LETTERS FROM THE GLOBAL PROVINCE

GP 24 September 2008: Riding Out the Storm

Sharing a Foxhole. Guys who have been around the Army for a long time lecture young recruits on the difference between a ‘garrison’ soldier and a ‘field’ solder.  The garrisonian does well in peace, makes things run around headquarters in an orderly fashion, and glibly pumps out meaningless phrases at machinegun speed that keep politicians happy.  The fieldsman often gets drunk and unruly when not caught up in action, and says all sorts of unfortunate things to all the powers-that-be in Washington, to  nitpicking journalists, and to the snap, crackle, pop horde of armchair generals around the nation.  But he’s the man you want at your elbow when the wars are fought, wedged in beside you in the trenches.  Patton comes to mind when you think of an intrepid field soldier, while the succession of post World War II generals who have served as National Security Advisor all pretty up measure up to the well-creased uniforms worn by military bureaucrats.  We happen to need both types of solders, but the blood and guts types would seem to be the right fellows for the present day.

For we look to be in for ten or more years of hell and high water—a time when we need swordsmen rather than bureaucratic infighters.  The hurricanes are about.  Wall Street is imploding.  The country’s infrastructure is not measuring up to the challenges with which it is presented.  The little wars and terrorist disruptions are multiplying.  And we have not even listed half the crises that you already have on your short list.  Like it or not, we are moving past great speeches and finely applied cosmetics, and are almost but not quite ready to demand people who can actually do something, rather than talking about it. We are now in the last torturous act of a transition in our national life that began in the late 1970s.

What to Do?  As mortgage giants and investment banks suffered major cerebral strokes and nutrient-infused billion dollar blood transfusions were prescribed in the foggy days of last week, we chatted with money managers in various parts of the country.  The smarter chaps have long since gone heavy into cash, but then the question is where to park your cash since all the usual shelters are currently suspect. Many of the money funds are in disarray.

Simultaneously we have seen a bunch of storms and hurricanes rip through the South on into the Midwest.  It’s not always clear, despite the barkings of governors and Homeland Security, that you should get out of town.  One evacuee from Houston, who has pulled up stakes in previous storms, moved towards Dallas as Ike came ashore, then discovered that would not necessarily be far enough, and finally made his way to west Texas:

When we later realized the hurricane would strike the area in Centerville also, and likely as a Category 1 storm, we all vacated and headed West.  We ended up at a kind of dude ranch an hour west of San Antonio, Texas and stayed there through the storm enjoying the fine wine and haute cuisine of the local “good eats” emporiums.  

As it happens, his house in Houston was quite safe and did not even lose its power. Friends moved in and took advantage of both his air conditioning and his wine cellar.  He could have stayed home and completed those research projects that only progress when  bad weather keeps you inside and the office is closed.

On the other hand, another chap was well out of it, clear of his home in Baton Rouge, which took quite a hit from Gustav, and, humorously, situated himself in New Orleans which did not do that badly.  It is instructive to realize that the national news coverage sort of missed the depth of the woes in Baton Rouge, over-focused on New Orleans—an okay place to be if you knew where to do your drinking.  The national chattering media did not even do that good a job on Ike: the best details about Houston and Galveston, we discovered, came out of local Houston stations.  For Baton Rouge, Gustav was a humdinger:

We’re in New Orleans—drove in here before the hurricane struck Louisiana.  Not sure you’ve heard, but the situation in BR is dire … no power, no food, no petrol … sewage plants are running on emergency power (as are the hospitals).  It is a significant disaster and MUCH worse than is being reported.  1.4 million folks are without power.  The latest word from officials is that 1/2 of Baton Rouge will get power back in 1 to 8 days.  The other 1/2 can expect to be without power for up to 4 weeks … yeah you heard me right 4 weeks!!!!  This is crazy.  Supposedly, the damage to the power grid was twice as bad as with Katrina or Rita.  But the long and short of it is this was MUCH, MUCH worse for Baton Rouge than any other storm.  Even Hurricane Betsy (40+ years ago) didn't do this much damage.

What emerges from the hurricane stories is that if you are going to escape, you have to do it 4 or 5 days before the storm even touches your general area.  One has to take strong, very decisive, unequivocal action well in advance.  And, in fact, that’s about the same with the financial markets.  The bloodbath in Wall Street has been much worse than need be because both government and corporate officials dilly-dallied.  One has to act fast and act early, never looking back, to avoid the worse consequences.  In other words, nature’s storms and Wall Street’s hurricanes demand field soldiers who get up and go, not garrison soldiers.

Where to Go?  Years back we heard of a chap who saw, with crystal clarity, that World War II was on the way and that the armies of Germany and Japan would soon envelop the world.  In his eyes, the conflagration would touch all the principal countries on earth and bring tumult to lives in Europe, America, and Asia.  Cleverly he decided to sit out the war—in relative comfort—on a Pacific Island.  Not so cleverly he picked Guam or some other target of the Japanese.  All his insight bought him nothing.  Oft as not, it is a real challenge to find the right port in a storm.

It is strange, however, how often salvation literally lies on the high ground, wherever you can find it.  Sometimes that is quite near at hand.  Such is the case in Boccaccio’s Decameron:

Boccaccio begins with a description of the Black Death and leads a group of seven women and three men who flee from plague-ridden Florence to a villa in the (then) countryside of Fiesole for two weeks.  To pass the time, each member of the party tells one story for each one of the nights spent at the villa.  Although fourteen days pass, two days each week are set aside: one day for chores and one holy day during which no work is done.  In this manner, 100 stories are told by the end of the ten days.

