Archive for June, 2008

Alert: "Batten down the hatches"

Monday, June 30th, 2008

The Federal Reserve Bank’s lack of action to backup their bullish dollar comments appears to be sending a "flash point" signal to the worldwide credit markets.  Since last year I have been warning of a financial storm that could wreak havoc in the global markets.  The hurricane warning flags are now being posted:

Barclays warns of a financial storm as Federal Reserve’s credibility crumbles

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/27/cnbarclays127.xml

and

RBS issues global stock and credit crash alert

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/18/cnrbs118.xml

With last week’s notable recovery of the gold price and the Dow Jones Industrial Stocks pushing into Bear territory, Wall Street may be confirming what the British have alerted their clients to.  In itself, sending a subset of global investors into flight may cause the entire herd of elephant size investors to run for the hills.

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Oil has responded to the U.S. Dollar’s lack of support by trading at $143.  $170 is now in view.

 

Gold, Silver, Oil, Natural Gas, Swiss Franc, Euro, etc. are all alternatives to holding dollars.  You have been alerted!

The Demise of the Business Model

Sunday, June 29th, 2008

What is a Business Model? A business model is a framework of creating value by a company.

What is a framework? A framework is a basic conceptual structure used to solve or address complex issues.

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Source: http://en.wikipedia.org/wiki/Business_model#Do_Business_Models_Matter.3F

Now that I have defined the business model, let’s look at the relevance of this topic to Biblical Economics and Love.

VALUE!

Four years ago, we bought a high-end digital television from BestBuy as a family Christmas present. The salesman urged me to buy an extended warranty. I agreed knowing that new technology tended to have “bugs” and I didn’t want a negative experience one month out of factory warranty. He indicated that the one working part (the lamp bulb) could burn out and justify the extended warranty. I took the bait. Anytime I look at extended warranties I look at the probability of the company remaining in business over the life of the warranty. After all, serviceability is the backbone of an extended warranty. I had a total of four years ending December of 2008 to test this “Value Add”.

It happened! The lamp bulb finally burned out. I pulled my paperwork and manual from the file, so much for simplifying my life. I have to keep a file with manuals for all of the electronics in insure that if the device fails, I have my receipt, a copy of the warranty, etc. Uggh! BestBuy suggests that you go to their website for Warranty customer service. No way! As an Information Technology professional I know that they want me to do all of the work. How do I know whether or not their website will freeze up just before I press the critical button? I called their 800 number, I am taking no chances on finally using this extended warranty.

When I connected to their warranty service I immediately was connected to a live person, just kidding! I went through their automated telephone directory “people barrier” system. If you have the resolve to navigate through this system, they will talk with you. After a few minutes of being on hold, I finally spoke to a customer service person. Hallelujah! After I explained that my TV needed a bulb (based on the manual’s problem analysis page), she directed me to the parts department. While on hold, They had me listen to their recording boasting of maintaining over 7,000,000 parts in inventory. Wow! I was sure that this was going to be worth the wait. After 8-10 minutes of being on “hold”, the parts person finally picked up my call. Once again, they brought up my record after I gave them my 10 digit extended warranty #. This was not enough. He wanted my serial #. Wait a minute, don’t they keep that information on file? Oh well, after retrieving my trusty flashlight and magic reading glasses, I was able to locate the serial # in the dark abyss behind my TV where a thousand cables reside. @#$%^*, there it is! Armed with my serial # I returned to the phone. In my manual, the model # of the bulb was mentioned. Obviously Sony knew that this bulb was going to fail. I wonder why they didn’t include an extra? Anyway, the parts representative agreed with me on my bulb’s model #.

Now came the surprise: “We will ship you the bulb 4-6 business days“. What? The bulb is not close by? Knowing that most large companies can ship in 3 days, I pressed the guy on the other end. Why don’t you immediately ship it? He said that they must get the bulb from the manufacturer. WHAT ABOUT THAT 7,000,000 part inventory???? I spent $$$$ for this high dollar TV and you don’t stock the bulb? Gimmee your supervisor.

