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Recently a chorus of voices from various backgrounds have been pointing to the patterns found in nature as holding the keys to the future security and ultimately survival of an increasingly fragile globalized world.

The argument goes something like this: globalization has exponentially increased the complexity of modern civilization and eliminated many of its redundancies (inefficiencies?) based on the pursuit of specialization and comparative advantage.  While many praise, and duly so, the various benefits of globalization, few understand or acknowledge the fragile state it has created in its campaign for greater efficiency.

The stripping away of redundancies and growing interconnectedness of nations and markets now makes a “butterfly in Brazil” scenario more likely as the global system has become much more sensitive to change and less robust.  To secure ourselves from future doomsday scenarios we should model nature and trade back some of our efficiency for increased redundancy and robustness.

Nassim Nicholas Taleb has been hammering on this theme for years now, adding a new updated section to “The Black Swan” on Robustness and Fragility,

First, Mother Nature likes redundancies, three different types of redundancies.  The first, the simplest to understand, is defensive redundancy, the insurance type of redundancy that allows you to survive under adversity, thanks to the availability of spare parts.  Look at the human body.  We have two eyes, two lungs, two kidneys, even two brains (with the possible exception of corporate executives)—and each has more capacity than needed in ordinary circumstances.  So redundancy equals insurance, and the apparent inefficiencies are associated with the costs of maintaining these spare parts and the energy needed to keep them around in spite of their idleness.

The exact opposite of redundancy is naïve optimization.  I tell everyone to avoid attending (orthodox) economics classes and say that economics will fail us and blow us up (and, as we will see, we have proofs that it failed us; but, as I kept saying in the original text, we did not need them; all we needed was to look at the lack of scientific rigor—and of ethics).  The reason is the following: It is largely based on notions of naïve optimization, mathematized (poorly) by Paul Samuelson—and this mathematics contributed massively to the construction of an error-prone society.  An economist would find it inefficient to maintain two lungs and two kidneys: consider the costs involved in transporting these heavy items across the savannah.  Such optimization would, eventually, kill you, after the first accident, the first “outlier.”  Also, consider that if we gave Mother Nature to economists, it would dispense with individual kidneys: since we do not need them all the time, it would be more “efficient” if we sold ours and used a central kidney on a time-share basis.  You could also lend your eyes at night since you do not need them to dream.

In an e-mail discussion with Timothy Thompson he drilled down the objections of many in this growing crowd to a more specific risk,

…the whole globalized economy relies on just one critical element: cheap transportation. And cheap transportation means cheap transoceanic container shipping, which in turn relies on just one critical factor: cheap oil. The world economic system can be disrupted at any time by simply increasing the price of marine fuel.

So, an entire global economic system has become dependent on the price of just a single commodity, crude oil.

From a security standpoint, the anti-globalization crew also write that any terrorist or military threat that stops transoceanic container cargo also stops most of the world economy.  So just one big terrorist bomb arriving in just one shipping container in just one port can cripple the whole global economy.

In coming up with solutions, John Robb is making a good go of it with his study and writings on resilient communities, also modeled in Suarez’s “Freedom.” He believes one of the answers to the potential problem of long-distance production and shipping is the use of 3D fabrication technologies to manufacture tools and products locally.   In his own words, “Localize Production.  Virtualize everything else.”

Concerning food, we can already see a glimpse of this ethos  in the rise of urban farming and local farmer’s markets.  It’s very possible that this will spill over into manufacturing (See Etsy) as the technology becomes cheaper and more readily available.

So, what to do as an individual?  Well, globalization is not going anywhere for now.  Rather than fighting its advance or holing up in a cabin in Alaska, the best stance may be to skeptically embrace its benefits, rebuffing naive claims of global utopia, while doing more to safeguard ourselves against its weaknesses.  It’s a balance of course.

