By Ajay Shah, on August 12th, 2009
Air India has got itself into serious trouble, and private airlines are also doing badly. The CMIE report on air transport for August 2009 shows a bad picture for the airline industry: from the quarter ended June 2007 onwards, in each quarter, the PAT margin was negative.
There are three interesting aspects to the present situation. The first is about the role of the State. Flying by plane is a private good and not a public good. Seats in a plane are rival and excludable. I fly in a plane, I benefit. There is, hence, no role for government to be in this area. Governments in good countries do not run airlines. The right thing to do is to privatise Air India as soon as possible, without trying to engage in a government-led restructuring. In an auction, if the highest bid is a negative number, government should pay this to get the company out of public ownership.
The next point is the cost of a bailout. NHAI highways cost roughly Rs.5 crore per kilometre. Hence, if government puts Rs.5,000 crore into Air India, this comes at the opportunity cost of 1000 km of four-lane highways.
The most interesting dimension, and one that has not been widely noticed in India, is the impact of Air India upon the woes of the aviation industry. Air India today is a `zombie airline’: a firm which should be dead but isn’t only because it is artificially propped up by the government. (The phrase `zombie firms’ or `zombie banks’ originates in the experience of Japan in the late 1980s).
If market forces were allowed to work, then Air India would go into liquidation. This would lead to somewhat higher prices for air travel since competition would be reduced. In addition, it would lead to somewhat lower prices for staff (since erstwhile Air India staff would be looking for jobs) and somewhat lower prices for planes (since erstwhile Air India aircraft would be available for purchase or lease).
Other firms in the industry would thus obtain somewhat higher revenues and face somewhat lower costs.
Conversely, when a government steps in to create a zombie firm in an industry, it damages profitability and investment amongst the healthy firms of that industry. If this process goes on for a while, then otherwise healthy firms in an industry will become sick. This was the experience in Japan, when the `zombie firms’ supported by the government led to sickness spreading amongst other firms and led to a extended period of reduced private corporate investment.
In summary, one reason why the private airline industry as a whole is in the doldrums is that Air India is being artificially kept alive.
By Winton Bates, on August 12th, 2009
“Societies need subjective indicators of well-being to aid policy makers and ordinary citizens in making decisions.” This is the opening line of the recently published book, “Well-being for Public Policy” by Ed Diener, Richard Lucas, Ulrich Schimmack and John Helliwell. The first three authors are psychologists (Diener has played a leading role in the field of happiness research) and Helliwell is an economist.
The final sentence of the first paragraph explains: “Overall, accounts of subjective indicators of well-being will help policy makers make wiser decisions regarding policy alternatives and help citizens be better educated about the choices that affect their lives”.
I am in favour of research to enable people to become better informed about the choices that affect their lives. I hope that what the authors mean by “help citizens to be better educated” doesn’t involve anything more sinister than publication of research findings.
While reading the book I became irritated by what seems to me to be a naive view it presents of the policy making process. Although the nature of policy making is largely incidental to the purpose of the book, I will devote the remained of this comment to policy making. I promise to focus on the substance of the book in a later post.
According to the “public interest” view presented in the book, public policies are made by “policy makers” who would make wise decisions if only they knew what policies would improve the well-being of citizens. In reality, however, the policy making process is a messy business which involves politicians seeking votes and hoping to further their careers, civil servants seeking to expand and protect empires, voters who have little interest in most policy issues and even less incentive to understand likely consequences of the proposals being considered, interest groups seeking to further the interests of the people they represent and electoral rules that may give disproportionate power to particular groups. The process also attracts ideologues of various kinds who wish to advance their particular views of the good society.
In my view, rather than attempting to persuade us that more information on the subjective well-being of citizens would help some hypothetical “policy maker” to make better decisions, it would have been better if the authors had sought to persuade us that this information would enable policy processes to produce better outcomes.
Would this have made any difference to the book? Although the basic arguments about the validity of subjective well-being measures and their potential usefulness would have been unchanged, I think this change of focus would have made some difference. In particular, it seems to me is that the authors would have had less difficulty convincing readers that they “do not advocate the idea that governments should intervene strongly to move society towards a primary goal of increased well-being” (p209). When most of the book seems to be devoted to telling “policy makers” how they can use subjective information to improve the well-being of citizens it is natural enough to expect readers to be concerned that some “policy makers” might act paternalistically in using this information. Some readers might not be entirely reassured that paternalistic “policy makers” would have regard to the findings of happiness research which show that humans tend to feel most satisfied when they perceive that they have freedom to choose how to live their lives.
