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Joe Barbieri has Bachelors' degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 13 years, with over 10 years on the institutional side of the business. He has covered positions from Fund Accounting to Investment... More
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What Is Your Money Telling You?
  • Can Excessive Debt Financing Take Down Large Corporations?

    The flood of cheap money via lower interest rates has allowed everyone access to cheap debt. For corporations, this means that the cost benefit analysis of carrying debt versus the return on investment is skewed towards investments with lower returns. Lower returns may imply poorer quality since a good investment would command a higher return. This phenomenon has allowed corporate takeovers to balloon over the last 5 years. Since many takeovers are financed with debt, the takeovers are easier to orchestrate since they are cheaper to fund.

    What are the risks to this kind of behaviour? The lower return on investment required to pay back the debt is one factor that has already been mentioned. Should a business decision be based on a lower return on investment, this means a company can be less prudent about what sort of investment it makes. In the case of a takeover, this translates into what sort of company it is buying. What if interest rates rise? Won't these corporations be responsible for a much larger interest payment to finance takeovers of companies? Higher interest rates could also mean that companies being taken over may become less profitable on average due to higher interest expenses. This represents a double whammy that can make takeovers financed with low interest debt look foolish in hindsight. If many big companies are doing this, it may be setting up a crisis in corporate solvency. How likely this "crisis outcome" is depends on how many companies have enough resources to whether an interest rate hike or a change in financing requirements. A company that is sitting on a lot of cash will be able to buy much more when companies are cheaper in value; a type of deflationary scenario in the corporate world. A third risk factor is that large corporate takeovers may also set up a huge concentration of wealth in a few companies.

    There has been talk about bubbles in real estate, the stock market and the bond market. There may very well be a bubble in takeovers which may reverse very quickly since interest rates can be changed in an instant and financing can dry up overnight. Since these takeover deals take months and years to play out, this can be a disaster if the takeovers are not timed right or have inadequate financing to see the deals through to completion. The talk of higher interest rates at the Federal Reserve means these risk factors may become a reality within the next year.

    Nov 08 11:41 AM | Link | Comment!
  • What Is The Trans-Pacific Partnership (TPP) About?

    The Trans Pacific Partnership is a trade deal involving 12 countries (or 11 countries depending on which media source you consult). This is basically an expanded version of NAFTA from 3 countries to 12. It also encompasses more issues like labour mobility and affects more sectors of the economy. The theory behind trade deals is that they seek to lower tariffs erected by governments which foster "fairer" competition and lower prices. A tariff is essentially an import tax which can influence trade by limiting what can come into a country (and will affect what is going out of the exporting country). Without these tariffs, the theory says that the free market would decide where the goods are produced and efficiency would be maximized due to innovation and increased productivity. This all sounds good on paper coming from the era of high tariffs and limited trade before these trade deals existed.

    Are trade deals really effective on a global scale? It is not very clear. Many people who support trade agreements say that increased competition will lower prices for consumers. This is true, but where do these lower prices come from? The supporters of trade agreements say that efficiency is the reason and that everyone benefits. This is not entirely true considering the trend toward outsourcing to countries with cheap labour, child labour, foreign worker programs and increased automation. It is nice to have cheaper goods, but if you have no job you cannot afford to buy them. This trend toward cheaper labour means higher unemployment. Stagnation of income and a lower standard of living are other effects of consistently lower wages.

    It is true that there is higher production in terms of GDP for the member countries, but the distribution of this wealth is not even. The expression "the rich get richer and the poor get poorer" summarizes this problem. Freer trade has contributed to this phenomenon by forcing people to work for lower wages to survive and not getting their share of the increased profit. That share of increased production goes to corporate profits, which have swelled higher since the advent of free trade agreements. Contrary to what people have said in the past, these profits do not trickle down to the consumer but get reinvested in more capital equipment. This creates an even larger divide between the rich and the poor without proper distribution. Producers will benefit from trade deals since they obtain cheaper labour and production, but this will come at the expense of the worker. This worker is also the voter, the citizen and the consumer - so is it worthwhile overall?