Here are some links to articles and videos discussing the themes of efficiency, redundancy, nature and security:

Nassim Nicholas Taleb on Robustness

http://www.isegoria.net/2010/06/natural-security/

http://www.foreignpolicy.com/articles/2003/09/01/adapt_or_die?page=full

http://www.physorg.com/news193586040.html

http://fora.tv/2008/08/08/Daniel_Suarez_Daemon_Bot-Mediated_Reality

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First, the books:

1) “Freedom” by Daniel Suarez

An awesome follow-up to Suarez’s first novel, “Daemon,” a high-tech thriller that turned the heads of national security experts, technologists and futurists alike.  The sequel focuses on the role of resilient communities in building a different future for those who detest the decreasing self-sufficiency (therefore freedom) of the common citizen and community.

Both “Daemon” and “Freedom” plus Robb’s “Brave New War” and Pollan’s “Omnivore’s Dilemma” provide a great blue print for those wanting to see the near-future of conflict for power and resources and operational space.  (h/t @TimothyThompson)

2) “The Collapse of Complex Societies” by Joseph Tainter

Two chapters into the book that ZenPundit says is the “academic to mainstream crossover book of 2010.”  More to come…

3) “The Irony of American History” by Reinhold Niebuhr

I’ve heard Andrew Bacevich sing the praises of Niebuhr for long enough now that I had to consume some of his writing for myself.  Thus far I have been blown away by his C.S. Lewis-like style and depth.

Writing during the postwar years, Niebuhr, the scholar, theologian and prophet honed in on “…the persistent sin of American Exceptionalism; the indecipherability of history; the false allure of simple solutions; and, finally, the imperative of appreciating the limits of power.”

4) “Cloud Atlas” by David Mitchell

Have heard about this book for a while, shortlisted for the 2004 Booker Prize and other awards, excited to read a contemporary novelist who has been compared to David Foster Wallace.

5) “For the Win” by Cory Doctrow

Lots of hype from TwitterNation, will crack open once I finish the above.

And posts and articles…

1) “The Sun in the Sky: The Relationship Between Pakistan’s ISI and Afghan Insurgents” by Matt Waldman

2) “Who is Ayn Rand?” by Charles Murray (h/t Isegoria)

3) “West Point Faculty Member Worries it is Failing to Prepare Tomorrow’s Officers” by Maj. Fernando Lujan, U.S. Army

4) The Cheap Vegetable Gardener (h/t Shloky)

5) “The Scientific Scandal of Antismoking” by J.R. Johnstone, PhD and P.D. Finch, Emeritus Professor of Mathematical Studies (h/t Isegoria)

6) David MacKay’s Without The Hot Air (h/t Carl Rigney)

Oh yeah…and about those $1 trillion of minerals underneath the mine-laden dirt of Afghanistan, I’ll put money on China getting way more contracts than the U.S.  Why?  They care more about business than changing governments.  The only question they’ll have for Karzai regarding his corrupt brother in the South is, “yuan or dollars?”

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There’s no doubt that globalization has its benefits, but we often ignore the fact that it has also exponentially increased the complexity of the world markets and has eliminated many of the redundancies (economists call these “inefficiencies”) and robustness that once made it so individual markets could withstand failures in other parts of the world.  Complex systems are very fragile.

See Nassim Nicholas Taleb’s Ten Principles for a Black-Swan Proof World

Here are a couple of my favorites:

1.  What is fragile should break early while it is still small. Nothing should ever become too big to fail.  Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

8.  Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial.  The debt crisis is not a temporary problem, it is a structural one.  We need rehab.

9.  Citizens should not depend on financial assets or fallible “expert” advice for their retirement.   Economic life should be definancialised.  We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require.  Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

For more Taleb see here.  (h/t John Robb)

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Is this the future of food?  I’m not sure, but our family is giving it a shot on a very small, humble scale this summer.