The problem of how paternalistic interventionists might like to use research findings is placed in perspective once it is recognized that competing interests are involved in policy-making through discussions in a range of different forums. These discussions are about various things, but the matters discussed by vast majority of participants usually relate in some way to the effects of different policies on the well-being of people.
The important issue is whether measures of subjective well-being can make useful contributions to the discussion of policy issues.
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By Bron Suchecki, on August 11th, 2009
Amusing read from Unqualified Reservations (UR) blog. Introduction comments:
Here at UR, “economics” is not the study of how real economies work. It is the study of how economies should work – in other words, of how sound economies work. Sound economies, as we’ll see, are also stable economies.
Since there are no economies on the planet which are even remotely sound, nor is there any prospect of any such thing appearing, this discipline cannot conceivably be empirical, quantitative, or worst of all predictive.
Readers familiar with Austrian economics will find much to skim, especially at the start, but should also watch out for nontrivial differences in the origin of money and the structure of the loan market.
By Trace Mayer, on August 11th, 2009
Market liquidity is a business, economics or investment term that refers to an asset’s ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. As market liquidity dries up then the bid and ask widen. The depth and breadth of United States financial markets has provided significant liquidity which has resulted in tremendously inflated illusory asset prices.
This will be an introduction to The Depository Trust and Clearing Corporation along with a brief analysis about how by its very nature market liquidity can evaporate extremely quickly which would destroy your value and purchasing power and what you can do to protect yourself.
THE DTCC
The Depository Trust And Clearing Corporation, or DTCC, plays a primary role in preserving liquidity in US financial markets. The DTCC, through its subsidiaries, clears and settles transactions for money market funds, general equities, corporate bonds, municipal bonds, mortgage-backed securities and even the nefarious over-the-counter derivatives. Subsidiaries include the National Securities Clearing Corporation, The Depository Trust Company, Fixed Income Clearing Corporation, DTCC Deriv/SERV LLC, DTCC Solutions LLC, EuroCCP Ltd. and a joint venture, Omgeo, which ‘plays a critical role in institutional post-trade processing, acting as a central information management and processing hub for brokers, investment managers and custodian banks.’
The DTCC is the largest depository in the world. It provides custody for more than 3.5 million securities issues from the United States and 110 other countries around the world. The DTCC has custody of approximately $40,000,000,000,000 of assets. A shareholder under corporation law is someone who is registered on the stockholder’s list. Being a shareholder can impart many rights under corporation law. The DTCC, through ‘Cede & Company‘ is, in many cases, the only shareholder of many publicly traded corporations. This is accomplished through an indirect holding system.
As Professors Baums & Cahn observed in their working paper “The Rise And Effect Of The Indirect Holding System: How Coprorate America Ceded Its Shareholders To Intermediaries” on page 23
The ultimate goal in this model is for all issuers to cede control of shareholder data to a single entity, which would then conduct all of the market’s transactions on its books, just as if all securities in circulation on the market had been dematerialized. Today, in fact, it is likely that a listed company will have only one registered shareholder, appropriately named “Cede & Company”, the nominee of the Depository Trust Company (DTC), which is a subsidiary of the Depository Trust and Clearing Company (DTCC), the entity whose group clears and settles almost all transactions entered into on organized markets in the United States. The rules of DTC require that Cede be registered as holder for all deposited securities.
For shareholders, such as Cede & Company, there are several advantages for corporations having only one shareholder. A few examples include, (1) clearing and settlement of shares can be accomplished quickly which provides increased liquidity (so long as there is confidence in the system), (2) shareholder derivative lawsuits brought by minority shareholders are more difficult to prevail with, (3) under the Uniform Commercial Code §8-207(a) there may be a rebuttable presumption that provides that an issuer (corporation) may have the right to deal solely with registered shareholders, (4) under corporation law a duty generally arises that provides for corporations to give notice of annual meetings, voting, dividends, etc. to shareholders, and (5) shareholders should be able to contact each other directly and the shareholder manifest contains the contact details.