It behooves us, similarly, to go with some companionable friends to a scenic height such as Fiesole when our lives are threatened, telling each other stories and dwelling on other diversions which take our mind off the problems left behind.  Isn’t it fortunate, in like manner, that the Bacardi rum family could retreat to its operations in Puerto Rico when Fidel Castro double-crossed it and expropriated its enterprise in Cuba?  Somewhere, next door, there is a place you go that affords a proper strategic retreat and the chance to come back strong on another day.  We all should know where our escape lies.

Systems Not Very Good.  To deal with the rising incidence of both natural and manmade disasters, it becomes apparent that we need tougher, more decisive chiefs and require well thought out plans as to where and when we will retreat.  That does not mean, however, that we have to accept ruinous disintegration as a given in our life.  The recent financial meltdown did not have to happen.  It came about because our leaders—government and business—let it happen and took away the ordinary safeguards that protect our citizenry from bubbles and chicanery.  This does not have to be.  Our disasters do not have to be so disastrous.

It can be said of hurricanes that they lend proof to the idea that our electrical systems are foolishly designed and built, and that our logistical schemes for disaster are rather primitive.  We do not know much about the utilities in either Texas or the Midwest.  But we would invite the reader to look at Duke Energy, headquartered in the Carolinas, with operations in the Midwest and in other parts of the world.  For several years magazines like Fortune called it the best utility in the country.  Truth is, it’s not very good, and we suspect that’s the story with a whole bunch of utilities.  Twenty years ago we accepted the common wisdom that banks and utilities were the worst managed enterprises in the country, and we have not been disabused of that notion.  They need to be retooled in several ways.  We say this after looking at Duke, which we only study because it is wrongly taken to be so good!

Examine, if you will, just a few facts about Duke.  It appears, to have lost a potload of money in energy trading some years back, a business it did not belong in.  If we are to believe some of the press, it may have crossed over ethical boundaries while in that business.  This is a sign of dramatically bad management.  You have to know what business you are in and stick to it.

Apparently Duke charges its customers average prices in line with the national average, but nonetheless electricity prices in its home state of North Carolina were significantly higher than those in surrounding Southern states, as reported in 2006.  Perhaps it got away with murder because of lax regulation in North Carolina.  One wonders why North Carolina rates are not comparable to those of its neighbors.  And finally we can report that Duke has significant outages, even without hurricanes, often arising from significantly under-built infrastructure.  During such outages, customer service is not tightly linked to operations, and so service personnel are often providing flawed information about the status of repairs to consumers.  It looks like Duke, a highly rated utility, charges its customers much more and gives them much less for it.

However, the problems with Duke and other utilities range well beyond mere operations flaws.  Its highly centralized network design, along with that of other companies, necessarily results in huge numbers of customers being put out of service during hurricanes.  Its own network and the national grid are, at least in our eyes, recipes for disaster.  Local networks and the national grid are too fragile and too under-built to guarantee reliable power during emergencies. 

We used to say of our missile silos that they are hardened so as not to be easily put out of action.  Not so, our utilities.  Our utilities are not properly penalized for downtime and, as demonstrated by blackouts, are allowed to operate in a manner where local outages sometimes can cascade throughout a network or region.  Venality and poor business practices aside, the highly centralized business philosophy of our utilities, worsened by thin maintenance staffs and lack of systems redundancy, puts our country in the way of many more week and two-week electrical breakdowns.

Past and Future.  Whether we are talking about utilities or banks or Homeland Security, we must ask ourselves how we can put them together to withstand the certain storms ahead.  This is not an academic question.  We used to have so much money at our disposal that we could invest a bit in everything, and we spent a heap of dough on things that were passé.  Now we must get clever and frugal, and only put all our chips on the future.

P.S.  The Americans just reclaimed the Ryder Cup from Europe, 16.5 to 11.5.  The American rookies such as Anthony Kim brought in the bulk of the points, suggesting that we have long needed vastly different kinds of warriors for vastly different times.  The U.S. had not won a match since 1999, convincing us that it had gotten itself locked into the wrong players, the wrong mindset, and the wrong zeitgeist for a number of years.  Captain Paul Azinger had a plan to win for 2008, devised over a long period of time, not thinking impulse and improvisation would carry the day.  Winging it won’t work.  Cleverly, we think, he broke his 12 man team into 3 squads—Team Aggressive: Kim, Mickelson, Justin Leonard and Hunter Mahan; Team South: Weekley, Perry, Holmes and Furyk; Team Laid-Back: Stewart Cink, Steve Stricker, Ben Curtis and Chad Champbell.  In fact, when you are fighting against superior forces, small units prove themselves to be more agile and more motivated.

P.P.S.  Duke, it should be noted, is finally buying its way into alternate energy—something resisted by many utilities and energy providers.  It has just completed the acquisition of Catamount Energy, a sign that it is getting serious about wind energy, with up to 6000 megawatts eventually due to come into its portfolio.  But it has spread itself too thin, both geographically and technologically, and it is still making too many bets on fossil and nuclear sources.  None of this has spared huge numbers of customers in the Midwest from severe power failures during Ike.

P.P.P.S.  As we have said elsewhere, new infrastructure is what the nation needs, and the Northeast is historically and intellectually suited to be the home for inventing and producing it.  Headquartered in Connecticut, GE, which has bet a lot of its future on infrastructure, should take the lead with regional politicians and planners to get the Northeast ultra-focused on such a future.  Right now state governments there are rather aimless.  

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