Following The Money Trail: Inflation A Key Theme For 2010

``Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat”-Sun Tzu

WAY past the self imposed $300 billion and October deadline, the US Federal Reserve continues to load up on long dated US treasuries this week.

Figure 1 Cleveland Federal Reserve: Credit Easing Policy Tools

Notably the amount of purchases has doubled to $ 7 billion from last week’s $2.8 billion. These Quantitative Easing activities have coincided with a new watermark high among global equity benchmarks (see figure 2).

Importantly, US Treasury purchases by the US Federal Reserve which commenced in the week of March 18^th of this year, has nearly been concomitant with the March 6^th lows of the US stock market.

Figure 2: Stockcharts.com and Cleveland Fed: Inflection Points Coincide With QE

This posits that after the US markets set a floor in March of this year (vertical blue line left window), the subsequent long dated Treasury purchases (light green arrow left window) by the US central bank combined with the earlier and larger purchases of agency debts have been tightly correlated with the revitalized actions in global stock markets which has likewise been reflected on the inverse price movement of the US dollar Index! (see figure 2)

Evidence and logical argument tells us that this has been more than just a tight correlation but one of causational influence.

So while the “desperately looking for normal” camp continues to pattern their analytics to the conventional economic sphere to predict for a “normalization”, the movements in the markets have increasingly been detached from the underlying motions in the real economy. And the evolving events have repeatedly and derisively contravened such expectations.

For instance, unemployment rates have soared to 10.2% in October (yahoo Finance) with the growling bear camp predicting unemployment rates to reach 12-13% (WSJ Blog) yet US markets continue to crescendo.

And such blatant disparity between surging stocks and improving but tepid economic growth activities has left the mainstream deeply discombobulated.

US Government’s Primary Political Goal: Save The Banking System

Two principal reasons for such confusion:

One, imprisoned by walls of conventionalism, this camp obstinately refuses to acknowledge and or reckon with the political objectives of the incumbent political leadership and their respective bureaucratic authorities, and their consequent actions or measures thereof.

This camp also refuses to digest or internalize on the reality that political objectives have NOT been primarily directed at rehabilitating unemployment, output gaps (excess capacity), idle resources or economic growth, which appears to be secondary, but on the PRESERVATION of the banking system!

The morbid fear out of a massive wave of near simultaneous banking closures or banking collapse (ala the Great Depression) that would lead an eventual systemic deflation has prompted the US Federal Reserve to engage in a massive and unprecedented scale of operations to buttress its banking system.

And it is for this reason that the Federal Reserve has reconfigured bank earnings from its traditional “deposit and lend” operating model, in the face of a disinclined market hobbled by over indebtedness, to a “bank as trader” model.

The Fed has engaged in a massive manipulation of market conditions to the benefit of the “Too Big To Fail” Banks in order to attain such goals [see our expanded explanation in 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects].

A recovery in earnings is sine qua non to ensure the industry’s survivability and so far the financial sector appears to have positively responded to the Fed’s programs in terms of ameliorating the industry’s balance sheets via earnings growth (See figure 3)

Figure 3: Bespoke Invest: The Financial Sector’s Explosive Earnings Recovery

The bank as trader model has singlehandedly turbocharged the earnings of the S & P 500 despite a broad based sectoral decline in the third quarter on a year on year basis (left column). This is a concrete evidence of the outcome of state capitalism, where political officialdom selects the beneficiaries of its actions.

Meanwhile elevated stock prices appear to have somewhat reanimated the animal spirits that seem to have filtered into the earnings expectations of some sectors as the Technology and Materials in the 4^th quarter.

To quote Bespoke Investment, ``The Financial sector is currently expected to see growth of 133.8% in Q4 '09 versus Q4 '08. This high estimate in the Financial sector helps put estimates for the entire S&P 500 at +65.2% in the fourth quarter. Ex-Financials, the S&P 500 is expected to see Q4 earnings actually decline by 7.6%. Technology is expected to see growth of 21.5% in Q4, while estimates for the Materials sector are currently at 97.5%.”

As you can see stock prices have been on an overdrive while earnings have only gradually begun to recover, except for the Financial sector. This unique market-real economy divergence has long been prompting bears to call for a reversion to the mean. Unfortunately for them the market continues to scathingly defy their convictions.

Following The Money Trail Analytics

Moreover, the “desperately seeking normal camp” which mainly sees current policies as a “one size fits all” remedial approach to both the banking sector and the US economy is a highly misguided diagnostic.

The fact that the US has spent more and provided gargantuan guarantees for its banking system than for the economy conspicuously reveals of its political priorities.

As we previously quoted a Bloomberg report, `` The U.S. has lent, spent or guaranteed $11.6 trillion to bolster banks and fight the longest recession in 70 years, according to data compiled by Bloomberg. That’s a 9.4 percent decline since March 31, when Bloomberg last calculated the total at $12.8 trillion.”

For the real economy only $132.5 billion or roughly 17% of the $787 US fiscal stimulus have been spent as of November 10^th (recovery.gov)

Yet what seems obvious based on evidence hasn’t been given an appropriate weighting. Instead, experts have opted to selectively choose or data mine facts based on a preferred conclusion.

On our part analysis based on “follow the money trail” has been more effective.

And the money trail tells us that political reality translates to inflation as having been the chosen recourse to salvage the US dollar standard system pillared by the US banking system. The economy, despite the official pronouncements, is a secondary concern.

For as long as economic strains poses as threat to the survival of its banking system, the US political leadership will err on the side of an inflation risk and public sector credit risk than with the risk posed by deflation from a banking collapse. Hence, the sustained QE purchases on long dated treasuries, in spite of the self declared deadline and equally the sustained guarantees on the market mechanism conditioned by the US Federal Reserves that would allow the earnings of the banking system to recover.

This renders talks of “exit strategies” as mainly some sort of communication signaling ruse-meaning central bankers feign interest aimed at controlling the surge in asset prices. As we have been repeatedly saying, economic ideology and recent policy triumphalism has boosted the confidence of policymakers to undertake policies in the same direction. Any proposed “tightening” changes will likely be conservative.

