Recessions Spur Innovation

The Vanity Fair piece by Joseph Stiglitz has created a lot of fuss on the blogasphere this week. And I want add to it.

People seem to to be taking issue not only with his Kensian view of how to fix our financial crisis, but the idea that we are in some sort of structural shift in the dynamic of innovation and progress. Stiglitz draws parallels between the Great Depression, where innovations in Agriculture displaced farm workers with mechanization, and then created an oversupply. 

Today he concludes that innovations in manufacturing, and offshoring has hollowed out the working class. Cheap Chinese imports and credit, fueled an overhang, inflating bubbles, primarily in property. And now we need a serious effort on behalf of government to put the country back to work, rebuilding infrastructure, education systems and the like. The Great Depression ended with WW2. Hopefully it doesn't come to that!

But hasn't this experiment just happened. China has spent trillions, on high-speed rail, empty cities, and created a property boom that dwarfs that of any economy, ever. Yet their manufacturing and exports are trending in the same direction as the first world. Command economies often get things wrong.  Governments think they know best, but frankly that can't be trusted to spend wisely. 

The Great Recession we are in now, is the beginning of a new era, one that has yet to fully mature. Business are now under pressure to cut costs. They are not only going to cut staff, but look creatively at doing business more efficiently. Technology, outsourcing, off shoring are all in the mix.

But to say The Great Depression only saw a downturn in demand is seeing part of the picture. Read some of the first hand accounts. People abandoned the economic system altogether. A subsistence lifestyle became the norm. Growing, repairing and barter became the most efficient market to be in. People just didn't buy at any price. And look at anybody who had lived through this time. They knew how to save, even in the good times.

There are two sides on a ledger, many writers forget to include the consumer. Credit growth and money supply are inflating commodities, and deflating currencies. But not changing fundamental demand. Innovation in business practice and consumer habits will drive us toward a different dynamic, that is hard to foresee. Be we are only just beginning the transition.

Austerity and Default a faster route to prosperity

As the bond markets hammer the Eurozone, I'm stricken by just how much market power determines Government and central bank actions. The markets love the sugar-hit stimulus policies. But it seems the ECB's mandate for tight fiscal controls to head off inflation, forces its European members into austerity and/or default. This has an accelerated effect in degrading the health of each economy, in the immediate term.

Putting moral hazard aside, fiscal stimulus is not directly helping the economies for those its printed for. Hot money in our inter-connected international economic system, ends up inflating external markets. Asia, Commodities, treasuries. Pushing inflation into areas outside the economy that needs it most.  But this has not, and will not stop the presses, as the effects of debt-deflation are winds blowing over all economies, and will hit China in the coming year.

The European tragedy takes the gaze away from US and Japan who have run the same deficits, and relies on the same bond markets to make up a budget shortfall each year. But its not a sustainable practice in the light of a world recession and an ageing middle class. Japan is ten years in advance through this lost generation, and their overall population is now in deep decline.

The sooner the weakest of European economies successfully pull off an Iceland, and reset their debt obligations, the quicker they can live within their economic means, and find some prosperity for at least themselves, and any competitive advantage they can carve out for themselves.

Dr Copper Medicine for equity markets

A coordinated effort by central banks across the globe has eased inter bank lending rates, but that's not a complete indicator of the health of an economy. In fact little of what central banks are doing at the moment directly injects economic stimulus. It is simply an attempt to put a floor on asset prices by expanding the money supply, and thus keep the economy on a path of inflation. 

Industrial metals like Copper and Zinc are a truer indication of industrial production. They however show that deflationary pressures continue to plague the real economy. 

London Metals exchange Spot Price Copper YTD

This chart shows a volatile trend from its heights post GFC to now. It's a type of honesty in portraying industrial activity from electronics to construction. And unlike the precious metals, a diverse industry puts universal pressure to bear on spot prices. 

In fact one can plot copper with equity share indexes, they are in lock step. Neither leads nor follows, but they both move together in unison.

ASX All Ords YTD, follows copper every rise and fall 

The recent uptrend is only days old, with central banks cutting the cost of borrowing USD, primarily to put support under the insolvent banks in Europe.

