“That’s a matter for The Committee”

                         8 July 2015

Periwinkle,

   That which is least
   Natural is least fluid.

             Well, I thought I’d drop you a brief line this morning. Recent events have been of interest. It is simply a fact that today, perhaps more than ever prior, one must be able to glean what governments, central banks, NGOs and sovereign wealth funds are themselves intending prior to making any material decisions one’s self. Think this through a bit while sitting on the riverbank under the shade of your favorite local oak. The above noted players are nothing more than themselves market participants. Add in pensions, d/c plans, hedge funds, mutual funds, annuity subs, private equity, the large firms and you’ve come close to covering the players which dictate behavior. The committees. Retail is there as well, but principally through the above.
             In November, the Chinese opened the gates. By June, things had gotten quite elevated. Recently, matters reversed. What role have the above global characters played in the build and reversal? There has been much in the limelight about margin and local retail, but one should glean reality in part from the more lofty institutional folks and their actions. The move by the Chinese regulators to limit selling by the greater percentage stake holders was a shrewd decision. This may have curtailed the vehement conviction of the “negatives”. Who are the negatives? One does not know the true state of finances in the People’s Republic. Opacity still looms. What are the liabilities at the local level? Entitlements, demographics… However, is this new? Does it relate to recent market behavior? Are things coming to fruition? Or, is another day in the wild west playing out?
             It was unfortunate to read that the Conservatives have given in to the hike minimum wage theory. This evidently is being cast as a political trade off related to the soon to be implemented welfare reforms. It should remain the case that firms set their own wage schedules, not government committees. Man can think for himself, choosing an employer which offers the right blend of wages and benefits as seems suitable for his or her skill set and aspirations. Firms understand the global market place better than public committees and certainly the efficient allocation of resources. Governments appear to be reaching to elevate inflation. As you realize, Periwinkle, there are a host of reasons for this paradox; principally among them gross indebtedness. Drive prices higher, regardless of higher wages, drive economically nowhere. This applies here in the states as well as one can feel the pressure on the minimum wage front. Fathom if there were not the great indebtedness levels. Prices could decline and wage inflation would be less sought out by the committees. Low productivity may be the natural wage bump fix. Welfare reforms loom across many countries; mandatory wage hikes should not be the quid pro quo. Welfare in the US pales next to entitlements, defense, and interest on the debt as a percentage of the US budget. How transfers affect employment behavior, another matter all together. Speaking of budgets, local pensions and indebtedness, I see Puerto Rico and Chicago are the news again of late… Maybe public sector union reforms are going to finally play out, Periwinkle.
             Are firms behaving rationally “reshoring” their investments? Why would a US firm wish to relocate plants to the country given the newly mandated health care plan, which is unconstitutional, higher relative tax burdens (realistically likely to increase), environmental hurdles, significant regulations, and today potentially higher mandated wage rates? Energy rates are off so global transportation to markets costs less. Look at matters through a pure lens. Are markets behaving naturally? I remain firm in my conviction that it is without question in the interest of this country for the lesser developed countries to experience growth. There is a moral tinge to this, Periwinkle. Gleefully a greater bent towards the secular perhaps and less so towards global religious dogmatism. This mode of thinking seems out of favor lately, however. It means encouraging investment into the lesser developed countries. The wonks, their committees, are looking at things too much from a political / security standpoint. Down the road for a host of reasons we’ve already discussed, this will prove to have been a mistake. Cultivate economically the great populations of the developing states, productive future gardens. Rising global living standards mean higher international education levels. Further implications are better trade accounts and better national finances.
             It is understandable that developed countries need an expanding tax base to unwind the excesses of the past numerous decades. However, a rising global customer base is a greater consideration. To maintain and perhaps elevate domestic investment, provide the right economic climate. Given the fundamentals at the moment, this is not a simple affair. Folks are concerned about the economic divide. The fact is that monetary policy has to a degree enlarged the divide which is a phenomena of asset appreciation given a prolonged period of loose money. The policy authorities, sorry – committees – I wish to remain consistent, felt it their obligation to stabilize the global financial system to avoid what would have been a second Great Depression; however, the lengthy period of lower rates has had its standard effect of skewing matters. The wealth effect in this regard is less material for folks whose wealth is in their 401k and home. Business investment and entrepreneurial instincts are only somewhat influenced by prime at present levels. Therefore, the optimistic objective of getting wages to rise in this regard (new investment and business creation) is simply wishful thinking. It’s somewhat late in the day as well. Private sector demand is a greater consideration. Note I did not write public sector demand, infrastructure borrowing, etcetera… It is the case that the tax cut of lower interest burdens has been a financial salve; but, consumers, though certainly spending, remain concerned with continued balance sheet repair and saving rather than significant spending. Granted, of course, there’s not much incentive to save given present interest rates levels. How to further increase savings levels should be a significant consideration for the committee. We need more global customers. One might as well note also that the recovery is long in the tooth. Committees are going to be low on ammunition, Periwinkle.
             Might just as well close out with matters in Europe. Financially responsible, albeit quasi-socialist, states in the north are now being looked upon negatively in the press and by the non-financially responsible government leaders and citizens of some of the southern states. This was an inevitable and unfortunate outcome. Culture is a tough matter to change. The EU is not a federal body and the cracks are clear. The larger issue is how the project can tranquilly unwind. Sovereign states can trade among themselves. Most folks today are concerned about Greece exiting, but the honest question is, How can all countries exit peacefully with the lowest possible level of financial trauma? As we’ve discussed countless times, all matters economic and political are best implemented and maintained at the most local level. This is a natural and true state.

Better cut it off there. As always,

                     I remain your most humble servant,
                     Tetraneuris

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