Saturday Soother – December 4, 2021

The Daily Escape:

Mexican Hat Rock, Mexican Hat UT – 2021 photo by Jacky and Rick

The media keeps talking about inflation, saying that it’s bound to hurt the economy any time now. They mean that inflation will make workers ask for higher wages. That will force companies to pay workers more, and thus, lower corporate profits.

Sounds like a problem, but as Bloomberg reports, the fattest corporate profits since 1950 are debunking inflation stories spun by CEOs. US corporations enjoyed the widest profit margins in more than 70 years during the second and third quarters of 2021. US corporate profits before adjustments rose to a record high of $3.14 trillion in the third quarter of 2021. From Bloomberg:

“On earnings calls, plenty of executives complained about the squeeze from rising costs of labor as well as materials. But overall, profits were up 37% from a year earlier, according to data out last week from the Commerce Department.”

Nearly two thirds of publicly traded US corporations have reported higher profit margins this year compared to 2020. One hundred of the largest have booked profit margins at least 50% higher than last year’s levels.

Bloomberg reports that businesses have been paying more to their employees too, with total compensation up 12% in the last quarter vs. a year earlier. It’s not that every worker got a raise. A significant part of the increase was due to millions of Americans simply returning to work. But many got raises too. To date, hourly earnings broadly kept up with the fast-rising cost of living. And in some low-pay industries like leisure and hospitality they’ve outpaced it, although not by enough for those firms to get fully staffed.

The new data on corporate earnings suggest businesses are comfortably passing on their higher costs. In recent months, a number of US companies including Coca-Cola, Procter & Gamble, Chipotle, and Dollar Tree have announced price hikes, claiming that the increases were necessary because of higher wages and material costs.

But the Bloomberg data say that these corporate kings are using price hikes to pass their sky-high CEO pay and marginal increases in material and labor costs to consumers, in order to keep padding their already historically strong profit margins.

Still, politicians are calling for Fed Chair Jerome Powell’s head. Sen. Tom Cotton (R-AK) wrote in the WSJ that Powell doesn’t deserve another term because he caused inflation. Powell’s policies have contributed to US inflation, but there’s zero evidence that US inflation is a problem today.

For months, corporate executives and right-wing politicians have been parroting the claim that inflation in the US is due to Biden’s social spending policies. But the new data show that inflation is going up largely because corporations are driving it.

Remember, corporate profits are up by 37% while inflation amounted to about 6.2% in the same period. In other words, as the economy reopened and prices for goods went up, and corporations used the situation to raise prices a lot.

In fact, the FTC just announced it voted 4-0 to investigate the relationship between competition and supply chain problems. The FTC sent letters to nine dominant firms in supply, retail, and wholesale, mandating they respond within 45 days to a host of questions, as well as give internal documents on various topics.

This matters. Inflation and shortages aren’t neutral forces. The twin problems seem to be *helping* big business improve their profit margins. It’s important to ask why they are happening and who has an incentive to keep them going.

Even Morgan Stanley is now asking corporations to hit the brakes on accumulating profits. Their research division released a report highlighting the gap between corporate profits and worker wages. From the report:

“Real wages…still have to grow by 7.3% in excess of productivity growth to make up the gap….If this catch-up takes place over the next 5 years, unit profits will fall 33% from current levels…This would move the corporate profit share back to its 1990s average on a pre-tax basis and leave it just marginally above on a post-tax basis.”

Imagine. An investment bank telling corporations that they really should be making less profit. Things must be really going to get much worse than we think.

Let’s launch into our weekend, starting with a Saturday Soother. Try to forget about whether a government shutdown will hurt you or Biden, or whether the Supreme Court is now filled with ideological hacks.

Instead, grab a seat by a window and listen to “The Girl with the Flaxen Hair” by Claude Debussy. The Art Nouveau period was obsessed with women’s hair. Debussy was immersed in that world. It’s played here by the LA-based, Sakura cello quintet. Wrongo is a sucker for cello, and there are five of them! This was originally written for piano, and is transposed here for cello:

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Monday Wake Up Call – May 24, 2021

The Daily Escape:

Sun, clouds and Saguaros, North Scottsdale AZ – photo by rayredstonemedia61

After three decades of digital technology development, it’s evident that cybersecurity isn’t being adequately ensured by Mr. Market’s “invisible hand.” In remarks at the White House last Thursday, Biden said:

“…private entities are in charge of their own cybersecurity…and we know what they need. They need greater private-sector investment in cybersecurity.”