After 4-5 minutes on hold again, the supervisor re-explained that they don’t stock the part and must obtain it from Sony. However, she indicated that if I was able to buy the part myself, they would reimburse me for the cost of the part. After much frustration, I asked to be returned to the parts department. They had not given me any tracking information and I needed to be sure the part was ordered. Once again while on hold they were rubbing those 7,000,000 parts in my face. After 8-10 minutes of the recording with an interruption indicating that the “next available representative would be with me in 2 minutes” four times, I spoke to another parts person. She found my order and gave me the tracking information. She assured me that I would receive an email confirmation. So, at the end of 45 minutes, I hung up.

I wondered…. I think that I will google that lamp bulb on the Internet and see if I can get it here sooner. In five minutes, I found the bulb. The company had 18 Sony bulbs in stock and they could ship it out today (Saturday) and I would have it in 3 days. What is wrong with this picture?

BestBuy’s business model contains serious disconnects. This issue is not unique to BestBuy. IBM’s administrative red tape defies understanding. One customer can have multiple customer numbers and customers have complained for 30 years about the problem. Our largest newspaper in the state is converting to a new system and we were immediately past due on our bill that we have paid on the same day of the month for 15 years. The new software did not use the same business rules as the previous software.

America’s business model is breaking. When I was inquiring of The Lord, HE indicated that this would continue and that I was to accept this as a warning of things to come. I didn’t bring up the topic, HE did. The above experience is the symptom. I found that BestBuy was using a 3rd party to fulfill the parts needed in the Extended Warranty program. I was not talking to a BestBuy employee. In the above diagram, “the partner network” was being used for this function. The theory was good, the reality stunk! As more consumers get exposed to these breaking business models, sales will decline. Simplicity will once again prevail. People will walk away from the complexities of today’s environment.

There has been a mismatch of gifts and callings with employment. There are those who are called to run businesses based on the principles of love, not greed. Those people will be raised to leadership roles as the greed is cleansed from the system. Current business models serve the corporation and its executives’ bonuses, not the customer.Who will cleanse the system? Our Heavenly Father. HE will install HIS business Model- Love! Rather than exploit consumers, businesses will serve consumers. At that time, customer SERVICE will return. Until then brace yourself.

PS. When I opened my email confirmation from BestBuy, they were shipping me a Philips bulb, not a Sony bulb.

PSS. After posting this, I went to activate my new Citibank credit card used in my business.  I went through all the automated steps, was redirected to a live Rep.  She apologized for their system being down and please call back in a few hours.

Hubbert’s Peak

Saturday, June 28th, 2008

Recent record oil prices would suggest that we revisit the primary driver of high prices.  Throughout our lives there has always been an abundance of oil.  When Jed Clampett shot his rifle and discovered oil on the show "Beverly Hillbillies", the view of oil was one of abundance.  Oil discoveries enhanced economic development of the western world for the last 150 years.  The energy contained in one barrel of oil far surpasses earlier fuel sources.  The automobile propelled expansion of goods and services throughout the U.S.  That was then.

As I have shared in previous writings, major oil fields (called elephant fields) are in decline.

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Conventional world oil production peaked in May of 2005.  The producing nations have been unable to sustain production of existing fields as well as replace depleting wells with new discoveries.  In 1956 Dr. M. King Hubbert, Geophysicist, predicted peak oil in the U.S. to occur between 1965 and 1970.  He was right!  Further, in 1975,he predicted world peak production in 1995 "if current trends continue".  Others have studied peak oil and have given their own prediction as shown by the graph below:

 

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(click on Image to enlarge)

As of this writing, it appears that May of 2005 may be acknowledged as the peak a few years from now.  There are many opinions about when oil will peak.  I prefer to give credence to the technical views rather than the politically motivated (or funded) views.  Matthew Simmons, an investment banker, conducted a field by field research study based on technical papers provided by engineers around the world.  He concluded that peak oil was upon us.  In his book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, Simmons provides a rather complete analysis of the major fields  (elephant fields) and statistically shows that world production is peaking.

