Saturday, 18 December 2010

Christmas Message – Responsible Capitalism - the only real way forward.

Here in the West, for many people the forthcoming 'Austerity Christmas' will bring about intrinsic personal reflection, with self-generated questions pertaining to a very definition of value, in all its senses.

Over much of the last decade, many people – thought of course not all – have enjoyed what at times seemed a super-charged lifestyle, the scope of what was considered normal being a 'lifestyle entitlement' pushed ever broader and deeper. Such an expectation fueled by easy credit, the upward escalator of the material world, itself driven by 24 hour media, and the desire for ever more exotic experiences, from travel to personal attentions services to provide ever more esoteric luxury dimensions to life.

Although since the 1950s the younger generation have enjoyed greater income and personal freedoms, the Gen Yers of the now homogenious middle class became the Bright Young People of the 2000s, but unlike that enclave of the monied class in the 1920s the more recent emergence of BYP's were nationwide, who could at weekends literally live the 'high life' no matter what their background. Champagne of whatever Cru and cocktails became de rigeur in metropolitan areas, even if that be not quite the Cristal popularised on 'Bling' music videos and a preferance for Mojito cocktails. The pretence of holidaying in the Maldives or Cuba, or at least psychologically 'living the dream' could be had even if the actual holiday trip had been a package deal to a less salubrious place.

In the 2000s, the idea of luxury sold, and the archetype 'veblan good' reigned in the sea of lifestyle aspiration and the spiral staircase of ever higher expectation.

Materialism and consumerism has of course been part and parcel of an aspirant life since the beginnings of the industrial revolution, and 250 years later to that British invented schema, has become intrinsic to the life-blood of the world over; China's rise of course demonstrating its latest advocate for a better life.

But for the US and Europe 2008 brought the reality-check, the consequential economic strangulation has trickled-down into people's lives via the wrenching and writhing of slowly restructuring western economic models, as the very core of growth mechanisms are questioned and the cost-base of the West necessarily driven down via both commercial and public sector rationalisation.

Thus the leaders of western economies recognise the need for re-align to once again become globally competitive, yet that too has generated a USA vs European attitudinal split that sees the former taking greater steps to artificially inflate its way out of trouble, whilst the later stays as prudent as possible. Europe also trying to retain a sense of solidarity between floating and sinking member countries.

In short a pseudo-protectionist reactionary mentality has arisen, seen both in the USA and amongst the economically lost PIGS which add dead-weight to the Euro-model both in function and world-wide perception of the bloc-currency.

Thus the very value of what were 2 globally esteemed currencies are increasingly being considered and re-considered, on a near daily basis, set of course against the more muted but still ostensibly up-beat tone of the BRIC+ regions, themselves partially extracting themselves from the 'old-world' with ever increasing bi-lateral and multi-lateral trading agreements.

So it is at this time within the 'old-world' that the very question of how to define 'value' has arisen. Moreover, when identified in all of its guises, how it is created/obtained?

It is a question that reaches across from the individual's inward view... to government's outward view... to the players of the commercial world's facing up to the challenge as how to marry aspects former and latter via appropriated ratios dependent on both their fit in society and their place in their respective sector value-chain. Commercial conglomerates and industrial holding companies must view all of this from above as must the financiers within the investment community.

There has been much transition in the west even over the short period of the last three years, and it is set to continue as multi-nationals play both sides of the coin: maintaining the growth push in the EM regions and gauging the appropriate timing and level of western re-investment.

The expected rise in general input prices (as warned by the CEO of Robert Bosch) will probably be (when historically viewed) seen to trend as relatively slow, yet that trend line will be populated by bursts of speculation and correction as geo-political and nation-state economic events periodically send short-term investors to 'upward-bound' safe havens.

Conversely for the west, consumer angst still weighs driven by those basic employment concerns, private industry rightly insisting upon frozen wage/salary rates and flexible contracts and the previous expectation of state employees pertaining to job security and annual income increases now seen to be unsustainable.

Thus the context for all activities are being re-orientated, from B2B to B2C, from those related to wholly private consumption (from wealth management to automobile demand to fashion goods) to those directly concerning the national good (including infrastructure, health, energy, etc etc).

As a result of these shifting sands variously sized investors of various influence must both generate the trends of tomorrow and be able to track those trends.

Hence the 'financial interplay' between the capital bases of private finance, industrial finance and governmental finance has never been so simultaneously open and closed.

This era then is the period during which the 'old-world' West must essentially re-build itself to become once again globally meaningful so as to stand a chance of not being left stranded, increasingly remote and insular relative to ever-rising Asian, S.American, African and Middle Eastern 'new-world' global economy.

This issue then puts pressure on the commercial and industrial infrastructure of the West, and that means making sure the inter-play between governmental finance, industrial finance and private finance is all-together well targeted, harmonious and efficient.

With the 2008 collapse and intervention of governments, many commentators stated that the old capitalist model had failed and that a new ideology was sought. Yet ironically, today in the US, UK and Europe, as a result of these 'bail-outs' and rapid bounce-back by the survivors of the banking world it is the very nation-states themselves that are now weaker than ever, with cash-cushioned multi-nationals and the banking sector itself playing a greater part in 'holding together the western fort'.