DTCC OPERATIONAL ACTIVITIES
On 9 June 2009 Larry Thompson, General Counsel for the DTCC, testified before the United States Congress’ Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, that
Now many of you may not have heard of the DTCC before. That’s purposeful. We have traditionally kept a low profile, given the nature of the role we play in U.S. financial markets. Last year DTCC settled $1,880,000,000,000,000 in securities transactions across multiple asset classes. We essentially turnover the equivalent of the U.S. GDP ever three days – and we provide the post-trade processing efficiency and low cost that attracts investment capital that helps fuel the U.S. economy. [emphasis added]
According to the DTCC 2009 annual report the company had $1.4B total revenue, $127.6M of net income, paid $22.8M in income taxes and had an $11.4B increase in cash and cash equivalents.
DTCC BOARD OF DIRECTORS
The DTCC’s board includes 20 directors. For those who have read The Creature From Jekyll Island or Secrets Of The Temple many of the institutions will be familiar. It is interesting to see the correlation between firms that have received bailout funds and members of DTCC’s board of directors. So, for those who have wanted to put faces with those who have received bailout money. Perhaps making off with all those millions in bonuses is why they are all smiling?
 |
Art Certosimo |
Senior Executive Vice President |
Bank of New York Mellon |
 |
Norman Malo |
President and CEO |
National Financial Services LLC; Fidelity Investments |
 |
Stephen P. Casper |
Partner |
Vastardis Capital Services |
 |
Gerald A. Beeson |
Senior Managing Director & Chief Operating Officer |
Citadel Investment Group, LLC |
 |
Louis G. Pastina |
Executive Vice President |
NYSE Operations; NYSE Euronext |
 |
Donald F. Donahue |
Chairman and Chief Executive Officer |
The Depository Trust & Clearing Corporation |
 |
William B. Aimetti |
President and Chief Operating Officer |
The Depository Trust & Clearing Corporation |
 |
J. Charles Cardona |
CEO of The Bank of New York Mellon – Cash Investment Strategies |
President of The Dreyfus Corporation |
 |
Randolph L. Cowen |
Co-Chief Administrative Officer |
The Goldman Sachs Group, Inc. |
 |
Norman Eaker |
Chief Administrative Officer |
Edward Jones |
 |
Timothy J. Theriault |
President – Corporate & Institutional Services |
Northern Trust Company |
 |
Neeraj Sahai |
Managing Director and Global Business Head |
Securities and Fund Services Citi |
 |
Gerard LaRocca |
Chief Administrative Officer |
Americas Barclays Capital |
 |
David A. Weisbrod |
Managing Director and Risk Executive |
JPMorgan Chase Bank |
 |
Stephen Luparello |
Vice Chairman and Senior Executive Vice President of Regulatory Operations |
FINRA |
 |
Mark Alexander |
Managing Director, Global Wealth & Investment Management – Bank of America Merrill Lynch |
Head of Technology Operations – Broadcort Clearing |
 |
Ronald Purpora |
President |
ICAP Securities USA LLC |
 |
Robert Kaplan |
Executive Vice President |
State Street Bank & Trust Co. |
 |
Michele Trogni |
Managing Director and Global Head of Operations |
UBS Investment Bank |
 |
Ian Lowitt |
Administrative Officer |
Lehman Brothers |
DISADVANTAGES OF CONSOLIDATION
The more consolidation the more risk of a systemic failure. Should there be a systemic failure, or even the perception of a system failure such as the firesale which formed the plot of the movie Live Free or Die Hard, then market liquidity would quickly dry up in this interconnected and increasingly location independent world.
Should there be actual damage to the records held by the DTCC then sorting out who owns what could get particularly interesting. There would be a lot up for grabs all at once. Like with the bailouts the environment would be ripe for fraud. The DTCC is a member of the Federal Reserve System; that same system which has been funneling trillions of dollars of bailout money to private financial interests without due process.
REDUCE RISK
Simple actions can be taken to reduce your risk. You can eliminate as many layers of institutions and organizations as possible between you and your assets. Wealth takes two primary forms as either a tangible or financial assets. Tangible assets have intrinsic value. Financial assets derive their value from underlying tangible assets.
