Tuesday, November 26, 2013

WalMart: Monopsony Destabilizes Economies as Much as Monopoly Does

Author's Note: Some 30 years ago, as an undergraduate studying Economics, I took a course in Industrial Organization and Public Policy. I have been mulling some of the ideas I first encountered in that course ever since. The following in the product of just such mulling.

Many Americans are at least passing familiar with the 19th-century rise of corporate monopoly power in this country to set prices when selling and the subsequent development of the anti-trust regulations and legislation that came about to limit the power of monopolies. Far fewer Americans, however, know about the flip side of monopoly: monopsony. Put bluntly, a monopolist controls the prices of goods and services it sells. By contrast, a monopsonist controls the prices of goods and services it buys.

Just as it is in the interest of a well-run capitalist economy to prevent the formation of monopolies, so too it should be the policy of those same economies to prevent the creation of monopsonies. Too much power to set prices when purchasing goods and services will produce the same destabilizing influence as too much power to set prices when selling those same goods and services.

WalMart may be starting to take on the least attractive qualities of both monopolist AND monopsonist. As the sole brick and mortar retailer for consumer staples in many communities across the country and increasingly the globe, WalMart’s ability to set prices is so common sense as to hardly require mentioning. But in many of those same communities, WalMart functions as a monopsonist purchaser . . . of labor. In many communities, WalMart is the only employer of note. Workers either work at WalMart or they don’t work.

If one thinks of a labor union as a voluntary monopoly on labor, meaning the union exerts solitary pricing power for labor for all its members in the various economic contexts in which it operates, it seems clear why labor unions would be desirable from a public policy perspective. Unions’ monopoly power as a seller of labor balances the might of WalMart and other giant monopsonist buyers of labor. I have left for another discussion consideration of WalMart’s monopsonist power as a buyer of products. Much anecdotal testimony exists as to how WalMart can threaten the existence of suppliers who fail to satisfy its pricing targets. Again, this anecdotal testimony suggests, if it does not prove definitively, that monopsonist power, whether to purchase labor or products, destabilizes markets. Policy makers should act strongly to curtail monopsony power. Failing that, policy makers should augment unions’ powers to organize and bargain collectively, if only to provide a necessary stabilizing balance to monopsony power.

Sunday, November 17, 2013

How high can it go?

I've recently been hearing a lot of discussion about an impending market correction or even crash. The prophets of doom have the numbers on their side: the S&P 500 has advanced some 25% so far in 2013, but corporate earnings have advanced only 3%. Simple logic tells us that this means the market is pushing the price-earnings ratio higher.

At some point, we will face 'reversion to the mean,' as historically, P-E ratios have averaged 14-15% and are now, depending on the metric one uses, in the neighborhood of 19-24%, i.e., far above their historical mean.

And yet . . .

The collective consciousness of the market could be right in pushing vauations so much higher in the absence of YTD growth. For one thing, if GDP growth begins to accelerate more quickly as we head into 2014, corporate earnings should grow to echo that GDP growth. Thus, what may now seem like historically high P-E ratios may soon appear closer to historical norms if the 'E' in the ratio increases. The collective consciousness of the markets tends to price in where it thinks the markets will be in 6-12 months.

So the market is pricing in continued growth (and acceleration in growth) of earnings.

But if the market is wrong . . .

A reversion to the mean could spell a very sharp correction in the near-term. It has been over 570 days since the markets have experienced a 10% correction but history tells us to expect one every 350 days or so. Again, 'reversion to the mean' comes to mind. If earnings do not grow as fast as anticipated or even decline, then the 'P' in the P-E ratio will decline to bring said ratio into conformity with historical norms.

As for myself, I have begun to trim back equity positions in large- and small-cap growth and have rotated some of those funds into value components and into bonds. Right now, I have about 48% in equities and about 52% in bonds and cash. If the market continues to ascend, I'll continue to trim equities into the rally and add to fixed-income and cash positions. As far as rotating back into equities, I'm now waiting for at least a 5% correction to take any decisive actions as far as augmenting my equity positions.

