Not So Dismal

Making Economics a Little Easier to Understand

Posts Tagged ‘Cars

If It’s Too Good to Be True…

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I wish I could say that it’s stunning how many victims have emerged in the Bernie Madoff Ponzi Scheme that resulted in the evaporation of more than $50 billion in assets. I wish I could say that it’s stunning who those victims are, among them some of the world’s largest banks, including RBS, HSBC, Natixis and BNP-Paribas, and some famous “small” investors, including the owners of the Mets, Dolphins and Eagles.

Alas. The only part of this that is stunning is that so many seemingly intelligent people allowed themselves to be drug into this pyramid fraud. The problem is that people believe in the concept of long-term profits that exceed the market return. It’s possible to outrun the market for a while, as I have done for the past few years holding a stake in Apple, but the extra risk inherent in a technology company, as well as a lack of diversification, that brought outsized returns in years past has served to erase those profits in a matter of months recently.

The same holds true- eventually- for everyone. No mutual fund, no individual investor, no algorithm, has ever successfully beat the average market return over a long-run timeframe. This isn’t meant to be a blog specifically about the finance industry or even the stock market, but rather economics in general. The fact that the market cannot be beat in the long-run is an economic absolute, not a financial absolute.

The reason is because it’s impossible for any algorithm or investor to account for the precise demands of every market consumer in the world, every potential news story or natural disaster, every political election, etc. Markets in general are priced, at least in theory, on every piece of data in the world (or at least every piece possibly relevant in the slightest to market values). This is the meaning of an “efficient” market. And where markets are even just generally efficient, not perfectly so, achieving an outsize profit in the long-run is unfeasible.

Those that were sucked into this scheme allowed themselves to be fooled by the trappings of finance. Financial wizards have concocted a variety of complicated instruments and investment schemes meant to perfectly shield from risk, provide excess returns consistently, or otherwise “break the rules”. We see their handiwork on display right now in the utter destruction of some of Wall Street’s oldest names. This particular story is no different and brings to mind an old adage: pigs get fat, hogs get slaughtered.

Even though Mr. Madoff was reporting returns well above those of the market year after year, without disclosing any type of pricing model or particular insight that could lead to exploiting market inefficiencies to such success, some of the world’s most respected banks apparently did not think to ask how this was possible. They were willing to believe, in effect, that two equaled five, and not just once, but on a continuous basis. Shame on them. Individual investors are more likely to get cheated into such a scheme because they don’t necessarily have the requisite knowledge to know that even the best investor couldn’t achieve these gains continuously. The financial institutions, though, should have known better.

This will eventually become the overriding narrative of this market tumult: the people in charge have no idea what they’re doing. To return to an economic description, one might say that 10% of the market is a reasonable portion to dedicate to those financial middle-men that handle all other transactions in the economy. Yet nearly 20% of the economy, when seen in terms of the S&P 500, was dedicated to the financial sector as recently as last year. Does anyone reasonably believe that one in five dollars should be allocated to transaction costs in our grand technological age? Even the federal government would be impressed by this level of bloat and inefficiency.

Welcome the current market convulsions. What we are witnessing is the grand economic reallocation of a full 10% (or more!) of our economy away from poor decisions to better avenues. It is clear that many of the people currently in charge of billions of dollars of other people’s money should not have that responsibility. Market forces will, we must hope, see to their demise.

This is why opposing government bailouts is important. This meddling in the market serves to reward those that have made poor decisions. As for saving those that were hurt by frauds perpetrated by men like Madoff, this too would be a mistake. The investors here are as guilty as Mr. Madoff. They participated in a willing suspension of disbelief in order to bring home profits that they knew had little to no grounding in reality.

The automakers (or more succinctly, the UAW) are facing their own reckoning. I believe that they will emerge stronger and more competitive in the end, or they will face ruin. GM will be drug by the government or by the market to friendlier waters. Ford has already properly vectored itself for success. Chrysler will die.

As I have said before, we face a unique opportunity here. The market will decide where all of this newly-freed capital will go, unless we intervene. I don’t support doing so, but the political realities seem to make this all but inevitable. If that is the case, we should do our best to be the market’s intercessor and be active in promoting those policies that will make us all more prosperous in the end.

Written by caseyayers

15 December, 2008 at 11:02 am

Of Pianos and Cars

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A great column has been published today over at Mises worth reading. As a musician myself, the subject certainly struck a chord (ha). The author looks at the rise and fall of piano production in the United States and how it compares to Detroit’s situation today. Certainly an interesting and valid analogy, proving that no particular product or good is exempt from the laws of the free market. I stand by my previous statements that providing a bridge loan to GM and Ford is a more palatable situation than printing money to cover losses on absurd, synthetic financial instruments, but Mr. Tucker does us the good deed of reminding us that less-bad is not the correct option in the long run. Excerpt and link to the full article follow below:

With the growth of this manufacturing came an explosion of shops that served the piano market all up and down the industry. Piano tuning was a big-time profession. Retail shops with pianos opened everywhere, and the sheet-music business exploded with them. Ever notice how in big cities the music stores are typically family owned and established 40, 50, and even 100 years ago? This is a surviving remnant of our industrial past.

