Tag Archives: economics

the FT’s “listen to gold” op-ed

May 22, 2013 By in Constructing a Portfolio, Current Market Thoughts, Gold, Portfolio management, Strategy Tags: , , , , , , , , , 1 Comment

The other day the Financial Times carried an op-ed column titled “We should listen to what gold is really telling us.”  It was written by regular contributor Mohamed El-Erian, the  marketing voice of bond fund giant, Pimco.

I usually skip over what Mr. El-Erian writes.  His prose style is weak and the solution to every economic or financial worry he discusses is to buy more bonds.  In this case, I made an exception.  I was curious to see whether Pimco would be in the old-school camp that says gold is money or whether, like me, Pimco would maintain that it’s an industrial metal that new mine development has put into chronic oversupply (just like in the 1980s).

The article isn’t really about gold, though.  It’s about the fact that when more money than is needed is sloshing around in the world economy–and central banks around the globe continue to print new money at a rapid rate–some (all?) of the excess finds its way into speculative investing.  Sometimes, according to Pimco, even though the overall speculative tide has not yet crested, some prices become so divorced from reality that localized bubbles still burst.  Three examples:  gold, AAPL and FB.

At this point in the article, I thought what would come next would be an assertion that these three are harbingers of the behavior of all sorts of financial investments once monetary stimulus starts to be withdrawn.  If so, I thought to myself, Pimco will have a hard time ducking the issue of the popping of the biggest bubble of them all, the bond market.

That’s not the tack Mr. El-Erian takes, though.

He asks what happens if all the global monetary stimulus fails to reignite economic growth.  Put in a different way, what happens if world economies begin to roll over and enter recession?  The money taps are already wide open, so there’s nothing central banks can do to cushion the fall.  Fiscal policy is the only tool available.  But that takes time to work–and requires well-functioning legislatures to understand what’s going on and act both appropriately and quickly.  Fat chance.

This is a really scary scenario.  There’s absolutely no current evidence I can see that it’s likely.  El-Erian just poses the question and doesn’t say what he thinks.

Still, from a financial planning perspective, it’s something we all have to consider and be on the alert for the signs of.  Of course, conveniently for Pimco, this is the only situation I can think of where it makes sense to be holding government bonds.

pricing out a low-end shirt: investment implications

May 21, 2013 By in Asian economic development, comparative advantage, Current Market Thoughts, economics, emerging markets, Industry Analysis, Retail Tags: , , , , , , Leave a comment

A while ago, I wrote about pricing out a polo shirt that retailed for $150 then ($175 now).

Today’s post goes to the other end of the fashion spectrum:  pricing out a “fast fashion” shirt that might sell at H&M or Zara for, say, $15.  The source of my information about Bangladesh is an op ed column, “The Economics of a $6.75 Shirt,” by Rubana Huq, who owns a garment business there.

Just for reference, the factory gate cost of the KP MacLane  luxury polo is:

–materials           $10.35

–manufacturing          $11.05

= $21.40.

These figures are unusually high for a shirt, mostly because of the small initial lots involved.  The unit price could easily be below $15 now, depending on how successful KP MacLane has been in its sales efforts.

in comparison, costs in Bangladesh…

…for an order of 400,000 fast fashion shirts:

materials      $5.75

–cotton cloth           $4.75

–labels, other          $1.00

manufacturing     $.875

–wages          $.38

–finishing          $.15

–utilities, factory rent          $.11

–overhead          $.11

–debt service (for manufacturing equipment)          $.125

= $6.625

The selling price at the factory door is $6.75.  Therefore, the per garment profit is $.125.  The total order earns the manufacturer, before paying himself (or, in this case, herself), $50,000.  In the example Ms. Huq gives in her op ed column, this order represents about five months business for the factory.

what I find interesting

Although the KP MacLane polo and the fast fashion t-shirt sell for wildly different prices at retail, the material costs aren’t that different.

The markup over production cost is 718% for KPM, 140% for the tee.  As I mentioned in my earlier post, a Hermès polo sells for $455, or about 2.6x the price of the KPM one.  Hermès’ production costs are probably lower than KPM’s, so the markup is likely higher than 1800%.   In both cases the buyer is clearly paying primarily for the branding, not the garment.

The operating model for classic luxury goods is far different from that of fast fashion.  The former sells far fewer items-most of which have very long shelf lives–at huge markups.  The latter sells huge numbers of items with short shelf lives at low markups.

The two styles demand different skills.  Fast fashion, in particular, has little room for error in design or sourcing/pricing from manufacturers.

the Bangladesh situation

First of all, we have to remember that the data Ms. Huq present come from a manufacturer in Bangladesh, hardly a disinterested party.  Certainly she will want to put her best foot forward.  Still, I’ve found the situation she describes to be typical of the garment industry over the decades, whether located in New York City, Japan, Thailand, China or Bangladesh.

