I ran across this article today in regards to some nations hoarding food due to rising food prices and shortages of rice. There are many issues for the run-up in food prices over the last several months. The primary issue is the same one we see with oil, rising demand. Demand for corn, rice, and grain have been driven up by the increased demand for bio-fuels. On the other side of the coin we have seen some supply disruptions such as the flooding in the mid-western U.S. and the droughts in Australia. It is difficult for me to speculate on where this will all go, but the squeeze on food and energy is bound to impact business owners in the near-term.

I know many successful entrepreneurs. Some started their businesses, some put everything on the line to buy their own operation, and some inherited their business as part of a succession plan. I have often tried to pin down what I believed were the personal characteristics that all of these people shared. What are those traits that help make them successful entrepreneurs? I have yet to come up with a good list. An article in today’s New York Times has a pretty good list of character traits that are helpful if you want to run your own show. I like the list, although I would say that this is really a list of what it takes to be successful in business. If you fall short on too many of the items then you are probably going to face some stark challenges not only as an entrepreneur, but also as a manager in any organization.

Oil prices have crested $140 per barrel, and now some are predicting $170 is just around the corner. The stock market is now flirting with true bear market territory. The economy has lost more than 300,000 jobs this year, and consumer’s are not in a very good mood. So much for the idea that the economy is strong, and we have just been trying to talk ourselves into a recession! Over the past year I have posted several articles about my concerns in regards to the economy. I have pointed out that the jobs data has been on a progressive downward trend since 2006, that we have not yet reached the peak in regards to mortgage resets, and that we have an economy that is flirting with recession. I have also pointed out that all of this does not mean business as we know it stops, it just means we will have to work harder to maintain and grow the business we have. Despite all of this data, and all of the challenges we face, there are still industry experts and analysts going on T.V. telling us that this economic downturn is simply a figment of our imagination manufactured by those who apparently have an interest in seeing the U.S. economy slow. To those who believe that we allow the national media to talk us into downturns and upswings I would like to point out a couple of realities.

•  In regards to oil, when demand outstrips supply then prices go up. People continue to tell me about all of the untapped oil reserves, and that the market is really being driven by speculators, but the reality is global demand for oil is rising faster than supply. Until this fundamental issue shifts and oil producing countries can pump crude faster than we can consume it, we will continue to pay higher prices at the pump. This is not a environmentalist’s conspiracy, it is an economic reality.
• If you export a large percentage of your manufacturing base to low cost labor markets, then job growth will slow. You cannot expect to ship hundreds of thousands of jobs overseas, and at the same time expect our job market here at home to grow as it did in the past. Many folks have expressed the idea that globalization in the long-run is healthy for our economy, that it gives American Consumers access to low priced goods in the marketplace, and it creates new sources of demand for other goods manufactured in the U.S. There is a certain disconnect with reality here, if a business can manufacture a plastic toy in China for one-tenth what it can in the U.S., then why would it not do the same with a car, a computer, or a circuit-board. Until we create laws that put us on a level playing field with all our trading partners then we will be at a disadvantage.
• The housing market will be a mess for some time, and it is a mess because aggressive lenders wrote loans to folks whose ability to repay that loan was suspect. The bloated inventories of unsold homes will take some time to bleed off. We are not going to wake up next month, and have a sudden turn-around in housing. It took years to create this problem, and it will take years to fix it. The investors and financial institutions who heavily purchased mortgage backed securities will suffer the losses, as well as the homeowners who will continue to see the value of their largest asset decline. 

Despite all of the bad news there is a good reason to be confident today. The pendulum has swung and many analyst now recognize some of the major issues we face. Accepting a problem is usually the first step to fixing it. We also know that the economy operates in cycles, that every downturn is followed by growth, and every period of growth is followed by contraction. As business owners our job is to manage our business for the realities of the marketplace, and be prepared for the next bull run!

My wife and I have been together for 17 years, we have been married for 16. Of those 17 years we have worked together for more than 10.  So when I ran across this article today in The New York Times about women hiring their husbands, I could not help but take notice.  The article provides some insight into the challenges of working with your spouse, and it has some interesting tips about compensating each other.  For me the bottom line is, if you are going to work with your mate then you must be a true team player.  If you desire to dominate your professional relationships, then working with your spouse is probably a recipe for disaster.  If you view marriage as a 50-50 proposition, and respect each other’s point-of-view, then an entrepreneurial venture with your spouse may be your path to matrimonial harmony.  