Yet, in contrast to mainstream expectations, QE or “money printed from thin air” buying of US treasuries and US agency debt instruments from private institutions, have been flowing into commodities and equity markets and has likewise exerted pressure on the US dollar-giving a semblance of a US dollar carry.

Nonetheless misreading effects as a cause would seem like a sign of incomprehension or outright denial as a result of either economic ideological zealotry or blind spot biases.

The Folly Of Money’s Neutrality

The second reason for such confusion is the widespread or popular fallacious wisdom of the neutrality of money.

Conventionalism treats money has having a minor impact on its purchasing power or in the economy as transmitted by such inflationist policies. This is the reason why the mainstream can’t seem to reconcile on the dynamics behind rising asset prices and the divergence seen in the real economy.

Professor Mr. Ludwig von Mises explains the flaw in populist wisdom (bold emphasis mine), ``It is a popular fallacy to believe that perfect money should be neutral and endowed with unchanging purchasing power, and that the goal of monetary policy should be to realize this perfect money. It is easy to understand this idea as a reaction against the still-more-popular postulates of the inflationists. But it is an excessive reaction, it is in itself confused and contradictory, and it has worked havoc because it was strengthened by an inveterate error inherent in the thought of many philosophers and economists.”

``These thinkers are misled by the widespread belief that a state of rest is more perfect than one of movement. Their idea of perfection implies that no more perfect state can be thought of and consequently that every change would impair it. The best that can be said of a motion is that it is directed toward the attainment of a state of perfection in which there is rest because every further movement would lead into a less perfect state.”

In short, economic activity is seen as fundamentally independent from money supply growth.

Furthermore, asset prices have been deemed to operate on the premise of ‘efficient’ market price signaling brought about by disparate entrepreneurial assessments, estimates and evaluation. This is hardly true today.

And such perceptions of market efficiency will unlikely reflect on the same performances of yesteryears, as global governments have taken to the center stage in the propping up of financial markets.

The Periphery As Global Economic Locomotive

A recent rundown on the performance of global stock markets can be seen in Global Stock Market Performance Update: BRICs Firmly In Command. What seems obvious is the relativity or the variability of performances from the collective pace of global reflationary activities.

Major emerging markets have monstrously been outperforming developed economies equities for several crucial reasons: a largely unimpaired banking system, low systemic leverage and high savings, from which monetary and fiscal policies seem to have generated a visible efficacy-read my lips-seminal bubbles.

This also means that the transmission mechanism of inflation has been segueing from the core (developed economies) to the periphery (emerging markets) -where the periphery is now expected to lift the economic conditions of the core.

Figure 4: World Bank Asia Pacific Update: China’s Powerlifting The Developed Economies

The recent crisis has triggered the reshuffling economic might. China’s economy offset the economic losses from developed economies as shown in figure 4.

According to the World Bank, ``Thanks to China, East Asia remains the fastest growing developing region in the world. Although China’s economy accounts for less than a tenth of the global economy, the increase in China’s GDP in 2009 will offset three-fourths of the decline in G3’s GDP. This number underlies China’s markedly increased global role, but also reveals the limits to what China alone can do, because this year’s outcome was achieved through a huge monetary and fiscal stimulus that the authorities will find neither prudent nor necessary to sustain for an extended period of time. Take China out of the equation, however, and the remainder of the region is set to expand at a slower pace than the Middle East and North Africa, South Asia, and only modestly faster than Sub-Saharan Africa (Table 4). This reflects the openness of East Asia and the fast transmission of shocks through production networks serving the U.S., Japan and other global markets.” (bold highlights mine)

In short, conventionalism continues to embrace myopically a US centric world, even as global growth dynamics appears to be shifting to a very important theme: the periphery as the world’s economic growth locomotive.

In addition, conventionalism can’t seem to grasp the encompassing dynamics where government has practically been THE market. The US Government has been the market because the political authorities deem the “Too Big To Fail” segment of its banking system as indispensable to the economy or for unspecified purposes (known only to the authorities-saving friends perhaps?).

This means that when government as policy, prints money to buy assets from private institutions that owns these securities to shore up its financial sector; money from the proceeds of the sale of assets circulates in the economy or is imbued by the financial market.

Why? Because according to Professor Mises, ``Money is an element of action and consequently of change. Changes in the money relation, i.e., in the relation of the demand for and the supply of money, affect the exchange ratio between money on the one hand and the vendible commodities on the other hand. These changes do not affect at the same time and to the same extent the prices of the various commodities and services. They consequently affect the wealth of the various members of society in different ways.”

In short, inflationism is fundamentally a redistribution of wealth.

From the US perspective, since the advent of the crisis, US taxpayers have been funneling wealth into its financial sector, which is being precariously upheld by the government policies.

On a global scale, the ongoing QE process by the US government has been facilitating for capital outflows from the US. Conversely, such outflows have translated to influx into emerging markets channeled via a vastly weakening US dollar-ergo, the immense disparity in the equity performances between emerging markets and developed economies.

So while we may not have seen generalized inflation yet, what we are seeing today has been a colossal flow of money into assets or “asset inflation” mostly in terms of rising prices of stock markets and possibly in real estate markets of some emerging economies aside from commodity inflation.

Myths and Fallacies, Inflation A Predominant Theme For 2010

Figure 5: Danske Bank: Euroland Loans Picking Up

In addition the vast excess reserves held by the banking system in the developed economies, given today’s buoyant sentiment, is NOT a guarantee that the reserves won’t be converted into private sector loans (see figure 5)

Even as money supply year on year change on the Euroland has been on a decline (right window) since 2007, the loans to non-financial institutions and households have been resurgent (left window). Given the fractional reserve nature of our banking system, sustained loan growths would eventually translate to a surge in money supply growth.

Essentially, more of the continued central bank money printing activities and circulation credit from global zero interest rate regime will transpose to even more systemic inflation.

Remember, it would be a fallacious argument to read ‘deflation’ as contracting money supply in debt plagued economies and apply a different definition to emerging markets (mostly in terms of surplus capacity).

Such inconsistency makes the global deflation theme highly vulnerable or flawed.

Figure 6: World Bank: Different Structures, Different Impact

As seen in figure 6, credit growth has been relatively nuanced among Asian economies and has impacted the region’s economies distinctly.