(h/t John Robb)

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On Afghanistan, waterboarding and COIN:

1) A fascinating paragraph from Robert Kaplan’s latest article on Afghanistan in The Atlantic (h/t Andrew Sullivan):

The very prospect of some success by July 2011 increases the likelihood that U.S. forces will be in Afghanistan in substantial numbers for years. In effect, the proficiency of the American military causes it to be overextended. British Major General Richard Barrons, a veteran of the Balkans and Iraq now serving in Afghanistan, told me he learned during the most depressing days in Baghdad that “the long view is the primary weapon against fate.” If you are willing to stay, you can turn any situation around for the good. But that is an imperial mind-set, with its assumption of a near-permanent presence, which today’s Washington cannot abide, even as its own strategy drives toward that outcome.

2)  On Waterboarding: here and here (caution: disturbing)

3) Getting Close to the Afghans:

Our distance from the population, and the enemy’s proximity, encourage the people to alert the insurgents when our troops approach. They encourage the people to keep quiet about IEDs, which are now powerful enough to kill passengers in our best armored vehicles. Force protection measures thus result in less protection for our troops.

The risk aversion among American commanders has many sources. Fear of casualties and doubts about our purpose in Afghanistan cause segments of American society to pillory units that sustain large casualties, and to ignore units that cling to large bases and accomplish little. Talk of troop withdrawal dates discourages leaders from taking short-term risks for long-term gain.

Part of the blame lies within the military, which has often promoted risk-avoiders ahead of risk-takers, and has undervalued other attributes of vital importance in counterinsurgency such as creativity, sociability and empathy. The extent to which American units collaborate with Afghan security forces and obtain assistance from the population depends primarily on these attributes, and it varies widely.

On millenials, the economy and the coming anarchy (light reading, I know, sorry Linda):

1) The Dropout Economy a.k.a. when Millenials get tired of paying for the broken system created by the baby boomers and decide to opt-out. (h/t Shlok Vaidya)

Look at the projections of fiscal doom emanating from the federal government, and consider the possibility that things could prove both worse and better. Worse because the jobless recovery we all expect could be severe enough to starve the New Deal social programs on which we base our life plans. Better because the millennial generation could prove to be more resilient and creative than its predecessors, abandoning old, familiar and broken institutions in favor of new, strange and flourishing ones.

Imagine a future in which millions of families live off the grid, powering their homes and vehicles with dirt-cheap portable fuel cells. As industrial agriculture sputters under the strain of the spiraling costs of water, gasoline and fertilizer, networks of farmers using sophisticated techniques that combine cutting-edge green technologies with ancient Mayan know-how build an alternative food-distribution system. Faced with the burden of financing the decades-long retirement of aging boomers, many of the young embrace a new underground economy, a largely untaxed archipelago of communes, co-ops, and kibbutzim that passively resist the power of the granny state while building their own little utopias.

2) Britain ‘four meals away from anarchy’ (h/t John Robb)

…at least there’s always music, check out this sweet visualization - Rock ‘N Roll Metro Map

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We learn from our gardens to deal with the most urgent question of the time: How much is enough?” – Wendell Berry

Last summer after attending the Puyallup Farmer’s Market nearly every weekend for 4 months I caught the bug…the vegetable gardening bug that is.  Piles of fresh, colorful, local produce began to invade not only the Schaefer family dinner menu (Jamie Oliver would be proud), but also my thinking on resilience, sustainability and health.

I soon began skipping the merchant stalls to spend my time firing flurries of questions at four nice ladies manning the gardening help table.  They seemed excited that a random 26-year old suburban hack seemed so interested in their hobby and assured me that despite my complete lack of knowledge or cute gardening hats, I too could produce something edible.  “It’s all about the soil,” they nodded in zen-like unison.  Thus, I’m planting vegetables in our backyard this Spring.

Rather than weaving some beautiful, Wendell Berry-esque narrative on what has driven me to take a crack at growing my own food, I’ll try to give you a few snapshots of random thoughts I’ve had that led me to a conviction that planting a vegetable garden is such a worthwhile endeavor to pursue.

- Growing one’s own food is a path to resilience. What do I mean by this?  Without sounding too alarmist, we have never before seen so much of our food controlled by so few companies…this is incredibly risky.  Any small variations in the industrial food system could have massive consequences, unintended or otherwise, leading to scarcity, huge price increases, disease, etc.  By growing your own food, no matter the scale, you are going “off the grid” and insulating yourself from the volatility of the globalized food market.  **For more in-depth discussion on building resilience see John Robb’s blog here.

