Value for Money

"Price is what you pay.  Value is what you get." - Warren Buffett

"If you would know the value of money, go and try to borrow some." - Benjamin Franklin

"A stock broker urged me to buy a stock that would triple its value every year.  I told him, 'At my age I don't even buy green bananas." - Claude Pepper

The value of money is a very interesting economic concept.  Everyone places a value on money but everyone has a different value associated with money.  To some money is evil and should be avoided, rather live in the mountains as a self sufficient farmer with no need for the evils associated with money, to others it is highly prized and coveted.  To most capitalists, money shows social status and often people's egos get the better of them when they try to maintain a social status above their means.  To these people greed often takes over at the expense of moral virtues and they end up committing a crime of some form to get hold of the source of perceived joy.  It is only once they are serving time does the true realization of their actions take hold and they realize that the perceived value of money was far less than they initially thought.

Economics deals with the value of money in many ways and one is the utility function of money.  This is a concept given to the perceived value of receiving an additional dollar into your bank account.  To most of us an extra dollar really has no impact and therefore it has a low utility function but to someone begging on the street it means an awful lot.  As the amount of money that flows into you bank account increases the utility function of money loses its luster as you need more and more money to make you feel better about yourself.  For example if you are earning $100,000 a year and you receive a bonus of $1,000 you would probably feel slighted.  This would be the equivalent of leaving a 20 cent tip on a $20 tab at lunch.  So utility function is also related percentages although not completely.  For example if you earned $100,000 but you spent $101,000 then that $1,000 would mean more to you than a person who earned the same but only spent $50,000.  So while there is a relationship with percentages it is relatively loose.

Taking this a bit further there is also a time where the perceived value drops so low that the investment or the service is shunned.  Take for example eating out.  As earnings have stagnated in the United States the purchasing power of each dollar earned has depreciated by inflation.  We are currently earning in inflation adjusted dollars the equivalent to what we earned in 1995.  Furthermore inflation has cut into company profits so they have cut back to keep earnings robust.  Combined this has resulted in a large drop in the value of money.  Back in 1995 the cost of the meal was lower and the portions were larger so the perceived value was there.  Eating out was not considered a luxury but rater a way of life in the United States.  Fast forward to today and the portions have been reduced to keep profits up and the prices increased to such an extent that eating out is now considered by many as a luxury.  The perceived value for money has swung against eating out and so more food will be purchased at the grocery store as consumers swing their budget towards the better value for money.

While these are relatively easy concepts to understand often people forget to factor them into their investment philosophy.  Buying into companies that are being hurt by this loss of value for money will result in a drop in the share price as these companies will see their margins cut.  Make sure that you invest in businesses that can retain their earnings power by continuing to provide value for money and you will be well served.

Globalization

"Imagine there's no countries.  It isn't hard to do.  nothing to kill or die for, and no religion too.  Imagine all the people, living life in peace...  You, you may say I'm a dreamer, but I'm not the only one.  I hope some day you'll join us and the world will be as one." - Lyrics to the song Imagine by John Lennon

With renewed conflict and now a possible resolution in the Ukraine, globalization comes to the fore.  The West wants to claim another democratic nation while Russia considers it part of the Soviet Union and expects it to conform to their laws and society rules.  How this will all play out is any one's guess but one thing that we know is that this struggle will not be the last one the globe will see.  As the world seems to become a smaller place these struggles are becoming more common place and at the heart of all of the conflict is globalization.

The concept of globalization is a simple one - turn the world into one massive free market where goods and services can move seamlessly across borders.  The theory expounds that be establishing one global free market, world trade will expand bringing peace and prosperity to all but is this really the case and how is this playing out in the real world?

In order to expound the virtues of free trade the World Trade Organization was established on January 1, 1995.  The WTO also tries to monitor and control the market through criticism of nations that place barriers to free trade such as tariffs and government subsidies.  The theory is that if all barriers are removed then the market will react efficiently and each country will end up producing goods where they have a comparative advantage. 

