Chris Mack's Instablog

Are You a Capitalist?

Mon, 29 Nov 2010 19:24:31 -0500

It is a common misconception that a capitalist is someone who believes in the process of capitalism as an economic model. This definition, like many others, is designed by the western education system to misinform. The belief based definition is a non-sequitor and is used to enforce the participation in Hegelian dialectic distraction from reality and promote a breakdown in thought. Facts remain true whether one can comprehend them or not.

The term capitalist was first used by several economists such as David Ricardo in the 18th century and later on by Karl Marx who understood the process of capitalism thoroughly. When Marx wrote the Communist Manifesto in 1848, it was clear that a capitalist is a private owner of capital. Capitalism refers to the economic relationship in which capitalists invest in capital such as land and equipment and pay laborers to operate the means of production to generate economic output. The incentive for the capitalist is potential profits, and the incentive for the laborer is their wage.

As an example, a capitalist could build a manufacturing plant to stitch clothing and hire 10 people that used to hand stitch clothing. The laborers would earn more than they could by hand stitching, the capitalist would earn a substantial profit, and more clothing would be available to consumers at lower prices. Everyone gains, and because the relationship is voluntary, it is difficult to argue otherwise.

While this relationship has existed throughout history it become prevalent at the onset of the industrial revolution because productive innovations were created that provided an explosion in economic value but required the division of labor and capital investment beyond the reach of most laborers. Without this relationship, most innovations of that industrial revolution and beyond would have never materialized. From the year 1000 to 1820, the world economy grew by 500%. However, the world economy has grown by more than 5000% since 1820.

Marx's criticism of this relationship was notably that unskilled laborers have little negotiating room and therefore suffer from stagnant or falling wages through natural competition. Marx also observed that unskilled labor ends up with more routine and less enjoyable work. While these points are true, it is important to note that laborers enter into agreements to work on their own free will. If workers believed they would be better off providing value another way then they are free to do so.

There are only two ways to amass an abundance of wealth. The first way is to take more value from others than you provide - essentially by stealing. Those who use this strategy view wealth accumulation as a zero sum game. Madoff, Ken Lay, many bankers and politicians have proven this strategy successful however it will never be as successful as the second method. The second way is to create and add more value than you consume. The more value you create for others the more capital you will accumulate. While this is a simple concept, it has been largely forgotten by laborers in the developed world - and to their own detriment. Capitalists must understand this concept in order to be successful as their income depends on it. Bill Gates, Warren Buffet and Steve Jobs have all amassed incredible wealth in their lifetimes by creating even more value for the world.

Because capitalists create most of the value in the economy, they earn larger incentives through financial gain than most laborers. That being said, some laborers such as athletes and actors have created immense entertainment value and been compensated greatly for it. But they are still laborers. This demonstrates that wealth alone doesn’t make you a capitalist and laborers can out earn capitalists especially if they are particularly skilled.

What does it take to be a capitalist?

Clearly, a capitalist must have a capital investment with a profit motive. It should be noted that a capitalist without any capital is a laborer as a capitalist is a synonym for investor. However, it is possible to create capital to become a capitalist. Many notable examples of this come from the technology industry where college students starting from nothing have created billions in value. A much more common way of becoming a capitalist is adding excessive value as a laborer until enough capital is accumulated to invest as a capitalist. Retired laborers who invest in rental properties or dividend stocks are capitalists. Small business owners, landlords with rental properties, land owning farmers, and stock investors are also capitalists.

While the purest definition of a capitalist is one who derives all their income from capital investment, many people assume the role of a laborer by working for an employer and also as a capitalist by owning other investments. This is an important realization because it means that laborers do have the ability to transform themselves into capitalists.

Many capital investments are beyond the resources of individuals however it doesn't mean that smaller investors can't participate in profitable projects. The risks and costs of capital investment can be shared amongst pools of investors with capital slices.

Conclusion:

The more value you create, the more wealth you can amass for yourself and others. Capitalists add a massive amount of value to the economy by creating jobs for laborers and innovating. Laborers and small investors can pool their resources to become larger capitalists, enabling them to create even more value as a group than they would have alone. A breakdown in this relationship would create a breakdown in the economic growth and development witnessed over the last 200 years. Governments don't create jobs or profits, capitalists do.

Disclosure: No Positions

Dow is Flat Since 1999, but Down Against Gold and Real Assets

Thu, 08 Jul 2010 09:24:55 -0400

Dust off your pom poms, the Dow has just crossed the 10,000 level to the upside. Most people aren’t partying like its march 1999 though – when the Dow first crossed that level. It has crossed the same level more than 30 times over the last 11 years, and the same exuberance has worn thin.

Perhaps investors are less exuberant because the Dow today buys so much less than it did in 1999. Today’s Dow 10,000 is worth less than 7,500 when factoring in the governments CPI index. Compared to the price of oil in 1999, the Dow has fallen to around 2,650, and compared to gold its worth only 2300. The Dow to Gold ratio has fallen from 37 to 8.

Not only has the Dow remained flat since 1999, it has lost anywhere between 25 and 80 percent of its value, depending on the comparison involved. The concept of compounding has remained the same, but now in reverse. Losses in both nominal and real terms compound to create larger losses.

