"We know we're not close to full employment, not close to an employment level consistent with our mandate, and unless inflation were a significant concern, we wouldn't dream of raising the federal funds rate target." - Janet Yellen Federal Reserve Chair
The quote above is from Janet Yellen's first Federal open Market Committee and I have to say that it is refreshing that at least she is speaking in relatively easy to understand sentences. Remember Alan Greenspan? One of my favorite quotes from him was, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." He was the master of disguising his meanings and for some reason everyone loved him mainly because the stock market went on a tear to remember.
Yellen has a different problem to Greenspan in that no matter what she says or does it will be incredibly hard to get the economy kick started and remove the Federal Reserve stimulus and the excess money printed by her predecessors without creating either a very bad recession or huge inflation. Greenspan on the other hand was the first to print money so the impact was huge with small denominations of cash. Bernanke took printing to an unprecedented level and after it had little impact (other than to the stock market) he handed over the reigns to Yellen to try to deal with the coming issues. So it was interesting to listen to the new Federal Reserve Chair talk about her main concern at the present time which is unemployment. Her belief is that interest rates should remain low until such time as unemployment picks up and she detailed the metrics that she is looking at to track improvement. Fortunately I think she is on the right track with her employment metrics but I have little faith that her policies will have much impact.
1. U-6 - The U-6 is a broad measure of unemployment that I have been following for years. This measure captures the underemployed (those who would prefer a full time job but have to work part time as there are no full time positions open). By this measure the unemployment rate is 12.6% a far worse level than the 6.7% reported by the unemployment number.
2. Long-term unemployment - This measure looks at people out of work for 6 months or longer. In 2010 this stood at 45% of the unemployed and has since improved to 37% but is well above the 17% pre-recession number.
3. Labor force participation rate - This measure I have also tracked for years. The number reflects people able to work versus the number working and in December it fell to its lowest level in 35 years. This is terrible for growth prospects as less people working means lower GDP and economic growth prospects.
4. Quitting and hiring - People only quit their jobs if they think that a better opportunity presents itself (being fired is a whole different story of course). Therefore the more people that quit the better the health of the job market and thereby the economy. Yellen also wants to look at hiring as this also shows a poor or robust economy. So far the numbers have revealed that while the "quitting" index has improved, the number of hirings is still woefully inadequate. To me this measure smacks of people not only being fed up with their job but also relying on social handouts rather than showing opportunity.
5. Wage growth - Growth in wages has been anemic. As I have discussed in earlier blogs earnings are at the equivalent of 1980 earnings (when factored against inflation) and their current growth of 2% is still not keeping up with inflation. While the Federal Reserve has as its benchmark an inflation rate of 1.2% you and I know that this number is a very poor reflection of the true increases in our daily cost of living.
With inflation low and unemployment anemic, the Federal Reserve has a lot of latitude in what it can do to stimulate the economy. The question therefore is will the new Fed Chair implement policies to take the bull by the horns and unfortunately that answer is an unequivocal no!
As you can see from the unemployment metrics the economy is not on a good footing. Employment leads to wages, wages lead to spending and spending leads to a healthy economy. Until these measures can improve her mindset is to keep rates low as that is the key to boost economic growth. It is interesting then that she continues to cut the amount of monthly stimulus as past Federal Chairs have looked at stimulus as the only way to engineer growth and keep interest rates in check. Maybe she realizes the futility of these methods or maybe she is just testing the market to see how low she can go in terms of stimulus before things take a turn for the worse. Either way she will not be able to keep rates low without artificially supporting them with more money and in all honesty as Bernanke showed, neither of these policies will stimulate employment.
So once again we have a Federal Chair that monitors the numbers but does not provide a policy that will address the underlying issues. Until such a policy is put in place it is just a matter of time before she is forced to increase monetary stimulus in a another futile effort to grow the economy. While she is new she should take the opportunity to implement new policies but it appears that she will continue down the same path until there is a problem. Why try to improve something until it breaks? To me this is equivalent to standing in front of the Hoover Dam waiting for the wall to break even while you see cracks appearing so I choose to move out of the way of the coming floods.