During The Great Credit Contraction capital has continued to seek the safest and most liquid assets. For example, as capital migrated down the liquidity pyramid from Auction Rate Securities into Treasuries the ARS market evaporated. So likewise major events, real or fabricated, like the crisis during the fall of 2008 can quickly dry up liquidity.
The quoted price for assets is becoming increasingly illusory because of the fake liquidity which will learn how to vanish. For example, the NYSE reported, “Due to an NYSE system error, Goldman, Sachs & Co. was inadvertently omitted from the chart of most active firms, but the firm’s program activity was included in the total level of programs as a percentage of NYSE volume, which remains unchanged at 48.6 percent.”
Given the large degree of illusory liquidity currently in the market and the control by a single institution, who is of course represented on the board of the DTCC, the risk of illiquidity is increasing as the share of volume increases with those institutions.
Of course, if you want to reduce as much risk as possible you can move your capital to the safest and most liquid asset and just buy gold. To diversify you could buy some silver or even purchase platinum. You can eliminate debt with the intrusive loan disclosures.
You could also take possession of your share certificates and be entered on the shareholder manifest. Mr. Warren Buffett also prefers shareholders of Berkshire Hathaway, whom he views as long-term partners, to take physical possession of their certificates instead of being held by “Cede & Co.” or via some other intermediary. Prior to 2003 he would make a contribution to a recognized of the shareholder’s choice for each ‘A’ share they had taken possession of and those held in via intermediaries forfeited the charitable contribution. In the 2003 Berkshire Hathaway Annual Report Warren Buffett wrote, “We recommend that you use certified or registered mail when delivering the stock certificates and written instructions.”
CONCLUSION
The corporate governance of U.S. publicly traded companies has been increasingly weakened as shareholders have been ceded to intermediaries. The DTCC, through Cede & Co., is the sole shareholder of record for many, if not most, publicly traded companies. The board of directors of the DTCC are from many institutions which United States Congresswoman Marcy Kaptur warns that ‘high financial crimes have been committed’. As a result, much of the American public’s wealth is held in custody of these intermediaries and exposes them to an increased degree of risk.
If you think the financial assets you think you own in brokerage account are actually there, unencumbered, or otherwise as safe and secure as possible then you may be mistaken. During these tumultuous and precarious economic times it is particularly prudent to remove as much risk as possible between you and your investments.
Disclosure: Long physical gold, silver, platinum with no position in Berkshire Hathaway or the problematic GLD or SLV ETFs.
By Ajay Shah, on August 11th, 2009
Peter Wayner has a story about a WiMax rollout in Baltimore in the US. They seem to be getting 6 Mb/s download and 1 Mb/s upload. This is termed a `4G’ network (which might just be marketing speak).
In India, Thomas K. Thomas has an article on price cuts by Airtel. My sense is that we’re in for a big crash in prices of bandwidth through a combination of improvements in prices of wired services and the rollout of 3G which is now a credible alternative to land lines.
The exciting new development on mobile bandwidth is the CDMA EVDO devices being sold by Reliance and Tata Indicom. Last night I did a bulky upload and it worked at 350 kb/s without interruptions. Naman Pugalia and Alok Parekh are measuring the performance of Reliance and Tata Indicom at locations all over India. The picture so far is that EVDO is a lot better than dialup (or CDMA 1.x) but it ain’t really fast.
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By Trace Mayer, on August 10th, 2009
One of the most recognized, innovative and valuable brands in the world, Apple, is under assault. Apple has long been known for its fanatical followers, innovative solutions like a graphical user interface or the mouse and stylish products that meld hardware and software to create the best user experience possible.
With several successful product launches, the new Snow Leopard operating system which quickly rose to #1 on Amazon being available for pre-order and iPhone sales being up 700% over last year which contributed $1.69B to revenue the company looks to be doing well fundamentally.
Many within the cult of Apple are developers who build applications for the iPhone with over 65,000 currently available in the App Store. These are developed at no cost to Apple while the developers hope to have them pass Apple’s arbitrary and discriminatory review process for inclusion into the App Store where significant revenues can be earned. The applications add significant functionality to the iPhone and provide for a better user experience.
