Inflation

Jim Rogers noted something about inflation in the United States which the government could be wrong about. Follow it at this link (http://blogjimrogers.blogspot.sg/2013/10/us-government-lies-about-inflation.html)

Inflation is Global

There is disturbingly frequent upward adjustment in prices where I spend my money. The price of a can of drink at a coffee shop now costs around $1.60 it used to cost lesser just 5 years back. To the careful observer, some can drinks are now packed to 310ml or 300ml vs traditional 330ml. Check it out.

Jim Rogers said something about inflation in the US which is also similar here. Anybody willing to observe will find inflation in other economies like, for instance, the Eurozone.

ECB Inflation Data

The table below is extracted from ECB. (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-31102013-AP/EN/2-31102013-AP-EN.PDF). .

ECB Inflation Data

Table1. ECB Data

 Analysts are screaming for a rate cut as the number is below target. Who will this rate cut benefit?

Statistic is not Real

The metrics that official inflation measure is just a theoretical inflation figure. This theoretical figure is not applicable in most instances. Let me cite an example.

For instance, an office worker who cycles to work will not enjoy the drop in price of pump prices (i.e drop in crude oil prices), unlike another office work who is rich enough to drive to work.

This has to do with income level and wealth level.

Income and Wealth Distribution

Let us look at the Eurozone Income Distribution and Eurozone Wealth Distribution.

Table2. Gross Annual Household Income in Eurozone

In the Eurozone, the average household income is above the majority of the households (median) gross income. The report also mention that “the wealthiest 10% of households hold more than 50% of total wealth”. The report is available from this website (http://www.ecb.europa.eu/pub/pdf/other/ecbsp2en.pdf)

Its means that chances are citizens of the Eurozone are low income, and not wealthy. The numbers look better because outliers are distorting the average. The report also seem to point to it. These are extremely high income earners and extremely high wealth households.

ECB Inflation Weightage

When one “makes enough money to meet the needs”, it means money for food and shelter.

Look at the ECB Inflation Data in Table1 above, we learn that inflation for food is surprisingly under-weighted (193.7/1000).

Low income people don’t have much money to purchase services, but it is over-weighted at (423/1000).

It is counter-intuitive, even go against Maslow Hierarchy of Needs.

Above all else, isn’t cheaper energy better? Isn’t cheaper housing better? They lower long term set up costs of local labour, hence long term pressure on wages.

Interest Rate Cut

The way central banks uses interest rate as a policy tool to keep inflation in check does not necessarily works when it is used to encourage inflation. The rich and credit worthy can borrow, and borrow cheaply to buy assets like stocks, bonds, properties etc,, but others either can’t borrow or cannot not borrow cheap enough to benefit.

In this environment, rate cut creates inflation associated with wealth creation, like rise in investment asset prices like bonds, equities, housing but not necessarily inflation due to new income creation.

Businesses borrow to invest in capacity building when they see demand. If there is trepid new income creation, businesses will not want to invest to capacities and like jobs. Instead, they will want to maximise returns by merely moving money around.

Every one of us wants to create wealth, but in reality, the wealthy constitutes merely 10%. What is the chance of getting there as a nouveau riche?

Conclusion

The wealthy will like it, but is it right this time to cut rate for the sake of trying to stoke inflation?

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Tax Payer Money

Tax payer money and corruption are intertwined.

A definition of Corruption obtained from the web

“An act done with an intent to give advantage inconsistent with official duty and the rights of others. The act of official or fiduciary person who unlawfully and wrongfully uses his status or character to procure some benefit for himself or for another person contrary to duty and the right of others.”

I encountered an interesting question, that goes like this,…would you tell someone (we call him Z) that his status now was advertently procured?… no doubt that Z had put in effort to secure, and enhance it.

Most of us would answer “no” as it is believed that Z could be an innocent third party in transaction that benefits Z. It is irrelevant to burden Z with historical facts?

Let us look at a possible circumstance. Suppose if this item is a scholarship that is obvious to Z that there is high probability that only Z fits the bill?

Tax Payer Money

The case to draw analogy is the Brompton Bike Case that is on trial, charges filed, inter alia, providing false information, and abetting…

The legal question should be, would the arrangers / book runners be guilty of abetting? Since its a legal question, the courts are in better position to investigate.

The moral question should be asked if we are in the shoes of Z, ”Would I have consented to this arrangement?” if I know that its arranged for my benefit?

If Z answered yes, consent, then would Z be guilty of participation.

 Tax Payer Money

Let us look at another 2 cases with different settings.

Case 1

Your friend resigned from his job and returned from sabbatical leave. He wrote more than a hundred resumes and cover letter but did not clinch even an interview. He was in a dire situation as his expenses piled up.

You wrote a perfect cover letter and resume, bumped up his asking salary by 40%. He bagged the job with this asking salary.

Would we fault him for asking 40% more of salary than is originally intended; and that his resume and cover letter is not his own?

Normally, the answer is no because we don’t bother because he deliver his work. This is what head hunters do for a living.

Case 2

A chap escaped illegally from a war torn nation, landed on foreign shores and subsequently caught for illegal entry. He successfully sought political asylum, granted citizenship, and now doing extremely well.

Would we fault him if he had bribed his way at the visa office to procure a visa to exit his home country?

Normally, the answer is no because we may recognize that dire situations requires dire responses

 

One Differentiating Principle

All the three cases looked similar but there is one common distinguishing factor; tax payer money.