Friday, March 21, 2014
Friday, March 14, 2014
Growth AND Value - Where More IS Better
When I was playing a lot of golf my golf coach would always make fun of the fact that when I made a change to my golf swing or setup that improved my game I would naturally and unconsciously do more of the change which would ultimately result in disaster. There was a tipping point when a small change was good but more was not better! I can still hear his words ringing in my ears "More is not better!"
This tip could be taken to a number of places and in most cases finance is one of them. Buying more of a losing stock is one example as all that more did was lose you more money. Adding more risk to an already risky investment is not better and neither is adding more debt to an otherwise overly levered investment. One place where it does ring true however is finding stocks with better growth prospects than its peers and having more value. Also if you add the two together; doubly more is doubly better (I know poor English but I could not resist).
Typically investors look for value stocks or growth stocks but it is only when you find a deep value stock that has extraordinary growth prospects then you truly have a home run. The idea of diversification is to scatter money around so that you might get lucky and hit one of these but this waters down the overall returns which is why people search for these stocks all their lives. I have found a few of these in my life and let me tell you they will exceed your wildest expectations of returns. The hardest part is not selling too early but that is the art. The science is finding these stocks.
Now before you get too excited I am not about to tell you the names of these companies for the simple reason that since finding DDD I have yet to find another one. If I do I will let you in on the secret but until then it is your job to search for the next one (and let me know) and believe me it is not easy and I have found that luck often plays a part. Take for example one fortuitous day when I met the CEO of Encore Capital, a local company in San Diego. Carl was an incredibly detailed person and he had the company whipped into shape during his tenure as the turnaround expert. The market capitalization as represented by the stock price was languishing at a third of cash flow. That is right, you could have purchased the entire company using only one third of one year's cash flows. The market had forgotten about this company. It was a deep value stock.
Now for those of you searching for deep value (as I have done most of my life) you will often times find that the stock price does not move for years. It remains deep value forever and you are not rewarded for your wonderful find. The reason for this is that while it may be a safe investment that is producing significant cash flow, the growth prospects do not warrant a premium over the market and for this reason it sits, stuck as a deep value stock forever, increasing in value slowly over time as the cash position improves. Holding this position results in opportunity costs and selling is hard because you are sure that the moment you sell it will take off. The result is lackluster performance.
Now Encore at the time was not only a deep value play but its growth prospects were huge. The market for their products was expanding and with it Encore's prospects. I therefore loaded up on as much of their stock as was possible without moving the price of the share and then once I was filled sat back and waited. Now as its growth started to accelerate right as I was buying it did not take long for the market to wake up to this fact and within 18 months the stock had appreciated by 1,500%!
So when you look for stocks make sure that you are digging around not only for value but also for growth. Value without growth often lags the market and growth without value increases the risk of the investment tremendously. Growth stocks can trade at price to earnings multiples in the hundreds as investors drive the stock into orbit expecting the growth to continue forever. The risk is that once the company fails to grow as quickly, not only does the stock take a hit from the reduced profitability but also from the narrowing of the multiple - a double whammy which shows the risk inherent in buying a growth stock when it has already left the starting blocks. You need to jump on the bandwagon early and this is why a search for value plays is necessary even if you are an inherent growth investor.
Finding a deep value stock with growth prospects is thus the best possible way to minimize the risk of the investment and maximize the return. This will require a lot of patience as I would be surprised if you manage to find more than 20 in your lifetime. I say that not to scare you away from looking but to let you know that the market is relatively efficient and will more often than not reward these stocks well before you find them. I also mention it because if you work hard enough at it and then find one, do not hesitate but back up the truck and load as much on board as you can as this will be a life changing investment.