Therefore, oversimplifying inflation or deflation without fully understanding the fundamental individual political economic constructs of each nation would seem nebulous.

Moreover, it is likewise another fallacious argument to predicate the “containment” of inflation on lofty bond prices alone. As earlier discussed, applied to the US, US treasuries have been one of the key markets supported and manipulated by the US government aimed at bolstering its banking system.

Where price controls can create temporary conditions favorable to policymakers, imbalances from market distortions are fostered from within that would eventually unravel once the system can’t absorb more of these at the margins.

Yet, to assume that current market conditions accurately paint today’s economic environment would be a monumental folly. To be sure, this view critically fails to contrast on the political dynamics from economic metrics.

Moreover, this view seems like a perilous miscomprehension on the operating dynamics of inflation. Inflation does not just randomly pop up where central banks can do a whack-a-mole. Inflation is a political process that operates and is manifested on the markets in stages. [see What Global Financial Markets Seem To Be Telling Us]

Hence, market action is conditional on the direction of global government policies where so far political authorities have been predisposed towards the global reflation context.

This, in essence, also suggests that inflation, as expressed in mainstream definition as higher consumer prices, will likely surprise to the upside and will be a key theme for 2010.

Mark Mobius On Russia's Stock Market: Significant Upside Potential And Remains An Attractive Investment Destination

Emerging Market Guru Mark Mobius of Templeton Funds features Russia in his latest commentary...(bold highlights mine)

``During 2008, Russia was among the weakest stock market performers in the emerging market universe, losing more than 70% in US$ terms. But this year, the market has staged an impressive rally surging nearly 100% in the year-to-October period. The Russian market is among the cheapest in the emerging market universe and is trading at a discount of around 50% to its counterparts.

``Today, Russia and many other emerging markets are now being driven by an excess in money supply in the international markets which means that these markets are experiencing an inflow of money for investments. Consequently, as Russia was more depressed than other markets, the upside is greater. At Templeton, we continue to find attractive opportunities in most sectors despite the recent rally as valuations remain undervalued. The Templeton Emerging Markets team continues to study individual companies and maintain a long-term investment outlook. Of course general factors such as trends in regional consumer expenditure, commodity prices and corporate governance policies are also taken into account.

We believe that Russia’s equity markets are poised to climb significantly higher because even among Russia’s blue chips you can still find undervalued stocks relative to global and sector peers. Take for example, Gazprom and Lukoil. Gazprom is the largest producer of gas in the world by reserves and production. The company’s reserves account for nearly a fifth of the world’s supply. It is also the biggest gas supplier to Europe and makes up for a majority of the gas production in Russia. Its valuations, however, remain extremely attractive with a P/E of just 4.5x and P/BV of 0.9x.

Lukoil is the second largest vertically integrated oil company in Russia and one of the largest in the world in terms of reserves. The company is engaged in exploration, development, production and refining of crude oil and marketing and distribution of crude and oil products. Lukoil is also trading at very attractive valuations with a P/E of 5.3x and P/BV of 1.0x.

However, there are still risks involved with Russia. The short-term risk is a downturn in money supply and a political event which could impact market sentiment while in the longer-term, it is a change in government attitudes towards privatisation and a market economy.

There are some sectors that we prefer over others within Russia. At the moment we like commodities and in particular the oil companies. We also like consumer sector given that it is a growing market in Russia. In particular we are finding good value in consumer products and distribution companies.

In general, our long-term outlook for Russia remains positive. The country has the world’s third largest foreign exchange reserves at more than US$400 billion. Meanwhile, inflation has been trending down and due to timely and adequate support from the government to the domestic banking system, a new equilibrium for the Ruble has been established. As a result, the authorities were able to cut interest rates. Moreover, Russia owns large proportion of the world’s natural resources and many of the country’s commodity companies are among the world’s low-cost producers.

``Last but not least, it is interesting to note that based on current valuations, the Russian market is among the cheapest in the emerging market universe. With Price to Earnings (P/E) of just 9.8x and a Price to Book Value (P/BV) of just 1.2x, the Russian market is trading at a discount of about 50% to its emerging market counterparts. This gap should eventually narrow, which is why we believe that Russia could outperform its emerging market peers in the future. In addition, Russia is also trading at a discount to its BRIC peers (as represented by the MSCI BRIC index), which have a P/E of 15.8x and P/BV of 2.2x. Thus, the Russian market has significant upside potential and remains an attractive investment destination."

Global Migration Trends: 700 Million Desire To Live Overseas Permanently

If migration would be liberalized, some 700 million people is likely move overseas permanently. That's based on Gallup's estimates...

``Gallup finds about 16% of the world's adults would like to move to another country permanently if they had the chance. This translates to roughly 700 million worldwide -- more than the entire adult population of North and South America combined."

And the most preferred destination for global immigrants would be the US.

Again from Gallup, The United States is the top desired destination country for the 700 million adults who would like to relocate permanently to another country. Nearly one-quarter (24%) of these respondents, which translates to more than 165 million adults worldwide, name the United States as their desired future residence. With an additional estimated 45 million saying they would like to move to Canada, Northern America is one of the two most desired regions.

But of course, while the US would be the most desired destination, one would have to reckon with their prospective emigrants. Simply said, while the world sees the US as their prime location for immigration, several Americans would opt to to live overseas.

Here Gallup measures prospective net migration flows via Potential Net Migration Index.

According to Gallup, ``The Potential Net Migration Index is the estimated number of adults who would like to move permanently out of a country subtracted from the estimated number who would like to move into it, as a proportion of the total adult population. The results are based on nationally representative surveys of more than 260,000 adults worldwide. The higher the resulting positive PNMI value, the larger the potential net adult population gain. In Turkey, for example, subtracting the estimated 7 million adults who would like to move abroad from the 2 million adults who would like to move to Turkey and dividing that number by the total adult population (52 million) results in a PNMI value of -10%."

``Across the 135 countries surveyed between 2007 and 2009, Singapore posts the highest Potential Net Migration Index of all countries and areas, with a net migration index value of +260%. Saudi Arabia (+180%), New Zealand (+175%), Canada (+170%), and Australia (+145%) round out the top five.