But with the stock price rising to about $165 the P/E has soared to 29 and it appears that speculative fervor may be beginning to boil. Fundamentally Apple’s profitability is inextricably linked to its brand and its venerable brand is now under assault from some of its most loyal (formerly) followers. After all, the opposite of love is not hate but apathy.
EXPLODING IPHONES
The TimesOnline reports, “Apple attempted to silence a father and daughter with a gagging order after the child’s iPod music player exploded and the family sought a refund from the company.”
The iPhone started hissing and then spontaneously combusted flying 10 feet into the air. I have been unable to find a functioning hyperlink to the exploding iPhone app in the App Store though, sorry. Despite Apple’s environmentally friendly advertising this is not the first example of a iPhone posing a serious health hazard. There are many examples which can be found using Google.
AT&T – THE BRAND DESTROYER
I remember watching Steve Jobs announce the iPhone. I was incredibly excited and made the decision that I would buy it. When I found out that there would be an exclusive agreement with the notorious AT&T I simply held my nose. AT&T’s core competencies include (1) damaging the customer and (2) destroying shareholder value. For example, over the past two years since this millstone was hung around the iPhone’s neck the share price has fallen from about $42 to $27 or 35% decline.
Having been an iPhone user since they were launched and I even waited in line for hours at launch day. I think the device is that is great (it has not exploded yet and burned down my house or car) but the relationship with AT&T has been absolutely horrible and over-priced. AT&T does not add-value they destroy value.
One of the strategic reasons for the iPhone was to be an introductory product for Apple. People who had never bought an Apple product would purchase an iPhone and then after a positive user experience go on to purchase a MacBookPro, etc. Since the iPhone release Apple’s market share for smartphones, computers and operating systemss has been rising.
Most new users probably have a good experience with the iPhone so long as they ignore the massive debacles that happened during activation, do not mind being required to purchase the iPhone in an AT&T or Apple store and not online, the serious dropped calls issue and other problems.
Then there are the tethering restrictions which really, really annoy me as I travel often and if I could access the Internet with my laptop through my iPhone’s $30/month unlimited (only on the iPhone) data plan 3G connection then the user experience would be that much better. Overall, this is all extremely frustrating for a luxury product where the cheapest monthly plan is twice what my friend pays for his cell phone.
AT&T is the likely culprit when it comes to the tethering restrictions. Why? So AT&T can attempt to charge more. In fact, AT&T is the likely culprit for the activation issues because it did not want iPhones sold and then jailbroken and then used on a different cellular network. Just blame AT&T for everything that goes wrong.
And if AT&T is not the culprit Apple should still try and shift as much blame as possible to them. But ultimately Apple made an exclusive agreement with AT&T and therefore only so much blame can be shifted before Apple’s brand begins to be degraded by associating with brand destroyers.
GOOGLE VOICE
Another Internet behemoth is moving into the cellular market. Google Voice, currently available by invite only, is one of the greatest innovations for handling voice communications I have ever used. To ease the burden on American solders “Military staffers with .mil addresses will receive Google Voice invites within 24 hours after requesting them”.
Want to integrate Google Voice and the iPhone in order to greatly simplify your life? There was an app for that. On 27 July 2009 TechCrunch reported about all Google Voice applications being excluded from the App Store. It seems ‘a reliable little birdie’, probably through Twitter, told John Gruber of the Daring Fireball that AT&T is the chief instigator of blocking which software can and cannot be used on the iPhone. The move has sparked many customers, developers and even the influential TechCrunch blogger and early adopter Michael Arrington to ditch the expensive and luxury iPhone.
Being in the catbird’s seat the Google spokesman throws all the blame for a sub-optimal user experience on Apple:
We work hard to bring Google applications to a number of mobile platforms, including the iPhone. Apple did not approve the Google Voice application we submitted six weeks ago to the Apple App Store. We will continue to work to bring our services to iPhone users — for example, by taking advantage of advances in mobile browsers.
Even the regulators are annoyed with their user experience being disrupted and the Dow Jones reports, “The Federal Communications Commission has launched an inquiry to AT&T Inc. (T) and Apple Inc. (AAPL) over the rejection of Google Inc.’s (GOOG) voice application for the popular iPhone.”
