business

An excellent item in the comments thread on this piece in the UK Telegraph about the impending printing of dollars to combat deflation. It states that we have already had deflation for the last decade, a period when you could buy a T-shirt for less than 30 years ago, or a Chinese DVD player for less than a Hollywood DVD:

“Why do people not understand we have had deflation for the last 11 years, it was on the imported goods from China. This is what caused us to get into a mess as we decided for an arbitrary reason that inflation had to be 2% and so we kept rates low and had an inflation boom in services and assets.
Now it is reversing as the deflation from China has run its course and becomes inflation, hence the assets and services must deflate.

Letting rip with money supply and govt spending will end with significant inflation and not the “old equilibrium” that they seem to be looking for. it will erase the debt but will not give people jobs…..”

[It will give people jobs – but perhaps, not long term jobs, if this is money spend purely to bootstrap, it does matter what the long term investment benefits are. Spending on weapons or patching up existing infrastructure won’t be good in the long term.]

Prices over the last decade depend on which frame of reference you use. The convenient view in places like America and Britain was that asset prices like houses were rising rapidly relative to goods. People borrowed against these assets and banks leveraged the borrowing further.

If, as is entirely reasonable, you look at this from another frame of reference, then house prices stayed the same, and wages dropped as China started to replace our manufacturing base, producing cheaper goods. Only one thing did rise – oil.

So what is happening now? A switching of the frame of reference.

It seems that a bunch of people are coming to the same conclusion:

That massive stimulus spending may actually only work in places like China. I’m not convinced, but the implications are disturbing, given that the government has run out of other weapons.

I’ll try to summarize their argument as best I can, correct me if I’m wrong:

It is China that is analogous to the US before the Great Depression, not the US.

i.e. China own US treasuries, US owned gold; China is a massive exporter, the US was before WWII.

The conclusion is that massive internal stimulus programs will work in China converting an economic engine which is externally driven by exports into an internally driven one. The more ruined other economies like the US are, the better this will work, because it will quickly destroy international trade and create an even bigger stimulus for a domestic market.

None of this actually precludes Keynsian policies from working in the US, except their efficacy will be far less than for China. This is because a domestic economy with American goods would result in prices that would be far more expensive than what we have been used to. In China the result might actually be the opposite.

What we are seeing is inevitable, the reduction in trade between emerging and developed economies will result in a period of regulation and trade barriers as the global economic engine temporarily (as in 50 years) fragments into smaller economic systems before eventually rebooting interconnected systems of free trade. The problem is that these periods tend to create wars precisely because there are rival, competing, less connected economic systems which are disrupted.

I like to think in pictures and imagine the following:

There is an economic, ‘figure-of-eight’ shaped system of connected ‘whirlpools’ that comprises people making cheap things in places like China for people to buy in places like America.

With every turn of this whirlpool, the difference in price between Chinese and American production shrinks as China becomes more developed and people make more money, to the point where the energy required to maintain the inertia driving the whirlpool in the same direction increases. The resulting system slows, becomes unsustainable and the whirlpool disappears.

The chaotic unpredictability of current markets are the result of the exact same mathematics that governs the messy collapse of such things as whirlpools.

When new whirlpools, or economic engines re-emerge, they will be more like separate spirals rather than linked figure-of-eights. This is not a result of deliberate policy, such as regulation, but the result of universal law, spontaneous emergence of single spirals are more likely than complex interconnected systems of flow.

The whirlpool that represents America will require more energy, compared to China, to make it spin, like a whirlpool in a viscous fluid. This is because the substance of which it is comprised is people with higher expectations and costs. It will therefore be smaller or grow less fast, and the people caught in its sticky vortex will be unhappy.

