By Paul Tolnai | 22 May 2008
|
Well, imagine for a moment that there is a budding craze developing around toilet paper. Yes, plain old-fashioned TP is about to become the next "big thing" in the investment universe. Now some folks might just continue to consume what they need, while others will begin to horde TP like crazy. Soon the backyards of North America may be filling up with rented shipping containers to provide the storage space for that most valuable of all commodities— TP. Still others, the smart set, will make a play on TP future contracts, and options on TP manufacturers.
What will be the consequence of all this activity? Well the price of TP will skyrocket and the hoarder/speculators will become rich. And yes the more levered they are, the more of a modern day Croesus they will have become— everything they touched seemed to have turned into TP. These high TP prices will have created an affordability issue and there will be a growing call for the establishment of a Federal Toilet Paper Administration (the FTPA) to provide more liquidity (eau de toilette?) to the TP marketplace.
However, this may all seem a bit irrational to some of you because nowhere was there a real increase in demand for TP, or curtailment of supply. Some of you may think this all a bubble which will have to, sooner or later, be flushed away. The hoarder/speculators will be stuck with a bunch of TP that isn't worth, well, more than toilet paper [[actually, quite a bit less: he forgot to mention that during the TP "crisis", the capacity to manufacture TP increased by at least 10-fold and, moreover, all of those TP hoarders will be trying to unload TP at about the same time!: normxxx]]. They're in distress. What to do? Should the FTPA be given an expanded mandate to help relieve the distress, or should this job just be offloaded to Fannie Mae? (sorry 'bout that; couldn't resist).
Two potential solutions will present themselves in this coming scenario/crisis. The one "solution" is to tax, one way or another, overtly or stealthily, the non-hoarders in order to rescue the backyard TP stuffed container people— to accommodate "stability". Why? And what good will that do? What happens when a mania on Kleenex tissue develops— and what is going to stop that from developing? There will be potential profits to be made then, and the same arguments for mitigating losses will be served up then as well. On the other hand, the TP hoarders that can't pay their debts could simply have their assets seized and liquidated. What would the outcome be? Well, the price of TP will come down and TP will become plentiful and affordable again. Is that so bad?
Well, that's a bit simplistic because one is forgetting about the devastating effect this would cause the speculators. Can you imagine the Wall Street crowd having to power lunch at Micky D's instead of the '21' (.....oh the humanity!). And what of all the TP hedge funds and the banks who provided the leverage? Are you forgetting that our banking system is a fractional reserve one and it is likely that their losses will exceed their capital?
It seems to me that we are living in a derivative world. If one focuses just on the physical toilet paper, the problem isn't really all that complex. The problem arises due to the increasing financialization of our economy. Everything from physical commodities, to the paper security instruments of the stocks of productive companies, to the intangibles, such as interest rates and credit risks become nothing than more than "play activity" in this derivative world of ours. Of course, that will be countered with the 'efficient markets' counter argument: that all this capital shifting hither and tither, to and fro, arbitraging its way into the crevices of inefficiencies and smoothing them out is actually good for the overall economy.
But all of this strikes me as nothing more than a debate between a pragmatic roll-up-your-sleeves world and the world of the chalkboard, nothing more than a philosophical debate over a priori versus a posteriori knowledge. If all of these efficient markets nostrums are so right on the money, how could the men and women of America in the 1940's, '50's, and 60's, who built up this great land of ours, be so utterly ignorant? And how did such vast ignorance yield such stellar results? And how indeed, could such wonderful theory yield such abysmal results? With apologies to Nassim Nicholas Taleb, perhaps it wasn't a black swan that so recently disturbed our economic pond— I believe it was just a run of the mill American Turkey.
The physical sciences periodically go through paradigm shifts: the materialistic view of Thales supplanting the Olympian, the mechanical view of Descartes and Newton, the relativistic and quantum mechanical views of Einstein and Heisenberg. All of these shook up man's view of his physical world. Perhaps too, economics can revisit its fundamental assumptions as well. I would suggest revisiting the Modigliani-Miller theorem and its capital structure irrelevance principle. Although not cause and effect by any means, not long after its acceptance into the corporate finance world, the U.S. was transmuted into a fiat money economy and it seems one was the fulminate of mercury to the other's dynamite.
So what does the world of corporate finance post Modigliani-Miller, investment houses, hedge funds, credit default swaps, fractional reserve banking, and traditional security derivatives have in common? Simply put, a propensity toward leverage. Even current Black Swan theories attempting to explain what went wrong resemble an apologia. It wasn't the strategy of camping out in Vegas, per se, that is the result of your downfall, rather, "what are the odds, who coulda known" that the dealer would have had such a [bad] run. Asian countries save 15% to 50% of their income; we use to be the world's largest creditor nation. Now we worship debt.
In 1847 in a Vienna hospital, Ignaz Semmelweiss noticed a dramatically high incidence of death among women who were assisted in child birth by physicians who had come directly from autopsies. He recommended some practical reforms, like washing of hands [[and the changing of the surgeons outer 'robe', on which was borne every mark of past bloodied encounter, like a badge of honor: normxxx]]. It was a practical instinct that animated him since this was before the germ theory of disease [[and even 'correlation' was unknown, since statistics was still largely a hobby of a few mathematicians and hardly taken seriously by 'real men of learning': normxxx]]. Despite the devastation all around them, his recommendations were viciously attacked by the establishment. Let us learn from history and return to the practical ways of our forebears.
Many years ago Alexander Pope, wrote:
|
So until that time comes, when a new paradigm is revealed to us, and we can all bask in the light, returning to the practical ways of our forebears might very well mean, what people across civilizations have been doing for the past few thousand years: trust in gold.
ߧ
Normxxx
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
No comments:
Post a Comment