Gold can only be trusted as a fear indicator. Silver is almost universally employed in Solar PV panels, which buoyed by Government subsidy and is abnormally inflated at the moment. But trust Dr Copper to give a true indication in the health of real economic activity.

Inter-bank Lending rates on the up

One thing that characterized The Credit Crunch of 08 was that Banks' didn't trust each other. The indicy that expresses this is starting an upward trend. The LIBOR is a good predictor of a looming Credit Crunch 2.

LIBOR creeping upward for three months now

At its peak in 07/08 LIBOR was touching 4%, so we still have a long way to go, but its worth watching as Banks are exposed (speculating) on European debt. They watch nervously for the ECB to do something, before they become insolvent, holding worthless paper.

Jobless Future

All we have been hearing in the news, is how the economy depends on creating jobs. Our politics of late is fixated on it. But the reality is that technological innovation has transformed the employment landscape so permanently that the very idea of work and employment for the majority are becoming an obsolete notion.

As consumers, we have been trained into realizing the convenience of using technology in our daily lives. The ATM appeared in the early eighties, and accounts for the lion's share of cash transactions now. How about those new self-serve checkouts in supermarkets? Or the web-based shopping cart. These examples represent a structural change in the way that we are all prepared to accept technology, under the notion of saving us time and money. This has the effect of displacing the most expensive business expense; the wage earning employee. And these technological innovations have only just started to make inroads into our consumer and professional lives.

Many have talked about jobless economic growth for a decade now, citing stagnant wage growth coupled with the exporting of manufacturing  and services to low wage economies. Even corporate profits are sent off shore to low tax countries like Ireland. Complicating government's ability to respond its spending strategies with dwindling sources of taxation.

Science Fiction has been telling us of this glorious future, one where we are free to chase a our dreams, instead of exchanging toil for wealth. But the transitions in our social values and economic systems have yet to catch up. The term of welfare state is used to describe those high taxing nations who endeavor to provide social infrastructure to all regardless of income. Its widely perceived among monetarist economists, that this is of detriment to an economy, stifling innovation and a peoples' will to work.

In fact the social stigma of unemployment perpetuates inefficient practices. I was talking to a plumber replacing my water meter the other week. He said that the union forbids electronic metering equipment, because it will cause layoffs in the water utility. Economic prosperity of an entrepreneur, company or country relies on innovation. Innovation in commercial terms, is code for efficiency including labor productivity, and/or efficient use of materials/processes.

Productivity has aided our standards of living allowing us a better lifestyle than our forebears, precisely because technology has made life's essentials so much cheaper to produce. We have to move beyond those notions of personal success in terms of employment and income. Because the next decade it will become harder for all of us to remain "employed" in the traditional sense of the term.

Goldman in aluminum market manipulation?

Stumbled over this reuters report this morning. It seems to suggest that Goldman is reaping millions on leasing warehouse space to third parties who are stockpiling aluminum in Detroit. Goldman is gaming the London Metals Exchange rules to its advantage. The side effect is choking back supply of aluminum to domestic industrial consumers.

London Metals Exchange Aluminum price per tonne, time period 12 Months to today

This graph straight from the LME website would suggest that there is quite a lot of volatility in aluminium trading. If houses like Goldman are the first order buyers of commodities, could all kinds of futures contract games be played with these assets in storage?

I'm surprised industrial metals are holding up so well in the face of flagging industrial output in Europe, Asia and to a lesser extent America. This big scam may go part way to explaining what is going on with commodities while the world is still limping out of recession, after the GFC.

China's High Speed Rail

Wow did no western, mainstream news outlet catch this one? link. Thirty die in high-speed train derailment, inland China. Terrorism, and a celebrity suicide seem to take precedence. This is a big deal for a country headlong into the future of transport. Hopefully not a setback to the already weak patronage.

I'm an avid watcher of the miracle that is high-speed rail in China. Already the fastest, longest and least utilized fast rail in the world. Chinese authorities are forcing the nationalised banking system, to lend trillions to build thousands of kilometers of track. China's skill in building rail are winning it lucrative contracts in the middle east. China is even considering laying track beyond her borders eastward toward Europe!