Bangladesh employs 4 million garment workers, the vast majority of them women, who are the chief breadwinners in households totaling 20 million.  They earn US$70 – $80 a month, which is far more than an unskilled laborer could expect in any alternative employment in Bangladesh.  Although their families are barely surviving, the greatest fear of these workers is doubtless that the garment industry will shift away from Bangladesh to other low labor-cost countries, like Vietnam, leaving them unemployed.

The garment manufacturer in Bangladesh may make $100,000 a year if everything runs smoothly.  But that could be considerably less if he’s inefficient or if he encounters production delays that, say, require him to pay for shipment by air.  So one can certainly understand–not condone, just understand–the temptation an unscrupulous owner may feel to lower rent by turning a blind eye to safety violations.   It’s not clear how much leeway fast fashion has to alter its operating model by raising prices, either (look what happened to JCP).

In theory at least,  consumer pressure on international retailers for a keener eye to worker safety when sourcing garments may solve that issue–although the same problems seem to recur decade after decade and in country after country.

The more difficult issue to reconcile are the ideas that income of $70 a month is a good situation to be in, which in Bangladesh it is, and that well-intentioned efforts to improve it may make the workers’ lot considerably worse.

the US Census Bureau on immigration (and GDP growth)

May 17, 2013 By in Basic Concepts, Current Market Thoughts, economics, Portfolio management, Strategy Tags: , , , , , , , , Leave a comment

gauging GDP growth potential

Over the years, I’ve found that there’s a very simple and effective rule for quickly gauging a country’s GDP growth potential.  Here it is:

Output can rise in one of two ways:

–either more people are at work, or

–workers are more productive.

My first boss in the financial markets was as close to a nineteenth-century capitalist as I’ve ever encountered.  He maintained that increasing productivity is solely a function of employees spending more time at their desks.  Although this suited his penny-pinching mentality, it’s not true.  Productivity gains come primarily from the employer investing in better equipment, and from better worker education/technical training.

If we pluck a number out of the air and say that a country can achieve a constant 1% increase in worker productivity per year (I’m not trying to be precise; I want to get a simple picture that gets the general idea.  Also, a 1% annual gain is a pretty good number), then a country’s ability to grow economically becomes a direct function of one thing   …the expansion of its population.

the Census Bureau Annual Population Projections

That’s what makes the Census Bureau’s latest population assessment so interesting.

Two days ago the Bureau, an arm of the Commerce Department, issued its 2012 Annual Population Projections.  It says that in the US, net births/deaths are currently adding about 0.75% annually to the population.  By 2030, that figure will drop to 0.50%.  By 2050, it will shrink to about 0.35%.

Two reasons the figure is so low:  as people become more prosperous, they tend to have fewer children, and people are living longer.

projecting US GDP

So, what’s the trend growth rate of GDP in the US, according to my simple rule?   …2%- per year, or about what we have now.

how to make growth higher

Can we make the economic picture brighter?

Yes, in two ways–both of which, unfortunately, are questions of policy coming out of Washington.

–We can allow foreigners to come to the US to work, either permanently or by increasing the number of work visas awarded to highly skilled foreigners who want employment in the US for a period of time.

Republicans oppose the first,  Democrats the second (for reasons that escape me).

–We can attract productivity-enhancing capital investment to the US.  This is primarily a function of tax policy, which neither party in Washington appears to want to change.

We can also make out schools better.

implications

This isn’t really new news, but thinking about long-term GDP growth suggests, to me, two investment conclusions:

–investors anticipating a rapid expansion of GDP from the current level are likely to be disappointed (look for that in Asia, or from exposure through US-based multinationals), and

–superior earnings growth–and stock performance–will come from companies that have unique products or services that are in high demand.  In other words, the environment favors growth stock techniques rather than value.

(Note:  I realize that it’s not really the population that counts.  It’s the workforce.  But looking at the workforce introduces complications that I don’t think change the overall picture, but which can easily obscure it.  Stuff like:  the influence of the Baby Boom, the decline in female participation, long-term unemployed…)

 

 

 

Dr. Copper is speaking–but what is he saying?

May 7, 2013 By in Mining, Portfolio management, Recent Market Action, Stock ideas, Strategy Tags: , , , , , , , , , Leave a comment

Albert Edwards

Albert Edwards of Société Générale is one of the longest-tenured strategists of global securities markets around.  He’s very smart.  He foresaw the problems that would result in the peripheral EU countries from the very beginning.  He predicted long ago the current condition of globally low interest rates and slow growth, which he dubbed the “ice age.”  It took a more uplifting spin by marketing juggernaut Pimco, which called the situation the “new normal,” before the idea gained wide acceptance.

In some sense, Mr. Edwards’ predictions are  …well, predictable.  He’s almost always bearish.