``Interestingly, the United States, which is the top desired destination among all potential migrants, does not make the top five in terms of potential net population growth. The United States' net migration value of +60% places it farther down the list, after Canada and several other developed nations that dominate the top of the list. One important caveat to consider, however, is that the population size of a destination country is related to its ranking.

``Developing countries, in contrast, dominate the bottom of the list. The countries with the highest negative Potential Net Migration Index values are the Democratic Republic of the Congo (Kinshasa) (-60%), Sierra Leone (-55%), and Zimbabwe (-55%), Haiti (-50%), and El Salvador (-50%)."

Gallup estimates a potential net migration index for the Philippines as -20.

The top 5 nations with the largest positive net migration index are commodity exporting countries except for Singapore. Moreover, 4 of the 5 are in Asia (except Saudi-maybe the preferred choice for most of Muslim Migrants) and are economies that have been ranked as economically free, i.e. Saudi Arabia 59th, Singapore 2nd, Australia 3rd, New Zealand 5th and Canada 7th (Heritage Foundation)

Decoupling In Oil Markets: Asia's Developing Thirst

Decoupling in oil markets as seen by the Economist.


According to the Economist, ``GLOBAL demand for oil is set to rise from 84.7m barrels per day (bpd) in 2008 to 105m bpd in 2030, says the International Energy Agency in its latest annual energy report. Transport will account for 97% of this increase as rising numbers of cars hit the roads of the developing world. Demand from these countries will overtake that of the industrialised OECD nations by 2030. By then, America, Japan and Europe will be using less oil than in 1980. But the thirst for oil will balloon in Asia—and in India and China in particular—where demand is predicted to rise by as much as 400% compared with 2008."

See our earlier June post:

Decoupling in Oil Markets: The Centre of Gravity in Energy Markets Has Shifted To Emerging Markets

Global Stock Market Performance Update: BRICs Firmly In Command

The following is an updated year to date stock performance among 82 countries monitored by Bespoke Investment.
According to Bespoke, ``So far this year, 71 of the 82 countries are in positive territory, and the average change of all countries is 33.27%. With a gain of 20.76%, the S&P 500 is 13 percentage points below the average, yet it's the second best G-7 performer behind Canada so far in 2009.

``The BRIC countries (Brazil, Russia, India, China) have been standouts this year. Russia is up the most out of all countries with a gain of 126.71%. Brazil, China, and India are all up more than 70%. Along with Russia, the Ukraine, Argentina, and Peru are up more than 100% year to date.

``Eleven countries are down so far in 2009. Ghana is down the most at -48.26%, followed by Puerto Rico (-40.56%), Bermuda (-38.36%), and Costa Rica (-35.37%)."(bold emphasis mine)

My additional comments:

Asia constitutes half of the 20 best performers including the Philippines (16th).

Yet if one includes Israel (Western Asia) that should translate to 55%. Moreover, Turkey and Russia are both Euro-Asian countries.

It's fundamentally a rising tide lifts all boats dynamic except for the 9 outliers.

Latin American bourses have been mixed- Peru and Brazil are top performers while 4 are among the worst (Ecuador, Costa Rica, Bermuda and Puerto Rico)

The gap between the BRICs and G7 economies are miles apart.

In addition if the average gain is 33% then G7 economies fall below the average despite the positive performance.

The wide chasm accounts for the divergent impact of the crisis as well as the varying impact of the reflationary policies adopted.

Europe's Cannabis Usage and Drug Decriminalization

The Economist gives us a perspective on the state of Cannabis usage in Europe.


According to the Economist, ``OVER a fifth of Europeans have taken cannabis at some point in their lives, according to new report on illegal drug use from the EMCDDA, the EU's drug-monitoring arm. Over 30% of Danes, French and Italians aged between 15 and 64 have puffed on a joint. But perhaps for Danes it is just a phase: the Italians, Spanish, French and Czechs are most likely to have dabbled with cannabis in the recent past. Levels of cannabis use are still high but may be declining, says the report. Recent studies suggest that the drug's popularity is waning among the younger generation."

While it is good news to know that Cannabis usage have generally been declining especially among the younger generation, what seems noteworthy is that both Netherlands and Portugal, which has partly decriminalized drug use, is shown to have relatively low instance of usage. This defies common objections where legalization would lead to a drug use explosion.

See our earlier related posts:
Drug Decriminalization: Regulation Versus Prohibition,
Drug Decriminalization Caravan Gets Rollin',
War on Drugs: Learning From Portugal's Drug Decriminalization

20th Anniversary Of The Fall Of Berlin Wall

20 years ago today marked the fall of the Berlin Wall.

Here is an article from the Bloomberg's chart of the day

(all bold highlights mine)

``The toppling of the Berlin Wall 20 years ago sparked a surge in German stocks and bonds, confounding economists who’d predicted the cost of unifying East and West Germany would stunt economic growth.

``The CHART OF THE DAY shows the benchmark DAX Index of equities and the REX Performance Index, a measure of German government bonds, since 1989. Both outperformed gold and the pan-European Dow Jones Stoxx 600 Index. The chart also shows Germany’s annual per-capita gross domestic product until the end of last year.

``The cost of unifying East and West Germany was 2 trillion euros ($2.97 trillion), according to a study by Klaus Schroeder, professor at Berlin’s Free University, published Oct. 28. Investors say that cost has paid off as the fall of Europe’s Iron Curtain boosted global trade.

“It opened up economies in Eastern Europe,” said Trudbert Merkel, manager of Deka Investment GmbH’s $5 billion Dekafonds in Frankfurt. “Germany was able to maintain its top spot in the export business and become less dependent on the U.S. The beginning of globalization helped soften the costs of the reunification.”

``The DAX has more than tripled since Nov. 9, 1989, when the East German government allowed Berliners to breach the wall that had divided their city for 28 years.'"

I would presume that economic experts, whom were allegedly baffled by the huge progress in the aftermath of the Fall of the Berlin Wall, grossly underestimated the impact of capitalism. They seem to have focused on the rebuilding and integration cost aspects rather than the potentials from unleashing the explosive force of productive capacity as consequence to embracing a market economy.

