At the Towson University Investment Group’s International Market Summit, Part 2

Here are some questions submitted in writing that did not get asked.  Here are some questions & answers:

1        What do you make of the move towards energy independence in America and what are some benefits that accommodate it?

Any innovation that lowers costs is a good thing.  Energy independence is a a shibboleth that many bow to but is meaningless, absent embargoes or war.

The important thing is to deregulate exports of energy from the US, so that it can be done freely, allowing energy companies the ability to send crude oil and LNG to the places that value it the most.  We also need to permit pipelines, and ignore the shortsighted environmentalists who don’t realize that pipelines minimize pollution relative to rail.

There will be some benefit to other US industries, which will get cheap energy because they don’t have high energy transport costs.

2        You can argue that we are in the midst of a bond bubble.  What are the implications on markets in the event this bubble bursts?

We aren’t in a bond bubble, at least not yet.  Bubbles are typically asset-liability mismatches, where long assets are financed short.  For a bond bubble to pop, you need the short financing rate to rise above the yield of the long bonds being financed.  In more plebeian terms, you need the yield curve to invert.  Bubbles pop when investors have to feed the asset in order to hold the position, and that never lasts long.

3        What are some risks of the global stimulus taking place?

We are involved in a colossal “race to the bottom.”  Those with low exchange rates can temporarily stimulate their own economy, until another major country devalues their currency.  The main risk is stagflation.  Little growth, and depreciation of purchasing power.  Personally, I would have preferred a deeper recession that eliminated bad debts.

4        How big of a risk is the European Union and Euro instability given the unprecedented circumstances in Cyprus where depositor monies are at risk?

The risk is big.  Why should anyone hold money in a non-core Eurozone bank?  Better to put it under your mattress where it can’t be confiscated.

Cyprus demonstrated that a Euro is not a Euro; value depends on where the Euro is.  Far better to have many predictable currencies than a single unpredictable currency.

The Cyprus experience teaches two main lessons to those in stressed nations:

a) The deposit guarantees mean nothing.

b) Your money has a safer home buried in your yard.

You don’t want that to be the case.  Runs on banks in weak nations compound all the other problems.  Why help create the conditions of the Great Depression?

5        What do you make of the transparency (or lack thereof) in China? How big of a threat does this pose to investors and companies that do business in China?

Regardless of how cheap an asset is, you never trade away transparency.  If you don’t understand an asset, you will never be able to trade it properly.  It is a huge threat; avoid situations like this.

As an aside, China does not have the “rule of law.”  They have “rule by law.”  The distinction is significant, because under “rule of law” the government is subject to the law.  Under “rule by law” the government controls the legal process.  You are only as safe as your government connections are strong, and that is not very reliable as a foreigner.

6        With the suggestions from the president to increase the minimum wage, what are some of the effects that it might have on unemployment, foreign and business investment, and the market in general?

7        Should state minimum wages be tied the federal minimum wage and will the change in minimum wage at the federal level have any effect on states since they are not tied to federal minimum wage law?

You can’t get something for nothing.  Any government intervention changing a price will have less impact than commonly believed.  The free market should regulate wages, not the government.

But away from that, many corporations are penny wise, pound foolish.  There are virtues in paying your employees an above-market wage where you:

  1. Train them
  2. Instill loyalty
  3. Make them part of the decision-making process
  4. Give them a sense of ownership, and offer profit-based bonuses.

If you pay your employees the minimum, expect minimum or worse efforts.  Pilferage often comes from employees who realize their efforts are not appreciated.

I suspect this will go 2-3 more pieces.  I hope you enjoy them.

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