"Kee" Points with Jim Kee, PhD.

Quick thoughts on global headlines: I mentioned that business people apparently see less difference between Clinton and Trump than they do between either of those and Barack Obama, and that could be showing up in business investment spending (nonresidential fixed investment, research & development, etc.), according to revised second quarter data (WSJ). You need more than a quarter’s worth of data to confirm a trend, but the data are somewhat encouraging. As for oil prices, it seems odd that markets would applaud efforts by OPEC to restrict output and increase oil prices. I reiterate that the only way this makes sense to me is the idea that, below perhaps $40 per barrel, low oil prices become too destabilizing to OPEC members, which creates uncertainty and angst that dominate the positives of cheaper energy. In China, the yuan was officially added to the International Monetary Fund’s basket of currencies called SDR or special drawing rights. SDRs are used only by the IMF and were created as an asset for use in managing the Bretton-Woods monetary system, which fell apart in the late 1960s/early 1970s. But the SDR maintains a limited role with the IMF, serving basically as a unit of account or measure of value without having to rely on a specific currency. I agree with most that this is a non-event, and feel that the real event from China will be the economic data released over the next 12-24 months. In Europe, concerns over the solvency of Deutche Bank (Germany’s largest) dominated the headlines, as investors (e.g. hedge funds) pulled cash from the bank. This drew comparisons to a “Lehman” event in which Lehman Brothers was forced to file for Chapter 11 bankruptcy protection on September 15th, 2008. But the Lehman bankruptcy occurred amidst debate over whether or not a big bank failure would precipitate a crisis. “Liquidationists” held some sway at the time, arguing to let the banks fail, a mistaken philosophy that none other than free market economist Milton Friedman argued was a mistake that contributed to the Great Depression of the 1930s. The financial fall out from Lehman supported Friedman’s hypothesis, and needless to say further Lehman events were discouraged in favor of bailouts. It’s a serious situation, but I am in the camp that the world indeed learned a lesson from the collapse of Lehman Brothers and that Germany and/or the ECB will not allow a disorderly collapse. Finally, a fashionable trend last week was tying the falling Mexican peso to the rise of Trump in the polls, but looking broadly the peso began its descent when oil prices started declining in 2014, and I see that as the fundamental driver of the weak peso.


For those who think the pace of change today is unprecedented: I read an interesting fact on a book jacket the other day pointing out that, in 1820, a person could travel and communicate only at the speed of a horse. Within 30 years, the world could travel on high speed (40-60 mph) trains and communicate at the speed of electricity via the telegraph and later the telephone. If you really think about it that’s pretty dramatic!


Alternatively, for those who think we’re running out of ideas/innovation: Just looking at the FANG stocks (Facebook, Amazon, Netflix, Google-now Alphabet), Alphabet alone has twice the market cap (twice the value or expected cash flow generation) of the entire Materials sector, which includes Diversified Chemicals, Mining & Metals, Chemicals (agricultural and commodity), Construction Materials, Forest & Wood Products, Steel, Paper Packaging, Precious Metals and Minerals, and Aluminum (total market cap of approximately $250 billion). Amazon and Facebook each have market caps that exceed that sector by $100 billion. Uber is expected to be valued in excess of $68 billion and wasn’t even around a few years ago. It’s a bigger topic than can be taken on here, but I see information technology-led disruptions everywhere, not intellectual stagnation.


So is the world given to “over production”? That’s called the “general glut controversy” in economics, and in this debate the starting point is that, in a world characterized by unlimited wants and limited means and driven by signals of profit and loss (i.e. free market capitalism), a general overproduction of goods and services would be impossible because wants are never satiated. As 20th century economist Frank Knight put it, people don’t just desire to have their wants satisfied, they desire bigger and better wants. But the world isn’t entirely characterized by free market capitalism, particularly when countries like China and Japan (and others) subsidize firms and industries in a big way whether they are profitable (i.e. value exceeding costs) or not. So I’d say certain industries can surely produce into a general glut (supply exceeds demand), but I’m skeptical of overall over-production sans a (temporary) global crisis like the 2007-09 global financial crisis.