Wrongo’s last assignment was as CEO for a division of a F500 defense contractor. We were targeted by Chinese and other hackers thousands of times per day. By 2005, the parent company was investing tens of millions annually on cybersecurity. Most non-defense firms have come to investing in cybersecurity slowly and without large funding.

We again became painfully aware of the issue when hackers shut down the Colonial pipeline on Mother’s Day, bringing back gas shortages and long conga lines of cars trying to fill up. We subsequently heard that Colonial paid the hackers $4.4 million in Bitcoin to regain control of their networks.

From the New Yorker:

“…we are a country that has seen nearly a thousand reported ransomware attacks on our critical infrastructure since 2013. This includes transportation services, wastewater facilities, communications systems, and hospitals. The average recovery cost of a ransomware attack for businesses is around two million dollars.”

Even though private companies are most vulnerable to counterattacks, they continue to set their own cybersecurity standards largely based on operational and economic priorities, even if their negligence exposes the public to risks. So why won’t companies fix their mess?

Most in the private sector think that cybersecurity regulations will cost too much, which they do not want to pay, or may be incapable of paying. Many in the private sector also consider requirements for better cybersecurity to be yet another form of government regulation.

Mostly, it’s about money and secondarily, about a shortage of IT skills. Some argue that the incentive structure is backwards. Companies often think the costs of adding robust cybersecurity to be higher than their likely losses from a cyber theft. In a way, they are self-insuring, but that ignores the harm to their customers that occurs when personal information is stolen, or when you can’t buy gasoline.

CEOs are concerned primarily with the short-term profits and stock prices of their corporations. Companies have regularly absorbed losses incurred by security breaches, rather than reveal weaknesses in their internal cybersecurity systems, all in the name of protecting management reputations.

In 2015, Obama’s DHS designated dams, defense, agriculture, health care, and twelve other sectors of the economy as “critical infrastructure,” meaning that they:

“…are so vital to the US that their incapacity or destruction would have a debilitating impact on our physical or economic security or public health or safety.”

But while the DHS issued cybersecurity guidelines to those sectors, most companies operating critical infrastructure (like Colonial) are privately owned, and they ignored them. That includes 80% of the energy sector, including pipelines, power generation, and the electricity grid. DHS said in 2015 that those industries needed to develop a common vision and framework to deal with cyber threats.

But corporate America never developed that vision and framework.

In 2019, a European cybersecurity researcher using open-source tools available to anyone, identified and mapped the location of twenty-six thousand industrial-control systems across the US whose internet configurations left them exposed and vulnerable to attack. But you know, they would be prohibitively expensive to fix.

On May 12th, Biden issued an executive order that directed federal agencies and their contractors to abide by a host of stringent new cybersecurity regulations and reporting requirements. The order also required IT service providers and companies that operate industrial-control systems, to inform the government about cybersecurity breaches that could affect American networks.

Biden’s order is a significant workaround for the lack of government control of cybersecurity in the private sector. Many of the cloud services and software packages used by government agencies are also used in the private sector. So, Biden is creating the likelihood that those standards and requirements will be more broadly adopted. That would be similar to auto-emissions standards: When California raised its standards, 12 other states decided to adopt those requirements, and five automakers agreed to design all their new cars to meet them.

Something similar could occur with cybersecurity. Like with Covid, we’re again learning that there’s a very good reason for a robust central government that has the will to write and enforce 21st Century regulations.

Time to wake up America! Corporations aren’t your friends. From sending jobs abroad, to out-of-control share buybacks, to failing to invest in cybersecurity, they need much closer scrutiny. To help you wake up, let’s dust off Depeche Mode with their 1989 hit “Personal Jesus”:

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Monday Wake Up Call – July 1, 2019

The Daily Escape:

East Inlet Pond, Pittsburgh NH – photo by Wes Lavin. The East Inlet area has one of the few remaining virgin stands of forest in the east.