In the first case, one person gained, but many lost because abuse assignment of public money is involved. Taxpayer money is abused.

In the second case, one person gained but no tax payer money is lost.

In the last case, had he stayed where he was, no tax payer money was lost, but no taxpayer money was gained.

Conclusion

The fact that tax payer money is lost due to an act is not something to be proud of.

Our conclusion brings us back to introductory quotation, that as long as it is an abuse of tax payer money, no matter the form, one cannot sleep well in the night.

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Fed Taper

The current Federal Reserve Chairman Ben S. Bernanke and Kenneth N. Kuttner wrote the paper titled “What Explains the Stock Market’s Reaction to Federal Reserve Policy?” (http://www.federalreserve.gov/pubs/feds/2004/200416/200416pap.pdf)

Ben S Bernanke learnt that Federal Reserve policy surprises will have an effect in the stock market. If the surprises are on the positive, then equity prices will rise; and the opposite is true. The absence of Fed Taper cause equities to celebrate as equities as assets could remain high. Why? If US10yr bond, considered as theoretically risk free, goes for 2.6%, the S & P 500 yield would go happily at this low level (plus a bit risk premium).

Fed Taper

The August 2013 FOMC did not reduce US10B worth of bond purchase. This constitutes a positive surprise to the upside. Let us look beyond the chatter and just narrowly look at this paper Ben S Bernanke published and the decision. It leads to the only question, ‘Why would Ben S Bernanke engineer this surprise?’

Fed and unlikely bedfellow, US Treasury

The US treasury needs to sell those equities held up during the days of TARP. Treasury could not sell them with profit it prices of equity keeps coming down. One way is for the Ben S. B to generate a positive surprise to prices of equity. Treasury did sell some shares during the period. (http://www.treasury.gov/initiatives/financial-stability/reports/Pages/daily-tarp-reports.aspx)

The data as of 27 Sept 2013, Treasury accounted that it has recovered $423B of the $421B spent. (http://www.treasury.gov/initiatives/financial-stability/reports/Documents/Daily%20TARP%20Update%20-%2009.27.2013.pdf). That means, technically, the treasury is in the money.

The Billion dollar question is will they try to make another surprise on the upside? The balance of probabilities says it’s rather difficult. The market could be fooled once (read book by James Surowiecki, “The Wisdom of Crowds), and diffcult to fool progressively.

If the hypothesis is true, fed taper could be round the corner as the US treasury’s TARP program is also in-the-money.

28 Sept 2013

Disclaimer, believe at own risk. I am long USD. Fed Taper.

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Individual vs Group

Let us look in the above in the context of creativity and survivability; of individual and group.

Many of us went through the “marooned on the moon” simulation exercise. The result is well known, people make poor decision as individuals. This is highlighted by the more negative variance from recommended solution.

After bargaining the results as a group, we find that the negative variance of the collective solution is smaller than individuals. There are few rare individuals that make better decision than their group. These individuals rarely exceeded 1 in a group of 5. (This does not mean it’s about 20% but statistically about 5%. (This is a hunch. Look forward to test the hypothesis next company retreat)

The above result led to conflicts of interests between individual vs group.

According to Peter Senge, in book “Presence : HUMAN PURPOSE AND THE FIELD OF THE FUTURE” (other authors, Joseph Jaworski, C. Otto Scharmer, Betty Sue Flowers), he uses a term “Groupthink”. “Groupthink” defined as “the continual albeit often subtle, censoring of honesty and authenticity in a team. This collective Voice of Judgment tells people what they should and shouldn’t say, do, and even think.”

This is a conflict in individual vs group.

In context, it appears that in this game of survival, groupthink is a proven to ensure high chances of success for individuals. However, the downside is that entire group can be simply wiped out from the face of the earth because of groupthink.

Group wins

Borders, a mega bookstore that made it from zero-to-hero and back-to-zero (ended in a leverage buyout failure). The groupthink in Borders made its success, chain concept of retailing book. They are able to capture a wider audience through variety of titles of books carried, and purchase bargaining powers. Borders got so prominent that they could not avoid anti-trust lawsuit (settled in 2001).

Individual wins

The founders of Amazon went into, amongst others, book retailing business. It is a long tail business, without physical retailing space. The book “The Long Tail : Why the Future of Business is Selling Less of More” by Chris Anderson provides a good grasp. Jeff Bezos bulldozed Borders to the ground. Borders gave up their online business in the early 2000 to concentrate on their physical retail.

Borders board had groupthink because they are already so big while this individual outperformed Borders because he is not stuck with groupthink. Not Yet. Now amazon is big, Amazon has groupthink problem.

Individual vs Group

The million dollar question is, “When groupthink is right vs when individual think is right?”. My hunch (earlier in the story) says that only 5% of the individual ideas out-perform the group. In the reality, it’s something so difficult to identify.

Before making a judgment call, it’s good to meditate for a minute, listen to the advice of this faint inner voice. Survival of the species depends on it. The most difficult voice to detect is the one that come heart.

{Caution

The head usually tricks us it’s a voice from the heart. Think of dating and marriage. During dating the mind registers a groovy feeling, before marriage “…from the bottom of my heart…”; after marriage “…”..titanic.}

Individual vs Group

Conclusion

Listen to this faint voice from the heart. Ensure that it is not a mind trick. Group consensus voting on decisions is good. Meditate before doing anything. Don’t hesitate to deviate and meditate harder in a situation of individual vs group, go alone.

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