Quote of the Day: From The Capitalist as the Ultimate Philanthropist

At the end of the day, there are only four things you can do with your money: You can spend it, pay it to the IRS, give it away or reinvest it. Consumption is on the receiving end of productivity—furthering personal instead of public welfare. Government spending is by definition not productive, as you realize every time you step into a DMV. Same goes for charitable giving—no profit means no measure of value or productivity.

And so the most productive thing someone can do with his money—the only thing that will increase living standards—is invest. If the Ford or Clinton foundations really wanted to help society, they’d work on lowering barriers to business formation and cutting the regulatory chains that inhibit productive hiring in the U.S. and globally. But what fun is that? Better to boast about reducing inequality, public welfare be damned.

This quote is from former hedge fund manager and author of "Eat People" Andy Kessler at the Wall Street Journal (a recommended read)

Chinese Political Neo Luddites and How Productivity Means More Employment

The clashing visions of entrepreneurs, whom in general desires to improve productivity through the marketplace (profit and loss system), and political agents, who looks at immediate needs for the purpose of staying in power, can be best illustrated by the proposed wide scale adaption of robotics in China’s economy.

From technologyreview.com

One of the defining narratives of modern China has been the migration of young workers—often girls in their late teenage years—from the countryside into sprawling cities for jobs in factories. Many found work at Foxconn, which employs nearly one million low-wage workers to hand-assemble electronic gadgets for Apple, Nintendo, Intel, Dell, Nokia, Microsoft, Samsung, and Sony.

So it was a surprise when Terry Guo, the hard-charging, 61-year-old billionaire CEO of Foxconn, said last July that the Taiwan-based manufacturing giant would add up to one million industrial robots to its assembly lines inside of three years.

The aim: to automate assembly of electronic devices just as companies in Japan, South Korea, and the United States previously automated much of the production of automobiles.

Foxconn, one of China's largest private employers, has long played an outsize role in China's labor story. It has used cheap labor to attract multinational clients but now faces international scrutiny over low pay and what some see as inhumane working conditions.

"Automation is the beginning of the end of the factory girl, and that's a good thing," says David Wolf, a Beijing-based strategic communications and IT analyst. Wolf, who has visited many Chinese factory floors, predicts an eventual labor shift similar to "the decline of seamstresses or the secretarial pool in America."

Since the announcement, Guo hasn't offered more details, keeping observers guessing about whether Foxconn's plans are real. (Through its public-relations firm, Burson-Marsteller, Foxconn declined to describe its progress.) Trade groups also haven't seen the huge orders for industrial robots that Foxconn would need, although some experts believe the company may be developing its own robots in house.

"Guo has good reasons for not waving his flag about this too much," says Wolf. Keeping quiet could give Foxconn a jump on competitors. What's more, with the Chinese economy slowing down, "it is politically inadvisable to talk too much about replacing people with robots," he says.

China's leaders see employment as essential to maintaining a harmonious society. The imperative of creating jobs often trumps that of efficiency. For instance, Wang Mengshu, deputy chief engineer at China Railway Tunnel Group, says that labor-saving equipment isn't always used even when it's available. "If all the new tunnels were built with the advanced equipment, that would trim the need for the employment of about six million migrant workers," he says. "In certain fields we don't want to have fast development in China, in order to solve the national employment problem."

Political leaders are shown here as practitioners of neo-Luddism—opposed to many forms of modern technology.

They are either unaware that advances in technology leads to greater productivity and more employment or simply have been looking at their narrow interests.

Hedge fund Andy Kessler eloquently explains the causal relationship in layman’s lingo.

From the Wall Street Journal, (bold emphasis mine)

So how does productivity result in more employment?

Three ways. First, some new technology comes along that allows something never before possible. Cash from an ATM, stock trading from an airplane's aisle seat, ads next to Google search results.

The inventor or entrepreneur who uses the invention benefits from sales and wealth and hires people to produce the good or service. We don't hear about this. Instead we hear about the layoffs of bank tellers, stockbrokers and media salesmen. So productivity becomes the boogeyman for job losses. And many economic cranks would prefer that we just hire back the tellers and toll collectors.