BRAND DAMAGE
Apple is taking marching orders from AT&T to degrade the user experience of their most loyal and lucrative customers. Currently, Apple earns $4.8B on $32.5B in gross revenue compared to Dell which earns $2.5B on $61.1B in gross revenue. It is Apple’s brand and their focus on the user experience that is a significant factor in the better margins. Additionally, Apple sells premium products that are more expensive.
Apple should learn a lesson from Dell’s past mistakes. I found that Simpson’s video on Apple Hell which must be modeled after Dell Hell which got started by a single little blog post by Jeff Jarvis who later recounted,
But the most telling moment came in a blog post by Toronto venture capitalist Rick Segal, who overheard a bank teller in his office food court saying, “I was going to buy a new Dell but did you hear about Jeff Jarvis and the absolute hell he is going through with them?”
Apple ought to get this situation of exploding iPhones and their relationship with the brand destroyer AT&T under control before they have an absolute PR nightmare on their hands. It is a lot easier to sell another expensive luxury product to a happy customer than attempt to acquire one through intrusive advertising via failing mediums like television, magazines or newspapers.
The 29 P/E ratio is largely contingent upon the ability to acquire new customers at double digit growth rates, sell expensive luxury products and maintain high margins. All of this when there is nothing positive about the fundamentals of the American economy and there is another massive market crash coming. An expected 1.5M unemployed seeing their unemployment benefits cease by year end. They are going to continue cutting any extra expense they can.
If this idea virus that Apple is intentionally degrading the user experience begins to spread it could turn into a full-fledged epidemic. AT&T spends millions on advertising an who believes them? Likewise every negative blog post that is written, email that is sent and conversation that is had causes damage to Apple’s brand and erodes shareholder value.
CONCLUSION
Apple has a tremendous brand and has been able to monetize it to create shareholder value. Google also has a great brand and is working hard to leverage it to provide a better user experience. On the other hand, AT&T is a giant brand destroyer and has targeted Apple with its Death Star.
Apple’s current P/E is contingent upon virile growth but they are making the same mistakes Dell did which prompted a community to gather and commiserate which spread the idea virus that Dell treated their customers poorly. That stigma still has presence in the social zeitgeist. All of this in the midst of not just a recession or even depression but The Great Credit Contraction. I would stay away for now.
What is Apple thinking? Caveat venditor.
Disclosures: No position in Apple or AT&T. Long Google.
By Bron Suchecki, on August 10th, 2009
With gold looking to attack the USD 1000 level, it is fitting to review the new kid on the gold block – securitised bullion – that many say has been a contributor to gold’s resurgence. I say “new kid on the block” because gold ETFs are only seven years old whereas people have been storing wealth via gold for over 4,000 years.
The key change ETFs have brought to the market is transparency. In the past, gold was purchased in bar or coin form and either stored at home, in safety deposit boxes, or with a custodian. Problem is that all this activity was private, with no reported numbers on the volume traded or held. The ETFs, by reporting their balances daily, now provide a small window into the activities of private investors.
According to the World Gold Council’s (WGC) 2007 figures, private investors (which includes institutions) hold 16.4% of all the gold ever produced (1). Adjusting for latest mine production, this means that as at March 2009 private investment in gold totalled 865 million ounces.
The table below shows all the ETFs and other non-listed custodian facilities who publish regular figures on their holdings. This data has been sourced from http://www.sharelynx.com/, who is the guru for data on gold. Sharelynx tracks all of these products daily and has built an extensive history on their movements, making it an essential subscription for any serious analyst of the gold markets.