Furthermore, the lessons of the Berlin Wall is shared with the failure of the essence of communism. Professor Paul Hollander in a recent commentary at the Washington Post captures the zeitgeist,

``The failure of Soviet communism confirms that humans motivated by lofty ideals are capable of inflicting great suffering with a clear conscience. But communism's collapse also suggests that under certain conditions people can tell the difference between right and wrong. The embrace and rejection of communism correspond to the spectrum of attitudes ranging from deluded and destructive idealism to the realization that human nature precludes utopian social arrangements and that the careful balancing of ends and means is the essential precondition of creating and preserving a decent society."

The video below showcases the victory of the individual against the collective following long years of oppression. This should serve as a reminder for us to keep the torch of freedom burning. [Hat Tip: Peter Boettke]

Ludwig von Mises: The Man Who Predicted the Depression

One of a rare instance where Mr. von Mises gets deservingly featured in mainstream press.

Except from the Wall Street Journal's Op Ed ``The Man Who Predicted the Depression" by Mark Spitznagel, a hedge fund manager

``Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

``Mises's ideas on business cycles were spelled out in his 1912 tome "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit"). Not surprisingly few people noticed, as it was published only in German and wasn't exactly a beach read at that.

``Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

``Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

``Ordinarily, any random spikes in credit would be quickly absorbed by the system—the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

``The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

``"Theorie des Geldes" did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming "A great crash is coming, and I don't want my name in any way connected with it." [my favorite excerpt]

Read the rest here

A Case Of Economic Freedom: Texas

Texas, the second largest US state next to California (in terms of GDP), has benefited from low taxes and low government spending (measure of government intervention) that has translated to economic resiliency even during the recent recession.

This from analyst Martin Spring: (bold emphasis mine)

``Interesting to see how successful the US state of Texas has been through policies such as cutting public spending, cutting taxes and implementing tort reform (limiting the damages courts may award in product, medical and similar liability cases).

``Texas has no state taxes on income or capital gains – yet it continues to run a budget surplus despite the recession.

``Between 2000 and 2007, more than half-a-million people moved into Texas, compared to the 1.2 million who exited notoriously high-taxed California.

``Last year Texas created more jobs than all the other 49 states combined – 70 per cent of net new jobs of the entire nation."

This from Bruce Kellison of IC² Institute (University of Texas)

``The real story behind the jump in GNP, then, might not be the dependency of consumers on government programs like “Cash for Clunkers” and the first-time home buyers’ tax credit, but the resiliency of firms to remain innovative, nimble, and competitive in a still-globalized economy. Texas was among the last states to feel the effects of the current recession, and many economists believe it will lag in recovery. But exports might mean Texas will lead, not lag, coming out of the recession." (bold highlights mine)

Some research sites for Texas: Tax Foundation.org, Texas Policy.com, Nelson Rockefeller.org

Rediscovering Gold’s Monetary Appeal

``Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency.”-James Grant

For some rising gold prices has been gladly cheered upon. For the gold is “barbaric metal” camp, rising gold prices account for as an intense denial to the vulnerability of their interventionist doctrines.

For us, rising gold prices epitomizes a build up of monetary systemic stresses arising from an overdose of politicization of the US dollar- the world’s de facto substitute to the gold standard. This warrants more concern than either acclamation or denial.

The world has been operating on a monetary system that has been anchored on paper money since 1971 or 38 years ago, yet for the thousands of years of human civilization, paper money has unsuccessfully thrived as the sustained standard of global medium of exchange. This has been due to the cyclical or inherent self serving nature of the political leadership to profit from inflation or by taxing society in order to uphold, expand or preserve their political powers.

Even commodity money had not been spared from the inflation taxation. This has been evident even during the Roman Empire, as Joseph Peden wrote ``In Diocletian's time, in the year 301, he fixed the price at 50,000 denarii for one pound of gold. Ten years later it had risen to 120,000. In 324, 23 years after it was 50,000, it was now 300,000. In 337, the year of Constantine's death, a pound of gold brought 20,000,000 denarii.”

And the same dynamics holds true today.

Essentially, the politicized nature of money eventually leads to its demise.

Inflation Is Dead. Long Live Inflation!

Gold have been rising for many valid cited reasons such as an inflation hedge (see Figure 4), supply demand imbalances, the shifting nature of gold ownership (as investment instead of jewelry), or central bank buying or reduced sales [see Four Reasons Why ‘Fear’ In Gold Prices Is A Fallacy]

Figure 4: US Global Funds: India-IMF Deal: Tipping Point for Gold

Gold’s record price surge appears to have resurrected its innate monetary appeal.

Over the years, gold had earlier been reckoned as headed for oblivion, as the political authorities along with their banking agents, whom are their chief associates, as well as their academic disciples imbibed on the fantasy that “inflation as an elixir” have allowed them to finally “domesticate” and “tame” inflation with modern and sophisticated mathematical tools.

In essence, the supposed conquest of inflation became a mainstream credo which operated under the principle of the philosopher’s stone- or the alchemy of turning base metals into gold! Prosperity can, thus, simply be achieved by Free Lunch policies! And supporting such beliefs were literatures that sprouted to claim the death of inflation!

Unfortunately today, reality has begun to sink in. To add, such bubble psychology has also commenced to unravel over the imbalances built beneath the surface by overweening overconfidence. Hence, the ramifications from the previous sins have started to emerge and become manifest in the marketplace. All these are being reflected in terms of changes in price levels.

The Role Of Scarcity In The US Dollar’s Diminishing Luster

So why gold’s role as money being revived?

Because the very important fundamental attribute of money is in the process of being perverted.

The basic and most important attribute of money according to Mr. Ludwig von Mises is scarcity, ``Media of exchange are economic goods. They are scarce; there is a demand for them. There are on the market people who desire to acquire them and are ready to exchange goods and services against them. Media of exchange have value in exchange. People make sacrifices for their acquisition; they pay "prices" for them. The peculiarity of these prices lies merely in the fact that they cannot be expressed in terms of money. In reference to the vendible goods and services we speak of prices or of money prices. In reference to money we speak of its purchasing power with regard to various vendible goods.”

When money fails to dispense of its role, then the public begins to question its existence and look into alternatives. The ruckus to replace the US dollar by key emerging market central banks reflect on these symptoms.

