Monday, 16 June 2014

Macro Level Trends – Modern Capitalism – An Evolutionary 'Mobius' System.

With the present tenor of 'Inclusive Capitalism', the previous weblog questioned as to how the thought leaders of capitalism would be able to re-orientate the western (and global) capitalist structure to appease the mass throng of an increasingly agitated public.

From the demonstrations seen in Rio de Janeiro using the Football World Cup as a publicity platform, to what may be a new 'passive-aggressive' attitudinal stance by many affected as 'non-economic' beings elsewhere (especially the young), the need for a re-balancing of economic fortunes has been well understood by leading economic actors.

That change appears to happening, albeit slowly, a new 'flip-side' to capitalism which promises much.

Thus the system, though ostensibly of fixed philosophical shape with the economic circularity of money at its heart, might be now considered a Mobius System, whereby - as per Euclidean theory – the same directional looped route may be travelled, yet with the in-built ability to swap onto an obverse path.

End of One Era -

In the West and Triad region, with the previous era template between 1948 and 2008 effectively exhausted, perhaps the most important action - indeed arguably the only option open - was the creation of QE, able to notionally “pump” but in actuality 'trickle' new inflationary liquidity into the US, UK, Japan and an awaiting Europe, to counter-act the necessary post-crisis deflation required to compete upon a now much revised global stage.

Whilst such liquidity was indeed pumped into Wall St, The City and Marunouchi / Otemachi - with a planned long-cycle reaction of 'demand pull' underpinning stock, bond and derivatives purchasing (reaching across safe and now even 'junk' instruments), the reality as seen is that the process of feeding broad portions of that liquidity into the real economy is an onerous and time consuming effort.

The financial crash effectively re-configured the financial and operational fundamentals of western business: whether from the balance sheet perspective with high unserviceable debt, a cash-flow basis requiring dramatic overhead reduction, likewise necessary given retracted banking facilities, the reality of postponed client payments (this creating a 'prompt payment discount' effort) and so a “down the line” effect throughout all supply chains.

In essence the after-effects of 2008 could be likened to that of a commercial fitness test for Western and Triad businesses.

That slow process – six years thus far – is very painful for all people directly effected, and people wish to become economically active once again; yet rationality and emotionality must be distinctly separated if new green shoots are to be sustainable.

Western banks have been publicly lambasted by politicians, business commentators and the public for their apparent lackadaisical efforts to channel nationally budgeted 'Lending For Business' monies into the real world.

But to use an agricultural euphemism, if such precious new finance were simply “broadcast into the air” without meaningful commercial assessment of the specific entities involved, it would be a real economic travesty which would raise the spectre of a new crisis in latter years.

Instead the funds must be necessarily “seed drilled' into fertile soil”, with what is effectively new seed money (for all enterprise sizes) targeted at specific businesses which themselves are best operationally attuned to their changed environment or are able to grasp new market opportunities in today's much altered commercial landscape.

Hence, here and now the process of due diligence is more critical and so more detailed than ever before, and given the scale of commercial change at a level never see before. Thus the lengthy time period endured stems from an unfortunate but necessary rehabilitation phase

The same is true for the logical convincing of private equity, sovereign wealth funds, pension and insurance institutional funds, dedicated regional / sector or them fund managers and now even the average person given regulatory moves to improve self-directed financial management.

Today whether fixed-income lender or equity stake-holder, there is a necessary fundamental re-assessment of those contemporary commercial engines which are set to create new value.

In effect, the 2008 to date period could be seen as a parallel to the beginnings of modern capitalism, but with a new egalitarian promise.

Back to the Beginning -

Throughout human history, for good or ill, it seems that the profit motive of gain has been the prime central underlying philosophy. For the most part, the process of civilization thankfully inducing humanity to transform its inter-relationships from the simplistic territorial 'spoils of war' of barbarians, to the somewhat awkward and generally inefficient practice of gifting and bartering to the establishment of ever more meaningful and trusted transactional currencies from about the 6th century BC onward, until today.

The true landmark however came with the instigation of the joint stock-holding company format.

Financial and general historians will no doubt continually debate the finite origins of the concept. Whether it effectively stems from the “Société des Moulins de Bazacle”granary windmills in mid-13th century France, the creation of the “The Company of Merchant Adventurers to New Lands” in England in 1553, Russia's “Muscovy Company” of 1555, England's “East India Company” chartered on the very eve of 1601, or the more commonly associated effort of “The Dutch East India Company” in 1602 as a central pillar of the simultaneously established Amsterdam Stock Exchange in The Netherlands.