The Department of Commerce said today that their final take on first quarter Gross Domestic Product was that the economy grew 1 percent to start 2008.  This is marginally better than the .6 percent growth in the final quarter of 2007.  Some analyst are pointing to this number as an indication that the economy has dodged a recession.  I would like to see an uptick in second quarter numbers before I make that assessment.

An article in today’s Financial Times has me pondering this question.  The article asks why the Boards of Directors of the major financial institutions failed to understand and communicate the environment in which these institutions find themselves today.  It reminded me of a mid-western Fortune 500 company that recently moved its top 200 people from a mid-sized city to one of the offices near the World Trade Center in Manhattan.  The logic being they would be closer to their customer.  Keep in mind this is an international business with customers all over the globe.  When I heard about that decision I wondered (aloud) how the Board rationalized the decision to spend hundreds of million of dollars to move these folks.  How was this in the best interest of the shareholders? 

As a board member for several closely-held, for-profit businesses I have always viewed my responsibility as one of protecting the shareholder’s best interest.  Too many board members look at their duty as protecting the CEO’s interest and their board seats.  This leads to a great deal of capitulation in the board room.  Board members are afraid to challenge management, and are more likely to go along to get along.

For me the idea of governance has always been a stop-gap measure.  The responsibility of a savvy board member is to coach management without being overbearing.  Get Senior Managers to move in a general direction not by force, but by gentle persuasion.  Good board members help promote a clearer strategy for the business, voice concern when they believe management is headed down the wrong path, and understand shareholder needs.  When board members focus on these things, everyone wins.

The U.S. Federal Reserve lefts rates unchanged yesterday after their June meeting.  Although the Fed is concerned about stimulating economic growth, several inflation indicators have been strong enough to force a neutral stance.  The challenge is another decrease in rates may result in higher oil prices, and energy driven inflation.  Increasing rates may put the brakes on any stimulus the Fed has tried to provide so far. 

The price for a barrel of oil has almost doubled over the last 12 months.  As I write this post crude prices are at $136 per barrel after starting the year around $70 per barrel.  The natural tendency in our system when something goes haywire is to find someone to blame.  Some will say it is the fault of oil companies who are gouging consumers, some will say it is the fault of environmentalist who opposed offshore and ANWR drilling, and some will say it is simply investors trying to push up commodity prices to make money.

The New York Times has an article this morning about Congressional Hearings into rising oil prices, and the search for who is to blame.  The irony here is that few people would say that we have an infinite supply of oil.  Most industry analyst indicate that oil is a commodity in which the demand is increasing faster than new sources of supply.  We all know from Econ 101 that when demand outstrips supply prices go up.  Until this trend is reversed, until consumer behavior shifts, and people look for ways to cut their energy usage (and cost), prices will continue to rise.  There may be days, weeks, or even months where prices will fall due to other economic issues, but over the long run oil prices are likely to continue their march upward.

At this point placing blame is pointless, what we really need are Congressional Hearings focused on solving the problem!

The Conference Board released their survey of consumer sentiment for June, and the news was not good.  The index slipped to 50.4, the lowest since it hit 47.3 in February 1992.  This is really a follow up to an article I posted Monday in which we discussed the three major issues holding down consumer spending oil prices, the housing slump, and labor markets.  The consumer sentiment data is a good indication that Americans are feeling uneasy about the current economy.

It is pretty clear that the U.S. economy has slowed over the last few months.  A soft housing market, declines in new job growth, and higher energy prices have all slowed consumer spending putting the brakes on the economy.  On the other side of the coin there has been a debate about the prospect of inflation.  The Fed’s solution to each problem is quite different, to stimulate growth the Fed will reduce interest rates to spur development.  To hold down inflation the Fed will raise rates to reduce the money supply.

The prospect of energy driven inflation has always been on the radar, but two stories this morning caught my eye.  The first was about an increase in iron ore prices, the second was about Dow Chemical raising its prices, and adding a fuel surcharge.  Both of these are significant because they signal the prospect of big increases in raw material prices.  Unless the Fed’s recent rate cuts take hold, and growth turns, then we are likely facing 1970’s style stagflation over the next several months.  Stay tuned!