| Gold Ounces |
As at July 2009 |
% share of Total Privately Held Gold |
| Gold Bullion Securities |
40,465,445 |
4.7% |
| Zurcher Kantonalbank |
4,738,397 |
0.5% |
| ETF Securities |
2,716,282 |
0.3% |
| ishares |
2,323,677 |
0.3% |
| Julius Baer |
1,849,375 |
0.2% |
| Central Fund/Trust of Canada |
1,571,037 |
0.2% |
| Xetra Gold |
1,019,540 |
0.1% |
| Bullion Vault |
583,705 |
0.1% |
| GoldMoney |
425,168 |
0.0% |
| Claymore |
366,000 |
0.0% |
| Bullion Management Group |
92,544 |
0.0% |
| Benchmark (India) |
68,674 |
0.0% |
| e-Gold |
68,208 |
0.0% |
| GoldIST Turkey |
46,780 |
0.0% |
| UTI (India) |
46,136 |
0.0% |
| Reliance Captial (India) |
38,935 |
0.0% |
| SBI (India) |
23,920 |
0.0% |
| Kotak (India) |
11,060 |
0.0% |
| Quantum (India) |
1,961 |
0.0% |
| Gold “Products” Sub-total |
56,456,844 |
6.5% |
| COMEX |
9,140,646 |
1.1% |
| TOCOM |
180,464 |
0.0% |
| Total Other Privately Held |
798,816,800 |
92.4% |
| Total Privately Held |
864,594,753 |
100.0% |
This table clearly shows that Gold Bullion Securities (listed across many exchanges) is the “King Kong” of gold products. What is more interesting is that it only represents 4.7% of the total amount of gold held by individuals and institutions. Even including in the reported physical inventories of the COMEX and TOCOM futures markets only brings us to 7.6%.
While this is a small “market share”, compare it to the situation five years ago. In July 2004 there were only five visible gold products totalling 2.4 million ounces. Combined with COMEX and TOCOM inventories, this amounted to less than 1% of privately held gold.
The other interesting feature of this table is the small size of the ETFs listed in Turkey and India. GoldIST has been around since 2004 and the Indian ETFs first appeared in mid-2007. By July 2007, there was 141,271 ounces in ETFs across both of these countries. Two years later is it a mere 237,466 ounces. Compared to the considerable size of the physical gold markets in these countries, this is not an impressive performance and shows their continued preference for physical over paper.
By Winton Bates, on August 10th, 2009
In his recent paper, “Thinking clearly about economic inequality”, Will Wilkinson – a research fellow at the Cato Institute in the U.S. (and prominent blogger)- mentions some reasons why Nicole Kidman is wealthy. He states: “Nicole Kidman is fabulously wealthy because millions of individuals have chosen to see a movie with Nicole Kidman in it instead of a non-Kidman movie, or instead of going bowling”. He uses Nicole as an example to illustrate how the pattern of incomes “emerges from billions upon billions of individual choices and transactions” (p 14).
I think Wilkinson is making a good point. People often talk about income distribution as though government is actually distributing national income among the citizens – like a mother deciding how large a slice of a cake to give to each of her children. If we want the cake metaphor to reflect the real world, however, we have to accommodate the fact that mother doesn’t actually bake the cake, the children do. And distribution is the result of mutually beneficial process in which individuals earn cake by contributing to its production.
Wilkinson’s mention of Nicole Kidman is also relevant to a somewhat different point that he is making, although he doesn’t make the link specifically. Nicole Kidman has dual citizenship between the U.S. and Australia. If she is viewed as a U.S. citizen for the purposes of considering the distribution of income that makes the distribution of income in the U.S. look more unequal. If she is viewed as an Australian citizen that makes Australia’s income distribution look more unequal. Who cares?
The point is, of course, that there is something peculiar about viewing income inequality as a cause for concern at a national level, when this can change just because people move across national borders. When people talk about the effects of migration on income distribution in countries like the United States and Australia they are more likely to be thinking of the migrants who make income distribution less equal by occupying the lowest rungs of the economic ladder than those who make it less equal by occupying the highest rungs on the ladder. But the questions raised about the relevance of income distribution to well-being are the same in both cases.
Wilkinson makes the point: “If you focus only on the shifting pattern of incomes among legal residents within the statistics-keeping jurisdiction … you can easily lose track of the real story of human welfare …” (p 14). He comments as follows on the effects of the migration of unskilled migration on economic inequality in the U.S.: ‘If were to assume a natural and mundane moral perspective, from which all people involved are taken into account and assumed to have equal worth … what we would see is a profound reduction in both poverty and economic inequality. If the question is “What happened to the people in this scenario?” then the answer is “The poorest people became considerably wealthier, narrowing the economic gap between them and the rest”.’ (p 15).
It seems to me that this reasoning is relevant to Australia as well as to the U.S. If we are interested in the well-being of people we should be interested in the opportunities that are available to them. When you look at it carefully the concept of income inequality doesn’t have much relevance to well-being.