    Some sectors will benefit from a trade agreement and some will not. The sectors that benefit a given country are the ones where a member country can produce the cheapest goods. If you are not the low cost producer, you will lose business since a company can locate in any of the 12 countries and produce goods for close to the same price. The low cost producer does not equal the best producer since social services, costs to the environment and indirect costs tend to be borne by the citizens and not the producer of the goods. In how many sectors can Canada produce something cheaper than Vietnam or Peru? Even sectors like mining or oil production can be determined by countries with cheaper extraction methods. If innovation is an advantage and it has been established, the production can still go to the lowest bidder. In situations like the dairy sector, the producers are being paid by the Canadian government to become more efficient over a time period. Once the transition period is over, they will sustain the same competition as other sectors.

    The whole intention behind trade deals is to create prosperity. The assumption is that the wealth generation is for the majority of people in a democratic society. Are these assumptions really true? If these deals are good for the average citizen, why are they always held in secret? If secret meetings are good for negotiating, why aren't the contents of the deal exposed during the negotiation process and prior to signing it so that the deal can be debated by anyone who wants to participate? There should also be adequate time for people to get informed and digest what is in the agreement before anything is signed and voted upon. These policies are supposed to be for everyone's benefit - so why are most people not represented physically at the negotiating table and not consulted?

    There are reports concerning a company's ability to contest a country's laws and demand compensation under a trade deal. It seems odd that a corporation has the right to overturn the law in a jurisdiction in which it operates. If this is the case, laws will be aligned with corporate interests rather than the citizenry and they will get very expensive to enforce. These expenses will be paid by the citizens of a given country via taxes. These citizens are also the workers, voters and consumers. If this reality is indeed true, it should be disclosed upfront since it is a game changer. Environmental, safety or social welfare laws will also be aligned with corporate interests and these may are opposed to what the average person wants. Should a company produce something that is superior to what currently exists in the market, it may be sued by its competitors to protect their profit margin. Isn't the whole point of freer trade to create better products fairly? Protecting the status quo is actually a hindrance as it promotes current methods as opposed to better ones.

    Are these trade deals delivering the prosperity that everyone believes they do?

    Oct 13 11:57 AM | Link | Comment!
  • Is Economic Supply And Demand Being Replaced By Dependencies?

    The basic notion of economics is that a group of people decide they want something that has not been made before. This want is called demand. Someone understands this want and decides to build something that provides a solution. That someone is the entrepreneur and the something is called supply. The demand group and the supply group get together and agree on a price to exchange the solution. This is called price discovery in a market. In the beginning, there were no other influences in setting how much of the solution was made or how the prices were set. This is called the free market. Notice that the customer created the demand and the entrepreneurs or suppliers met their need to create the market. The customer has a choice as to whether this product will continue to be purchased. Should it be the reverse and the supplier builds something before the demand exists, the customer had the choice to refuse it. This would create a change in the economy through bankruptcy or other changes in the market participants.

    What is a dependency? Another word for dependency is an addiction or a captive market. In this case, the customer is not buying because of want or choice but out of lack of choice and lack of alternatives. A monopoly, oligopoly or cartel of any kind used to be illegal and frowned upon because these groups were known to warp a market by creating false scarcity and skewed pricing. A group of businesses that are not a formal cartel but engage in anti-competitive behaviour will do the same thing as a monopoly or an oligopoly. If you are buying something, you are following the terms of the seller and there are no other options. You can choose not to deal with the monopoly, but in some cases this is not possible. Present day "cartel like" structures include OPEC, the diamond cartel, currency issuance by government, privatized utilities, toll roads and petroleum companies. There are options in all of these cases, but they are either made illegal, the competitors are bought out, or replicating the service is cost prohibitive.

    There is an economic argument made that in some cases, the monopoly is the only choice because having one provider is the most efficient solution. Should this happen, the monopoly should be regulated or have its profits limited due to its ability to skew markets. The regulation should be designed to keep the markets fair rather than create a hinderance for market activity. This was the case in the past, but is it true today? As an example, if you have a private hydro system, and prices are not regulated or accountability enforced by someone objective, what options are there? If a consumer tries to provide their own energy, they may encounter issues with distribution or selling it. These hurdles prevent the free market from doing its job. The customer becomes a dependent to the product or service provided, which is now a captive market. Both the free an captive markets exist today, and knowing the difference is key to getting the facts about what is happening in the economy.

    Sep 29 11:01 AM | Link | Comment!
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