How did Boeing, a company known for meticulous design and manufacturing, screw up the 737 Max so badly? Bloomberg is reporting that Boeing outsourced software development for some of the 737 Max’s software to Indian companies. There are concerns that decision may have contributed to Boeing’s two deadly crashes.

Bloomberg says that starting in 2010, Boeing began relying on Indian software engineers making as little as $9 an hour in their design program. The software engineers were supplied by the Indian software developer HCL Technologies, which now has annual sales of $8.6 billion. The coders from HCL designed to specifications set by Boeing but, according to Mark Rabin, a former Boeing software engineer:

“It was controversial because it was far less efficient than Boeing engineers just writing the code.”

It turns out that the HCL engineers were brought on at a point when Boeing was laying off its own experienced software developers. In posts on social media, an HCL engineer who helped develop and test the Max’s flight-display software, summarized his duties:

“Provided quick workaround to resolve production issue which resulted in not delaying flight test of 737-Max (delay in each flight test will cost very big amount for Boeing).”

This may be resume inflation. Boeing insists that HCL had nothing to do with the Max’s Maneuvering Characteristics Augmentation System (MCAS) software. HCL said that it:

“…has a strong and long-standing business relationship with The Boeing Company, and we take pride in the work we do for all our customers. However, HCL does not comment on specific work we do for our customers. HCL is not associated with any ongoing issues with 737 Max”.

It isn’t unusual for US companies to use outsourced talent. Prior to his dynamic blogging career, Wrongo was CEO of an outsourcing firm. Our clients were the US government, and several big tech and office product companies, including Dell, Microsoft, and Xerox.

But managing outsourcing is tricky, both for the company moving the work out-of-house, as well as for the outsourcer. Unless the parties develop detailed plans, procedures, and follow strict quality control, even top people can produce work that fails to meet design standards.

The typical jetliner has millions of lines of code. From Rick Ludtke, a former Boeing flight controls engineer:

“Boeing was doing all kinds of things, everything you can imagine, to reduce cost, including moving work from Puget Sound, because we’d become very expensive here….All that’s very understandable if you think of it from a business perspective.”

More profits over people.

In 2010, HCL and Boeing opened a “Center of Excellence” in Chennai, saying the companies would partner to create software used in flight testing. Ultimately, there is no denying that testing software plays a huge role in ascertaining safety standards. You can find further information and resources related to software testing and a guide to IEC 61508 Compliance by checking out the Parasoft website. Generally speaking, this type of testing is typical for big companies. Boeing also has a design center in Moscow. From Cynthia Cole a former Boeing engineer who headed the Engineer’s Union from 2006-2010: (emphasis by Wrongo)

“At a meeting with a chief 787 engineer in 2008, one staffer complained about sending drawings back to a team in Russia 18 times before they understood that the smoke detectors needed to be connected to the electrical system…”

A big reason for offshoring is price. Engineers in India make about $9 – $10/hour, compared with $35 to $40 for Indians in the US on an H1B visa, and higher for a US engineer. Anyone who understands offshoring knows that the cost of rework needs to be added to the apparent hourly cost, and in some cases, that can push the real price closer to $80/hour.

For the 787 Dreamliner, much of Boeing’s work was outsourced. It is well-known that the 787 entered service three years late, and billions of dollars over budget, in 2011. That was due in part to confusion caused by their outsourcing strategy.

Was another globalist lesson learned by Boeing with the 787? Not really, if the 737 Max troubles are any indication.

So this cheap labor story is another black eye for Boeing. It goes along with the Justice Department’s criminal probe, and the FAA’s continuing concern about the Max software. Boeing also has disclosed that the company didn’t inform regulators of the MCAS problems when they first learned about them, because engineers had determined it wasn’t a safety issue.

This is more of the crapification of America’s best companies as they chase lower costs. This time, people died.

Wake up Boeing! The high-value, high-risk elements in your product must be sourced at home.

If America had a real Justice Department, Boeing’s management would be in jail.

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