The flagship Shanghai to Beijing high speed rail line has just opened to the public. Ridership is expected to be diswaded from the plane or the bus due to a quicker and cheaper service. But the reality is more disappointing for the larger high-speed rail network. Ridership figures which are lower than expected. This is likely because bus services have replaced the old slow rail, as the average Chinese citizen will not pay the premium ticket price to travel at 350kph.

However recent speed decreases have been ordered with safety concerns having been sighted. But in reality a fast train wears both track and wheel much quicker, so most new rail services travel well below 300kph.

China is in very good company. It too, along with most of the western world, has mortgaged itself with a loss-making passenger rail system. The only high-speed rail service in the world, that is economically viable is the Shinkansen between Tokyo and Osaka. This being a 35 million person population density corridor (link economist), from which to draw a near capacity ridership that travel between these points. 

With all the rumors of kick backs, sub-standard construction, and ill conceived routes/destinations. I truly hope the Chinese can benefit from the gleaming stimulus fueled infrastructure. Its a shame our governments can't seem to even consider building infrastructure like this. Instead they stimulate the banking system, with a vague hope that private industry will invest in mega-projects.

Bitcoin Asset Market in Panic

For anyone watching BitCoin on the sidelines, we all knew that something would eventually scare the speculators. link

BitCoin is a peer-to-peer token transfer system, that seems to be totally independent of any central banking authority. But if you can't trust our own digital wallet to manage your BitCoins, you go to a broker to help you store and transact with others.

But alas one of these institutions had their users' password hashes stolen. So anybody with a weak password, like 'password' or '123456', will likely have lost their BitCoin Stash. The administrators are rolling back transactions, and alerting those involved in any transfer in BitCoins of the occurrence. Plus they have initiated a password reset for all their users.

You never hear about this shit from the Banking system, not because it doesn't happen, but because a loss in faith of the system could be devastating.

Anyway, I still have faith my PC will generate me a BitCoin, one day!

There's gold in that there supernova

The M51 Supernova was observed last week, from 25 Million light years away. Our own galaxy gets one every one hundred years or so, and we are overdue as the last was in 1601. It's also thought that a gamma ray burst from a supernova 44 Million years ago made two thirds of the earth's species extinct.

Note that all the naturally occurring elements heavier than iron are fused into existence during the violent burst of a supernovae. Including that rare and long coveted element Gold (Au).

In Debt we Trust

Local news this morning, Australian first home buyers are most relaxed with the high debt burden to acquire their first home (Link to genworth press release). Its painful irony that debt appetite of the home buyer is the sole reason for the huge capital outlay one needs to buy property in the first place.

The report goes on to say that 39% or Australian first home borrowers are using half their income to service their debt. The average age of the first-time home borrower has risen on average from 27 to 30, in those countries surveyed.

Australia vs US private debt to GDP ratio as %

The above chart comes courtesy of Steve Keen of the University of Western Sydney, his blog debtdeflation.com, is always a good read. Keen claims that the run up in house prices is simply an appetite for debt, and that the coming collapse in home prices is a symptom of an economy that can no longer service these debts.

This contrasts nicely with of debt appreciation shifting from the private sector to the public. Some theorize that the weak recovery since the GFC is solely attributed to a debt fueled government stimulus.

Core Deflation in the AUD, not yet...

This little graph comes courtesy of the Reserve Bank of Australia, and shows a slowing in the growth of the money supply and consequently credit growth in this country. Or is that the other way around?

Note growth declines began well before the GFC. Demonstrating an apatite for credit was already at its peak, long before asset markets began their collapse. During height of fear, some freshly printed money flowed into the banking system. But it had little or no effect on turning around credit growth. This money was likely to have been exported, in search of a return.

I'm not sure how this correlates with the rise in the Ausssie dollar. The dollar's rise has in part to do with the commodity markets. But the carry trade has brought us hot international currency looking for reward in our comparatively high cash rate, currently 4.75%!

Looking forward to seeing this graph for the 2011/2012 figures. With the property market cooling, credit expansion may actually fall into the negative. Given our excessively property-focused consumption economy.

Sliding down hubbert's peak

Big news upon waking this morning is this Gulf of Mexico oil discovery.