Robert Hirsch and associates conducted a study for the U.S. Department of Energy.  The study was published in February of 2005.  The following are the conclusions of the Hirsch Report:

  • World oil peaking is going to happen, and will likely be abrupt.
  • Oil peaking will adversely affect global economies, particularly those most dependent on oil.
  • Oil peaking presents a unique challenge (“it will be abrupt and revolutionary”).
  • The problem is liquid fuels (growth in demand mainly from transportation sector).
  • Mitigation efforts will require substantial time.
    • 20 years is required to transition without substantial impacts
    • A 10 year rush transition with moderate impacts is possible with extraordinary efforts from governments, industry, and consumers
    • Late initiation of mitigation may result in severe consequences.
  • Both supply and demand will require attention.
  • It is a matter of risk management (mitigating action must come before the peak).
  • Government intervention will be required.
  • Economic upheaval is not inevitable (“given enough lead-time, the problems are soluble with existing technologies.”)
  • More information is needed to more precisely determine the peak timeframe.

The current supply problem was not unanticipated.  Short-term thinking by the U.S. leadership placed the American people in this serious economic challenge.  Cheap energy has been the economic assumption of the entire American population.  This population has also been the economic engine of the globe.  The shift away from cheap energy thinking will be difficult, impossible for some.  The movie "Giant" was about a west Texas rancher who fought the oil and gas paradigm, first in denial then in anger.  How long will the American people live in denial and anger?  The world is moving away from the "American-centric" thinking.  How long will it take?  It is moving much faster up the exponential curve now.

There is unlimited free energy.  Scientists have not been able to unlock the energy potential in cold fusion and other technologies.  I believe that the world is at a crossroads.  "Control" has prevailed in the recent past.  Our Heavenly Father is well aware of our energy situation.  It would appear that a day of judgment and repentance is coming.  Repentance is "turning away" from your present course.  The revelation associated with free energy will be withheld until that day of repentance is at hand.  Once we repent and once again seek The Father and His Love, I believe the Tabernacles period will be in full view for all to see.  At that time we will not be held captive by those who control the resources but will appreciate what "rest" really means!

Unequal Weights and Measures: Airlines

Saturday, June 7th, 2008

This week the airlines were in the news with their massive personnel cuts and downsizing plans.  See: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=als_9FvReWTY  Something just didn’t seem right.  The reason given for cutting jobs, schedules, and increasing fares by up to four times the previous prices just didn’t add up.  Being the financially oriented guy I am I decided to do a little research.  Here is what I found:

One of the most popular airplanes is the Boeing 737.  Southwest Airlines has built its business model around the 737.  Other low cost carriers have done the same.  I have flown hundreds (maybe thousands) of flights in a 737.  The following numbers represent estimates based on practical views of the "fuel issue".

The burn rate of fuel for a Boeing 737-4 is 792 gallons per hour. Source:

http://www.pbs.org/wgbh/nova/teachers/activities/3203_concorde.html

The cost per gallon of jet fuel on May 30th, 2008 was $3.826.  Source:http://www.iata.org/whatwedo/economics/fuel_monitor/index.htm

So, let’s look at the economic comparison versus one year ago:

Oklahoma City to Kansas City on Southwest is approximately 1 hour of flight time.

Current year cost:

There are about 122 maximum seats on the flight.  I have been passenger 122 before.  It was ugly in the very back of the plane!

On a full flight, the cost of fuel to Kansas City was approximately 792 gallons x $3.826 = $2,996.93 or $24.56 per passenger.

On a 61 passenger flight the cost was $49.13.  However, this summer I have not been on a flight half full, most flights were 100% full.

Last year cost (1.99 per gallon):

Full flight:  792 x $1.99 = $1,576..08 or $12.92 per passenger.