Reading updated Wikipedia entries for bankers since the ‘great recession’ started and discovered this gem:

Fred Goodwin of RBS:

Awards
* December 2002 – Forbes “Businessman of the Year”” by the global edition, which described him as an original thinker with a fast-forward frame of mind who had transformed RBS from a nonentity into a global name.
* April 2003 – No.1 in Scotland on Sunday’s Power 100
* December 2003 – “European Banker of the Year” in 2003
* June 2004 – Knighted in the Queen’s 2004 Birthday Honours list, for his services to banking.
* December 2008 – Nominated by Slate Magazine columnist Daniel Gross for World’s Worst Banker

Link

[ picture above shows the AIG board in 2005, with “a tradition of providing very long-term incentives to key managers of American International companies around the world“, according to the insurer’s annual report for 2002 ]

In France, decades of socialist policy have resulted in a sense of entitlement amongst workers, while decades of monetarist policy in the US and UK have resulted in a sense of entitlement amongst managers.

After the embarrassment of expensive, taxpayer paid, corporate retreats and huge continuing compensation, this week, the bottomless, bail-out money pit, called AIG, used their PR machine to congratulate themselves publicly, that bonuses and salary would be reduced for top executives.

To highlight the sleight of hand here, in case you missed it, they used tax payer money to make themselves look self-sacrificing, while not sacrificing anything but tax payer money. But the real chutzpah is that they aren’t even doing that really. As this story in the FT reveals, AIG are burying compensation in large ‘retention bonuses’, and releasing this news over Thanksgiving to hide it further.

I am in France, for a month, where I have already just about gotten into a fight for shouting at someone tagging a 17th Century building in broad daylight.

Sadly, in France, where the state gives you so much, it breeds a culture of entitlement which reveals itself in the little things, like people not bothering to pick up dog shit, or rich looking kids out shopping, carrying bags of purchases from expensive stores, defacing three century old buildings right in front of the cops (that was the scenario). Of course, there is graffiti in America, just as there is dog shit, but there are fewer punks at street level, with an endemic sense of entitlement.

In America, where the state gives ordinary people way too little, people tend to be polite and pick up their dog shit. There is, however, a different culture of entitlement there, and it is at the corporate level where the private sector has given so much for so long. Ironically, rather like ordinary French people, for non-ordinary people like AIG management, the state is now giving them so much. A tax payer bailout of AIG is surely necessary, but it has been justified so that ordinary people suffer less, not management.

Technically, AIG executives may be behaving within the law, if only because the law hasn’t caught up with what’s currently happening. In moral terms, however, they are behaving in a manner much worse than some self-entitled punk defacing an ancient monument. The manner of what they are doing is also very different – they are trying to cover up their mess.

As everyone knows, its the coverup that gets you.

Link. Commentary.

In 1960, France had 200,000 cafes, said Bernard Quartier, president of the National Federation of Cafes, Brasseries and Discotheques. Now it has fewer than 41,500.

And this was before the credit crunch.

Given that cafe society in places like England, has grown massively in the same period, this shows quite how extraordinary France would have appeared then.

Krugman: “This is an economic emergency.“

Accross the Curve (the best finance blog, of which I barely understand 50%): “The break even spread on 10 year TIPS is about zero. The market is predicting no inflation for 10 years.“

Calculated Risk: “The current stock market decline is the worst since the Great Depression.”

This has to be capitulation point.

“Think of Ireland. Rotate it 90 degrees clockwise, make it a third bigger and hang it like a pendant from the Arctic Circle. Crack open the earth’s crust below to release limitless supplies of geothermal steam, then fill its territorial waters, all 200 miles of them, with an abundance of cod…Now allow this country’s banks – virtually unregulated – to borrow more than 10 times their country’s gross domestic product from the international wholesale money markets. Watch as a Graf Zeppelin of debt propels its self-styled “Viking Raiders” across the world’s financial stage, accumulating companies like gamblers hoarding chips. Then sit on the sidelines as the airship flies home and explodes, showering its blazing wreckage over this once proud, yet tiny, nation.”

