If they say "This Time It's Different" take the other side...

You would think that with the number of people who have business degrees and experience corporate failures would be isolated events.  Sadly, many of these practitioners of management skipped their classes concerning capital financing, research and development, competition and human resource development.  They've managed to take good businesses and drive them into oblivion.

The remnants of Blockbuster have been absorbed by Dish Network.  Borders book store is closing its remaining stores and liquidating its inventory.  Both companies initially were successful in their respective niches.  But with a change of ownership and management operational success turned to failure.

There were several reasons for the collapses.   

• The acquisitions were financed with an inappropriate amount of that, calculated with projections that were overly optimistic.  Management apparently believed their own B.S.

• The markets that both companies were serving were evolving, but Blockbuster and Borders did not, or did so much too slowly to satisfy their customers can keep up with the competition.

• Management was unwilling to redesign their operational framework until it was too late

The drop in revenues and new customers reduced cash flow to the point both companies had difficulty making the interest payments on their debt, meeting payroll, and providing products to their stores.  As the deteriorating condition of Borders and Blockbuster became public knowledge, the lack of consumer confidence reinforced the negative downward spiral that carried them to the point of no recovery.

Borders is in the process of closing its remaining stores.  Blockbuster, which at one time had over 5000 stores, is struggling to retain the last 500 locations.

Trying to continuously expand using highly leveraged debt over the course of multiple economic cycles without adapting to new market conditions is business suicide. The result is catastrophic, a terrible waste of financial and human capital.  When senior management commits successive errors in vision, judgement, and execution you need to remove them from their positions of power in order to stop and repair the damage.

Our elected "professional" politicians are squabbling about how to reduce the bloated spending of the federal government, and holding our capacity for debt hostage so they can use the control of that debt as leverage with the voters.  They are reluctant to change the spending for 'fear' of upsetting their constituencies, even while acknowledging the system will collapse, and soon.   The majority of these politicians are concentrating their efforts to defend their political positions and spending , and have no clue as to what the effect of their current actions will have on the economy in the next three to six months.

The following is my personal opinion, but here goes:

• The housing market for sale of existing homes will contract by 5-8 % due to higher interest rates and lower demand.

• Food, clothing, a consumer product will increase by 5 to 10% due to inflation forces, further reducing personal disposable income.

• Businesses will be forced to raise prices to cover commodity cost, regulatory fees, new taxes, and personnel costs (if they can).  Profit margins will suffer, because of businesses maintain the same profit margins, their total business will contract due to less people been able to afford the purchases.

• Equity markets will reflect this action with lower prices, further shrinking federal and state tax receipts due to lack of capital gains.

• Interest rates will begin to rise substantially.  That debt markets will start to more accurately reflect the risk/reward profile of the cash flows from capital assets.

•  Our Gross National Product will struggle to stay positive due to lack of demand and increased costs.

A description of the above is something like "this will not be pretty".  The most disgusting part of the circus will be the stampede of politicians trying to avoid blame for their extravaganza with the help of the mainstream media sycophants.  The entire situation is so revolting it makes one want to throw up.

If there is any upside to the situation (based on the above scenario) is that this type of debacle results in the replacement of the sitting politicians with a new set of elected officials that are a bit more pragmatic when it comes to fiscal conservatism - or at least we can hope.

Until next time

The Instigator

P.S.

Dow Jones Industrial Avg. - 12, 304
S & P 500                       -    1,305
10 yr  Treasury Bond Yield  - 2.97%


Watch for the stock markets to rally before the unemployment report next week.  It's a recovery from the oversold condition.  Some people will attribute it to the action in Washington over the weekend, but in reality I believe its a setup for more seriously disappointing news in August and September.