On Mar 4, 2009, at 4:44 PM, Ira Glazer wrote:
> http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5663091.ece
> February 5, 2009Academics - and their mad theories - are to blame
> for the
> financial crisis. They too deserve to be hauled into the dock Anatole
> Kaletsky
That's funny. Kaletsky was the "Kal" part of an investment boutique named GaveKal, which got famous for claiming that the U.S. current account deficit wasn't a problem, because conventional accounting was missing the "dark matter" - all those intangible sources of value that make the U.S. truly, if immeasurably, great.
The beginnings of a summary of the GaveKal position:
<http://www.dailyspeculations.com/wordpress/?p=719>
A Review of GaveKal Research, by Victor Niederhoffer January 16, 2007 |
The GaveKal research group has an optimistic view of the forces that will affect economies across the world. This is almost the exact opposite view that Steve Roach, the Sage, the Palindrome, and the Elizabethan ghost take. Gavekal build their view on the foundation that globalization, industry de-regulation, technological processes, smaller families, the spread of the internet, low volatility as a result of more stable employment, and the emergence of the platform companies guided by trade and the invisible hand will lead to low inflation, a high profit margin, and an ebullient stock market environment. They make a written case for this in their book Our Brave New World and in two research reports, The Invisible Hand's Impressive Work and Welling @ Weeden Brave New World. I have read all these reports and I feel like one of the doubters described by Thomas Kuhn in The Structure of Scientific Revolution, although every serious student of Austrian Economics, Adam Smith, and Dimson, Marsh and Staunton should know that equity prices are incessantly going up and that Gavekal's view, opposite to that of the Abelprechfaberoachbuffesoros', will lead to great riches anyway.
Despite this, a close reading of the work shows that they build their view from many concepts and buzz words of economics, finance, and business management that are completely untested, and counterbalanced by many more incisive and useful economic theories. Their recommendations as to what to do with their work are fuzzy and are not particularly likely to lead to above average profits.
Central to their view is that a new kind of company has emerged, which is the platform company. This kind of company consistently increases its profits by concentrating mainly on design and marketing its products. It has no need for outside capital, and it buys all its goods from companies in China and India that do the unprofitable manufacturing and inventorying, and care only about employment. But is any part of this assertion true? Are such companies more prevalent than they were before? Do they make greater returns? Are they better buys than companies in China where there are 3000 ball bearing manufacturers, and 300 automobile manufactures? Do companies that outsource manufacturing, or do service companies, make a higher return than others? Is there an increasing number of such companies and will this lead to higher or lower returns? An extensive list of linked queries and studies with ever-changing answers will determine whether this is a useful concept.
Another pillar of their argument is that we are moving toward perfect competition and perfect information where companies such as Walmart, Carrefour, Ikea, Li and Fung, and the IDS group, are the optimum investment issues and models for others to follow. This will lead to constantly decreasing prices in the bottom end of the market where the masses buy their goods, and higher prices at the top end where the rich are constantly finding it more expensive to be rich/individual. The cost of capital will remain low, prices will continue to drop, and excess capacity will develop.
I find no reason to believe that excess capacity will develop, as decision makers are very knowledgeable and they all wish to increase their wealth and opportunity. Continued above average rates of return on investment are highly transitory, subject to great competition and affected by many shifts in regimes and tastes. I doubt that Chinese manufacturers will constantly realize declining profits, and that platform companies will be able to garner these to any greater extent than the more integrated manufacturing companies that were the standard model in the older days. Such suppositions would again have to be tested.
One of their favorite points, which many of their conclusions are based on, is a very elementary form of the quantity theory of money; mv1 + mv2 = p1t1 + p2t2 — They believe that one part of the right side of the equation increases, and that the other side will decrease.
In opposition to this belief, velocity is always changing and there is constant substitution between goods, and shifts in demand and supply. To assume knowledge of velocity or to assume its constancy is to conclude that interest rates, and competition and substitution, don't come into play. They conclude that there will be higher rates of inflation for luxury goods, an irresistible rise of real estate, declining volatility, the propriety of taking on more debt, and the chronic tendency to over-capacity. These conclusions are based on a simple model of the quantity theory, related fixed shibboleths about the rigidity of capital, and the continuation of present trends. Here's one of their typical conclusions, which I find no supporting evidence for, except for that it explains some of the movements of markets in 2003-2005.
"As the prices of financial services and luxury goods are driven persistently higher, service producing countries such as Britain, Honk Kong, or the U.S. get richer relative to countries which specialize in manufacturing … The virtual limitless supply of cheap labor and capital in China, and the chronic misallocations of capital ensures that manufactured goods continue to get cheaper."