Saturday, January 12, 2013

The Approaching Debt Ceiling Fiscal Cliff

Well, well. Turns out the last-minute avoidance of the so-called Fiscal Cliff merely pushed it down the road 30-60 days. The government's legal authority to borrow will expire sometime between Feb. 15 and March 31, in the absence of any congressional action to raise the debt ceiling.

Debt Ceiling Deadline May Be February 15 | According to an estimate by the Bipartisan Policy Center, the deadline for Congress to raise the nation’s debt limit — which House Republicans have threatened not to do without policy concessions — could be February 15 (or March 1, at the latest). As CNN Money reported, “there likely would be less revenue coming in than has to be paid out for each of the days between Feb. 15 and March 15. On Feb. 15, for instance, Treasury will take in an estimated $9 billion in revenue but is committed to pay out $52 billion.” President Obama has said that he won’t negotiate with Republicans over the debt limit.

Approaching deadline

 And then there is this little squib about what may happen come Feb. 15:

The federal government hit its legal borrowing limit of $16.394 trillion on Dec. 31, and has begun taking "extraordinary measures" to cover shortfalls. The Bipartisan Policy Center's estimate indicates when those measures run out and the Treasury will only be able to pay bills with the daily revenue coming in.
Problem is, there likely would be less revenue coming in than has to be paid out for each of the days between Feb. 15 and March 15.
On Feb. 15, for instance, Treasury will take in an estimated $9 billion in revenue but is committed to pay out $52 billion.
Authority to borrow


Let's be honest here. What's really going on is the current House's refusal to fund debts taken on in good faith by its predecessor sessions. Did the people who voted for Republicans really intend to vote for a default on the good faith and credit of the U.S.? Did the people who voted for these Republicans intend to give terrorist\anarchist Lib-tards a chance to wreak havoc in the lives and welfare of millions of vulnerable citizens (by either forcing a government default or forcing cuts in social safety net programs)?

This debt ceiling deadline is much more of a true Fiscal Cliff than its previous namesake. And the stakes could not be higher for the republic. If you live in a district represented by a Republican, time to contact your rep to tell him or her not to hold the debt ceiling hostage to policy disputes. The stakes are simply too high.

Friday, January 11, 2013

Weekly unemployment claims rise 4,000

So yesterday the government's Bureau of Labor Statistics reported that weekly new claims for unemployment compensation rose by 4,000 to 371,000. The consensus among economists had been for new claims to fall to 362,000. There was very little commentary about these numbers on the internet yesterday but, no matter how I slice it, these numbers bespeak a macro-economy caught in a 'dead-cat bounce,' an economy where an unemployment rate below 8% is considered progress and where annual growth in GDP of 2% is considered a sign of health.

It really brings to mind Disraeli's witticism that there are "lies, damned lies and statistics." I'm willing to wager that when California's unemployment numbers for December are finally released, the figure will still be hovering around 10%. (California's UE rate was 9.8% in November 2012.)

Thursday, January 10, 2013

The Emperor Has No Clothes

I just read a brief news blurb on SeekingAlpha.com that Carl Icahn has reportedly purchased a stake in Herbalife. I see this as a sign that American capitalism is in a final death spiral, when one of its foremost practitioners invests in what can only charitably be called a 'pyramid scheme.'

Ask yourself this: who purchases Herbalife products aside from other Herbalife distributors? Herbalife has no retail outlets and relies solely on a multi-level marketing (MLM) scheme to make its sales. OK, one can say, caveat emptor and all that. But for Icahn and Dan Loeb to take stakes in the company? When the SEC is reportedly investigating it for being nothing more than a Ponzi scheme?

My point is that when the titans of industry start to underwrite and support such transparently fraudulent operations as Herbalife, such support signals a rotten core at the center of American capitalism. We've become an ecomomy of Herbalife distributors all selling madly to the next fool in line and hoping to grab the last seat in the game of musical chairs before the music stops.

If you can stand to read about how Herbalife and its agents have defrauded various people, check out this link: