http://www.daytona.se/sessions/vol2/umair

We have again reached a point where a substantial number (29 American and 185 International) of company’s market capitalisation is below their cash funds. This number is higher than in the last stock market sell off in 2002. One year after 2002 this kind of stocks rose an average of 66%, compared to S&P 500′s 29% rise. [source]

I think the markets are lead by the irrational fear of investors who are focused on short term news. Just take E*Trade Financial as an example. AFAIK the company is an online platform for trading all kinds of securities. At the moment it holds 2.82bn USD in cash. Market capitalisation is 1.38bn. Should the company be liquidated? Should we just throw their customer base and all the processes they set up to trade securities out of the window? I don’t think so. Maybe some people will not be so eager to invest in stocks a month or two from now, but definitely in 6 months or a year.

Anyone who backed off from the stock market to go into cash or gold will loose, while waiting for the right time to go in again. Governments all around the world keep pumping money into the market. This will let currencies slump and increase inflation. Last week Warren Buffet wrote in the NYT:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

This has been on my mind for a long time. The current financial crisis makes it even more urgent. Once again we have seen that big government is not – and probably will never be mature enough to handle the money supply and therewith our most important medium of exchange.

This ability to tinker with our money at will (think Iraq war or bail outs for banks) gives government the power to spend money it doesn’t hae and never earned through taxes. Its people pay for it by less favorable exchange rates, less purchasing power, a lower standard of living and higher inflation. Since most of our fellow citizens don’t have the necessary education to see the connections, government can channel their anger to more obvious “outside” enemies. Some popular examples include foreign governments (usually emerging market countries), greedy managers, immoral capitalists and investors, minority groups, immigrants, you name it.

A de facto gold-standard would force governments to raise the money for their useless wars, useless subsidies to dying industries and useless civil servants by taxing people in more obvious ways. That way the public may realize how much money “their” country actually burns. In 1966 Ludwig Von Mises wrote in his book “Human Action: A Treatise on Economics“:

The gold standard makes the determination of money’s purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence.

You can find the full excerpt in a recent article of the Capitalism Magazine. If you’re interested in how a gold standard might work I can also recommend another excellent episode of Econtalk.

Credit for the pretty picture goes to Swamibu from flickr.com.

• Why do glaziers earn less than opticians?
• Why is it so expensive to go by train?
• Why are houses in Austria are scattered all over the place with public transport far, far away?

All these questions can be answered using simple concepts like opportunity costs or supply/demand. I believe that people could make a lot more sense about the world if would be taught a little bit of economics in secondary school. Maybe instead of teaching them the difference between a pig’s and a cow’s leg. (Yes, I learnt that.)Read on:Freakonomics-Blog at NYT

Many people think mistakenly that modern prosperity was founded on this fossil energy revolution, and that when the oil and coal is gone, it is back to the Stone Age. If we had no fossil energy, then we would be forced to rely on an essentially unlimited amount of solar power, available at five times current energy costs. With energy five times as expensive as at present we would take a substantial hit to incomes. Our living standard would decline by about 11 percent. But we would still be fantastically rich compared to the pre-industrial world.

For the sandal wearing end of the population Christmas has always been a great opportunity to fret about all kinds of so called “inequalities” and “imbalances” that are just as visible during the rest of the year, but are being picked up by keen reporters especially around Christmas. May it be children in Africa or exploitative work practices in less developed countries far away.

The article “Christmas is coming – all the way from China” is another example for this annual sorry affair. First the article mentions a container ship loaded with Christmas goods from China. Like an unstoppable apocalyptic rider the ship is coming closer and closer to fortress Europe. Ready to dump its bloody load, a product of inhuman exploitation and brutal slavery at our doorsteps. Or so the mainstream press tries to make us think. What they don’t tell you is that this mysterious ship is owned by the Danish Mærsk Group, number 138 of Fortune 500. They also don’t tell you how much European companies and consumers are gaining from trading with China. Those gains don’t only come from cheaper goods consumers are able to buy (which keeps inflation lower than it otherwise would be), but also from a greater diversity of goods they can choose from. Without international trade our life would be a lot poorer. Just imagine Christmas without (Vietnamese) tea, (Japanese) Playstations or (Korean) mobile phones. Pretty dull, isn’t it?Next the a article mentions the growing UK-trade deficit with China, which is mainly a result of an artificially low RMB. This exchange rate imbalance is very expensive for China to sustain and has already started to adjust, though Chinese authorities have chosen the slow path here because they want to give their domestic producers a chance to adjust to the new market conditions, ie less competition on price and more on quality and technology.

The article also makes the point about workers being exploited in China. Of course it’s tempting to believe that the poor Chinese teenager who stitched one’s trainers falls on his simple bed of straw after working for 15 hours in a row. Though the reality is different. Just ask any European who works in China and is responsible for any kind of human resource management. They will tell you that China has the world’s most competitive labor market, especially for employers. In most so-called first-tier cities like 上海 (Shanghai)，北京 (Beijing)，南京 (Nanjing) or 广州(Guangzhou) wages are already reaching international levels. More regions are likely to follow soon, as producers who rely on cheap labor inputs move further inland. Employers are willing to switch their jobs for wage differences as little as 10 $US. Such a dynamic labor market is unimaginable in labor union-driven Europe.

Last I’d like to pick up the question, whether people consume too much at Christmas. Here the answer is a definite “yes”. Though I don’t personally believe in Jesus and his it seems to me that this “heavenly day” is more an excuse to buy useless crap in a pre-Christmas shopping spree, mainly caused by clever marketing.

My main recommendation here is to question any established prejudices carefully and take everything with a pinch of salt, especially before the Christmas holidays.

Merry Christmas. 

Read about it in The Economist