All of this changed again in 1930, which was the last great year of the American piano. Sales fell and continued to fall when times were tough. The companies that were beloved by all Americans fell on hard times and began to go belly up one by one. After World War II the trend continued, as ever more pianos began to be made overseas.

In 1960, we began to see the first major international challenge to what was left of the US market position. Japan was already manufacturing half as many pianos as the United States. By 1970, a revolution occurred as Japan’s production outstripped the United States, and it has been straight down ever sense. By 1980, Japan made twice as many as the United States. Then production shifted to Korea. Today China is the center of world piano production. You probably see them in your local hotel bar.

Click to Continue Reading “The End of the US Piano Industry”

Written by caseyayers

10 December, 2008 at 12:06 pm

Steve Jobs, Auto Industry Savior?

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Marketwatch has an interesting column that follows up on a point made by a different interesting column written a few days ago by Tom Friedman. At the tail end of his article, he said:

Lastly, somebody ought to call Steve Jobs, who doesn’t need to be bribed to do innovation, and ask him if he’d like to do national service and run a car company for a year. I’d bet it wouldn’t take him much longer than that to come up with the G.M. iCar.

The question is, could The Steve save the US auto industry? The unionized workforce is a major bump in the road, so to speak. Part of what makes Apple so successful is its cutthroat culture. Called a “Stevetatorship” by more than one, the UAW would balk at any attempt to as tightly extract every ounce of effort from each employee.

Further, it seems like many of the Big Three’s designers and engineers are simply stuck in the past and not always willing to make the next big leap. Another important key to Apple’s success is its almost gleeful abandon at the prospect of leaving old ideas and technologies on the side of the road. Consider the switches from the old OS 9 architecture to OS X, from Carbon to Cocoa or, the most high-profile of these sea changes, their complete shift from PowerPC to Intel in less than two years. The last one in particular is incredible. Here was a situation where both the software and the hardware saw major changes across a variety of products in a very short period of time, and it was accomplished with the least pain of any comparable transition by other manufacturers by far. Compare this huge shift in architectures to simply trying to upgrade to Vista from Windows XP and tell me which operation was handled with greater care.

Concept Chevy VoltThis flexibility comes with a price, of course. As mentioned above, Apple is definitely a fast-paced company and has not shied from a tough decision since Jobs retook control. It is this mental agility and confidence in quality that has been Apple’s formula for great success since the launch of the first iMac. This level of innovation does exist within the bowels of the large American auto manufacturers; their presence is made most clear at industry trade shows when sleek and sophisticated concept vehicles are put on display. But, for one reason or another, this potential seems always dragged back to Earth. Just consider the differences between the original Chevy Volt concept vehicle compared to its production counterpart, even now at least a year or more away. What was once a beacon of great imagination has become just another Malibu after the first 45 miles of electric-only power.Volt Production

It’s not just the vehicles that need fixing, though. The whole fuel architecture must be changed in order to make any real progress from an environmental standpoint. The chief problem with electric vehicles is their relatively short range and long recharging times. The solution is to have battery-swap programs in place at refueling stations across the country. Simply putting a new battery into the vehicle should be no more painful than refilling a gas tank is now, and if the architecture is laid out efficiently then it does not need to entail a massive new line of expenses for the end user.

Finally, improving the driving experience is key. Americans continue to shy away from compact vehicles even in the face of high (but continually decreasing, at the moment) fuel prices because they like the luxuries afforded by larger vehicles. US auto makers must make the features onboard the most innovative and highly-sought after in the market. This, as Apple well knows, is a difficult and continuous proposition, because the competition will simply lift the best ideas and put them on next year’s model.

The magic isn’t in Steve Jobs, the person. The magic is in “Steve Jobs”, the mentality. “Fixing” the domestic auto makers doesn’t mean converting all of their factories wholesale into subcompact production lines, because this is not what the market demands. Prices must fall, yes, but more importantly, quality must rise. Because as Apple knows, this may not be the recipe to market domination, but because people will pay a premium for a clearly superior product- an American product, whatever that means today*- it is the recipe for recovering and roaring profits.

*-It’s important to remember that many vehicles from Japanese automakers are made today in American factories, mostly located in the South, where open shops ensure that the ludicrous arrangements devised by unions will not exist.

Written by caseyayers

14 November, 2008 at 2:51 pm

Charlton Heston on America’s Energy Future

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Gotta love the prescience.

Written by caseyayers

15 October, 2008 at 11:02 pm