As I have discussed in earlier blogs, as the name implies comparative advantage is not an absolute advantage but rather an advantage based on the theory that nations will tend to expand into markets with the highest value allowing other nations to prosper by producing the lower valued item forfeited by the former nation.  This ever changing advantage means that goods and services flow from one country to the next, remaining for a while but then being relinquished to another nation as the original country expands into new higher valued alternatives raising the standard of living for all.  The problem is that there are periods of slow growth and high unemployment as workers who were producing the lower valued item lose their jobs and have to retool to find move into the new opportunity.  During these times governments are often replaced by a new party that runs on the platform of job creation and change.  Often this job creation is fictitiously achieved by implementing tariffs which provide a short term respite.  The problem is that this leads to a trade war between the two countries and neither nation benefits.

The second issue is the legal platform.  What is though to be fair game in one country is considered a crime in another.  Take for example trademark infringement.  In some parts of the world it is perfectly acceptable to copy another country's products and reverse engineer them.  Japan gained traction playing this game and China is now a renowned copier.  Unless there is one global legal framework countries and the WTO are relatively powerless and the stealer is immune from serious repercussions and is able to use this protection to develop the expertise to become a challenge to the original incumbent.  Once traction is gained the formally infringing nation normally joins the non-infringers in calling for more protection and around we go again.

The last issue that I want to discuss (and believe me there are plenty more) is emigration or the legal ability to work wherever you choose.  For globalization to truly work, workers must be allowed to freely move from one country to the next with no barriers to entry.  As work ebbs and flows around the world workers need to able to fill these positions regardless of nationality.  To me this is the biggest barrier of all as countries are fearful that opening the doors to anyone will undermine the opportunities available to their citizens and that as these citizens are the taxpaying and electoral base officials normally make sure that this demographic is protected by placing barriers in the form of emigration.

Until all of these problems are fixed globalization will remain a pipe dream but large corporations will continue to exploit the benefits as it is a huge advantage to them to be able to expand into new markets.  The question one needs to ask is does globalization really benefit the people it is aimed to help and right now, with the playing field so tilted toward big business, I have to say that once again unfortunately the advantage goes to the large corporations at the expense of the new comer.  So while the struggle for Ukraine rages on I am sure that large corporations are already posturing to gain a foothold on the new market regardless of the outcome.

A Full Court Press

A full-court press is a basketball term for a defensive style in which the defense applies man-to-man or zone defense to pressure the offensive team the entire length of the court before and after the inbound pass.  Some presses attempt to deny the initial inbounds pass and trap ball handlers either in the back court or at mid court.  Defenses not employing a full-court press generally allow the offensive team to get halfway down the court or near the basket before applying strong defensive pressure. - Courtesy of Wikipedia

In the United States basketball is a big deal.  As I am South African I have not watched a lot of the game but with March madness (the college basketball tournament) about to start, basketball fever is around the corner.  I have to say that I do enjoy watching the college teams as anyone can win a game and a lot of them come right down to the wire.  Normally during these tense stages of a game the losing team tries desperate defense to stop the other team getting the ball into play and it often works.  This full court press while great for basketball defense is not as helpful when the offense is small business and the defense is large business and the government.

This government full court press is at its zenith and the target for the last 50 years appears to be small business.  Policies that range from onerous legal procedures to taxes to the "affordable" health care act are crippling the engine of growth, the United States' offense, that is small business.  Economies rely on small business for growth and skewing the playing field against these business is having a huge impact on the economic outlook of the United States.  Until this full court press is removed the trend that has been slowly set in place over the last 50 years will strangle innovation and the middle class.

The majority of the middle class people get there through hard work and by setting up small businesses.  Entrepreneurs see an opportunity and fill that need by starting a small business.  They risk their assets to exploit the void and they end up making the market more efficient by improving techniques or innovating technologies and provide consumers with solutions to common problems.  They also employ millions of people and give these people the opportunity to prosper if the company is successful.  For this reason more middle class Americans can point to their success coming from a small business than any other demographic.

In any economy the middle class is the most important demographic for economic expansion.  They have discretionary income that is spent largely on goods and services, they start businesses and employ millions of people and they assist in breaking down the social barriers allowing lower economic classes to move up the socio-economic ladder.  Destroy this class and the economy is weak and growth is stagnant.