So it is of no doubt to us that commodities (particularly precious metals) will likely benefit from the uncertainty interregnum as the world continues to deal with the burgeoning tensions from the US dollar system.

Figure 5: stockcharts.com: Commodities versus the US dollar Index

Said differently, for as long as society hasn’t resolved on the dilemma of, or found a substitute for, the prevailing money (US dollar) system, these commodities will exhibit their innate roles as potential candidates as money, for the basic reasons of scarcity and their historical role as money.

As Professor Gary North wrote, ``Individuals in the past voluntarily adopted gold and silver coins as the preferred commodities to facilitate economic exchange. They did not accept these two metals as the preferred monetary units because of their commitment to economic theory. They chose those metals because there are advantages offered by these metals that competing commodities do not possess to the same degree. The main advantage is continuity of value (price) over time. Gold and silver became currencies throughout the world because they possess certain physical characteristics that facilitate their adoption as money. The most important aspect of both gold and silver is that they must be mined. It is expensive to dig these metals out of the ground. Silver is primarily a byproduct of the mining of other metals: lead, copper, and zinc. Mining firms must bear the costs of extracting these metals from the earth. This limits the production of these metals. They are comparatively scarce minerals, and it is expensive to dig them out of the ground.” (bold highlights mine)

Ergo, the pricing levels will exhibit on the relationship of precious metals’ role as money.

Does India’s Recent Gold Buy Herald A Watershed Moment?

In addition, India’s recent surprise acquisition of 50% of IMF’s inventory of gold for sale establishes two important points:

One, emerging markets appear to be intrepidly exhibiting a snowballing desire to accumulate less US dollars reserves and also less US denominated securities and channel most of their spare reserves into hard assets. It’s basically a vote against the US dollar.

This reinforces our “commodity-as-insurance” view and the potential role of commodity as part of the future money. According to Professor Michael S. Rozeff, ``There are only two kinds of solutions: inflationary and non-inflationary. A British pound as good as gold is long gone. A U.S. dollar as good as gold is long gone, but the dollar has hung on for 37 years now. A yuan as good as gold does not exist. A basket of currencies as good as gold does not exist. The inflatable dollar and inflatable currencies are ruling the roost at present. India’s action and some of China’s actions signal that they are inching – really groping – their way back to hard assets and a non-inflationary solution.”

Second, India’s gold purchases could be indicative of a monumental redistribution process or of a convergence of wealth between developed economies and emerging economies.

This quote from the Financial Times echoes such sentiment, ``Pranab Mukherjee, India’s finance minister, said the acquisition reflected the power of an economy that laid claim to the fifth-largest global foreign reserves: “We have money to buy gold. We have enough foreign exchange reserves.”

``He contrasted India’s strength with weakness elsewhere: “Europe collapsed and North America collapsed.” (bold emphasis mine)

Hence, India’s purchase of IMF’s gold could be interpreted as a watershed moment or a tipping point as this could mark the decline or the twilight zone of the US dollar as the international currency reserve.

Also, we’ve been asked if Gold at present levels is a buy today. While we have been serendipitous enough to have accurately called for a gold breakout last August [see Gold As Our Seasonal Barometer], market timing isn’t our forte.

Seen from seasonality patterns, gold usually peaks on February and will be on a downhill until August.

But it isn’t clear if such pattern will hold.

This would likely depend on how global central banks and global investors will react to recent fresh unprecedented developments.

As we have said, markets have been acting significantly less to exhibit the conventional mode. Instead, markets have demonstrated its unorthodoxy due to its Frankenstein state-being highly dependent on government steroids.

Figure 6: US Global Funds: India-IMF Deal: Tipping Point for Gold

And as figure 6 suggests, any bandwagon effect from India’s purchases could inflame a stampede for Gold!

With emerging markets holding the bulk of global currency reserves, ``IMF data shows emerging and developing economies hold USD 4.2 trillion of the USD 6.8 trillion in total reserves. China has over USD 2 trillion, followed by Russia with more than USD 400 billion and Brazil and India with above USD 200 billion each” (moneycontrol.com), and aside from central banks of emerging markets being vastly underrepresented in gold reserves relative to the US or Europe, a mad dash for gold can’t be discounted.

And we are not speaking of central bank alone, Adrian Ash of BullionVault.com recently estimated the gold market, ``Estimated at 165,000 tonnes, the total stock of gold-above-ground is now worth some $5.8 trillion. Research by BullionVault puts that sum at no more than 6% of global investable wealth, down from well over 10% throughout the 1980s and peaking nearing 30% at the points of extreme investor stress in the late 1970s and early '30s.”

Conclusion and Recommendation

To close, gold’s recent record run appears to have dramatically signaled a seismic change in the perspective of the marketplace and of governments in terms of gold’s role as money.

As strains or pressures on the US dollar standard remains unsettled, such uncertainty is likely to underpin the dynamics behind gold’s rise.

Rising gold prices represents global monetary stress than simple localized “inflation”. Moreover, because monetary stress is a structural issue, then it won’t just be central banks underpinning gold’s ascent but likewise the investing public, which accounts for a bigger share of ammunition, in the context of wealth preservation.

Moreover, the accumulation of gold by emerging markets signal wealth convergence aside from the watershed decline of the US dollar as the world’s reserve currency.

Since gold’s dynamics has been evolving from jewelry to investment and or central bank reserve demand, it would be futile to short term timing markets. The best is to buy on dips and await gold’s full transition of its bullmarket trend into the mainstream.

On the interim, the politicization of the monetary and fiscal policies will likely exacerbate the US dollar predicament. And as political faux pas compounds, gold’s functional role of money will likely expand.

Nevertheless, the end of the gold bullmarket will entail the resolution of the US dollar’s foreign currency reserve predicament, which is unlikely to happen soon. That’s because domestic politics and geopolitical issues serve as principal hurdles.

Central Bank Policies: Action Speaks Louder Than Words, The Fallacies of US Dollar Carry Bubble

``The cause of waves of unemployment is not “capitalism” but governments denying enterprises the right to produce good money”-Friedrich August von Hayek

In last week’s outlook [5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects], we proposed that the recent market volatility had most likely been a government mounted attempt to put a rein on “animal spirits” having gone berserk. We also posited that markets, having been overstretched, may have likely reached a snap back point or analogous to the breakage of the crosslinks elasticity as seen in the dynamics of a Rubber band.