This is a big mistake because new, cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense. Adobe software killed typesetters, but allowed millions cheaply to get into the publishing business. Millions of individuals and micro-size businesses now reach a national, not just local, retail market thanks to eBay. Amazon allows thousands upon thousands of new vendors to thrive and hire.

Consider Uber, a 20-month-old start-up, whose smartphone app knows where you are and with a simple click arranges a private car pickup to take you where you want. It doesn't exist without iPhones or Androids. Taxi and limousine dispatchers lose. Customers win. We'll all be surprised by new tablet applications being dreamed up in garages and basements everywhere.

The third way productivity results in more employment is by attracting capital to satisfy new consumer demands. In a competitive economy, productivity—doing more with less—always lowers the cost of products or services: $5,000 computers become $500 tablets. Consumers get to spend the difference elsewhere in the economy, and entrepreneurs will be happy to sell them what they want or create new things they never heard of, but will want. And those with capital will be eager to fund these entrepreneurs. Win, win.

The mechanism to decide the most effective use for this capital is profits. The stock market bundles profits and is the divining rod of productivity, allocating capital in cycle after cycle toward the economy's most productive companies and best-compensated jobs. And it does so better than any elite economist or politician picking pork-barrel projects and relabeling them as "investments."

The productive use of capital is not an automatic process, of course. It is all about constant experimentation. And it is never permanent: Railroads were once tremendously productive, so were steamships and even Kodachrome. It takes work, year in and year out—update, test, tweak, kill off. Staples is under fire from Amazon and other productive online retailers. Its stock has halved since its 2010 peak and is almost at a 10-year low. So be it.

With all the iPads and Facebook and cloud-computing growth, why is unemployment still 8.2% and job creation stalled? My theory is that productivity is always happening but swims upstream against those that fight it. Unions, regulations and a bizarre tax code that locks in the status quo.

Read more of the fallacies of Luddism from must read classics of the great Frederic Bastiat from “That Which is Seen and That Which is NOT Seen” (Machinery) or from the equally distinguished Henry Hazlitt’s Economics in One Lesson (The Curse of the Machinery)

I am reminded by the recent conversation I had with the charter president of Rotary of Mandaluyong, Fred Borromeo, who at age 86 ironically is an avid fan of technology.

In his recent encounter with some local government neo-luddites who objected to his suggestion to adapt to new (farming) technology for the same reasons as Chinese politicians, Mr Borromeo told them, “the world will move along with or without you”. Indeed.

Information Age Education: Student Focused Online Platforms

The information age will massively disrupt (20th century classroom mass based) education as we know of it today.

Hedge fund manager Andy Kessler in his interview with Artificial Intelligence expert Sebastian Thrun, published at the Wall Street Journal, gives us some clues. (bold highlight mine)

Yet there is one project he's happy to talk about. Frustrated that his (and fellow Googler Peter Norvig's) Stanford artificial intelligence class only reached 200 students, they put up a website offering an online version. They got few takers. Then he mentioned the online course at a conference with 80 attendees and 80 people signed up. On a Friday, he sent an offer to the mailing list of a top AI association. On Saturday morning he had 3,000 sign-ups—by Monday morning, 14,000.

In the midst of this, there was a slight hitch, Mr. Thrun says. "I had forgotten to tell Stanford about it. There was my authority problem. Stanford said 'If you give the same exams and the same certificate of completion [as Stanford does], then you are really messing with what certificates really are. People are going to go out with the certificates and ask for admission [at the university] and how do we even know who they really are?' And I said: I. Don't. Care."

In the end, there were 160,000 people signed up, from every country in the world, he says, except North Korea. Rather than tape boring lectures, the professors asked students to solve problems and then the next course video would discuss solutions. Mr. Thrun broke the rules again. Twenty-three thousand people finished the course. Of his 200 Stanford students, 30 attended lectures and the other 170 took it online. The top 410 performers on exams were online students. The first Stanford student was No. 411.