"This is one of the largest discoveries in the Gulf of Mexico in the last decade," Steve Greenlee, president of ExxonMobil Exploration Company

So that should be enough to make the US a self-sufficient oil producer for the next ten years? No, 700 million barrels of oil equates to a month of consumption in America. Just ten days of world oil consumption at current rates.

The above graph shows just how much this new discovery contributes to the energy mix in the coming decades. Specifically the green Line. Note that the crude price needs to stay above $90/barrel to bring these kinds of deep water discoveries to market.

The graph, in my opinion, is highly optimistic. Any growth in energy production hinges on the light blue and red areas. These are estimated future reserve figures given by OPEC countries, who are quite secretive. We also rely on numbers that plucked from thin air (red) called "Fields yet to be found". How can anyone quantify a contribution by oil fields that haven't been found yet!

Australia is well placed to supply natural gas to an energy hungry economy, but this too requires energy intensive processes in order to ship to far off markets. But switching energy intensive economic activities from oil to natural gas power is a long way off.

The writing is on the wall for anyone who looks at this subject deeply enough.

Deflation: Enemy Number One?

Some very early notes I have, when I first starting trying to understand this subject were:

"Inflation and Deflationary phenomenons are a direct result of the money supply"


I have found little evidence to draw me away from this view, so far. Because if you were to view money as any bulk commodity, supply and demand metrics are at play here. Just think of money as the commodity that one uses to acquire commodoties! But deeper in my notes is also this statement:

"Deflation is worse for growing an economy than inflation"

My observation is that central bankers around the world are shit scared of deflation. But I haven't questioned why the above notion is true. Until now.

This article on mises.org (another dense read), takes a couple of passes to really get the gist. Its a revelation, and has me scratching down extra notes in that little book of economic truisms. Like:

"Firms and households can successfully produce any quantities of consumers’ goods at any price level and with any nominal quantity of money"

"A fiat money regime considerably facilitates the re-distribution of resources within society. It allows the owners of the printing press and their political and economic allies to enrich themselves far quicker and at much lower cost than any other producer in any other field."

Is this stuff rocking your world? Thats just the opening paragraphs too! If it's not, watch the low budget documentary. "Money as Debt". To better understand some of the underpinnings of our money system, and why the second of the above statements carries such weight.

The prevailing assumption about the evils of deflation are centred around consumption and investment. Mainly, how will consumers consume and investors invest with an expectation of a fall in the monetary value of real good or service?

This first part of the question is answered simply. Profit, which is the spread between the wholesale price and its retail. That being, deflation, in an enterprise works both sides of the ledger. Just don't be holding on to stock for too long!

The second assumption are investors. They can forget capital gain. But for value investing, cash flow or capital appreciation as measures of business success, are secondary. For its year on year profit growth that ultimately determines business success. I often look at a debt/asset ratio too, just to see how much a company is burdened to its financiers. So in deflationary investment markets, the dividend becomes an investors solace.

The most interesting part of this article is the discussion of debt. Deflation is very bad for both lender and borrower, as both parties are likely to take a punishing toll. Inevitably, deflation means debt restructure. A very bitter pill for both government and finance to swallow. So all central bank tools to pursue an inflationary path are being enacted.

It can be argued that the sole reason for quantitative easing is to turn around deflating markets, like property. Two decades of economic growth has been driven by mountains of debt in all world markets. One would argue no amount of inflationary push by printing money will turn around the deflationary effects of the current fashions in paying down our debts.

Hire Cycles

One bike share programme is being hailed a success, while another a failure. But the statistics would suggest the opposite.

Just lifting this data off each of the two scheme's webiste:

	Brisbane	Toronto
Subscribers	4700	1700
Stations	100	75
Bikes	2,000	1,000
Trips	40,000	10,000
Subscription/yr	$60	$95
Population	2,013,000	5,113,000

* Toronto and Brisbane both share mandatory helmet laws

Despite all the bad publicity, Brisbane's Citycycle is doing pretty well when compared to other new cycle hire schemes. Commercial success is not likely to be either City's core objective here. So keep with the faith. Cycling is the superior transport model in the congested inner urban landscape.

