The Global Euro

Let's take a trip through Tim Cook's head. What must be Tim's constant thought? Well, as CEO of the best company on the planet, it must be: how to continue being the best company on the planet over the next decade, or so. Best, of course, from Wall Street's perspective. After that, he'll just pull the rip cord on his golden parachute.

How did Apple get here, one might muse? Was it Steve's genius? Not really. Apple rescued Steve as much as Steve is credited with saving Apple. Next was a failure, pure and simple. Until the iPhone, Apple was just a niche personal computer company. Still is, if you cull out all the non-computer revenue from the filings.

All that wonderful gross margin from iStuff comes from a simple fact: Apple works by cheap goods sold dearly. It has managed to do this by the cult of personality of Steve. The innards of any Apple product are bought in off-the-shelf. Yes, I know: the Ax cpu is wholly Apple's creation of genius engineering, blah blah blah. Fact is, not so much. All the teardowns of the various A chips indicate: added more cache, added more gpus (bought in, of course), and did a good bit of manual layout. The ISA of an ARM chip is set. The node is set by what the foundries can do. If the MO of Apple were not clear before, then the destruction of GT Advanced Technology should make it clear: Apple gives you a pittance, then shoves a telephone pole up your butt. Which fact answers the Big Question: why does Samsung supply Apple? The answer is, they can afford to. Only another economic Gorilla can. It's what the econ types call countervailing power.

It's worth recalling that the first iPhone had a strong advantage for the first couple of years: Apple had captured the supply market for cap touch screens which fact limited competition severely.

(I started this missive while still on the Island, and it's now mid-day Tuesday. I'll wait for the Apple quarterly news before continuing, although the share price isn't moving up.)

Just got back from a teeth cleaning, and Apple is getting cleaned in after hours. I'm going to wait until 8 pm eastern to continue. ... Was down a bit in after hours, now up a bit in pre-market. So.

"The law of large numbers does kick in," he added."Can the iPhone grow another 2-3 years or is it done growing?... I think investors are worried about the next two-year period. 'Can there really be iPhone growth?' Because absent that there's not really going to be much growth from Apple."

In simple terms: China was the last roll-up opportunity. If that sounds alien, check out what's been going on with Valeant; roll-up city. This quarter went OK, and Christmas may as well. Does either speak to the future? No.

Which brings us to Germany, Greece, the Euro, and the Trilateral Commission. One of, if not the largest, paranoid fantasy of the far Right.

On the right, a number of prominent thinkers and politicians have criticized the Trilateral Commission as encroaching on national sovereignty. In his book With No Apologies, former conservative Republican Senator Barry Goldwater lambasted the discussion group by suggesting it was "a skillful, coordinated effort to seize control and consolidate the four centers of power: political, monetary, intellectual, and ecclesiastical... [in] the creation of a worldwide economic power superior to the political governments of the nation-states involved."

Well, perhaps The New World Order is.

The point, of course, is that Germany, through the elegant expediency of forcing the Euro down all those countries' throats, has the benefit of a New European Order, which solely benefits it. While Volkswagen can adjust the price, in Euros, of the Passat across the countries (last issue of report), higher in France while lower in Greece, for example recognizing ability to pay; this is an active step which is totally different from the passive shocks incurred when China, say, pulls the rug out from under the Renminbi. What Apple wants, should Tim ever admit it, is for all countries to do as Bermuda has: a fixed 1-for-1 exchange with the US Buck. Bermuda even calls it a Dollar. That's what Germany got with the Euro. That's what Apple, and the rest of US multis want. Each quarterly they bitch about "currency problems".

A New World (Monetary) Order controlled by Apple and fellow co-conspirators wouldn't upset them in the slightest.

I Still Hate Neil Irwin, part the third

Spent the last week on the Island, wonky WiFi and just the Wifey's Windoze laptop. No editor or links. Very quiet on the rabble rousing front. So, I get back and The Times does its cynical, or ironic, or sarcastic two-step. Time to rabble.

First, a long piece on collapsing commodity markets. I'll just leave that for you to peruse at your leisure. No, this missive is all about Neil Irwin and me. Yum.

More than once, I've referenced pieces by the esteemed Mr. Irwin because they provide reportage proving (or, at the least, demonstrating) certain themes of these endeavors. Most often, as this one, they deal with quant (data) issues in macro-economics. Always a thorny problem. Most macro data is generated as sample surveys of business and labor.

Today's piece deals with a subject near and dear to my heart: Dee Feat is in Dee Flation. Not been a missive under that title in some time. Not that there's been a dearth of data, of course, just that the tune remains the same: we're headed down the rabbit (or, rat, as you prefer) hole of deflation. The cash hoarders look likely to get their return on idle moolah. Sigh.

Irwin takes a new path. One I haven't discussed since, I'll guess, grad school. Perhaps undergraduate. The dreaded Phillips curve. He explains, a bit.

How much faith should be placed in a line on a graph first drawn by a New Zealand economist nearly six decades ago, based on data on wages and employment in Britain dating to the 1860s?