[NB the latter seen by most as the foetus of today's global capital markets mechanism, which though viewed by some as in contrast to the edicts of Middle-Eastern 'Sharia' and Asian 'Participatory' Finance, is in actuality very similar, given the sense of mutual ownership and shared effort and responsibility; so negating the abhorrence of “usury money-lending”].

As colonial interests geographically widened so did the very idiom of created, sold and bought shares of a specific company as opportunities apparently arose. In 1606 “The Plymouth Company” was formed, succeeded by “The Virginia Company of London” both of which which sought to settle and reap from new North American ventures, whilst its own associated long excursions south to Caribbean Bermuda became formalised into “The Somers Isles Company”.

Widening the Net... -

Across the core commercial districts of Europe, the Americas and Singapore and Hong Kong, as commercialism appeared to grow exponentially thanks to agricultural imports, innovative industrial applications and because of both slave and cheap labour, so did of course the availability and choice of stock-holding possibilities.

This so for the fortunate (tho' periodically unfortunate) aristocratic elite, a finite upper class and a broader 'upper-middle', as inherited feudal and agricultural wealth alongside newer mercantile wealth was directed to promising commercial ventures.

With a Deeper Trawl -

The very nature of an ever expanding regional stock market dependent upon proof of concept via attractive company dividend payments or capital growth (or indeed both) to an ever broader uptake audience, the expanding range of commercial “projections” targeted at an ever expanding audience who themselves saw the advantages of partial company ownership.

The model was set and has been maintained even through the severe upsets of early “Tulipmania” and the “South Sea Bubble”. Though in fact many lesser known smaller contractions and collapses having greater consequential ripple-effects as the mass middle-classes became ever more entwined. When the life-time savings of 'old maiden aunts' and even whole families were wiped-out the hollowness of such investors' intrinsic remote trust in others, whether family associates or 'professional' advisors, became all too apparent as their middlemens' own remoteness from the true forces within market dynamics was itself experienced.

Nevertheless, even with such horror stories (which exist to this day), as new wealth was generated and accumulated - assisted by both international trade and economy-boosting / national debt-management 'money-printing' – so new opportunities appeared in an ever more complex industrial and consumer society. It was that very complexity, the increasingly separated and additionally created portions of the overall systemic value-chain, serving ever greater volumes of goods and services, which drove value creation.

To the Peak of the Cycle... -

Returning to stock-market realities, as seen investor interests and so share-prices eventually driven beyond sound fundamentals and 'fair value' by the interests of the many, private and professional. Ranging from the entrepreneurial moguls who over-hype their activities in search of investor support (and often personal exits) to desires of the partly informed average person seeking not to become left behind during the pronounced phase of economic expansion, to eventually the cliché of “dead-set” stock tips from the 'in the know' taxi-driver.

...And Renewed Beginnings -

Thus through both rational value-seeking and (ir)rational growth-storytelling aswell as long cycles of fair value from economic growth, plus the inevitable value gains to be had from “irrational exuberance”, the joint-stock company (via exchange) proffers much to the informed and ironically even uninformed (to a point). And with modern capitalism's ever broadened activity realms and deepened global base, thanks to real and virtual technology and humanities' demands for comfort and convenience has itself grown ever more convincing; even if an imperfect economic model.

Whereas the EM regions of old had to be settled, often migrant populated and wearily physically exploited, in the 20th and 21st centuries the foundations of new EM regions are fundamentally established, with their own homeland bourses and increasingly active participation by western multinationals; today seen as the spiritual (and sometimes commercially derived) successors of the initial crop of truly publicly orientated stock-holder firms.

Importantly, whilst stock-markets convey a most vivid image of capitalism and associated wealth via the media's portrayal (from everyday news reports to 'The Wolf of Wall Street' et al), the very same environment obviously serves; even with periodic contractionary dis-service. Most he systemically critical plethora of institutional pension and insurance firms, so as to provide for the future of people's financial needs individually and en mass by way of present liabilities.

But perhaps the more historically meaningful cornerstone – indeed foundation - of capitalism is the endemic notion of private property; that dream arguably more realisable for younger EM populations than for many today in the West.

The Automotive Sector -
As seen, the joint-stock format was well entrenched by the beginning of the automotive age in the late 19th century and early 20th century. Thus many of the early associated new enterprises were spawned from either the direct selling of inaugural private shares in all new start-ups, or by the offering part of a new venture free-float (private and public) from well established industrial firms.

[NB whether they be coach-builders, railway vehicle makers, bicycle and/or motorcycle manufacturing companies or indeed general industrial firms with internal capabilities to enter the new automotive sphere in cars and trucks]

In most instances, as with likes of Ford, the Dodge Brothers, Nash (to a degree), Buick, Durant and Chrysler in the USA private investors (and often investment banks themselves) sought to back specific entrepreneur's who had proffered realisable product and business plans; especially those who had learned along the way in those early days.

Though, as ever, where there was a flood of new money seeking-out promised returns, there was also chicanery, especially toward the enthusiastic but less knowledgeable.

Whether from founders themselves with little more than 'snake oil' propositions or from contriving and conspiratorial board members seeking to either oust the founder or undertake a 'cut and run' through misappropriation of investor's monies. Or indeed consecutive disingenuous behaviour by by those who saw the ongoing possibility of 'sucking dry' monies via successive start-ups and intentional collapses: the accrual of funding...implausibly incurred expenses...operational run-down and ultimately 'fire-sale' liquidation...with for the most ardent, the possibility of re-purchasing the bust firm's assets at heavy discount to re-run the entire money-grabbing and money-shifting ploy all over again with a new founder, a new set of enthusiastic investors, a new set (or indeed previous set) of employees.

The Era of Auto-Investment Stability -

By the 1930s there had been a great shake-out of the once nascent and volatile automotive sector, both in North America and Europe. The era of mass mobility had begun and the stratification of the general market had become increasingly marked, between a basic functional device (Model T) and a luxury status symbol (Hispano-Suiza) with a myriad of product levels between.

Post WW2 businesses improved yet more with the likes of “Whiz Kid” executives applying considered knowledge, so serving their customers demands whilst operating more efficiently, and generating new profit margin improving offerings via specifically applied technical and specification progress to gain model-line differentiation upon a 'next model year' basis, whilst simultaneously driving volumes and scale efficiencies through consumer credit and optimised common-part engineering dictums.

This golden age spanning post-depression 1934 to 1973 unsurprisingly served automotive stock-holders very well indeed, with the purchase of additional stock at depressed prices in 1940/41 all the way through to the Middle-East induced Oil Crisis, which itself actually spurred well aligned European and Japanese auto-stocks.

Social and Competitive Disruptions -

For various western auto-producers, and their auto-stock holders, the 1970s was value destructive. A a combination of the macro-effects of the oil shock upon regional economies, ever growing inflation vis a vis productivity declines generated 'stagflation', with the reduction of real earnings for many employees (especially in old industrial sectors) creating unrest and so the rise of union disruption.

As seen by Chrysler's collapse and Chapter 11 re-emergence, and by British Leyland's demise, dissection and divestment, the late 1970s and early 1980s were troublesome times for the old guard auto-players, their previous thunder stolen by the market relevance of ever improved Japanese vehicles still buoyed by a strengthened but still relatively weak Yen.

As Toyota retaught GM how to build some of its own re-skinned and re-badged models and generally improved cars at the Californian NUMMI plant, and Honda did likewise for its 'alliance-partner' Rover at Swindon in S.W. England, those auto-investors who had recognised Japan's constantly improving potential did well thanks to the ongoing climb in both domestic and western market sales, the slow strengthening of the Yen and the strong annual land asset-base re-valuations in Japan.

Into Another Boom -
The mid 1980s once again saw new economic traction in the west as the overt 1970s Keynesian governmental spending (criticised as “voodoo economics”) was reigned-in under the guise of 'Reaganomics' in the USA and 'Thatcherism' in the UK. Whatever the nomenclature, the pro-markets stance enabled by financial deregulation such as the 'Big Bang' in London, the ongoing de-nationalisation of industry and conversion of building societies into fully-fledged banks prompted a new investment and economic boom, most profoundly experienced in the price surge of all classes of property.

The automotive icon of the age was the BMW 3-series (E30), the vehicle which essentially made BMW the company it is today. It was viewed as the embodiment of “European chic” by American East Coast Manhattenites and Bostonians, the intentional intellectual opposite in size, weight and quality to Detroit's offerings. That highly influential 'Ivy League' favouritism spread demand westwards and eastwards across the Atlantic into the UK and Europe, and the little BMW – not Porsche (as forever quoted) – actually defined that period and long after by the size of its adoption. Whilst Europe's own parallel epicentre trend came with the second generation VW Golf GTI (1G/A2).

The 1990-91 Gulf War stifled overall growth, with what is in retrospect an over-reaction upon the broad economy, but did manage to calm both stock and property speculation. However by 1994 western economies had regained strength and with it a further relaxation of credit availability.
The undoubted reflective icon of this period was aimed at the American masses, with broad demand for the pick-up truck based SUV, seen with the Ford Explorer (and later bigger Expedition sibling) and Chevrolet Tahoe and (9th generation Suburban).

In the land where historically for the 'Average Joe' “Bigger is Better” since it is seen as a mark of social success, along with the viewed safety perceptions of SUVs, the 1990s and early/mid 2000s were an undoubted boom period for Detroit, even through 9/11...right up to 2008.

Consequences of Financial Avarice -

However, as has been felt so harshly, the American (and latter European) public and indeed business had been riding an ever inflating self-serving credit bubble, one which itself allowed for overt financial machinations and scandals such as ENRON. But it was not just bankers who were “dancing whilst the music was playing”.

Whilst many were culpable of creating and disseminating ever more "toxic" CDOs based upon associated phantom mortgages, it should be noted that the seemingly never-ending party also amongst the 'Average Joe' grew the popularity of property equity withdrawals, so as to buy ever more profligate fashion and leisure orientated consumer goods, including of course the car.

Onward Again, From Here to Eternity -

The obvious irony being that presently, whilst EM countries themselves go through the economic spasms of internal reform so as to regain lost competitive regionally and globally, even after the melt-down of 2008 and slow re-build to date, the USA retains its power if not strangle-hold) on capitalism.

If Wall Street never sleeps, then capitalism never stops.

Presently investment-auto-motives views the new renaissance of capitalism as standing upon three apparent pillars:

1. Re-Construction of the 'Old' Physical Economy 
2. Continued Construction of the Cyber Economy 
3. Merging of 1 and 2 within 'Augmented Reality'

The former consists of those companies which though battle-scarred have survived the after-effects of 2008. Of what ever size, multi-national to national SME to one-man-band, these are enterprises which – typically through conservative attitudes, business methods and much pain - have been able to endure in core socio-economic B2B and B2C sectors. In various cases able to seize the moment with efforts to grow through the acquisition of weaker competitors.

The latter is of course related to the advent of the net-connected, cyber-age whereby the dual aspects of both increasing productive connectivity through the growing 'internet of things' and personal and group 'augmented reality' offers wholly new realms of enterprise and investment opportunity; now being explored and tested by many in the California's 'Silicon Valley', London's 'Silicon Roundabout' and various other IT hubs around the world. It is recognised that much is simply on-line behavioural alignment via ever more screen-based enablers; such as the branded smartphone app which replaces the local restaurant's junk-mail menu and the once required telephone call to order delivered take-away food.

But it is the promise of the ability to increasingly and seamlessly merge these two physical and cyber-worlds through the 'internet of things' which then provides for yet further advancement of what may be termed neo-capitalism.

The New “Merged World” -

Efforts such as the recently availed autonomous 'Google Car' set the direction and tone behind the efforts to establish neo-capitalism.

Such innovation seeks to become far more than technology disruptors. Hence the perceived psuedo-prophetic words from the likes of Bill Gates, (the late) Steve Jobs, Jeff Bezos, Larry Page et al; individuals with access to so much money, the process of capitalism puts the power of socio-economic change directly into their hands. 

This now well entrenched technocracy seeks to proffer major social and behavioral change. In the case of the Google Car adding to personal productivity levels and transport safety. 

The consequential argument is that much of today's physical, man-made, infrastructural environment will demand a massive scale of re-modernisation; especially so in western lands which largely originate from the late 19th and early 20th centuries. The fundamentals of our immediate city-scape environment will need cosmetically subtly but nonetheless powerful alteration so as to itself “enable the e-enablers”. The world around us substantially re-imagined and re-configured.

The Take Away -

The gold rush times of the 19th century saw hoards of people chase the promise of the next big gold strike, but the real immediate and long-lasting was gained from those individuals and joint-stock companies which were able to sell the specifically required items to the hoards of gold-panners and gold-miner, aswell as offering the aligned commercial and respite services sought.

There will undoubtedly be many more rich strikes within the still burgeoning e-economy, amongst the plethora of 'modern-day miners' of BitCoin extraction and elsewhere.

Yet equally so, it looks to be those real-world re-alignment opportunities that provide greater prospects.

Paradoxically the original ancestors of today's joint stock shareholders had to fund very risky but potentially lucrative ventures to far-flung destinations. But today, the veritable hold of mankind over his ever more self-created world and domain means that value prospecting and achievement should be theoretically far more attainable, if one can avoid the 'fool's gold'.

To End -

The promise of a Mobius-like 'Inclusive' Capitalism which maintains its directed progress along an obverse path is compelling; exactly how it pans out remains to be seen in future years.

But what is equally compelling is the manner by which capitalism itself is directed, and from a simple “macro-tech” overview of points 1,2 and 3, twenty-first century western (and global) "neo-capitalism” appears a truly powerful phoenix.