While equities have not provided returns or protection from inflation over the last 11 years, commodities and other real assets managed to gain in value and have acted as a pillar of financial stability. Gold and silver have performed exceptionally well, and proven that it is possible to generate positive inflation adjusted returns in precious metals. In other words, gold and silver not only acted as a store of value, but also provided returns beyond that which can be discounted by a rise is prices or monetary supply. Make no mistake, over the long run precious metals are not expected to rise at a faster rate than inflation. However, buying precious metals at the right time and price can yield outstanding returns just as the Dow did from 1980 to 1999.

Where are we in this investment cycle? Gold and silver were considered too risky at 270 and 3. When they are considered no risk buys, then you can look for similarities to 1999 - and we are far from such sentiment.

Disclosure: No Positions

China Plays Currency Chess

Wed, 30 Jun 2010 19:30:29 -0400

Mainstream media has interpreted the recent announcement by China that it will allow their currency to float more against the dollar to be a positive signal for the global economy and beneficial for the US. This stream of political spin, that came from the White House and Congress, will prove to be as false as talk of a long term recovery last year.

Politicians are claiming that the move, which will lead to a higher Yuan, was made to appease American officials. They also claim that China wouldn't allow their currency to float higher if their leaders were concerned over a double dip recession. For this reason, the announcement was perceived to be a sign that China is bullish on the markets and economy.

Let there be no mistake; China will revalue their currency on their terms when the timing is most beneficial for China. A more likely scenario is that Chinese officials are anticipating the next phase of the recession and realize it is an opportune time to decouple their currency from the dollar. Despite common misinformation, a strong currency supports a strong economy. The dollars relative strength during the last century is a testament to this. The Chinese realize this and do not want to dragged down with the western economies as they drown in debt and currency debacles. China wasn't calling a bottom in the stock market, they were calling a top in the dollar.

Would it have made sense to revalue the Yuan against the dollar a couple of years ago when the dollar index was threatening to break below 70 and everyone was short the dollar? The near financial collapse launched the dollar higher to its current level near 90, and the Chinese Yuan went along the ride by default. Had the Chinese decoupled earlier their currency would have been trashed just as the Australian and Canadian dollars were.

The coming weakness in the global economy has already begun and will in the near term continue to increase demand for the dollar and treasuries. This will be an opportune, and possibly the last great time to exit the dollar. By decoupling when the dollar is near its peak, the Chinese currency will be launched at a moment of strength and might even give them the chance to sell some dollar based assets before the next round of quantitative easing begins.

Disclosure: No Positions

Why You Should Buy Gold Bullion or Coins and Not Miners

Sat, 26 Jun 2010 13:02:10 -0400

Many people are now seeing the value of investing in gold and other precious metals more than other types of commodities. They are now considering precious metals as insurance, and a financial safe haven to protect from inflation or financial distress.

There are many rumors going around lately about the value of currencies could fall further, and the threat of inflation is becoming more noticeable. People are starting to realize that investing in precious metals is the way to go, but they are not sure what type of investment to make.

Most investors that are new to precious metals, are probably already trading stocks, ETFs such as SLV, GLD, or mutual funds. For this reason, many people with turn to mining stocks or ETFs as a quick and easy way to invest in precious metals. While miners will likely yield high returns over the long run, they also carry a lot more risk than physical gold and silver.

Mining companies often move in the same direction as gold because mining profits tend to rise and fall with the price of gold. However there are other factors that can influence the share prices more. If energy and labor prices also rise, they could mitigate mining profits.

Furthermore, mining is capital intensive and time consuming and risky. It can take up to a decade and hundreds of millions to discover gold and silver minerals, build the infrastructure and develop it into an operating mine. Equipment can break. Workers can go on strike. Water or electricity lines could be cut. Environmentalists could sue. Mining companies can close down. Even successful miners often deal with a number of these issues.

Another risk for miners is having too much success. A quality gold mine is an easy target for taxation or even confiscation - as the Australian government has recently proven.

On the other hand gold and silver bullion in physical non-leveraged form carry very little risk. The price can go up or down, but a coin is a coin and it will hold its value over the long run. Gold and silver can't go bankrupt, or go to zero. In addition gold and silver can be traded even if the stock markets and banks are closed.

So instead of simply buying gold miners, investors should consider buying gold and silver bullion. The metals are less volatile, more stable, and more liquid.

Disclosure: No Positions

What's the Fed's next move

Tue, 22 Jun 2010 23:53:28 -0400

With the stock market up over 50% last year, talk of a V shaped recovery, green shoots, and other aberrations, most analysts expected the economy to resume growing as if 2008 was some sort of unpredictable outlier. With interest rates at 0, and massive government spending programs, the biggest concern for mainstream media was that the economy might grow too fast.

However, it seems evident that even the Federal Reserve doesn't believe in the green shoots theory anymore. Despite government intervention, economic indicators are rolling over, money supply measured by M3 is declining, and financial stress is increasing. Europe is now in an economic crises that could easily spread, and oil is filling the Gulf of Mexico. Risks of a shock to the financial system are everywhere.

Some analysts have been arguing that interest rates must rise to compensate bond holders, however the European crisis has been a gift to the dollar and treasuries so interest rates have remained low. A spike in interest rates appears unlikely in the near term.

If the current trajectory continues, there could be another sharp correction in equity markets globally but US assets may perform the best in comparison, especially treasuries. This could trigger another bout of financial asset deflation and panic. But what can the Fed do now that interest rates are at 0? Will Robert Prechter finally be right after so many years?

Unlikely.

The Fed will never be out of bullets as long as there is a fiat currency - for better or worse. The Fed would probably resume quantitative easing programs on an astronomic scale if necessary. And it might even work for a while.

Disclosure: No positions