The answer, of course, is not much. Phillips, as many macro-economists (esp. of the Right Wing, labour hating, branch), assigns only that sole cause to inflation. But, as the first piece so clearly shows, flation isn't just about wages. Far from it. Just ask your local greasy spoon proprietor why s/he's exploded the price of your 2 over easy.

As the Fed's chairwoman, Janet L. Yellen, put it in a 2007 speech, the Phillips curve "is a core component of every realistic macroeconomic model."

Except it doesn't work. Or at least, it hasn't worked very well in the last few decades in the United States. And it has proved particularly problematic to try to use that historical relationship to predict where inflation is going.

What he neglects, shamefully, is tell the reader about other drivers of flation. That's my task. Again.

To refresh, there are three ways flation (either direction) happens:
- wage push
- cost push
- demand pull

The first happens when workers get paid more than their marginal product (wiki), at least according to even Right Wingnuts who worship at the feet of classical economics. Otherwise, it's just Social Darwinism with capital compressing wages to subsistence, i.e. slavery without the chains. Which worked fine, in a macro sense anyway, during pre-industrial and even early industrial regimes. These days, with such heavy capital requirements, the The Tyranny of Average Cost™ makes it a fool's enterprise. Irwin goes on a long discussion of why Phillips and actual inflation are disconnected, beyond the simple arithmetic.

The second happens when there's not enough widgets to satisfy needs. Petro goes through cycles, which we're always experiencing. And, for the nonce, your 2 over easy. Why the likes of Irwin can't point out this obvious fact is puzzling. Over the decades, and centuries, I'd wager that material shortage is the number 2 cause of inflation.

Finally, that third is what the Right Wingnuts prefer to call "debasing the currency", and why they hate QE and fiscal policy and every other tool used to resurrect an economy. Argentina in the 1980s. But even Left Wing economists know that dropping moolah from airplanes will, if long enough and large enough, cause inflation. This is particularly true when an economy:
- is largely non-self sufficient
- lacks surplus capacity in desired widgets

In other words, the USofA today. Financialized economies, Bermuda is my favorite whipping child, are more susceptible to demand pull inflation, since the moolah dropped from airplanes won't be spent on domestic production. Spent on domestic production, the point of dropping moolah from airplanes, we find more demand for home grown widgets; thus more employment, more investment, more profit and so on. The point of dropping moolah is simply to get folks buying stuff. However, if the stuff isn't created domestically, the follow-on benefits don't occur. And so it was in Argentina.

Simply relying on naive` Phillips is foolish.

If you simply look at the unemployment rate in the United States versus the Consumer Price Index, excluding volatile food and energy prices for every year since 1958, there is nearly no statistical relationship at all, just a jumble of dots. (A best-fit line actually points the wrong direction, correlating higher unemployment with higher inflation, albeit very weakly.)
[my emphasis]

To the rescue comes a Freshwater Economist, Robert J. Gordon of Northwestern. Yes, another nerd who sees the future as distinct from the past. The link is an interesting read, for nerds anyway, but on to the day's topic:

Robert J. Gordon, an economist at Northwestern University, has his own version that he argues explains inflation levels throughout recent decades. But it is hardly simple. Its prediction for inflation relies not just on joblessness but also on measures of productivity growth, shifts in food and energy prices and overall inflation over the six preceding years.
...
or by factors that policy makers have little control over (like what happens to oil prices)

In other words, the sum total effect of those two other, oft ignored, forces. It ain't just the greedy 47%.

The 2 Percent Solution

For some time, both the quant version of these endeavors and the macro-economic version have harped on the quite apparent lack of investing in real assets. Corporations are sitting on $2+ trillion just overseas. QE money has largely gone to financial instruments. True innovation in physical widgets has clearly stalled: the best new thing is Force Touch on an iPhone?? Really?

The CxO class just can't seem to find creative ways to allocate fiduciary capital to physical form. I found this HBR piece recently and was going to write it up. Nah, just go read it. The bottom line, so to speak, is that the Masters of Wall Street are extorting the CxO class to put moolah into fiduciary, rather than physical, investment. The United States of Bermuda.

Well, even Yahoo! Finance (am I the only one to view that as oxymoronic as "happily married"?) now gets it. Real value in an economy comes from physical investment in productive processes. Finance and real estate and insurance (FIRE, as it's known) are just ways to skim moolah off the transfer from savers to borrowers. All their profit comes from extortion. The American Way.

Hubris

Volkswagen demonstrated, once again, that The Masters of Universe make money the old fashioned way, they steal it. So, what does the Angela of death have to say?

"I believe the reputation of the German economy and the trust in the German economy has not been shaken by this to the extent that we are no longer considered a good business location," she told Deutschlandfunk, according to the text of an interview due to be broadcast later on Sunday.

Of course, Germany is a good place to do business. Government is the lap dog of business. Germany didn't define fascism, Mussolini did, but they perfected it. Government for, and by, capital. So long as Germany can export, particularly in the fixed rate Euro, it can sit fat and happy. Without export, the German economy collapses. Much like China.