Open another browser window and point it to finance.yahoo.com. Click on the chart for the Dow Jones (^DJI) and click on the Interactive chart link on the left. Expand this out to include all the years from 1960 or earlier to the present. What do you see?
The chart is ascending slowly but steadily from 1960 to just after 1980. Then the slope increases and gets steeper still. Not only does it get steeper and steeper, it becomes more jagged. From 1980 to the peak in October 2007 the Dow goes from 785 points to 14164 or 1700% growth. Did America's economy grow 18 times larger or its population increase by 18 times? No. This phenomenal growth is due in large part to the increase in liquidity into the markets. Of course a lot of America's top companies have increased their international presence and are returning profits in foreign currencies. But their share value growth has seemingly outstripped this.
The 401K can take some of the responsibility for the exponential growth. It came into effect in the early 1980's which happens to be around the time the share markets started to boom. When workers entrust their retirement money to investors they want to see returns better than the bank. Currently the average dividend on Dow Jones component shares is around 2.66%. Interest from banks on fixed term savings are around 0.6% to 0.9%. So shares would make a better investment assuming market stability. But the real attraction in shares is their ability to realize significant capital gains. And they have certainly done that.
Capital gains are often seen as a form of bigger fool investment. You buy something in the hope that around the corner there is a bigger fool waiting to buy it from you. Reliable wealth comes from income producing assets. Business profits, salaries and wages, royalties from intellectual property, rents, dividends and interest are all forms of income. They are certainly not assured as market forces will always dictate what is worthy and what is worthless. But they come from fulfilling certain needs and wants in society and are usually more stable. Significant capital gains on the other hand are temperamental and rely to a certain extent on hope, desire and greed.
There is nothing wrong with getting capital gains from your investments. But focusing on them is the wrong way to assess the quality of an investment. If an investment pays an income you can measure objectively: for instance how long before your investment has paid for itself. And if it is returning enough you can budget to live off or reinvest the returns without eating away your capital.
Now returning to 401K or superannuation. If your retirement funds are tied up in the share markets you may see phenomenal growth when markets rise and also phenomenal depreciation when they fall. The issue is that the liquidity (extra money) that comes from funds creates huge demand for the finite number of shares. Your investment is inherently relying on continued demand. In all markets where there is a surplice of money there is inflation. Things become overvalued. If the liquidity dries up and the bubble bursts you soon find yourself left with very little value, as happened in the sub-prime mortgage crisis. You need to take an active role in deciding when and where your money is placed to avoid being caught in the next bubble.
The smart investor will look at the markets as cyclic. This is due to money flow. When interest rates are low money flows into the markets and the value of shares and property over-inflate. When the interest rates go up the share and property markets correct. This is exacerbated by the huge amounts of capital held by investment funds and their ability to move it into and out of markets at will, usually in response to reserve bank rates and other market forces. You need to think counter intuitively. When interest rates are high look to buy quality shares and property but wait till you see strong evidence of deflation. When interest rates are low and inflation is climbing look to sell, especially when the talk on the street is that interest rates may be about to go up. But if you find an investment that is returning 5-10% or more on its purchase price keep hold of it for as long as it does this regardless of the capital gains and market fluctuations. As long as it is generating income and its balance sheet is good it will always bounce back when the market recovers. Quality should always be assessed by taking into account business fundamentals and rate of return on investment.
Saturday, 30 April 2011
Friday, 29 April 2011
Is Outsourcing a Good Idea for the Economy
When the term outsourcing is used it means taking the functions of a business that don't produce income and contracting them out to other companies that specialise in these fields. Usual areas for outsourcing are IT, billing and accounting, payroll and office administration. Indeed small businesses are used to sending their paperwork down the road to the accountant's office or calling the computer shop when the PC won't boot.
Outsourcing can create greater efficiency by allowing another company to assume the costs and risks while providing your business with an SLA driven service for a predicable cost. Those costs can in turn be placed on another column of the balance sheet providing further tax benefits through smart accounting. In recent years many medium to large enterprises have moved a lot of their business functions out of the business. But they have also moved a lot of functions and processes more closely aligned to their own service offerings to outsourced service providers, many of these overseas.
If you ask this of big business or of emerging economies in India, Philippines and Malaysia they will say this is a great idea. Businesses can maximise profits while minimising costs. If a company has an International presence they can outsource to another branch and effectively offer these overseas services over their internal network.
But where does this flexibility leave countries with strong currencies and high wages like Australia? The Labour push to introduce a National Broadband Network can only further increase opportunities for companies to outsource their workforce to other lower wage countries. In fact it won't just be the low income jobs that will be affected such as call centres and manufacturing. We've already seen those jobs go. It will also be possible for Australian consumers to consult with Doctors, Lawyers and Accountants in other countries.
You may question why anyone would want to trust a professional from another country with serious health, legal or tax issues? Well what if they've received Australia qualifications and certifications from Australian Universities and asscociations? And they'll be video conferencing on links so clear you'll feel you're in the same room. Australian education centres may be affected by the high Aussie dollar but they can also reduce costs by offering more services online to foreign students. Those students may never have to leave Mumbai, Kuala Lumpar or Manila to get a good Aussie education.
So what will be left for Aussie workers? Well if you can lift a spade or hammer, drive a truck or pour a good cup of coffee you will have job opportunities. It will also work in your favour if you can sell. You just need to be prepared (when not working from home) to walk into an office and log into a thin client that offers you a desktop session running on a server thousands of miles away. When you make a sale and fill in the forms, the product or service will be dispatched or set up on the other side of the world and shipped/emailed to your client. When they call you incessantly for support it'll be because they don't like having to repeat themselves over and over to your company's call centre staff. It'll be you who has to do that.
If the Australian government is serious about protecting Aussie jobs it would do away with Payroll tax and other discouragements to business hiring local staff. It would also provide inducements for companies to hire locally. After all income tax is a big part of the government's income so it makes sense to encourage local job creation. Relying on individuals and businesses with dwindling incomes to spend locally is not going to work. There needs to be GST charged on international parcel deliveries to protect local retail jobs. Businesses of course can claim this back through the usual means. And a tax on bandwidth which is getting cheaper with every mile of the NBN would also assist with funding local projects.
Outsourcing can create greater efficiency by allowing another company to assume the costs and risks while providing your business with an SLA driven service for a predicable cost. Those costs can in turn be placed on another column of the balance sheet providing further tax benefits through smart accounting. In recent years many medium to large enterprises have moved a lot of their business functions out of the business. But they have also moved a lot of functions and processes more closely aligned to their own service offerings to outsourced service providers, many of these overseas.
If you ask this of big business or of emerging economies in India, Philippines and Malaysia they will say this is a great idea. Businesses can maximise profits while minimising costs. If a company has an International presence they can outsource to another branch and effectively offer these overseas services over their internal network.
But where does this flexibility leave countries with strong currencies and high wages like Australia? The Labour push to introduce a National Broadband Network can only further increase opportunities for companies to outsource their workforce to other lower wage countries. In fact it won't just be the low income jobs that will be affected such as call centres and manufacturing. We've already seen those jobs go. It will also be possible for Australian consumers to consult with Doctors, Lawyers and Accountants in other countries.
You may question why anyone would want to trust a professional from another country with serious health, legal or tax issues? Well what if they've received Australia qualifications and certifications from Australian Universities and asscociations? And they'll be video conferencing on links so clear you'll feel you're in the same room. Australian education centres may be affected by the high Aussie dollar but they can also reduce costs by offering more services online to foreign students. Those students may never have to leave Mumbai, Kuala Lumpar or Manila to get a good Aussie education.
So what will be left for Aussie workers? Well if you can lift a spade or hammer, drive a truck or pour a good cup of coffee you will have job opportunities. It will also work in your favour if you can sell. You just need to be prepared (when not working from home) to walk into an office and log into a thin client that offers you a desktop session running on a server thousands of miles away. When you make a sale and fill in the forms, the product or service will be dispatched or set up on the other side of the world and shipped/emailed to your client. When they call you incessantly for support it'll be because they don't like having to repeat themselves over and over to your company's call centre staff. It'll be you who has to do that.
If the Australian government is serious about protecting Aussie jobs it would do away with Payroll tax and other discouragements to business hiring local staff. It would also provide inducements for companies to hire locally. After all income tax is a big part of the government's income so it makes sense to encourage local job creation. Relying on individuals and businesses with dwindling incomes to spend locally is not going to work. There needs to be GST charged on international parcel deliveries to protect local retail jobs. Businesses of course can claim this back through the usual means. And a tax on bandwidth which is getting cheaper with every mile of the NBN would also assist with funding local projects.
Thursday, 28 April 2011
Why were we so keen to follow the US economic model?
Once the greatest economic power on the planet the USA is now burdened by huge debt in excess of 14 trillion dollars and in danger of losing its AAA rating. Of course that 14,000,000,000,000 is in USD and one way to reduce it is to devalue the USD. This week following the months before it has seen the USD sink to new lows against the major currencies.
It seems that the pure capitalist model where government is kept small and everything is privately owned (except for money guzzling armed services that it uses to invade oil rich nations with autocratic rulers it has decided it doesn't like anymore) has done little to help America stay strong. China on the other hand has a government that owns and controls a huge amount of industry, mining and utilities. Not only that, China owns a huge proportion of American debt, which US governments are seemingly powerless to repay.
How can the US government repay its debts? It doesn't believe in raising taxes. And it doesn't believe in owning anything that makes money. But it does love spending money it doesn't own on things that go bang in other people's back yards.
Its governments say it is the defender of democracy and freedom and yet in parts of the US it would seem the only entities with democratic rights are the mega corporations. For instance a well known seed producer can sue a farmer if its genetically modified plant materials are blown by the wind onto his property and fertilise his crops; and a water company can sue home owners for installing water tanks. Where's the justice in these situations.
For a long period during the 1980s, 1990s and early 2000s other western countries like Australia and New Zealand moved away from their 'socialist' style governments to a more US styled democracy, selling or privatising their assets. Fortunately they did couple this with fiscal responsibility, keeping foreign debt under control. But if a government has no assets what is it going to do when times are tough and tax income falls? It ends up borrowing money (or selling bonds).
The path to true wealth is simple. You need to create and grow multiple income producing assets. Don't look at the capital gains aspect of the asset's value but rather look at the residual income from things like interest, dividends, rent or turnover. Governments should do the same. They should own banks, utility companies, businesses and rental properties. They shouldn't try to weaken private enterprise or lessen competition by doing so but they should also keep big business honest, especially in areas where competition has been reduced. But government enterprises do need to be more closely monitored, to keep them competitive and free of corruption.
By not limiting itself to borrowing or taxing to raise income our governments could also achieve remarkable GDP growth and improve the living standards for all citizens. That's what democracy is all about.
It seems that the pure capitalist model where government is kept small and everything is privately owned (except for money guzzling armed services that it uses to invade oil rich nations with autocratic rulers it has decided it doesn't like anymore) has done little to help America stay strong. China on the other hand has a government that owns and controls a huge amount of industry, mining and utilities. Not only that, China owns a huge proportion of American debt, which US governments are seemingly powerless to repay.
How can the US government repay its debts? It doesn't believe in raising taxes. And it doesn't believe in owning anything that makes money. But it does love spending money it doesn't own on things that go bang in other people's back yards.
Its governments say it is the defender of democracy and freedom and yet in parts of the US it would seem the only entities with democratic rights are the mega corporations. For instance a well known seed producer can sue a farmer if its genetically modified plant materials are blown by the wind onto his property and fertilise his crops; and a water company can sue home owners for installing water tanks. Where's the justice in these situations.
For a long period during the 1980s, 1990s and early 2000s other western countries like Australia and New Zealand moved away from their 'socialist' style governments to a more US styled democracy, selling or privatising their assets. Fortunately they did couple this with fiscal responsibility, keeping foreign debt under control. But if a government has no assets what is it going to do when times are tough and tax income falls? It ends up borrowing money (or selling bonds).
The path to true wealth is simple. You need to create and grow multiple income producing assets. Don't look at the capital gains aspect of the asset's value but rather look at the residual income from things like interest, dividends, rent or turnover. Governments should do the same. They should own banks, utility companies, businesses and rental properties. They shouldn't try to weaken private enterprise or lessen competition by doing so but they should also keep big business honest, especially in areas where competition has been reduced. But government enterprises do need to be more closely monitored, to keep them competitive and free of corruption.
By not limiting itself to borrowing or taxing to raise income our governments could also achieve remarkable GDP growth and improve the living standards for all citizens. That's what democracy is all about.
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