Mr. Thrun's cost was basically $1 per student per class. That's on the order of 1,000 times less per pupil than for a K-12 or a college education—way more than the rule of thumb in Silicon Valley that you need a 10 times cost advantage to drive change.

So Mr. Thrun set up a company, Udacity, that joins many other companies attacking the problem of how to deliver the optimal online education. "What I see is democratizing education will change everything," he says. "I have an unbelievable passion about this. We will reach students that have never been reached. I can give my love of learning to other people. I've stumbled into the most amazing Wonderland. I've taken the red pill and seen how deep Wonderland is."

"But Wonderland is also crazy!" I interrupt.

"So?"

Ah, another Thrun project that can radically disrupt the old way of doing things. "But isn't that exactly what we should be doing? I'm going part-time at Google to pursue this. I really care. Isn't this the American history? Can't you pinpoint almost everything that happened back to some technological breakthrough?" Indeed, this is going to disrupt public schools and teachers unions and universities and tenured professors and so on, Mr. Thrun effectively interjects: "The dialogue always focuses on what's going to happen to the institutions. I'm totally siding with the students."

I ask why he always takes on these quantum changes instead of trying something incremental. "That's what Google taught me. Aim higher. Udacity is my playground—to radically experiment and find out. I've seen the light."

Education in the information age will see a deepening trend towards personalized (demassified) learning, will focus on job related skill building (which does away with useless subjects aimed at indoctrination) and on increasing specialization.

Continues innovation, competition and noncontiguous platform which should cover the entire world (in terms of providers, educators and students), will become important forces in driving down the cost, or the “democratization” of education.

Finally, job hiring based on the education credential system model will be challenged, if not transformed to meet the new digital realities.

Explore Sebastian Thrun's Meet Udacity website here.

Quote of the Day: Ideas Grow on Blogs

Social networks, like real life, are driven by influencers—not necessarily those with the most friends or followers, but those whose thoughts, ideas and opinions have the biggest impact. Mr. Collegio notes that for political action committees "to seed opinion makers, Twitter is the ultimate platform. Ideas grow into stories on blogs and eventually in the mainstream media." Not the other way around.

That’s from author and former hedge fund manager Andy Kessler in an Op Ed column at the Wall Street Journal. The flow of ideas seem to be reversing; from the mainstream media to the public and now from the public--through social media networks as blogs--to the mainstream.

Quote of the Day: Consumption Equality

Just about every product or service that makes our lives better requires a mass market or it's not economic to bother offering. Those who invent and produce for the mass market get rich. And the more these innovators better the rest of our lives, the richer they get but the less they can differentiate themselves from the masses whose wants they serve. It's the Pages and Bransons and Zuckerbergs who have made the unequal equal: So, sure, income equality may widen, but consumption equality will become more the norm.

That’s from author and former hedge fund manager Andy Kessler in an op ed at the Wall Street Journal. Most people hardly realize that much of the improved standards of living have been a product of capitalism.

Celebrating Unsung Heroes of Capitalism: Wilson Greatbatch

From analyst Andy Kessler at the Wall Street Journal (emphasis added)

Wilson Greatbatch, 92, died this week a wealthy man. Investing $2,000 of his own money way back in 1958 and tending a garden to feed his family, Greatbatch invented the pacemaker. He licensed it to Medtronic, a company now valued at $36 billion that sells and continues to improve pacemakers and defibrillators. Greatbatch did his part to improve society, create wealth and increase, quite literally, our standard of living. But apparently that's not enough. President Obama suggested under a Cincinnati bridge this month that "if you've done well . . . then you should do a little something to give something back."

Give something back? Greatbatch did well specifically because he provided something that society needed. His and Medtronic's profits are what you and I are willing to pay above costs for these life-enhancing devices. This is true of Apple iPhones and Genentech Herceptin and Google Maps and Facebook Likes.

Ever since the mid-19th-century era of so-called Robber Barons, this country has had a philosophical divide over the role of business in a democracy. It's time to set the record straight.