It may appear strange to include within the Christmas message of a pro-capitalist investment advisory bureau the name of Vladimir Lenin, who as a Communist was against religion aswell as obviously capitalism, but his standing in that there are 3 types of alternatively avail ably sourced capital was and still is essentially true. As previously stated, these are: Government Capital, Industrial Capital and Finance Capital.

And their relative characteristics, expectations and strengths never in such sharp focus as today.

However, the first, Governmental - whilst obviously concerned with the development of the public good and is directed at projects and schemes that enhance national development - has never been so fragile. The second, Industrial- notionally itself a mixed economic model of publicly and privately sourced funds depending upon the region (previously say Europe in contrast with the UK) – today sees that innate ratio (of whichever previous ideology) tend toward greater self-sourcing or private sourcing. The third is of course purely privately
sourced capital, which historically was initially dualistic tending toward matured commercial sectors, and new (then new-world) 'ventures'; but through the latter half of the 20th century spread across a wide spectrum of sectors and the various growth stages of the various players in various particular fields as both industrial activity broadened and the types of players evolved and the types of instruments to assist also developed.

Thus, today even after the financial crash and the cries for fundamental structural economic change, the reality is that for the West it will be the strategic decisions of private finance and industrial finance that shape its future.

Thus whilst right to distinguish between capital's sources, and having his name recently echoed amongst the youthful yet aggravated intelligentsia of the university campus, Lenin's views have been proven by history as increasingly irrelevant, and could be argued today as being almost disruptive and destructive to the real-world challenge of re-energising the West.

[NB Communism and far-left Socialism proved to be an overtly idealistic and unsustainable economic model, one necessarily inherent high-mindedness and good-heartedness of (wo)men living within a falsely constructed social framework that disregarded the innate 'economic being' within most people, ranging from the purely utility-driven to improve 'his/her lot' to the inter-social competitiveness of a community for one-up-manship, thus Lenin's ideologies, whilst persuasive at a popularist level after the fall of German and Russian aristocracy in fact ran and runs contrary to the 'real-world'. A world in which it is almost a natural diktat that differing levels of inputs by different individuals of differing intelligence and capacity for work must be rewarded at different rates so as to be intrinsically fair, even if at purely the surface level of social impressions it appears unfair].

It is for this reason that the capitalist model - though admittedly with inherent faults that requires checks and balances - is becoming ever more dominant. The historical trend for increased general wealth perpetuating the growth story in less developed regions and so increasing the standard of life for those with little and exposed to the very real dangers of life whether natural or man-made; from the ability to buy medicines for curable disease to escaping poverty-stricken shanty towns and ensuring the next generation has access to education.

We live in a world where for many westerners the financial fortunes of west and east have rapidly switched, and to this end there is an understandable dilemma as to how capital should be attributed.

Although perhaps second to the provision of innate human caring, the responsible provision and allocation of capital remains perhaps the most important challenge for government, industry and financiers.

The auto-industry plays a significant role in wealth generation, but also has been seen to be an agent of wealth destruction time and time again. So the decisions as to which of those automotive sector companies – throughout the value chain - deserve and gain financial backing must be made responsibly by all 3 providers of liquidity. This backing of course depends upon reputation and the outcome of a deep due diligence process. But must surely be primarily based upon past performance, a convincing demonstration that through the previous good times of the 15 years leading up to 2008 - and indeed throughout the financial crisis – what should have been value generative companies lived up to expectation and proved their worth as positive contributors to society.

This is not to say all liquidity should be directed at industrial activity, since the ability to generate value and so wealth for re-appropriation was seen by the 2008-10 capital markets re-bound itself. And since money itself is also effectively a commercial commodity itself so it should be allocated toward the greatest return potential, which includes various capital markets. Indeed, beyond talk of government bail-outs, without that investor based speculative rebound the West would be far far worse state than today, and it is only right that where markets inadvertently drag-down good companies amongst the fear of the bad, so participants within the same market must be able to cherry-pick the sound/good from the bad (as seen with say Ford seen at $1 vs GM) after a fear-driven collapse..

[NB To avoid such pandemonium in future, whilst the 'up-tick' rule is perhaps too 'prescriptive', investment-auto-motives believes that the concept of an 'warning indicator' could prove useful stability tool. Something which warns the market once of a company stock dropping to say -5% below an time-period averaged MarketCap or Book Value. Thus provide the market time to properly assess the fundamentals of a company and so be driven by rationality rather than emotion. This is still of course still leaves a company open to large-play investors running 'hard-shorts' to perhaps intentionally run-down a company, but today's much smaller concentrated private equity world will probably be less likely to use such tactics, instead being seen to be part of the broad value building process].

At the beginning of this new era to do anything less would be disingenuous to both the populace of the West aswell as the fundamentally sound ideological platform that is responsible capitalism.

This then is the central Christmas Message from investment-auto-motives to one and all.

Whilst it may not convey the usual tome of seasonal rhetoric, it hopefully stands as part of a sustained and longer-term reason to cheer, long beyond this Christmas, the next and many of those thereafter.

In the meantime, for a couple of weeks or so, it is...

'Time to See Beyond the Bottom Line'.

My Best Wishes