61 passenger flight: $25.84 per passenger

 

Increase in fuel cost per passenger:   Full flight- $11.65    Half full flight- $23.29

CONCLUSION:

The airlines can easily raise fares by $25 per ticket.  They do it all the time.  We are being misled to think that their cutbacks are due to the "fuel crisis".  It would appear that they are using the "crisis" to trim staff, eliminate marginal routes, and erase expansion/aircraft mistakes.  What can the employee unions do about a crisis?  Would they dare strike when everyone knows the losses are due to the price of a gallon of jet fuel?

Let’s assume that my calculations are off by 100%.  A $50 increase would still cover the increased jet fuel cost.

The price of oil will become the excuse for business to downsize and cut staff in many industries.  Inflation actually helps wholesale distributors’ profits.  Current inventory bought at lower prices but sold at higher inflation pricing levels increases the bottom line.  Once again we are given convenient excuses for higher costs and worse customer service.  My heart goes out to the airline employees who lose the job because of this.

Inside the eye of the hurricane

Thursday, June 5th, 2008

We can see the sun and the wind has subsided, the ocean is still, all is calm, or is it?  The following graph illustrates the seriousness of the problem:

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http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&width=1000&height=600&preserve_ratio=true&s%5b1%5d%5bid%5d=BORROW

 

That hyperbolic blue line is the total borrowings from the Fed, now at about $140 Billion.  The gray sections are the recessions with the 1930′s having the greatest recession (depression).  It looks like we may be due for one if cycles hold true.  We are at risk of another credit meltdown, one even larger than the subprime crisis.  Gold and silver are at nice "buy" levels for those who believe that inflation is running at a greater level than reported by the government.

The New York Attorney General is preparing to settle with the ratings agencies who continued to "look the other way" while the mortgage bankers were placing trash as AAA rated securities into the system.  See:http://www.bloomberg.com/apps/news?pid=20601087&sid=aGcUiy5dBBEs&refer=home  The settlement appears to be a slap on the hand and a "wink".  Once again the investing public is dealing with "unequal weights and measures".  How long will the Lord God Almighty allow this to continue?  It would appear that the entire financial system is being set up for a huge fall.  Investors have been replace by gamblers who have stacked the deck against the average investor.  Hedge funds have been allowed to leverage their bets up to 300 to 1.  The average person cannot leverage anything.  Such leverage cannot stand a serious loss. 

There is approximately $180 Trillion in financial assets and there is about $2 Trillion in gold worldwide.  $1 Trillion is held by Central Banks and the other is held by the public.  Can you imagine the price of gold if just a small percentage held in financial assets were to shift to gold as a protection against inflation?  $3,000 per ounce is not unrealistic.  You can also see that when currency was tied to gold, inflation could not occur.  Once the link was removed, Central Banks could inflate their currencies in the name of expansion.  This will help us understand why a load of bread was once 30 cents.  A disconnect from gold evoked a policy of inherent inflation in the globe’s goods and services.

China is concerned about a dollar crisis within 5 years.  See: http://www.reuters.com/article/reutersEdge/idUSL0221460620080603  I believe we are within 36 months.  I have targeted 1/11/2011 as a watch date.  Oil is a world currency.  It has been denominated in U.S. Dollars but that is changing.  Other countries are beginning to move away from dollar denominated oil exchanges (oil bourse[commodity exchange]).  If the U.S. Dollar were not in a crisis and losing value relative to other currencies, there would not be a move away from dollar denominated oil exchanges.  China’s $1,600,000,000,000 USD is losing value.  I expect the value to decrease by another 30% or about $500 Billion.  What can they do to protect themselves?  They can buy hard assets which will not lose value relative to the dollar.

All of the issues point to a highly complex economic challenge to keep the wheels on the wagon.  State revenues are falling.  Some municipalities have filed bankruptcy.  The following graph provides a state by state outlook:

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My advice: Simplify your life.  Get rid of things you don’t need.  Pursue love, not things.  Eliminate debt.  Gold and silver are financial insurance.