Twenty Third Floor
Technical Business Advantage

It’s clear some people just don’t get that deflation is catastrophic from an economic perspective. You would have though that Japan’s lost decade (is it still only a decade?) would be sufficient warning.

Michael Pento from Euro Pacific capital writes about the options open Bernanke to stimulate the US economy through open market purchases given that interest rates are up against the zero bound.

He’s right about the options, but horribly misguided when it comes to wishing for deflation:

By keeping prices from falling more that they would have naturally, Fed intervention has created a burden.

The US public (and private) debt is such a significant portion of GDP, the correct answer cannot be to increase it as a percentage of GDP by deflating prices and keeping the nominal value of outstanding debt the same. Moreover, what the US needs is economic activity; encouraging everyone to leave their money in the bank because it increase in value every day and “nobody else is spending so deflation will continue” doesn’t sound like a success story to me. Downward price stickiness, particularly with wages (yes, even in the US) would add to the catastrophe.

Pent also raises the risk of hyperinflation:

…investors would be forced to once again abandon savings and chase runaway prices.

I don’t know how we went from fears of deflation to “runaway prices”. The challenge with this policy is to credibly promise moderate inflation for several years (depending on how strong your Ricardian views are).

Runaway prices are much easier to control than deflation. With inflation, we actually have a range of tools to use.

It’s unreal how many people have views on the economy that aren’t rooted in any economic theory at all.

According to a Fin24 story this morning, the FSB is probing smaller unit trusts.

The economics of a fund manager depends entirely on growing funds under management so that revenues (based on assets under management) grow to be larger than costs (significantly fixed and at most semi-variable). Details of performance fees and the second order impact of investment performance aside, a successful fund manager must attract positive net client cashflow, and lots of it.

Half the 960 available unit trusts have less than R100m in AUM. Some of these may be rapidly growing new funds, but many have been stagnant with slow growth for several years.

The FSB’s attention presents opportunities for consolidation between funds and should place larger funds in a stronger position competitively. Total Expense Ratios (TER) for these funds with significant scale should already be lower than smaller funds. Maybe it’s time the larger funds made more if their size and cost efficiencies. If they are going to take the heat for being too large to be nimble, they might as well reap the benefits too.

It will be interesting to see what this means for white labelled funds and whether the economics of these convince the regulator that they should survive.

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Tyler Reed blogs about entrepreneurs having to make decisions with limited information.

It’s almost all unknown

I don’t disagree.  It’s just that almost every meaningful decision ever made is made without all the information.

Unknowns can be categorised a hundred different ways. One way is to think about:

1. Unknown past information
2. Uncertainty around the current situation or position
3. Unknown future outcomes

Even a game like chess, where the past history of the game is easily known by good players, the current position is clearly visible and all the possible moves are knowable, it is not possible have all the information about how your opponent will react to your move.

How to deal with decision making under uncertainty – part 1

Tyler suggests that gut-based decision making can be effective much of the time – and it can. It there genuinely is no time for anything more than an instinctive reaction, you probably are best going with your gut.

Even if you have plenty of time, listening to your guy to formulate an idea is a great idea. Insight comes partly from experience and the reinforced neural pathways of our learning brain. If you stop with the gut though, you are missing out. There is a tremendous amount of research showing how ridiculously badly our instincts perform in many areas, particularly those relating to uncertainty and complexity! (more…)

I haven’t played Monopoly in a while (preferring Settlers of Catan, Carcasonne, Tigris and Euphrates and even Cranium), but after a recent conversation I started thinking about the game dynamics. There is surprisingly much that is relevant to the current story of our economy.

1 The Competition Commission is necessary

Monopolies serve to increase prices for consumers. In Monopoly, the “rents” charged are instantly higher as soon as a player has a monopoly on property in a certain area.

Worse than the increase in prices and decrease in supply, the additional profit for suppliers is not equal to the cost to consumers from higher prices, resulting in an overall “dead weight loss of monopoly” or an overall cost to society. (more…)

Apparently, car thieves don’t want your pink car. It’s not because they don’t like the colour (although they probably don’t). It’s also not only that it’s too distinctive and will be easily spotted (see the discussion later about red cars).

It’s that nobody else wants it. The resale value is much lower than other vehicles, and the risks and costs of stealing it are no lower.

Unlike the conclusion around high risk vehicles in my post on hijacking, this actually means you should be safer in a pink car. Just not safer from ridicule.

Dutch professor, Ben Vollaard, studied theft rates for vehicles as part of his research area of the economics of crimes. The data covered 109 vehicles from 2004 to 2008. Not the largest sample size, but enough to start thinking. (more…)

Moneyweb has an interview with Eskom CFO. For me, the point made about the reasons for differences between retail and industrial tariffs is worth highlighting. This is another example of where common perception is off.

(Incidentally, Eskom tariffs are currently 68 cents for residential, 28 cents for big industrial)

From the moneyweb interview:

PAUL O’FLAHERTY: What is one of the myths of this industry is that the key industrial user does subsidise the residential user – that’s a fact. And the reason for it, even though it seems on the tariff that you quoted, that can’t be – it is true because the cost of delivering electricity to someone living out in the sticks is a lot more than delivering it to a transmission station right next to a mine, for example. So there’s a significant cost differential in actually getting electricity out there, and therefore the key industrial users do actually subsidise the residential users.

In a previous post, Mumbling in the Dark, I argued that too much attention was being paid to Eskom’s proposed increased charges and too little at 5 separate points, the first being their actual cost of production.

It seems that NERSA has been looking at this and has discovered some areas where Eskom was incorrectly estimating their future costs. The numbers are large, but not so large in the greater budget of Eskom. This is more like a snowflake on an iceberg than anything meaningful, but it does show the value of looking at the real issues.

The safety rules and rigorous enforcement of these regulations damages the profitability of the entire industry – just not in the way you might think.

Regulations and Big Bank Buildings

Why have banks historically had impressive  marble-slathered floors and columns, high ceilings and ornate, heavy front doors? Would you really deposit your salary and savings into an operation run out of a caravan parked on a corner on your way to work?

The fixed, permanent high-investment nature of the impressive buildings is one way that banks can  communicate their seriousness, their high investment requiring a long-term relationship with a large customer base to recoup their upfront costs and their inability to up and off and disappear with all their assets overnight. This communication of financial strength and longevity gives customers the confidence to trust in them and bank with them.

If you’ve thought about this for more than a few seconds, you should be asking an important question. “How do Internet-only banks, with their apparent lack of real, physical assets and high upfront investment in their operations support this argument?” (more…)