This tip could be taken to a number of places and in most cases finance is one of them. Buying more of a losing stock is one example as all that more did was lose you more money. Adding more risk to an already risky investment is not better and neither is adding more debt to an otherwise overly levered investment. One place where it does ring true however is finding stocks with better growth prospects than its peers and having more value. Also if you add the two together; doubly more is doubly better (I know poor English but I could not resist).
Typically investors look for value stocks or growth stocks but it is only when you find a deep value stock that has extraordinary growth prospects then you truly have a home run. The idea of diversification is to scatter money around so that you might get lucky and hit one of these but this waters down the overall returns which is why people search for these stocks all their lives. I have found a few of these in my life and let me tell you they will exceed your wildest expectations of returns. The hardest part is not selling too early but that is the art. The science is finding these stocks.
Now before you get too excited I am not about to tell you the names of these companies for the simple reason that since finding DDD I have yet to find another one. If I do I will let you in on the secret but until then it is your job to search for the next one (and let me know) and believe me it is not easy and I have found that luck often plays a part. Take for example one fortuitous day when I met the CEO of Encore Capital, a local company in San Diego. Carl was an incredibly detailed person and he had the company whipped into shape during his tenure as the turnaround expert. The market capitalization as represented by the stock price was languishing at a third of cash flow. That is right, you could have purchased the entire company using only one third of one year's cash flows. The market had forgotten about this company. It was a deep value stock.
Now for those of you searching for deep value (as I have done most of my life) you will often times find that the stock price does not move for years. It remains deep value forever and you are not rewarded for your wonderful find. The reason for this is that while it may be a safe investment that is producing significant cash flow, the growth prospects do not warrant a premium over the market and for this reason it sits, stuck as a deep value stock forever, increasing in value slowly over time as the cash position improves. Holding this position results in opportunity costs and selling is hard because you are sure that the moment you sell it will take off. The result is lackluster performance.
Now Encore at the time was not only a deep value play but its growth prospects were huge. The market for their products was expanding and with it Encore's prospects. I therefore loaded up on as much of their stock as was possible without moving the price of the share and then once I was filled sat back and waited. Now as its growth started to accelerate right as I was buying it did not take long for the market to wake up to this fact and within 18 months the stock had appreciated by 1,500%!
So when you look for stocks make sure that you are digging around not only for value but also for growth. Value without growth often lags the market and growth without value increases the risk of the investment tremendously. Growth stocks can trade at price to earnings multiples in the hundreds as investors drive the stock into orbit expecting the growth to continue forever. The risk is that once the company fails to grow as quickly, not only does the stock take a hit from the reduced profitability but also from the narrowing of the multiple - a double whammy which shows the risk inherent in buying a growth stock when it has already left the starting blocks. You need to jump on the bandwagon early and this is why a search for value plays is necessary even if you are an inherent growth investor.
Finding a deep value stock with growth prospects is thus the best possible way to minimize the risk of the investment and maximize the return. This will require a lot of patience as I would be surprised if you manage to find more than 20 in your lifetime. I say that not to scare you away from looking but to let you know that the market is relatively efficient and will more often than not reward these stocks well before you find them. I also mention it because if you work hard enough at it and then find one, do not hesitate but back up the truck and load as much on board as you can as this will be a life changing investment.
Friday, March 7, 2014
Making Sense of What They Say
Today's blog is a tongue in cheek look at some of the crazy things that are said by analysts and pundits on television screens and radio shows around the globe and how meaningless these sayings are. The funny part is that often we take these things seriously rather than realizing the stupidity of the situation. I hope you enjoy this light hearted look at the investment industry particularly as I am sure to have said numerous of these on my radio show and throughout my blog posts!
1. "We are cautiously optimistic." - and you are also an oxymoron as either you are cautious or your are optimistic but you can't have both!
2. "We are neutral on this stock." - Really? So you own the stock and are praying for a recovery or you are dumping it to some other sucker or you have really just wasted my time and yours by talking about this!
3. "We are waiting for more certainty." - Good luck with that, oh, and when you find certainty let me know as that is definitely the day I dump my entire position.
