Repeating history

There is no doubt that we have witnessed the greatest loss of wealth in the equity markets in history in terms of current dollars. However, that was also immediately preceded by one of the most sustained value increases in history. The markets have now returned to price/earnings multiples thought to be prudent for several decades. The nouveau riche have had their fling and they are now on rehab. This

There is no doubt that we have witnessed the greatest loss of wealth in the equity markets in history — in terms of current dollars. However, that was also immediately preceded by one of the most sustained value increases in history. The markets have now returned to price/earnings multiples thought to be prudent for several decades. The nouveau riche have had their fling and they are now on rehab. This market adjustment is likely to be more painful than recent times would have suggested.

The economy is generating the largest number of initial jobless claims per week with more to come. It would appear that we should be worse off than the data indicates were it not for the fact that until this year, we employed more than ever before. Initial jobless claims did rise to over 400,000 for several weeks and now exceed levels reached in prior downturns as a percent of the work force. Because we recently employed more than in prior downturns, the adjustment had to be greater. However, it clearly did not need to be this great. There is overkill occurring on all fronts. One has to wonder if the special interest candidates are lining up at the government trough to bail out poor financial performance that was in place prior to September 11th.

A significant amount of blame for the current downturn needs to be laid at the feet of management. The rush to utilize cheap capital, forego long-term earnings for short-term market share gains, and the lack of accountability for failure led to rather unwise choices. The expectation that technology could supplement rather than complement customer service also led to a significant lack of customer loyalty, which made revenue enhancement (remember profits), virtually impossible. We appear to be caught in a situation that will take some time to correct.

Our system works on a not-too-delicate balance of investment and profit. That balance has been tested before and we have seen a return to the appropriate cost/price structure. It remains to be seen if that can happen again. There are several reasons to be concerned.

History does repeat itself, as evidenced by the 1950's thriller “The New Industrial State” by J.K. Galbraith. It seems like the technocrats are once again acting as a drag on the tiller held by management that has gotten further from the basics of how to manage. The staggering number of layoffs, Chapter 11 filings, and closures indicate a rather difficult situation — but hindsight should offer solid lessons.

Here are a few that may be worth noting:

  • If there is no profit for your endeavor, your endeavor is not worth doing, unless you see yourself as a charity.

  • The greater the number of employees, the less that will get done per employee. Plan on having your costs eventually go up, not down. Technology has a way of breeding an expensive employee base.

  • Competition is good but not necessarily correct. This means don't follow the lemmings off the cliff.

  • Amazingly, you may find that by downsizing, not only do you increase your rate of return on operating assets but could lead to an actual increase in absolute profits.

  • If 10% of your customers give you 90% of your problems, pass them along to your competition.



There have been reports that this downturn will yield benefits to the industry since the strong will be able to set the standards for future service/rate trade-offs. I've got enough gray hair to have heard that four times already.

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