Economic Transport

This tweet came to me via my local bicycle lobby group:

'Every bicycle km ridden saves society 25 cents in the dollar, every car km driven costs society 60 cents in the dollar' Jan Gehl

So the author is an architect, with experience developing public spaces. His emphasis is for a more compact people friendly environments. A resident of Copenhagen, who advocates the bicycle front and center in urban planning. But where do these figure come from?
 
Well I've heard some good statistics that may give this claim weight. Such as:

• The cost of 1 km of highway can build 200km of bike path
• Cyclists halve their risk of coronary heart disease
• The average american spends more on car transportation than they do on food.

But when the above areas of the economy (Health and Transportation), account for only about 12% of GDP, these numbers start looking shaky.

So much of the benefits of a truly cycle friendly city verge on the intangible. How much would people pay for clean air, or a more sedate, human centric public thoroughfares. I know the city's personality would change, but would economic prosperity?

Property values are at premium prices along bike paths, crikey! This is not a saving, its more like a cost!

The numbers just don't add up! Help!

Negative GDP the result of Positive Frugality

Australia’s Economy Shrinks Most in 20 Years as Floods Hurt Coal Exports. The Independent

While single reasonings make the headlines, there is a far more sinister set of numbers driving our GDP downward. For raw material exports account for a small fraction of Australia's GDP. And like the US, Australia is a service-oriented economy, which makes up 75% of its total GDP.

Retail sales, have gone backwards due to the household savings rate ticking upward. Economists generally applaud debt deleveraging, but the consequences can quickly become a snowballing of deflation. The Half-yearly sales, and deep discounting, may in fact get shoppers out for next quarter's GDP figures, but it won't help the prosperity for Australian retail. Lets not to forget that the Internet economy is robbing Australian retail, because even with the extortionate postage costs, its still cheaper to buy online.

Secondly Property Prices have peaked in pretty much all capitals, except federal government land (Canberra). So the decade long Greater Fool property market, or buy and flip is over for the moment. But this also bad news for the armies of tradespeople around the country. The idea that one can mortgage to increase equity in their homes with new swimming pools or extra bedrooms is a fools game now.

Lastly the strong Aussie dollar is sending our hard earned money overseas. Australians are going to Europe and America for their holidays now. Inbound tourism is flat too, tourists from all over the world can find much cheaper alternatives to our offerings. Leaving resorts all around the country to vie for a smaller slice of the tourist dollar.

Correlation or causality

Books and Mortar

News in Australia, is that the last handful of Borders bookstores are closing their doors in two weeks. Borders is a relatively new player in the retail scene, bringing a war chest for expansion with giant retail outlets Australia wide. They started here with a three stories tall flagship store here in Brisbane city, a stones-throw from the central mall.

No its not exactly a secret that book retail is a tough market, the cheaper, online giant, Amazon has and increasing slice of the bookworm pie. But thats not entirely the reason Borders went belly up. You see Borders and Angus Robertson the other big book retail outlet, were both owned by REDGroup.

REDGroup was not a book seller, it was a private equity firm. AKA investors, with an all too common business model.

1. Raise a whole lot of money through debt markets
2. Buy majority stake in some well respected brand name 
3. If there is still debt left over, aggressively grow that business and attempt be the dominant player
4. Transfer all that debt on to the balance sheets of these trading entities.
5. Hope these businesses can grow ahead of that crippling debt.

Well the GFC brought these business practices into the limelight, but dominoes continue to fall.

Degrees of Scam

http://inflation.us/ has a documentary called College Conspiracy. Which puts together a very clear argument against the prevailing assumption that a college degree is a ticket to continued prosperity. It draws a picture of US tertiary education system as a government sponsored scam. And like any business sector, is hell-bent on growth economics ahead of quality. But a constant in the film is student debt. Many students, especially in the US, exit their studies with a hefty mortgage on their brains, before they can even start thinking about debt for property.

But what got me was at 30:50, an unnamed individual enters the screen and touts that the Industrial age does not have long to go and that a Psychology degree is worthless when our species regresses to scratching around for food and water. Oh and the dollar will be worthless due to hyper-inflation anyway.