In short, we argued that the recent downside volatility could have embodied a “bear trap”- a bearish signal that turns out to be false or a trap.

Market performance, this week, appears to have validated us anew. While short term direction is less of a concern to us as markets can go or gyrate bi-directionally, what matters most is the strategic context of the risk-reward or market analytical framework fused with a tactical approach in portfolio management.

And strategical analysis should consist of objective interpretations of all available facts, underpinned by appropriate definitions and realistically functional theories, and not the selective collection of facts (data mining) that are designed to fit (usually ideological) biases and stamped as “analysis”.

And from this standpoint, we argued that government’s present pronouncements, which recently spooked markets, will eventually be unmasked in the face of grinding realities from the cumulative and prospective political actions and from the prevailing economic and financial conditions.

As we previously said, ``So the Fed’s communiqué and the real risks appear to be antithetical. One will be proven wrong very soon.”

It would seem that this vindication partly happened so soon.

Policy Statements And Actions Diverge

The Fed declared last October 29^th, the end of its Treasury purchase program, ``The Federal Reserve completed its $300 billion Treasury purchase program today amid signs the seven-month buying spree helped stabilize the housing market and limited increases in borrowing costs” (Bloomberg).

I don’t know what the Federal Reserve’s definition of today is, but to my understanding the self-imposed limits of $300 billion and October 2009 has been met yet the Treasury purchase program seems ongoing (see Figure 1).

Figure 1: Federal Reserve of Cleveland: Credit Easing Policy Tools

The Federal Reserve bought nearly $2.8 billion of US treasuries by November 4^th!

So if there is any short term validation, it is that the political actions of the US government have been to continually undertake quantitative easing or further inflationary activities regardless of its official pronouncements.

This only validates our postulation that the US banking system represents as the first order of priority among the many issues of concern by the incumbent US political and non-political leadership. Hence, the massive redistribution of wealth from the real economy to the financial sector and the corollary of accruing of structural imbalances in the pursuit of immediate resolution from short term oriented policies.

The same goes with the Bank of England, which recently declared a continuation of its own version of quantitative easing but at a “slower” pace (Telegraph).

Moreover one shouldn’t forget that equities have also been qualified as an eligible collateral as part of the TARP program.

To quote Mr. Practical of Minyanville (bold highlights mine), ``Under TARP, the fine print allows dealers to REPO stocks to the Fed as collateral (holy cow is right).

``What if there were an arrangement where large dealers buy stocks and stock futures through the day and REPO them to the Fed at the high closing prices? The dealer would book the profits derived from the difference at no risk.

``If you look at the trading patterns of the largest dealers, one in particular lost money trading in only one day last quarter. Statistically that's like finding a needle at the bottom of the ocean.”

What this implies is that the TARP program could be one of the many instruments used to prop up the equity markets.

As we have long been argued, markets today don’t act on the norm or as “traditional” forward indicators, which has essentially flummoxed the mainstream, but as policy instruments engineered primarily to keep the banking system afloat and secondarily to manage the “animal spirits” in order to jumpstart the economy.

As we noted last week, ``The underlying fundamental malaise is that the ‘bank as trader model’ has been a product of the collusion between the banking system and the US government to inflate the economy to the benefit of the elite bankers!”

So if market response this week appears favorable, that’s basically because money isn’t neutral- or money from these governments actions have filtered into equity and commodity assets-regardless of what has been happening in the real economy.

The Fallacies Of The US dollar As The Mother Of All Bubbles

This similarly shows that the allegations that the US dollar carry trade is now the “mother of bubble” isn’t generally true.

That’s because it hasn’t been the carry trade, but direct government liability accumulation via the quantitative easing aside from other government programs designed to reinforce the banking system that has kept the global financial markets at hyper-animated conditions.

Moreover, we take on the cudgels for investment guru Jim Rogers, in his debate with celebrity guru Mr. Roubini over the latter’s thesis that the US dollar signifies as the “Mother of ALL Bubbles” [see Jim Rogers Versus Nouriel Roubini On Gold, Commodities And Emerging Market Bubble].

We argue that the fundamental premise behind the falling US dollar hasn’t been the arbitrage leverage amassing within the private sector financial system especially in the US, which continues to reel from the lackadaisical credit growth amidst signs of surging reserves, but from global governments’ balance sheets.

Mr. Roubini oversimplistically attaches every asset class to the currency leverage, which he extrapolates as having an inverse direct causal relationship: a prospective bust in global assets as a result of delevaraging which should propel for massive rebound in the US dollar. This view has been anchored on (anchoring bias) virtually the same dynamics which made his celebrity “rock and roll star” status during the 2008 meltdown-(letting go of a success identity seems so hard to do!)

Moreover, the surge in commodity prices hasn’t just been a private sector dynamic, instead emerging market governments have played a pivotal role in the elevated state of commodity prices.

India’s recent surprise $6.7 billion purchase of half IMF’s gold’s reserves for sale serve as a major proof.

Figure 2: US Global Investors: China’s Impact On Metals

As one can observe in Figure 2, Chinese imports of metals and steel have exploded!

In addition, in 2009 China’s predominantly state owned enterprises has acquired $21.9 billion of privately owned resourced based companies (80% of which have been oil or energy while 20% have been in metals). Three more acquisitions are still in the process- Nigeria (offshore oil fields), Russia (stake at UC Rusal) and Norway’s Statoil (20 of the 451 drilling leases) [World Bank].

Emerging markets governments’ acquisition of commodities hasn’t entirely been for economic and monetary interests, but likewise has geopolitical dimensions into it. In short, the incentives that drives governments are likely political more than economical.

So it would be plain naïve to lump private sector speculation with government purchases and make a generalized conclusion based on unfounded one size fits all hypothesis.

I would like to further add that the degree of state buying advances our view that markets have been severely distorted by government interventions.