Robert Jackson’s definitive piece about Iceland. A middle class, white, failed state..

via the excellent Naked Capitalsm

Surreal but true, a sign of unpredictability punishing South West who hedged against fuel price rises. Perhaps this gives some idea of what is in store for hedge funds. Link

In Animal Instincts: Main Street Seeks Revenge on Wall Street, Robert Roy Britt and Jeanna Bryner argue unemotionally about why emotional needs should to be satisfied in a banking bailout, for business reasons.

In a free market economy, it doesn’t make sense to complain about executive pay – it is what it is, people only pay high salaries and bonuses because they can still make a profit and therefore shareholders are happy.

Moral hazard is a game theory phenomenon, if you play a game once and people lose badly you can help them out, but that will make them less worried about losing the next time they play. Similarly if people cheat and you don’t punish them or even play badly and don’t lose, you create a problem next time you play. Bailing out large numbers of mortgage defaulters creates moral hazard but not punishing people who deceived does too.

It is the job of a CEO to champion a company, but not to lie to shareholders. If things are OK this isn’t an issue and gets forgotten about. There are many CEOs who behaved like Wachovia’s Robert Steel. He appeared on a TV show (Cramer’s Mad Money) that styles what should be the sober, conservative, world of finance into an activity that looks pro-football, with shouting and bright colors and said his team was winning, days before Wachovia collapsed completely. Entertainment freakshows about speculation, are part of the problem – ditching shows like Cramer’s and replacing speculation with sober investment advice from someone like Buffet will happen of its own accord (you don’t get entertainment shows called ‘Mad Money’ in a deep recession), but Steel is a different issue.

You only need to punish a few people to avoid long term moral hazard involving large businesses. It is what it is, and the fear of god needs to be put into executives and CEOs of companies that could fail. This would create both transparency now, for people to see each others hands and a better game next time.

In addition, when you effectively nationalize banking, the shareholders are the country’s voters and they need to be kept happy. Creating a mechanism to put people like Wachovia’s Robert Steel in jail makes both good business sense and keeps the shareholders in a country happy.

I am back from San Francisco, my favorite place, where the buzzword that comes after Web 1.0 and Web 2.0 is Clean Tech.

There are two possible bogeymen that require investment in energy: expensive oil and global warming. The probable solution to the former is to justify dirty tech, like coal, and the probable solution to the latter is reduction in consumption, which goes against capitalism and, therefore, Venture Capitalism.

In the, ever optimistic, Silicon Valley, Clean Tech Capitalism is being offered as a potential panacea for both situations to combat both environmental and oil supply and demand issues.

Both expensive oil and global warming could in theory be solved by clean tech innovation, but that would require absolutely massive advances in things like portable solar technology to make energy simultaneously cleaner and cheaper than fossil fuels, very quickly. This is less likely than smaller advances in things like digging for coal.

This weakness in the current Clean Tech logic allows for Democrat’s energy stance to be leveraged for different ends by the Republican’s (justifying offshore drilling to combat peak oil, for example). Mark Thoma points out a piece by Ted Nordhaus and Michael Shellenbergers which argues that the Democrats “must break once and for all from green orthodoxy”.

The Register points to a Gartner report that suggest that the iPhone may not be an enterprise device because of poor battery life, among other things.

We do not need the Gartner report to nitpick about details, to know that the iPhone is not an enterprise product.

The iPhone is a wonderful, groundbreaking, beautifully designed product, just like the first Macintosh was.

Businesses do not buy groundbreaking, beautifully designed products that give the impression they might be spending too much money, just like they didn’t buy the Macintosh. They will buy a good enough, slightly crappy phone that has a keyboard – the Blackberry.

By quite a long margin: 25% more, in fact (Salesforce.com market cap: $7.5B, GM, just under $6B).

Other unlikely companies that are now worth more than GM: Ryan Air; Pitney Bowes; J C Penney; Autodesk; Bed Bath and Beyond. Even tech. train wreck, Sun Microsystems is worth 25% more. And in a case of a piece being worth more than the whole, automobile parts distributor, Genuine Parts Company, and dashboard GPS maker, Garmin, are each worth $500 million more than GM.

Use Google Finance to screen for companies worth more than GM.