So it is interesting that a report was published in Bloomberg that showed that small businesses have seen their share of workers drop from more than 50% in 1993 to just over 46% in 2013.  In addition small businesses added only 2.8 million jobs in 2013 down from 4.1 million jobs in 1993.  This trend will continue until the playing field is leveled however as the playing field has been slowly tilted in the direction of big business and government for the last 50 years, reversing this trend will not happen any time soon.  Every year more and more burdensome regulations, taxes, fees and expenses are piled onto the already enormous list and the current administration seems intent on continuing the trend.  While large business has teams and budgets to deal with these issues the small business owner does not.  If the expense of complying with the new regulations does not drag them under, the time sucked out of their day to deal with these problems bleeds the life out of the company destroying innovation and eroding market share and opportunities.

Until this situation is addressed growth in the United States will continue to stagnate along with poor employment numbers.  No amount of Federal Reserve money can kick start this part of the economy, the stimulus has to come from regulators and unfortunately it is looking like more of the same for years to come.

Tapering's Talons

"A wise hawk hides its talons." - Japanese proverb

Recently the Federal Reserve increased their tapering of the quantitative easing stimulus by another $10 billion a month.  That brings the total to $20 billion a month in reduced monetary spending from the Federal Reserve or almost a 25% reduction from the $85 billion a month peak stimulus.  The impact of this tapering has been relatively mild in the United States as outside of a 1,000 point drop in the Dow Jones Industrial Average, interest rates have fallen almost 15% which could assist housing.  The undercurrent though is a different story.  Stocks appear very weak and look likely to take another leg down but the real talons of the Federal Reserve's tapering are the deep claw marks being left in the emerging markets of the world.

When you try to stimulate an economy by blindly printing money, this money ends up in places other than those intended by the stimulator.  As the Federal Reserve has been printing money for years and as they have been holding down interest rates to artificially low yields, money has flown to find return and one of the best places for this was emerging markets.  As the Federal Reserve piled larger and larger sums of money onto the pyre, countries such as South Africa, Argentina, Russia, Ukraine, Turkey, Brazil, Hungary, India and Pakistan to name a few boomed as yield was hunted out in the jungles of the Amazon, the mountains of India and Pakistan and the game ranges of Africa.  The heat from this massive fire drove investors across the globe to seek refuge in the high yielding nations of the emerging markets.

As this money poured in these governments were able to expand their spending and cover up poor investment decisions all the while supporting economic growth with borrowed money.  As an example, Argentina grew at an average annual rate of 7.2 percent for a decade but much of that growth was tied to an increasing government deficit and spending financed by United States loans.  Now that the Federal Reserve is pulling back on their spending the first money to leave the shores of the emerging markets is the foreign investment and this is leaving deep talon scars across the landscape.  The Peso has cratered 26 percent in 12 months and inflation has followed jumping to an unofficial rate of more than 25 percent.  Strikes are ensuing and a default looks likely.  The boom days are gone and all the Federal Reserve has done is slow spending by $20 billion a month!

These types of stories are being related across the emerging market landscape and unrest is becoming more than a stir as riots break out in Russia, Egypt, Thailand and other countries around the globe.  While the Federal Reserve cannot take all the blame for this as the governments that took on the debt could have put the money to better use through projects such as infrastructure and education, the effects of such large scale unabashed money printing are starting to be seen and it is ugly.

The Austrian economist von Mises stated that; "The boom can only last as long as the credit expansion progresses at an ever-accelerated pace.  The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market."  It appears that even the Federal Reserve has realized that there is no way to continually expand the loan program and the effects of the tapering are being felt almost instantly.  2014 should be a highly interesting year as there is still the unknown personality of Janet Yellen and if her rhetoric has any weight I would assume that it will not be long before she puts her foot once again on the printer's accelerator.  The problem is that once again this would only bring temporary respite and not long term economic growth and you have seen a very small sample of what is in store once the stimulus ends as it must.