Moreover, unless one views the world as falling into an abyss from globalized deflation (which seems as a near impossibility given the fundamental nature of the paper money standard from today’s central banking and the diversified capital structure of each nation), today’s risk takers including that of governments/ government enterprises seem widely apprised of the risks from high inflation and the accompanying high interest rate regime, which could destabilize or cause heightened volatility in such arbitrages.

These have been evident from

-the numerous and growing clamor (including the United Nations) to replace the US dollar as reserve currency possibly with the Special Drawing Rights-SDR (a controversial rumor was recently publicized by the Independent which alleged that several key emerging markets and developed economies could have been attempting to a form coalition to conduct trade in oil in a basket of currencies outside the US dollar),

-increasing arrangements to conduct bilateral trade away from the US dollar (Argentina-Brazil, Russia-China, a Latin American Bloc),

-expanded currency swap arrangements in Asia, and

-importantly the proposed expanded use of the Chinese remimbi or the Yuan as the ASEAN’s currency standard [see The Nonsense About Current Account Imbalances And Super-Sovereign Reserve Currency].

Ergo, the accumulation of commodities by emerging markets could function as an insurance against currency volatility, in view of a heightened inflationary environment, as consequence to spendthrift and reckless US national policies that could incite systemic global instability. Effectively, this demolishes the core premise of the “US dollar carry trade mother of all bubble”.

True, there are maybe some parts of the marketplace that has engaged in the carry trade but the overall climate departs from the 2008 environment depicted upon by Mr. Roubini.

``A fiat-money inflation can be carried on only as long as the masses do not become aware of the fact that the government is committed to such a policy. Once the common man finds out that the quantity of circulating money will be increased more and more, and that consequently its purchasing power will continually drop and prices will rise to ever higher peaks, he begins to realize that the money in his pocket is melting away. Then he adopts the conduct previously practiced only by those smeared as profiteers; he "flees into real values." He buys commodities, not for the sake of enjoying them, but in order to avoid the losses involved in holding cash. The knell of the inflated monetary system sounds” admonished Ludwig von Mises. (bold underscore mine)

Put differently, as the public loses trust of the functionality of the prevailing money standard they either look for substitute/s (in the past-resort to barter or a foreign currency-but in this case a new currency standard) or a return to basics…commodities.

Fancy But Unrealistic Models

Of course, one can’t help but point out on the foibles of the highly mechanical traits of analyzing markets from presumptive models utilized by the mainstream that frequently leads to severe misdiagnosis and the subsequent maligned therapeutical prescriptions or perversely flawed actions in managing a portfolio.

Figure 3: Wall Street Journal: U.S. Factories Are ‘Grossly Underutilized’

Low capacity utilization is one of the most frequently used justifications by the mainstream to argue for “low” inflation which is blamed on the deficiency in demand as responsible for “idle” resources. The fundamentally flawed premise of mainstream’s concept of inflation is due to its definition-inflation is seen as rising prices instead of as emanating from money supply growth. Secondly, capacity is viewed in the context where capital is homogeneous.

In the Wall Street Journal article we note of such differences (bold highlights mine),

``Looking beyond the headline number points to another sobering reality: Some industries were hit much harder than others — and therefore have further to go to get back to more normal utilization. Capacity utilization in primary metals plunged from 86% in December 2007 to 55% currently, mainly because of collapsing demand for some types of steel, while the utilization rate in the computer and peripherals industry fell to 58%, down from 83% in December 2007.

``Each industry got hammered by its own mix of headwinds. Computer sales suffered as businesses postponed information technology upgrades and laid off white-collar workers, while makers of big ticket items such as furniture and cars suffered because consumer financing dried up even for those still eager to buy.

``Only a few industries avoided going off the cliff. Capacity usage in the petroleum refining and coal industries fell only 1 percentage point over the last 21 months, while in the food industry, usage declined only 2 percentage points.”

The performances of capacity utilization vary across industries. This extrapolates that the current monetary policies will likely influence relative “overinvestment/s” on specificity basis on a relative circumstances or that over investments will happen in some areas more than the others.

For instance, the implosion of the dot.com bubble in 2000 didn’t put a check on the 2003-2007 US housing bubble cycle from inflating. Moreover, in the recent case of Iceland, both rising unemployment and falling output didn’t forestall inflation, which had been a consequence of the currency’s or the krona’s devaluation [see Iceland's Devaluation Toll: McDonald's].

As Brookesnew’s Gerard Jackson explains, ``Sufficient monetary growth reduces excess capacity by raising the value of the product relative to production costs. (It should be noted that this does not always mean a general increase in prices). However, where inflation is already a force and there is a great deal misallocated capital then a loose monetary policy can bring about accelerating inflation before full operating capacity has been reached and full employment restored.”

Not to mention that the massive interventions put forth by the US Federal Reserve on the banking system combined with fiscal policies aimed at propping up select industries at the expense of the rest of society or as Mr. Jackson avers, ``inflation is already a force and there is a great deal misallocated capital then a loose monetary policy can bring about accelerating inflation”, ergo, the seeds of inflation has been planted, hence inflation is what we will be harvesting.

It’s just the “degree” of inflation that will likely be debated.

In short, mainstream can’t fathom the prospects of a stagflationary environment (at the very least) because of the continued reliance on popular but fallacious models.

Overall, for as long as global political and bureaucratic authorities continue to mount a massive campaign to fillip their respective economies with reflation steroids, we should expect the “Frankenstein” market to respond accordingly. So far the favorable responses will arise from Asia and emerging markets, until the systemic leverage renders them unsustainable.

Niche Versus Mass Marketing

Another splendid graphic from Jessica Hagy, which she calls "Ordinary Is Abundant".

From a marketing perspective, this chart/diagram basically illustrates on the distinction between mass marketing and niche marketing.

Marketing guru Seth Godin elaborates,

``Mass marketing works best when it assumes that everybody in the entire chain is just plain average. Or even a little bit less...

``Niche marketing, on the other hand, can thrive if it starts with the assumption that average products by average people for average people is just not your thing...

In short, general (mass) versus focused (niche).

As the world gets increasingly interconnected via the explosive improvements of technology, focus has been the intensifying trend of the markets.

So it would be a mistake to evaluate or discern events by simply basing on past paradigms when we have been segueing from the industrial age to the information age.