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Chase of Short-term Growth

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What is the problem anyway?

If you have watched or read anything business related these days, you probably have heard the buzz word growth. Economy grows by this much, corporate earnings grow by that much etc. It looks like anyone in business is fanatically obsessed with growth. The problem is that the growth that they talk about is short term and not long term and this is very destructive.

Being myopic is a standard these days. The average attention span of an investor is 1-2 quarters away. I feel that we will start splitting financial years into months and not quarters pretty soon. Of course that push from investors, has led to big pressure to business people and officials. In a world of capitalism, the investor is on top of the food chain and sets the pace.

Focusing on the numbers quarter by quarter is harmful and always has bad consequences in the long term. This pressure sometimes makes you even break the law.

Show me the evidence

I recently came across the case where Fiat Chrysler forfeit sales in USA. They pumped sales through the dealers by making them “buy” vehicles in this quarter and return them the next one. They did it because investors wanted…growth. And while Fiat is only one case, the other example shows the big picture in markets. We have witnessed record stock buybacks this year. Corporations are faced with flat earnings but the stock price must go up. So they borrow cheap money and buyback their own stock, while demand/supply dynamics start to kick in and stocks start to go up. This is one of the most devastating deployments of capital. Instead of spending on R&D, human development, technology, ecology, corporations borrow money only to buyback their own stocks. I hope you find this absurd.

The picture is no different in the public sector. Central banks have been on a printing money spree to boost growth. Officials do society wide changes to boost economic growth for the next quarter. With economy in sight, they disregard all other aspects of public life – culture, education, ecology, health care etc. Nothing gets that much energy and attention as the growth of economy.

Is there a solution?

The truth is that i don’t know, but am rather pessimistic. Greed has always been on the surface of most peoples’ actions. In the past we didn’t have the means to self destruct so fast but now we do. We have global markets where capital flows with stunning speed, we have the technology to destruct nature and extract resources in a matter of few years. You can study the case of Nauru (and not only) to see where my pessimism lyes. In order to prevent that, we need: new economic system which no one knows what to be, we need new ethics, we need to remove old elites that clinch to their riches, we need a new global mindset of what is sustainably right and what is not. Even if this is possible, this would take decades at best. The other solution is to conquer new planets so that we may expand as much as we want with disregard of sustainability. That, however, might be also decades away (hope i am wrong). Not all stories have a happy end, unfortunately. This is one of those.

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Gloomy economic 2016 ahead

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2015 was a very mixed year – however, in the plethora of news and events i think that global economy starts to top up and probably will enter a recession very soon. Consider the following:

  •  Commodities and oil are down in a big way. From metals to soybeans situation is harsh. That is very worrisome and probably signals that world economy is on its way down already no matter what the official statistics say. You can’t have a growth with commodities’ prices falling. These are the building blocks of all economies.
  • BRICs is no bright spot – these are the biggest developing countries (China, Brazil, Russia and India) and that’s where you expect the growth to come. Nah. Brazil is on the verge of collapse – Real is plunging, companies are failing, state bonds are with junk status already and some social unrest starts to surface up. Russia is on the downfall also with economic sanctions in place and cheap oil that is a drag on state finances. China starts to crack – we see the massive levels of debts accumulated there in the years start to cause trouble and the stock market is mirror of that. (especially in summer 2015 and yesterday when stock market in China crashed with close to 7%). Only India hasn’t gone through a rout last year.
  • Chances are high that US will follow. Last year SP500 was almost at 0%. But problems are starting to surface. SP500 is calculated not on an average basis but on a size distribution – that means that bigger companies have more representation in the index. Out of the biggest 15 in SP500, 4 went up big (Google – the second largest company went up 50%+, Microsoft, Amazon and Facebook) while only 2 went down in a bigger way – Exxon and Wal-Mart. The other 9 are kind of the same. So big companies might have skewed statistics to the upside and still SP500 went no where. Average P/E ratios are higher than historical values and the bull run spans longer than average. These are all red signals.
  • Political situation is gloomy. With Russia in the war in Syria, situation there goes from bad to worse. Saudi-Iranian cold war is heating up. Europe faces tough situation handling the millions of emigrants from the middle east which puts a greater strain on the fragile economic growth.
  • Officials are long ago known for bad economic predictions. Now they start to face downgrades AGAIN. IMF lowers its outlook for the global growth. I even doubt the 3.1% figure for 2015 but at least they confess for being wrong.
  • Gold and silver eagles sales had a very solid year – it was even record for silver eagles with 47 million peaces sold. That means that average Joe is  very worried about economic prospects (gold and silver are hedges against inflation and stagnation).
  • Real estate prices’ increase in US west coast are far outweighs the increase in incomes. It was in 2007-2009 when that last happened.
  • World debt levels are at all time highs – so the root cause for the last financial crisis has gone nowhere. No country/company/individual survived 286% of debt level without going bankrupt. It is not a matter of if but of when.
  • Incomes stagnate and unemployment stays high. US reports unemployment going down but they don’t account for the people outside of the labor force. These people are almost 100 million so far and continue growing.

 

I am not a gloomy person by nature but when facts speak it must be true. I think that 2016-2017 will be a cornerstone for world economy with most of the developing countries feeling prolonged pain. The US stock market bull run will end and real estate will start to crack. Europe will face stagnation and will return to the printing press in a big way. Japan will print even more as things deteriorate there also no matter the state interventions.  Australia will probably have a real estate bubble pop – real estate prices are at record highs while main exports (it is a resource export economy) prices’ go down.