- Potential long-term cost savings. Notice two key phrases, “potential” and “long-term.”  I’ve done enough research now to pop any idealistic bubbles that planting a vegetable garden will immediately lead to massive savings.  Seeds, equipment, water, fertilizer…these are all costs that add up and often push the savings on down the road a couple years.  However, if done successfully, there’s no reason you can’t eventually save a substantial amount on your monthly grocery bill and have fresher, more healthy food to boot.

- Buying and eating locally re-connects us with our food.  As Michael Pollan so eloquently points out in his book, “The Omnivore’s Dilemma” it is startling how disconnected we have become from something so intimate to us as our own food.  We purchase thousands of dollars of it off the grocery store shelves each year and have no idea where it comes from, or many times, what is actually in it (try pronouncing the ingredient list on any processed food and tell me if I’m wrong).

I long presumed that my ignorance equated to a moral pass on agricultural issues, but became convicted that I was voting with my wallet three times a day for a particular food system and I’d better know…really know, just what I was feeding myself and my family.

- Healthy eating for my family.  Obviously a no-brainer, but eating more vegetables is great for your health.  I spent my life avoiding them as much as possible, but was subsequently doomed when I married a woman who cooked them…and quite well at that.  It’ll be something I’ll comment on once we get into the swing of things, but my hunch is that we’ll consume a great deal more veggies as we begin producing them ourselves.  To top it off, we have two beautiful kids.  I want them to grow up in a family that eats healthy and grows its own food.

So there you have it.  Those are just a few of dozens of thoughts floating through my head when it comes to growing my own food, but hopefully this can be a good conversation starter.  If you want more good resources to check out see the following:

“Learning How to Grow Vegetables and Herbs in a Home Garden” by Jason Morgan

For those in the Pacific Northwest, The Westside Gardeners Timetable

Get Rich Slowly’s Gardening 101

What do you think?  Do you grow your own food?  Have any tips as I get started?

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Now that the global economy seems to have settled down a bit, most people are rubbing the financial slumber from their eyes and trying to figure out what happened and how to better prepare for the future.  As I’ve thought about the economy and personal finance in the past few months I’ve continually come back to the idea of becoming more financially resilient – basically, becoming better able to withstand and even thrive during future economic downturns.

It’s nearly impossible to become completely independent of the world markets, but the following are a few ways to help ensure that if things go south in a hurry (they will again, someday, sometime), you will survive and won’t be swept up in the wave of financial destruction:

1. Learn to track your spending – unless you can get a grasp on where you money is going each month, you have no basis for managing your finances.  With the availability of free online budgeting software like Mint and Wesabe, there is no excuse for not being able to track your spending.  Once you can categorize and measure the various financial transactions you make on a regular basis you can then develop a realistic spending and savings plan.

2. Be merciless with debt - during the past two years of financial wreckage, the first people to go under have often been those buried in debt.  An unexpected job loss, pay cut, or rise in interest rates can overwhelm anyone with a high debt-to-income ratio.  Whether you start with the smallest balance first, or the one with the highest interest rate, the important thing is to rid yourself of debt as quickly as possible and avoid accumulating more.

3. Cut costs/D-I-Y/Sustainability – to become better off financially there are only two options: spend less or make more money. Cutting costs is often a much easier short-term solution to increasing our wealth. Start by looking at your monthly expenses (see Step 1), identifying your biggest costs and whether or not they can be reduced. Do you have interest rates or fees that can be negotiated down? Subscriptions that you don’t really use? A simple phone call may save you hundreds, it costs nothing to ask.

Second, identify things that you could produce yourself. For example, my wife and I discovered that our monthly grocery bill was larger than we liked, but felt that much of it was due to our desire to eat healthy, fresh foods, specifically produce. Rather than cutting this out of our diet, we made the decision to plant a vegetable garden this coming spring. It won’t completely replace the grocery store, but growing our own tomatoes, lettuce, cucumbers, etc. will save us a significant amount of money over time, provide us with healthy, organic food, and insulate us from rising food prices.