History has proven that the road to increased standards of living and wealth was built on productivity—doing more with less. It was the Industrial Revolution that got us out of the growing fields and into factories, which allowed us to pay for roads and teachers and civil servants. And now the move out of factories into air-conditioned offices is creating anxiety. It shouldn't. Labor replacement is productivity. James Spangler's vacuum cleaner. The Walker brothers' dishwasher. Clarence Birdseye's flash freezing. DuPont's Kevlar. And John Simpson's guidewire catheter for angioplasty and heart stents—the list goes on. Each invention generated wealth because it improved our lives, not because someone "gave back."

Thanks Mr. Greatbatch, RIP.

I hope that people will learn to treasure those whom have truly contributed to our wellbeing through the markets.

Knowledge Revolution: Creators and Servers

The transition towards Toffler’s Third Wave or the Hayekian knowledge revolution isn’t just my outlook. It is likewise shared by some, who like me, sees things evolving from the fringes.

Author Andy Kessler predicts that people will play starkly different roles from that of the past, and where technology (and not the Yuan) will eat alot of jobs.

In promoting his latest book Eat People, Andy Kessler writes at the Wall Street Journal, (bold highlights mine, italics his) [my comments]

There are two types of workers in our economy: creators and servers.

Creators are the ones driving productivity—writing code, designing chips, creating drugs, running search engines. Servers, on the other hand, service these creators (and other servers) by building homes, providing food, offering legal advice, and working at the Department of Motor Vehicles. Many servers will be replaced by machines, by computers and by changes in how business operates. It's no coincidence that Google announced it plans to hire 6,000 workers in 2011.

But even the label "servers" is too vague. So I've broken down the service economy further, as a guide to figure out the next set of unproductive jobs that will disappear. (Don't blame me if your job is listed here; technology spares no one, not even writers.)

• Sloppers are those that move things—from one side of a store or factory to another. Amazon is displacing thousands of retail workers. DMV employees and so many other government workers move information from one side of a counter to another without adding any value. Such sloppers are easy to purge with clever code.

• Sponges are those who earned their jobs by passing a test meant to limit supply. According to this newspaper, 23% of U.S. workers now need a state license. The Series 7 exam is required for stock brokers. Cosmetologists, real estate brokers, doctors and lawyers all need government certification. All this does is legally bar others from doing the same job, so existing workers can charge more and sponge off the rest of us.

But eDiscovery is the hottest thing right now in corporate legal departments. The software scans documents and looks for important keywords and phrases, displacing lawyers and paralegals who charge hundreds of dollars per hour to read the often millions of litigation documents. Lawyers, understandably, hate eDiscovery. [Yes, this should diminish the brains for interventionists-Prudentinvestor]

Doctors are under fire as well, from computer imaging that looks inside of us and from Computer Aided Diagnosis, which looks for patterns in X-rays to identify breast cancer and other diseases more cheaply and effectively than radiologists do. Other than barbers, no sponges are safe. [According to Marketingcharts.com ‘8 in 10 Web Users Look for Online Health Data’-Prudentinvestor]

• Supersloppers mark up prices based on some marketing or branding gimmick, not true economic value. That Rolex Oyster Perpetual Submariner Two-Tone Date for $9,200 doesn't tell time as well as the free clock on my iPhone, but supersloppers will convince you to buy it. Markups don't generate wealth, except for those marking up. These products and services provide a huge price umbrella for something better to sell under.

• Slimers are those that work in finance and on Wall Street. They provide the grease that lubricates the gears of the economy. Financial firms provide access to capital, shielding companies from the volatility of the stock and bond and derivative markets. For that, they charge hefty fees. But electronic trading has cut into their profits, and corporations are negotiating lower fees for mergers and financings. Wall Street will always exist, but with many fewer workers.