Dr. Copper

He’s currently listening to “Dr. Copper,”  whose price has been falling since the beginning of the year.  Mr. Edwards likens today’s situation to that in 2007, when a swoon in the red metal (it ultimately lost 2/3 of its value) presaged recession.

Why is copper so important?  Its use is highly economically sensitive.  It’s tubing and wiring in building construction; it’s the guts of an electric power generator; and a new car can contain up to a hundred pounds of it.

Recession in the back half of 2013 wouldn’t be pleasant.  Monetary spigots around the world are already wide open.  Fiscal loosening takes a long time to have an effect–and, ex the EU, dysfunctional legislatures are unlikely to agree on anything positive in any event.  So for the first time since WW II, we’d just have to take our lumps.

is this right?

I’m not sure that Mr. Edwards is correct, though, about what’s causing the copper price to fall this time.  A tripling in the price of copper since 2006 has caused new mine projects to start up  and existing mine production to rise steadily.  I haven’t been able to find good statistics for recycled copper, another important source of supply, but I’m confident that it’s up as well.  As a result, a market that was chronically short of supply has recently turned into one where supply is now slightly ahead of demand.  Hence the price fall.  Unlike 2007, my view is that Dr. Copper is swhispering that supplies will be plentiful from now on, not that demand is drying up.

Europe is cheap

By the way, Albert Edwards has another big insight.  This one is bullish.  So, coming from a bear, it’s well worth listening to.

He thinks European stocks are startlingly cheap.  Copper is telling him that world economies are going to hell in a handbasket over the next eighteen months, so the timing isn’t quite right today.  But if–like me–you think he’s getting the wrong message from Cu, they’re worth taking a look at now.

Yahoo, welcome to France!

May 6, 2013 By in Recent Market Action, economics, Foreign markets, capital flight/brain drain Tags: , , , , , , , Leave a comment

Dailymotion

For the past half-year, Yahoo (YHOO) has been negotiating with France Telecom to buy a controlling interest in Dailymotion, an online-video website that FT acquired in 2011 for €127 million ($165 million).  According to the Wall Street Journal, the two parties reached an agreement last month in which YHOO would pay $225 million for 75% of Dailymotion, the 10th largest You Tube competitor.

This looked like a sweet deal for both sides.  FT would get all its cash back plus a profit and would retain a 25% interest in Dailymotion, while YHOO shouldered all the financial and operational burden of growing Dailymotion as fast as possible.  YHOO would take a big step forward in developing an online video arm.

redressement productif intervenes

Then Paris stepped in.  In a move reminiscent of its rejection of Pepsi’s bid to acquire yogurt-maker Danone, the parties were summoned to the offices of the French Minister of Industry (=redressement productif), Arnaud Montebourg on April 12th.  Le Monde says M. Montebourg yelled at FT, described Dailymotion as a national treasure that must remain in French hands and vetoed the deal.

Odd behavior for an official who is a central figure Paris’s campaign to convince foreigners to invest in French companies (“Say Oui to France, Say Oui to Innovation”).  On the other hand, this is France we’re talking about.

damage done

This government move has bad consequences both for France, and for Dailymotion:

–Dailymotion is now stuck being a part of a telephone utility, which doesn’t have the skills, connections or capital to help it grow.

–Dailymotion employees see that their dreams of making a large profit by cashing out in a sale, or of being key figures in a large internet entity have gone up in smoke.  The most talented are doubtless already cutting their losses and leaving France for tech jobs elsewhere.

–Paris has just shown foreigners that any capital they put into France is subject to the whims of the ruling elite and could easily be trapped there forever.   M. Montebourg’s public post-meeting gloating about his action only reinforces this idea.

–the move is another significant step down the path to economic irrelevance blazed by Japan.

France is not the only chauvinist…

…although it is the birthplace of the Nicholas Chauvin legend.

Every country restricts foreign investment to some degree.  Almost no one lets non-citizens control essential industries like defense, telecommunications or media, for example.  Developing economies, fearing that rich foreigners will spirit away local businesses on the cheap, often enact wider restrictions.  Continental European nations, where preserving the position of a small group of “haves” is a very high priority, do the same.  The US, fearing its growing economic power, won’t let China buy much of anything.

ironies

M. Montebourg seems to have no clue that he has highlighted the negative reality behind the “Say Oui to France-innovation” campaign.

The campaign’s website, which I thought was well done, features prominently an explanatory video driven by the same Dailymotion Montebourg has just eviscerated.

The French love to disparage American intellect and culture.  According to one recent description, we have been mentally ensnared by our greatest creation, Disneyland, and are now unable find our way back to the real world.  They don’t seem to get it that venerating yogurt and online videos suggests you’re a lot more confused than we are.   Or that being lost in memories of the glory of the Ancien Régime is not such a hot thing, either.

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