4. Develop multiple streams of income – the second part of the wealth equation deals with making more money in the first place. Even if you have a full-time job, you can increase your financial resilience by developing multiple streams of income. For example, while it doesn’t earn much, blogging provides me with an additional source of income.

Focus on developing passive income, or income that comes from activities that don’t require your full-time engagement. Examples of this would be rental income, advertising revenue from websites/blogs or royalties from publishing a book or other intellectual property. Think “set it and forget it.” By increasing your streams of income you help ensure that if one stream dries up you are still able to survive.

5. Build an emergency fund – If you live paycheck to paycheck you are not alone, but you’re playing a dangerous game.  No matter how well you budget there are always going to be unforeseen costs and emergencies.  Car trouble, medical issues, last-minute travel, etc.  The way to make sure these events don’t crush you is to build an emergency fund.  Trent at the Simple Dollar explains,

“An emergency fund is cash that you’ve saved up for the sole purpose of helping you maintain your normal life through the emergencies that life hands you. “

Check out his awesome step-by-step guide to building an emergency fund here.  Various numbers on how much you should have in savings get thrown around by the experts, but 6 months of income is a good place to start.

6. Maximize contributions to Roth IRA – there is no better retirement vehicle available to young people today.  The Roth IRA allows the money in your account to grow tax-free and keeps you from having to pay taxes when you begin to withdraw payments come retirement time.

Do everything in your power to contribute the maximum ($5,000 for 2009) each year.  It may not seem like much at first, but if you start in your 20′s the magic of compounding interest can work for you and provide you with a good chunk of retirement income.

7. Diversify investments – “I believe that 98 or 99% – maybe more than 99% – of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.” Warren Buffett.

The principle laid out by the Oracle of Omaha is sound advice for investors.  Since you don’t have enough knowledge (worry not, even the “experts” on CNBC don’t) to consistently and accurately predict which markets will provide the best returns and which will tank in years to come, invest in all of them.

How does the average 20-something do this?  By investing in low-cost index funds like the Vanguard S&P 500 Index Fund, which purchases shares of every company in the S&P 500.  By taking out the guess-work (excuse me, ehem, “technical analysis”) of fund managers the funds are able to charge the investor significantly less.  For more info check out Ramit Sethi’s in-depth post on mutual funds.

Of course, diversification extends beyond stocks.  Many have found real estate to be a profitable place to invest, as well as bonds, commodities, currencies etc.  However, for the average investor, index funds provide a great place to start.

8. Learn entrepreneurship – entrepreneur and author John Robb explains, “One of the best ways you can prepare for the future is to train yourself to become an entrepreneur — essentially a person that makes their own economic opportunities.”

Not everyone dreams of running their own business, but as more and more jobs are outsourced to countries who can do them for less money, the types of skills that may help you survive are those found in successful entrepreneurs.

Start small, test fast, fail fast and keep going.  Entrepreneurial opportunities are often much closer to home than you may think (sounds eerily like a piece of fortune cookie wisdom).

9. Nurture relationships – Very few people get through life without depending on the generosity, wisdom, or partnership of their friends and families in reaching their financial goals.  Besides the obvious benefits of having people to bail you out if you find yourself in trouble, relationships provide you with a network of people who can give you advice, mentorship and in some cases capital for a start-up or investment opportunity.

By nurturing close personal relationships you tap into a greater resource than any bank or investment firm could ever offer you – people who share in your vision and authentically want to help you succeed.  And in the end, no amount of money will fulfill if you don’t have people to share and enjoy it with.

10. Hold on loosely – Some of you might be asking, “Wait a minute Cameron, you just got done telling me how to make more money and keep it, now you’re saying to loosen my grip?”  Absolutely!  Money is a great tool, but it has an amazing ability to corrupt people who make it the chief end in itself.  When taking positive steps to better your personal finances it’s easy to become greedy as you witness just how much is possible with a few solid decisions and some daily fiscal discipline.