Now lets take this one point to its logical conclusion. If there were hyper-inflation, wouldn't that mean that ones educational debts would be inflated to nothing along with a worthless currency? The rest of the documentary sounds a bit hollow now. Crippling debt AND worthless currency? No you can't have it both ways.

These gold hoarding inflation hawks, with end of the world prophecies, make things hard for the rational world to make sense of the future.

My thoughts; we badly need a good harsh recession. Its when adversity strikes, that ingenuity, creativity and efficiency become more important for success. Thus. This entrepreneurial spirit is unlikely to come from any formal qualification. So remember kids, find your passion first, then plan your steps to better profit from it.

Market Volatility, forget Buy and Hold

The world market gyrates today into the negative, given the headline that economic growth is projected to be slower than anticipated.  But for the equity investor, the last two years have been dismal. Especially when one looks at the leading indices in inflation adjusted terms. 

Central banks in the developed world are in a race to the bottom, devaluing their currencies, in an effort to stave off the deflationary effects of a recession, and to regain some industrial competitiveness in the world economy. But not Australia, somehow we are proud of our strong dollar. Commodities have been where all this newly minted hot money has found a temporary home. Billions of investment dollars have landed on these shores to secure untapped coal, gas and iron ore in Queensland and Western Australia.

So why then has the All Ords gone nowhere. Even with a strong Aussie dollar, and core inflation at a record low, the ASX All Ords can't keep its nose above 5000 for anything more than a day or two

Because its impossible to find a good industrial, retail or financial that is thriving on the international stage. Simply put, the Aussie dollar is killing everything EXCEPT mining.

Retailers are hurting, because the strong Aussie buys more on Amazon then it does here. Any business who exports, is looking to offshore their operations. And banks are the first to show the cracks, with some negative price figures in our housing market. 

Investing on the ASX is a risky business now, speculative punts, while hedging on safe utilities, may be your gain on what is a turbulent era for the investor.

Duolopolies collude

Our local supermarket opened last week after a metre of river sludge inundated it in the January 2011 floods. Whats interesting are these discount vouchers both majors are dropping in our letter box.

Its great for you local community, and I'm sure cashflow at all these chain stores in the inner south are up. But I'm sure profitability isn't.

But what may be good for us, is not for the independent grocers who are hearing crickets instead of cash registers. This is the third week now that a 10% discount has been offered. And I'm sure this phenomenon isn't a common occurrence, anywhere in supermarket retail.

But we Australians have become accustomed to teaser discounts namely in store brand Milk and Bread. We are not paying the true costs associated with these staples. Lets hope that it does not mean the slow destruction of these industries, before we realize a long-run discounts do have an underling cost.

Get em while their hot!

Go Long Gordon T

Sometimes one has a light bulb moment. We swim through life half-understanding things about the world. Then an news article, movie or in this case a well written blog post blows away all that fog of quasi awareness.

Thanks to http://www.gordontlong.com/ explaining the cozy relationship the first world has had with the third. And what it has led to.

http://www.zerohedge.com/article/guest-post-economic-death-spiral-has-been-triggered

OK, its a rather dry, long technical piece, spattered with graphs, but it goes something like this:

• There has been a symbiotic relationship between the exporting Asian tigers and the very safe storehouse of wealth, the US Treasury
• This flow of capital has perpetuated a generation long shift in the fortunes of two very different economies. Both of which have benefited enormously.
• However the ground rules have changed, the first world is saturated in debt and can no longer service the lifestyle it has grown accustomed to, let alone continue the same growth path that it has for the last two decades. 
• In answer to this, monumental change in the apatite for debt. Central Banks have increased their money supply, in an effort to inflate their way back to prosperity.
• But this hot money has flowed out into any international market that shows any signs of growth potential. All commodity classes have seen price rises well beyond the USD's own deflationary curve. 
• Commodity inflation as adversely effected the third world, where basic needs for food have significant upward price pressures. Putting the brakes on their ascendancy to prosperity.
• There is no end in sight for continued Qualitative Easing, as there is still no sign of a turnaround for what was the mainstay of the US economy, housing. 

 Well like any well educated self-aware blogger, I love pessimism porn. So its so refreshing that this article never mentions the dreaded Hyper Inflation. But the comments section, has no shortage of this shrill end of the world talk.