerable to the disappearance of the middle class as the middle class is itself. 
They've managed around this issue thus far with an increasing emphasis on exports (now responsible for half of the S&P 500's sales and profits) as well as systemic and legally-sanctioned overseas tax evasion. Consider that Exxon Mobil made $19 billion in profits in 2009 and paid zero Federal income tax (you want to laugh, they actually got a rebate of $256 million). GE earned $14 billion in 2010 and also paid zero in Federal income tax. Microsoft and Hewlett-Packard have each set up offshore subsidiaries which they use as payment conduits so as to keep their profits shielded from the IRS. 
But offshoring of profits and the export of goods and services won't sustain these corporations forever. At a certain point, native companies within the developing world will nudge our adventuring multinationals aside (China's already building its own version of Wall Street).  And when that happens, Corporate America is going to turn around and be horrified by the devastation in its own backyard. 
"Where did all our customers go?" 
Well, you enormous fucking idiots, you fired all your customers. You've spent the last decade or so suppressing wage growth in the name of "creating shareholder value" and now even your shareholder base is disappearing. 
You allowed wages to stagnate for a decade and made every decision you could in the service of nudging the quarterly profit higher, thinking less of the yearly profit and virtually nothing of the long-term viability of your business.
Read the full post here. It's more than worth it.

Thanks, Josh.

Why @thereformedbroker Never Sucks

Okay, so you may want to officially refer to this post as a Resource Alert - and it is - but it's more than that.  It's damned near a paean of praise - and about an investment advisor, for God's sake.

You may also wonder why I:

  • have such a different - shall we say snarky (at least for me) - style in this piece and/or
  • used such a strange title for this post.
Blame it on Josh Brown.  What can I say?  He brings out the snark in me...and I always enjoy it.

Mr. Brown (you see how I'm being polite again?) is an investment advisor who blogs - constantly - and never pulls his punches.  That being said, I don't always agree with his assessments - but I'm always challenged and informed by his writing.

Take his piece "June Swoon", for example, in which he refers to June being a "sucky month for stocks most of the time."  (You see?  My post title is an homage!)

On the face of it, that's a nice piece of information but wouldn't normally be given more than a passing mention.  Brown, on the other hand, takes an analytical, contextual look at it and, in so doing, provides you with better thinking material as you look at decisions you need to make.

His writing is extremely clear (even when he talks "gangsta"), in immediate and historical context, concise and always with workable information that assists in expanding his readers' thinking.  For that he's always great.

He's honest and courageous in his writing, too.  And while his blog is not designed to give specific investment advice, whether you're looking at your own portfolio or you want to have a better sense of where industries are going worldwide, he's your guy.

On the other hand (because this isn't a love fest and I have a need to take this one shot at him), in a recent post about Amazon's decision to establish a Kindle-based imprint publishing romance novels, he refers to the readership as "nitwits" before changing that reference to "buyers." 

Clearly, he hasn't read the domestic and international readership surveys that the competing publishing houses (which are not happy with Amazon's decision) have been taking for decades.  Had he, he would have known that those 'nitwits' are a highly educated, very accomplished population of men and women who read those babies.

(Don't get me going on this one - because I'll win.  I researched the business model when I was in graduate school and have kept up with the industry since then.)

Other than that, though, the aspect of the topic that he addresses (i.e., the distributor becoming a direct competitor of the content producer) was on target and does raise issues - in publishing and otherwise - regarding intermediation and disintermediation across industries.

It's not easy when your supply chain 'partner' suddenly becomes your worst nightmare come to life - and that's a future that Amazon's move brings to the present.

Josh is a really smart man and a really talented writer.  You want to follow him.  He's well worth your time.

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Market Opportunities and Ethics - a Fascinating Juxtaposition

Just for the fun of it, take a look at two different articles in today's New York Times.

One is on the growing market in plus-sized clothes for women.  The other is on the expanding debt-relief industry.

Both are market opportunities.  In both cases, companies are looking for - and finding - new ways of making money.

Sure, there are challenges.  But what a difference.

For the fashion industry, it's figuring out how, with the increased costs of materials and the logistics of inventory storage, they can make adequate margins.  They will undoubtedly find a way.

For the debt-relief industry, it's figuring out how to keep one step ahead of the regulators as too many of them take advantage of a suddenly-needy population looking for answers.  They're finding ways, too.

Market opportunities are great things - and you always want to be on the lookout for them.

What you don't want to do - unless you want the sort of suntanned, well-lubricated description given in the latter of the two articles - is trade your ethics for a quick buck.

It's not good business - especially if your trajectory ends up being jail.

Bigger Does Not Equal Better

There's an interesting article in today's NY Times about Senator Christopher Dodd (D., Conn.) wanting to create a new financial services super-regulator. It would be established by combining four existing regulatory agencies while, simultaneously, reducing the authority and reach of the Federal Reserve.

Interestingly, there is a similar argument being put forward in Britain by the Conservative Party.  Their Shadow Chancellor of the Exchequer, George Osborne MP, wants to combine all financial regulatory responsibilities under the auspices of the Bank of England.  In the process, two other agencies would be incorporated into what would become one exceedingly large one.

The problem in both countries, from what is described, is not one of size, power or remit of the individual agencies.  The problem is coordination, clarity of responsibility and authority - as well as systems of accountability - among and between the existing entities.  That's what needs to be addressed - and it won't happen as a result of combining groups that don't mesh.

To get my drift on this, think M&A gone bad and you'll know where I'm going.  Better yet, if you're in the States, think Department of Homeland Security and you'll know exactly what I mean.

Too many organizations - public and private sector - are convinced that bigger equals better.  Not always - and especially not in a case like this.

Sometimes it is in the organization's (for which, in this case, read country's) best interest to allow each entity that owns part of a larger system to be specialist in exactly what it does.  That way, it can go narrow and deep in its activities to ensure that those within its remit are being well and clearly looked at and after.

The responsibility then lies with the corporate parent (for which, in this case, read Congress or Parliament) to ensure that those responsibilities are laid out clearly, lines of accountability are drawn and no competition for "favored" status exists or can be offered those being regulated  (a particular problem in financial services regulation).  Most importantly, the agencies should develop and execute proactive plans for coordinated, ongoing information sharing and joint action.

It's that last one that is the deal-breaker - because it is the lack of that planning that has caused politicians on both sides of the Pond (as well as their citizenry) to be so dissatisfied with the status quo.

Putting together the financial services agencies in either country isn't going to net the politicians what they say they want.  Nor will it give the public what it needs.  In the words of W. Edwards Deming, "The intent is noble.  The method is madness."

My recommendation to any executive who is considering going this "bigger is better" route is to go back to the drawing board and look at your intent - then look at your organization as it is and how you want it to grow.  Then you'll be able to decide how to get there - just as big as you want - without creating chaos and lost opportunity in the process.