How do you fend off greed?  Simple, by giving money away.  Being rich isn’t about the bling, it’s about freedom.  For me this means the freedom to support my family and bless others at the same time.  Many of my friends are involved in some incredible non-profit organizations and missions – being able to support them is one of my favorite things in life.  Holding on tightly to your money may help you feel in control, but in the end it keeps you from receiving a much greater reward, the joy of helping others.

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Former US Air Force pilot and tech entrepreneur John Robb explains in his book, “Brave New War: The Next Stage of Terrorism and the End of Globalization,” that, “war in the twenty-first century will be very different from what we’ve come to expect.”  Mainly, state-versus-state conflict is over (Creveld’s prophecy).  Nuclear weapons and globalization have created a situation where states have little to gain and almost everything to lose by going to war with each other.

Globalization

Instead we’ll be fighting non-state actors, or superempowered groups, Robb calls “global guerrillas.”   While globalization has unleashed amazing economic opportunities for all of us, it has also allowed for groups like al Qaeda to reap the benefits of low-cost technology, global communications, D-I-Y weaponry and information gathering.  Robb points out, the same tools we use everyday are being used against us by global guerrillas seeking to weaken and de-legitimize the state.

“Airplanes are being turned into flying bombs, cell phone networks are being used to simultaneously detonate bombs from miles away, and critical computer networks are being hacked.”

Rather than openly facing our military forces on the battlefield, most global guerrillas practice fourth-generation warfare (4GW), avoiding our strengths and exploiting our weaknesses.  One path through which they have found the most success in creating chaos is through systems disruption.  For example,

“…one small attack on an oil pipeline in southeast Iraq, conducted for an estimated $2,000, cost the Iraqi government more than $500 million in lost oil revenues.  That is a return on investment of 25 million percent.”

and in Africa,

“In February 2006, Nigerian guerrillas of the amorphous Movement for the Emancipation of the Niger Delta attacked the loading dock on Shell Oil’s Forcados export platform.  The attackers escaped without being captured or suffering casualties.  The estimated cost of the attack was $2,000…The cost to Shell was $400,000 in lost oil exports for an estimated two weeks and the indefinite shutdown of an adjacent oil field.  The estimated lost revenue to Shell was over $50 million.  The rate of return: 25,000 times the cost of the attack.”

For now these systems attacks have been taking place in far away lands, but there’s no reason to believe our nation is immune.  Global guerrillas are operating much closer to our border than most of us realize.

Black Swans

Of course, the example that hits closest to home is 9/11 (cost $500,000 to plan and execute) – which brings us to the idea of black swans.  Nassim Taleb explains in his brilliant book, “The Black Swan: The Impact of the Highly Improbable,” black swans are events with the following three characteristics:

• Outlier – “…it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.”
• Carries extreme impact
• Causes us to “concoct explanations for its occurrence after the fact, making it explainable and predictable.”

The frustrating reality is that black swans will continue to happen and there’s nothing we can do about them since, by their very nature, they’re impossible to predict.  In an increasingly interconnected world, the problem with black swans is that their impact can multiply exponentially.  Crisis in one country can easily lead to regional and global distress.

For example, the collapse of the Thai baht in 1997 led to a financial crisis all across Asia and was further linked to economic slowdowns in developing countries, the drop in oil prices, Russia’s default of 1998 and the collapse of Long Term Capital Management.  Regarding our extremely complex global system Robb warns,

“It is too complex for any single state, or group of states, to keep under control.  As a result, most of the systems we have built over the last several centuries to dampen the excesses of instability – enabled by markets, travel, communication, and other global systems – are now ineffectual.”

Resilience

How do we protect ourselves as a nation in an age marked by global guerrillas, increasing interdependence and financial volatility?  By building resilience into our networks and country.  The highly-centralized bureaucracy that characterizes much of our national security apparatus can barely keep up with the decentralized, rapidly evolving, open-source insurgencies at work around the world.