• Thieves have a government mandate to make good money and a franchise that could disappear with the stroke of a pen. You know many of them: phone companies, cable operators and cellular companies are the obvious ones. But there are more annoying ones—asbestos testing and removal, plus all the regulatory inspectors who don't add value beyond making sure everyone pays them. Technologies like Skype have picked off phone companies by lowering international rates. And consumers are cutting expensive cable TV services in favor of Web-streamed video. [crony capitalism under pressure-prudentinvestor]

Like it or not, we are at the beginning of a decades-long trend. Beyond the demise of toll takers and stock traders, watch enrollment dwindle in law schools and medical schools. Watch the divergence in stock performance between companies that actually create and those that are in transition—just look at Apple, Netflix and Google over the last five years as compared to retailers and media.

Two things:

One, this makes investments in the technology sector very compelling, despite the applied inflationism by global central banks.

Proof of this has been the steady ‘top’ ranking of the technology sector in the distribution of the sectoral weightings in the US S&P 500 over the years. And the technology sector remains a solid outperformer today.

Two, political opposition would likely emanate not only from anti trade/mercantilists but likewise from neo-Luddites.

Frederic Bastiat in his magnificent classic That Which is Seen, and That Which is Not Seen rebutted a similar objection as seen through this: "A curse on machines! Every year, their increasing power devotes millions of workmen to pauperism, by depriving them of work, and therefore of wages and bread. A curse on machines!"

Phisix: The Fantasy Of The 2008 "Window Dressing" Year End Rally

“If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion.” Aldous Huxley (1894-1963), English Writer

We learned that some local experts recently opined that if a rally should occur in the Philippine equity markets this month, this would likely be driven by so called “Window Dressing”.

Window Dressing according to Investopedia.com is ``A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders”.

So after the recent rout, where the Phisix have chalked up 48% losses year to date and 51% since the credit bubble imploded last July, how should we expect “to improve the appearance” of portfolio funds to lift the market?

In our view, either such expert/s have been living on a different planet or have completely lost rationalizations to explain away market actions.

Why?

1. Lost in the understanding is the process called debt deflation or deleveraging.

During the previous boom, asset values in the global financial zoomed due to massive speculations underpinned by an easy money environment or the moneyness of credit. Remember, banks based their lending on the value of the collateral and the lending process enhances the value of such collateral. Hence the entire process of lending and collateral values becomes a self-reinforcing feedback loop.

So in boom periods, rising collateral values allow for more lending which again translates to even higher collateral values…until the whole becomes unsustainable and reverses.

Today, the process of lending and collateral values could be seen as similar to a “global margin call” where falling collateral values compels lenders to tighten either by asking for more collateral to secure outstanding loans or forcibly liquidate assets in order to pay for such loans. The whole feedback loop, thus, accentuate the downward spiral in asset values which all of us have been witnessing today.

2. Lost in the understanding is that the finance industry and fund managers are the main conduits of the deleveraging process.

The unraveling debt deflation phenomenon has basically been vented on the financial markets.

And this has visibly caused the market’s miseries today here or in Asia (see Figure 1) or elsewhere.

Figure 1: IMF: Fleeing Foreign Capital

According to IMF’s Kenneth Kang and Jacques Miniane (all italics mine),

``But given the region's large trade and financial integration with the rest of the world, investors' views of Asia soured as the global turmoil intensified and perceptions grew that the global economy was in for a major slowdown. Large net equity outflows have driven down stock prices sharply. Asia-focused hedge funds have been among the worst performers worldwide, with their returns consistently below those of other emerging market funds.

``Capital outflows have also significantly weakened currencies in some countries, notably India, Korea, New Zealand, and Vietnam. And several countries have responded by intervening to support their currencies, in stark contrast to the past several years, when most Asian countries were concerned about the rapid appreciation of their currencies.

``With the rise in global risk aversion, Asian governments, corporations, and financial institutions have found it more difficult to access the global financial markets. Countries with banking systems that rely more on wholesale financing and less on retail deposits (Australia, India, Korea, New Zealand) have experienced a higher rise in borrowing costs, partly because of concerns they will face difficulties rolling over their debts. As a result of these tightened conditions, the region's private external financing has fallen sharply.”