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By Winton Bates, on August 7th, 2009
One of my reasons for reading Tony Abbott’s recent book, “Battlelines”, was to remind myself why I am not a conservative. The more serious reason was to find our how a politician who proudly wears the conservative label would attempt to justify proposing an amendment to the Australian constitution that would remove current restrictions on the policy areas in which the federal government has power to make laws.
In writing this book Tony Abbott, a former minister in the Howard Government who is now on the opposition front bench in the federal parliament, seems to have taken on the role of defining where the battlelines should be drawn in the approach to the next election.
One of the things Abbott is clearly trying to do in this book is to identify enduring values that will continue to bind the Liberal Party together. In the process he does a reasonably good job of minimizing the differences between Hayekian liberals and Burkean conservatives. At one point he writes: “Following Adam Smith, Liberals tend to think that government is necessary to keep the peace but otherwise should let people make mutually beneficial arrangements with each other” (p 82). If I believed that was a statement of conservative philosophy, I would not mind being called a conservative. In other places in the book, however, Abbott displays the contempt for personal freedom that is associated with traditional conservative values. For example: “The basic problem is that most Western countries have privatised the next generation. Having children tends to be regarded as a personal choice rather than a social good” (p 97).
Having now reminded myself why I am not a conservative, let me turn to Abbott’s views on federalism. The essence of his argument is as follows:
- When nothing else seems to solve problems, voters always expect the central government to ‘do something’.
- After more than 50 years of increasing federal government involvement in matters that were formerly the exclusive responsibility of the states, the federation has become dysfunctional. “There are few problems in contemporary Australia that a dysfunctional federation doesn’t make worse”.
- Current attempts to end the “blame game” between different levels of government are not going to work. Someone has to have the legal power to take responsibility.
- The only credible way to fix the problem is to give the central government the legal power to call the shots i.e. to over-ride the states.
- The argument that the states form a bulwark against the potential tyranny of the national government is “far-fetched”. Australia has states because this was the price of becoming a nation, not because the fathers of federation thought that an intermediate level of government was necessary to avoid tyranny.
I agree, more or less, with the first three points, but disagree with the last two. What reason do we have for thinking that a government attempting to run schools and hospitals out of Canberra would do a better job than one trying to run them from some office in a state capital? Absolutely none! And I think that Tony Abbott agrees with me. What he has in mind is that if the federal government was able to over-ride the states on health and education the most likely result would be for public hospital and school services to be “provided on a contestable basis by a range of independent and autonomous organisations as well as by state-government instrumentalities” (p 129). That sounds to me like a move in the right direction, but we can’t be sure that some control freak in charge of the central government would not attempt to intervene more directly in the management of hospitals and schools if he/she had the power to do so.
As I see it, the main problem of the federation arise from the stupidity of the central government in its choice of forms of intervention. The basic problem in both hospitals and schools prior to federal intervention was that people were unhappy with the services that state governments were providing from tax revenues. Instead of giving state governments more money to waste, the central government should have given people back some of the money they had paid in taxes so that they could purchase alternative services.
The central government does not need additional power in order to achieve contestable service provision. It just needs to stop propping up inefficient state bureaucracies and give power back to the people.
In concluding I would like to commend Tony Abbott for presenting his views in a forthright manner. It is nice to be able to disagree with quite a lot of the things he has written and yet still feel that, as politicians go, Tony Abbott is not a bad bloke.
By Eldon Mast, on August 7th, 2009
It looks like packed US car dealerships will continue. Late Wednesday the Senate majority leader Harry Reid announced that the US Senate now has enough votes to pass the House version of a bill to extend the popular automobile stimulus program.
Car manufacturers, their dealerships, and factory workers across the country are cheering. The firms have stated that the clunkers program is significantly driving up sales with most consumers buying smaller, “greener” vehicles.
General Motors Co (which just emerged from bankruptcy earlier in July) reported the best news among all the car makers accounting for nearly 1 out of 5 vehicles sold under the program. The program’s extension is now likely to lead all automakers to increase production and bring back laid-off workers. Several have already announcing plans to increase production cycles and others likely will follow suite once “part 2″ of the program funding is in place.
Late Wednesday night, Ford’s chief financial officer, Lewis Booth, said his firm would decide on production increases shortly and make an announcement in several weeks.
The Clunkermania developments provide more evidence of the increasing potential for a strong bounce in Q3 GDP growth.
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