Robb feels, “the only way to ensure security in the future will be through survival and decentralized resilience.”

The term survival tends to invoke the image of surrender to impending doom, but before you go thinking this sounds like raising the white flag, Robb explains,

“A focus on survival and decentralization isn’t as simplistic or naive as it seems on first glance.  It doesn’t mean that we don’t pursue criminals, terrorists, and other threats that face us – far from it.  The state should pursue these individuals with all the means at its disposal.  It also doesn’t mean that we should attempt to remake the world in our image or attempt to fight grand battles for the hearts and minds of the world.”

At the state-level resilience means:

• Not allowing nationalism to destroy international trade
• Decentralizing security and emergency response efforts
• Decentralizing utility networks like the electrical grid – allow individuals to become both energy producers and consumers (see here)
• Thinking in terms of ecosystems and open-source networks
• Increasing sustainability, decreasing dependence

Some will dismiss Robb’s ideas and advice as far-fetched or “gloom and doom,” but they do so at their own peril. The world we live in today provides many of us with limitless possibility and freedom, but there is a collection of individuals, looming just below the surface of this new world order, who threaten to hijack globalization for their own aspirations – we must adapt to meet the challenge.

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My new post at Art of Manliness is up, here’s a sneak peak, read full post here:

Thinking about men I admired, it dawned on me that most had a quiet contempt towards any excess of material possessions. Their expertise and confidence were displayed by the fact that they did not require much to live successfully. They could just as easily get along for a week in the woods with nothing but a knife as they could living in a posh suburban neighborhood with all its amenities. Possessions had no control over the trajectory of their lives. They were not gadget junkies, seeking their fix from the latest Best Buy sale.  They were in control of the things they owned, not the other way around.  Real manliness meant freedom from the bondage of material goods.

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Editor’s Note: The following is a guest post by my friend Marc Marmino, defense analyst, coffee lover and resident of the beautiful Pacific Northwest.

Those of us fortunate enough to live near Seattle (if only for the coffee) have the opportunity to visit the original Starbucks in Pike Place Market. If you too live in Seattle, or are visiting sometime in the near future, I strongly recommend forgoing the opportunity to see the “original Starbucks” in the market. Instead, visit the nearby newly “de-branded” store caddy-corner to the market on 1st and Pike. It is a throwback to the original conception of Starbucks, and a concept that has a lot of merit in my eyes as to what the company should strive to return to.

Also, you may be disappointed after waiting in the long line and flustering amongst the impatient crowd at the “original Starbucks” only to learn that it was actually the 4th store built and operated by the company. Actually, you’d never learn that unless I told you, because its location simply lends to a feeling of originality. So Starbucks actually goes along with the white lie that it’s the company’s first storefront. It’s great for business as several thousands of visitors flock through the market daily after disembarking from their cruise ship in the Seattle Harbor.

Speaking of Starbucks, what’s going on with that company nowadays? Last I’d heard: Howard Schultz had returned to the company as CEO after the stock price was greatly diminished, stores were closing all over the globe, and employees were laid off in droves. It seems that regardless of these facts, I still loyally buy almost 3 cups of the best Joe on the planet per week from the store. So where are they now in the face of their recent challenges? I did some research to find out…

As a quick recap of the company’s woes: The company was a part of the massive boom in the coffee industry following the turn of the century when the US retail coffee market recorded a growth of 157% in value terms between 2000 ($3,258 million) and 2005 ($8,372 million). As a leading coffee retailer during this lucrative period for the industry, Starbucks accumulated a large amount capital at a rapid pace. Accordingly, the company began to offer outstanding salaries and benefits to their employees while opening new stores at a feverish-pace. Starbucks was expanding globally and the company’s stock price rose quickly up until FY2007. At that point in time, Starbucks ran into a series of difficult circumstances that ultimately led its financial performance into a downward spiral.

Starbucks Corporation faced several challenges in recent years including:

• intense competition
• low employee productivity
• changing consumer habits from the global economic downturn.