And because the process of deleveraging equates to forcible liquidations in order to reduce debt exposure, this means that global fund managers have likewise been retrenching to meet redemptions or to simply cut losses.

So we see this in hedge funds…

From Bloomberg, ``The global hedge-fund industry lost $64 billion of assets in November, with an index tracking its performance declining for a sixth month as economies in Asia and Europe joined the U.S. in recession, Eurekahedge Pte said…

``Hedge-fund industry assets peaked at $1.9 trillion in June, data compiled by Chicago-based Hedge Fund Research Inc. show. Investment losses and withdrawals may shrink that amount by 45 percent by the end of this month, according to estimates by analysts at Morgan Stanley.”

And in the mutual funds…

From ICI.org, ``The combined assets of the nation's mutual funds decreased by $1.087 trillion, or 10.2 percent, to $9.600 trillion in October, according to the Investment Company Institute's official survey of the mutual fund industry.”

And we can’t expect the local counterparts to immediately replace them considering that the industry has been quite underdeveloped, where according to Icap,com, ``total of 22 mutual funds in the country. Six (6) of these are bond funds, five (5) are equity funds, while the remaining ten (10) are balanced funds while one is a money market fund” and even if we add the domestic bank based UITF counterparts.

3. Finally, market inefficiencies brought about by the dynamics of the sheer scale of liquidations aside from tax angles could factor in negatively for the US markets which could spillover to other markets…

That’s if we heed former fund manager Andy Kessler who warns the public to ``stick wax in your ears and don't listen to the market until February.”

Quoting Andy Kessler (Wall Street Journal):

``-Tax-loss selling: Whenever you have a loss in a stock -- and who doesn't -- it's always tax smart to sell it, take a tax loss and either buy something similar or wait 30 days and buy the original one back. December can be an ugly month of indiscriminate selling. The December effect will be huge this year.

``- Mutual-fund redemptions: Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it's usually because of mutual-fund redemptions…

``- Mutual fund cap-gain distributions: To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason's Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many "unvalue" names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill.

``- Hedge-fund redemptions: Instead of overnight selling like mutual funds, hedge funds typically require 45 days' notice for investors to get out of a fund. They've been furiously selling since September to raise cash to pay investors. This usually shows up as a set of stocks that just go down and down and down with no obvious explanation.

``Rubbing salt in hedge-fund wounds is the fact that Lehman Brothers was a prime broker to many hedge funds, holding their shares. While Lehman's bankruptcy was not a problem in the U.S., in England the policy is to freeze accounts until the mess can be sorted out. There are billions in assets locked in this bankruptcy, and hedge funds are forced to sell positions in the U.S. and elsewhere to raise cash, exacerbating the downside here.

``By the way, when hedge funds are down for the year, they work practically for free until they make up the loss. We'll see hedge funds close and stocks liquidated as -- no surprise -- hedge-fund managers like to get paid.

``- Margin calls: Whenever stocks go down sharply, you quickly find who owns them with debt. We have seen spectacular margin calls, a requirement for more capital to cover share losses. Chesapeake Energy CEO Aubrey McClendon unloaded 33 million shares to cover losses. Viacom CEO Sumner Redstone had a forced sale of $400 million in Viacom and CBS shares because of a margin call on other stocks. You can bet many not-so-public margin calls are behind many huge price drops. These usually take place in the last 30 minutes of trading.”

Overall, the fundamental premise that global and local fund managers will provide for a temporary facelift for the Phisix doesn’t square with global trend of rising risk aversion, client and fund redemptions and or perhaps tax induced selling.

If the Phisix and global markets should rise, it is likely because long term investors will take over short term players or take advantage of the collateral crisis related losses or even perhaps take refuge in stocks as “store of value” in a world where global central banks have been racing to collectively devalue their currencies.

Window dressing could possibly be an issue after the deleveraging phenomenon or when markets stabilize.

To argue otherwise seems living off a fool’s paradise, or as Sigmund Freud once wrote, ``Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces."