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Thursday, December 1, 2022

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Monday Morning – Getting Set for Earnings Season

OK, so where are we? 

As noted on the chart on the right from Josh Brown, the chief selling point to investing in the US is we don't suck as much as the rest of the World.  This is a very compelling argument for people who are forced to live in the rest of the World – as you generally don't have to draw them a map for them to understand how much the economy sucks "over there."

The US is hardly performing it's historic role as the engine of Global Growth.  In fact, that's a role we ceded to Japan in the 70s and China in the 90s and they've both blown up and you might think it's up to us to take the lead but, before we drove the World's economic growth, there was a land called Europe – and they used to own the whole thing (or at least acted like they did).  

Europe made an attempt to reclaim their old glory by unionizing back in 1993 and, since then, they've slapped together 28 countries with 500M people and have gotten their GDP to a bit higher than the US, at $16.5Tn.  Global GDP is $60Tn so the US (310M people) and Europe (500M people) have more than half while the rest of the World (6,190M people) get to "share" the remaining $27.5Tn, which works out to a per capita of $4,442 each for THEM and $40,123 for US.  Yay Us!!!!

If you pull Japan ($6Tn, 127M people) out of them, it gets a lot uglier for the remaining THEM but, as Pink Floyd said:  

Us and Them

And after all we're only ordinary men

Down and Out

It can't be helped but there's a lot of it about

With, without

And who'll deny that's what the fightings all about

As we head into earnings season, perhaps it's a good time to reflect on what this all means in the bigger picture.  How do Corporations make money?  They sell stuff, right?  But that's only part of it – they sell something to someone else for more than they spent to produce it – that's where the profits come in.  So, if I'm AAPL and I want to make money selling IPads (ignoring Apps and peripherals), then I want to charge the consumer as much as possible for as many units as possible (the old Econ 101 demand curve).  

Once you find the optimal price and set your supply and sales targets, the next thing a good Capitalist has to do is try to produce the item for as little as possible (while maintaining a minimum level of quality so as not to harm demand).  With an IPad, as with most consumer goods, you have raw materials costs, parts costs, transportation costs and, of course, labor costs and it's the manufacturer's job to minimize all of these costs as much as possible. 

To a certain extent, this creates an efficient marketplace and the undeniable success of Capitalism has shown that it's the best at creating a ruthlessly efficient marketplace that excels at bringing goods and services to market.  

But, UNFORTUNATELY, that model has never been truly tested in a static growth environment.  For the past 100,000 years, we have had nothing but rampant global population and economic growth – with the exception of the Black Death in Europe in 1350, that wiped out about 1/3 of their population and caused a 100-year depression.

In the two decades since the EU was formed, roughly 1990-2008 (last available data) the US grew from 270M to 300M (11%), Europe from 460M to 500M (8%), Asia from 1.6Bn to 2.2Bn (37%), the Middle East from 132M to 199M (50%), South America 282M to 370M (31%) and Africa from 634M to 984M (55%).  That's much more of THEM and about the same number of US.  

Capitalism has shifted from a model of GROWING the US and EU economies (since our populations have become static) to manufacturing more goods cheaper to suit the Global economy.  This is how our standard of living can consistently decrease for the past two decades without showing up because our consumers simply stop buying at the local botique and switch to Wal-Mart, where you can buy dress shirts on sale for $6.99 – the price we paid in 1980 for a tee-shirt! 

This is how the Government gets to say there's no inflation.  Forget the fact that all the stuff you buy is a generally cheap imitation of the stuff you used to buy – it's cheaper PER ITEM and we now accept the fact that clothes and couches and washing machines and refrigerators are disposable – and we buy them over and over again as the decades pass.  On the whole, this is much more expensive for the consumer than, say, our parents generation, who generally had all of their parents and grandparent's old dishes and furniture – since it lasted so long.  

At a certain point, GE can't come up with yet another reason for Mom to get a new oven.  In fact, it was a running joke on 30-Rock that Alec Baldwin was in charge of Television Programing and Microwave Ovens at GE and he had to keep coming up with crazy ideas to excite people about them both.  It is, on the whole, so much easier for Capitalists to sell you a new thing if your old thing breaks.  So the general deterioration of merchandise quality is very much a benefit to our Corporate Masters.  

Does this boost the economy?  No, not really.  Because (and here's where the whole thing falls apart), the money doesn't magically appear.  GE sells you a new microwave every 5 years because your old one blows up and you don't think twice about it.  So, rather than buying one good microwave (assuming such a thing is possible) for $500 and keeping it for 20 years or so, you buy 4 microwaves for $250 each.   

The margin GE used to make on one good microwave was 20% on $500 because they had to have the best parts (less fault tolerance) and the most skilled labor to assemble them but now they need any Chinese housewife with a soldering iron.  The mark-up is 100% on a $250 oven and if it breaks in the first year (25% chance), they just give you another one and still make 60% overall.  Between that and selling 2x the Dollar volume of ovens, GE is very, very happy. 

Making more crappy products uses more resorces, which is bad for the environment and creates more landfill, which is bad for the environmnet and uses more shipping, which is bad for the environment and the cost of buying the same things over and over and over is bad for your retirement (it's $500 worth of microwaves less you get to save) – as is outsourcing your job overseas and not paying taxes in the US (because the Cororations transfer the bulk of the profits to overseas tax havens) and all that money leaving the country and not circulating locally is bad for the US and EU economies.  

This is where Capitalism is failing US.  And by US, I'm talking about US economically in the First World as the economic engine that built us has now been thrown into reverse and is sucking all the jobs and all the local away and feeding them to the multinational 1%.  If that money were going overseas and boosting the Global GDP, it wouldn't be so bad because, after a while – a rising economic tide should lift all ships.  

That's not what's happening.  What's happening is the Corporations have gotten ruthlessly efficient at scooping up the profits as they move operations to countries where they can pay the least and pollute the most – shifting those costs to future generations while the American sheeple head off to Wal-Mart and buy items that ultimately cost them more jobs and even more money over the long-haul.

But who looks that far ahead?  

 

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