As a result of these challenges, “the company’s profit margin decreased nearly $500 million (an approximate 50% decline) during FY2008 in comparison to FY2007”.

Accompanying this fiscal crunch was the closing of many stores and the termination of thousands of jobs within the organization. Additionally, the anticipated growth of the company came to an abrupt halt in the face of diminished capital. The retained employees received massive cuts to their pensions and a seemingly hollow promise from the revived CEO Howard Schultz that the company would return to its once prominent spot atop the food and beverage industry. While it is apparent that recent results suggest that he is on the right track…some observers remain skeptical.

What has the company done to correct itself?

The coffee giant has taken several steps to address their current problems. First and foremost, it underwent a major restructuring effort that included downsizing the overall size of the company. To improve their balance sheet, Starbucks executives decided to cutout several liabilities in the form closing nearly 700 stores, both existing and under construction. In addition, the company made the difficult decision to lay off several thousand employees in the midst of a recession. The company has also attempted to shed their monopolistic-faux image by undergoing a “de-branding”.

The brand itself began as a local-niche-firm, one that was incredibly inviting and sparked the interest of millions of customers. Inevitably the firm grew quickly and eventually became a global brand that has lost its once niche appeal. According to one coffee advertiser, the relatively rapid success of the company “led to issues of brand depersonalization”. Now, in an attempt to return to its wildly successful roots, the company is de-branding in an effort to regain a community personality and the image of the neighborhood coffee shop.

There is an incredible urgency for this company to return to profitability. Mainly, competitors both small and large threaten to take over the majority of the market share in coffee retail and production. According to Data Monitor, “Starbucks faces intense competition in coffee beverage segment from other specialty coffee shops, restaurants, and doughnut shops”. Namely, McDonalds and Dunkin Donuts have increased their share of overall coffee sales worldwide.

In an effort to not miss out on the market of consumers thirsting for better quality coffee beans, grocery markets have adopted the practice of selling their company’s own higher-quality coffee-beans. In addition, coffee bean companies (i.e. Folgers) that have traditionally used lower-quality beans began offering a higher-quality bean choice to consumers. The urgency in this market shift deals with the risk associated with the recent economic downturn.

Consumers are now making more decisions based upon a cost-benefit analysis vice brand-name recognition. If an organization puts forth a product that is nearly equivalent to a traditionally higher-quality product for a lower price, the consumer is increasingly more inclined to choose the former product. In the case of Starbucks, competitors are doing just this, at a lower price. While the strong brand-name has seemingly protected Starbucks thus far, if they cannot fix their problems soon, many industry experts expect the company to fall further into irrelevancy in the eyes of the global consumer.

Motivation is one of the key elements towards positively changing the progress of the company. No one is more in tune with this concept than the resurrected Starbucks CEO Howard Schultz. Starbucks most recently dropped only 5% in year-on-year sales in the second quarter of 2009 compared to the same period in 2008 (beating analysts’ expectations).

Schultz sees hope in the progress made thus far, but is quick to not discount the work that lies ahead of the company and its employees. This sentiment was readily apparent in Schultz’s rhetoric when he recently stated that “There’s no victory lap going on at Starbucks here…We have a lot of work to do, one quarter [of improving sales] does not make a trend”. This cautious optimism that Schultz maintains is critical towards ensuring that the company does not become overly confident or complacent in its change effort.

If it fails to make the necessary changes, the coffee company will likely lose its majority stake in the marketplace to competitors, and ultimately lose money for its shareholders. A publicly-held company exists solely to make money for its shareholders, and a shrinking company fails to achieve its mission. Such an outcome would draw down levels of capital within the company from outside investors. Lower levels of capital equate to more job losses and store closings. In the worst case scenario, Starbucks would go bankrupt or even become obsolete. These reasons are indicative of why it is so important for Starbucks to make the necessary changes to ensure its viability for years to come.

In these times of financial uncertainty for so many companies, one thing is for certain…God they make great coffee…

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