4. "He was tired of throwing his money away renting so he bought a house." - Wow he must have paid cash because otherwise he is throwing his money straight to the bank. (Obviously there is upside to owning a home that is not available to renters but then say it properly.)
5. "Today the market fell (or rose) by 85 points as investors exited (bought) on the news that ABC Corp earnings were worse (better) than expect." - Yeah right that is exactly why the market moved today, every other stock moved in tandem because of this one stock's earnings announcement. Please stop making things up.
6. "Earnings were positive except for a one time charge." - Then they were not positive they were negative and you my friend own that stock!
7. "Earnings missed estimates." - Why do earnings have to meet or exceed estimates? Obviously the estimates were wrong. Why do people buy stocks based on these estimates rather than the long term business outlook of the company (as Warren Buffet does) and why does the headline not say 'estimates missed earnings as the analyst once again failed in their prediction'?
8. "It's a stock pickers market." - So certain stocks have run and those are not part of the index in which you invested meaning that blindly investing in indices did not work this year. Let's hope that next year we can go back to business as normal burying our heads in the sand once again and expecting the future to take care of itself because we would hate to have to work to make money!
9. "There is a lot of cash on the sidelines." - I have looked and I cannot find a sideline anywhere. In fact when the person who sold their position took their cash to the "sideline" there had to be another person buying otherwise the stock would have gone to zero!
10. "The next Black Swan event will come from ..." - Poor Mr. Taleb, he must shudder every time someone mentions where the next Black Swan event will come from. The whole point here is that no-one knows where the Black Swans are and that is why they are so catastrophic when they appear. If we could predict the next Black Swan it would be a non event not a Black Swan event!
1. "We are cautiously optimistic." - and you are also an oxymoron as either you are cautious or your are optimistic but you can't have both!
2. "We are neutral on this stock." - Really? So you own the stock and are praying for a recovery or you are dumping it to some other sucker or you have really just wasted my time and yours by talking about this!
3. "We are waiting for more certainty." - Good luck with that, oh, and when you find certainty let me know as that is definitely the day I dump my entire position.
4. "He was tired of throwing his money away renting so he bought a house." - Wow he must have paid cash because otherwise he is throwing his money straight to the bank. (Obviously there is upside to owning a home that is not available to renters but then say it properly.)
5. "Today the market fell (or rose) by 85 points as investors exited (bought) on the news that ABC Corp earnings were worse (better) than expect." - Yeah right that is exactly why the market moved today, every other stock moved in tandem because of this one stock's earnings announcement. Please stop making things up.
6. "Earnings were positive except for a one time charge." - Then they were not positive they were negative and you my friend own that stock!
7. "Earnings missed estimates." - Why do earnings have to meet or exceed estimates? Obviously the estimates were wrong. Why do people buy stocks based on these estimates rather than the long term business outlook of the company (as Warren Buffet does) and why does the headline not say 'estimates missed earnings as the analyst once again failed in their prediction'?
8. "It's a stock pickers market." - So certain stocks have run and those are not part of the index in which you invested meaning that blindly investing in indices did not work this year. Let's hope that next year we can go back to business as normal burying our heads in the sand once again and expecting the future to take care of itself because we would hate to have to work to make money!
9. "There is a lot of cash on the sidelines." - I have looked and I cannot find a sideline anywhere. In fact when the person who sold their position took their cash to the "sideline" there had to be another person buying otherwise the stock would have gone to zero!
10. "The next Black Swan event will come from ..." - Poor Mr. Taleb, he must shudder every time someone mentions where the next Black Swan event will come from. The whole point here is that no-one knows where the Black Swans are and that is why they are so catastrophic when they appear. If we could predict the next Black Swan it would be a non event not a Black Swan event!
Friday, February 28, 2014
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.
"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.
Friday, February 21, 2014
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.
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.
Friday, February 14, 2014
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.
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.
Friday, February 7, 2014
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.
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.
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