The “New Monopoly”

Yes, things reach my ears slowly at times.  But the newest version of Monopoly has finally made it to my attention.

Now, before talking about the Hasbro’s latest edition of a classic board game, we should talk about the concept of Monopoly.  Why was the game initially named Monopoly, and what does that have to do with anything.

According to my dictionary sitting here, a monopoly is:  the exclusive possession or control of the supply or trade in a commodity or service.

In other words, a monopoly is an entity that has control of a specific industry.  Often times people claim there is monopoly power in telecommunications, the automotive industry, or the airline industry.  They’re close to being accurate, but instead these industries are Oligopolies (they have a few competitors), so no one company dominates an industry.

For the sake of simplicity, a monopoly is a situation where one person or business entity controls a market.  They dominate, there is no competition left.

Turning back to the board game “Monopoly”, the name makes some sense.  The objective of the game is to buy as many properties as you can, build rental properties, and collect from the poor souls who land on your properties.  In the end, a person wins by “monopolizing” the properties and driving everyone else under financially.  The game is fairly true to it’s name.

Times are changing

With the latest edition of “Monopoly” something has changed dramatically.  Cash is no longer part of the game.  Instead, players have “bank cards”.  ATM card, credit card, what type of card is it really?  Not sure.  It’s billed as an ATM card, but the change in the game is concerning.  Plastic is plastic after all.

Over the past decade we’ve seen credit excess that goes beyond the pale.  Issues in sub-prime lending are only the tip of the iceberg.  But it seems the credit excess has gone on so long, and become so accepted, that a treasured game has now changed with the times.

Keep in mind, the objective of the game of “Monopoly” is to monopolize all of the assets in the game.  I’ve got a simple question.  If it all becomes about debt, how can one monopolize anything?  Initially the game demonstrated the concept of wealth building through the ownership of assets.  It still highlights asset ownership, but now via electronic payment.  Often times today people have possession of assets, while being in immense debt to obtain those assets.

For me, the original game was fine.  Actual cash, wealth building, and attempting to gain the upper hand.  While the game is still about wealth building for the moment, the cross over to electronic payment should not be looked upon favorably.  It’s another hit against “real money” and tangible wealth tracking.

Just remember, the Fed can change the money supply so simply today with a few electronic clicks, and suddenly devalue what you’ve got in your electronic account.

Like we didn’t see it coming

The economy is looking good. That’s what we keep hearing. And most of America believes it. But beneath the surface issues are lurking, and they’re not too far below the surface.

Last week’s issues in the stock market are only a partial indicator of what’s lurking for the US economy. People panic selling, a few down days on the DOW, and then the FED stepping in to reassure the market.

So, where are we really at, and what does it really mean?

The stock exchange is not the economy

First off, the DOW and NASDAQ do not directly represent economy. They’re a compilation of prices of specific stocks being traded. Nothing more. And stock prices don’t necessarily indicate much beyond what investors perceive a company to be worth.

Prices in the stock market have disconnected with the real economy, and they’ve been disconnected for a long time. Why is that? Easy money.

With the lower rates available during the 90′s there was a higher amount of liquidity in the economy. That means a larger money supply, which could translate into inflation (bidding up prices to keep pace with a growing money supply). But throughout the 90′s nobody seemed to worry about inflation. It didn’t show through in consumer or producer prices. But it did show through somewhere else.

The stock market.

When more people want to buy stocks prices get bid up. When more people have access to cheap money (borrowing), they bid up the price of the stock. Does that mean that the value of the company increased? No. It just means that folks with extra cash are over bidding.

That’s only part of the stock market bubble that occurred in the 90′s, but I think you get the picture.

Extra Bubbles

After the 90′s blow off, there was still an excess of cash and credit. Money was redirected, and a good bit was redirected into the housing market. If this doesn’t sound familiar I’ll give you a simple reminder. The 87 market crash, followed by the real estate boom, followed by a real estate crash in the early 90′s.

Do we have a similar scenario today? Yes, but it’s worse. The stock bubble and real estate bubble have regrown together. And they’re both built on super low interest rates. And with last week’s market concerns over the subprime lenders what did the Fed do? Lowered rates. Gee, nothing like putting gasoline on a fire that should be allowed to burn out.

A long way to fall

At this point, there’s a long distance for our economy to fall in order to get back to something approximating equilibrium. The economy works in cycles. And the upward cycle that started in the mid-90′s has been continuing, with government entities stepping in to keep it going. The more they attempt to thwart a retreat in markets, the worse the retreat will be when it finally comes.

It seems to me the housing market will lead the way now. Over leveraged home owners will start the downward trend, and this time the Fed might not be able to fix it. A foreclosure is a foreclosure. The best part…..home prices will retreat heavily over the next few years.

Why do I say that?

Simple, the housing market has been overbid for a long time. With easy credit, ARMS, Interest Only Mortgages, etc., consumers were allowed access to homes they couldn’t normally afford. It allowed them to buy more house, or bid up smaller homes. With buyers outbidding each other on a weekly basis, sellers could take a $150,000 house they bought a year ago and sell it for $200,000 with no improvements (the flippers).

Now that these sub-prime buyers are feeling the squeeze they’ll need to get out of their over leveraged homes. And if they can’t move it quickly, what happens? They’ll drop their asking price. But, if new buyers are now gun shy about high prices and short term mortgages the sub-prime owners will soon learn about creating bargain basement prices.

It will become a vicious cycle. Even with the recent rate cut, the process has already started. And that process is sending out minor ripples to the rest of the markets in the US already. Wait until the real selling starts, foreclosures accelerate, and home builders stop building because they can’t sell their current inventory.

Oh, and wait until the “boomers” start withdrawing their investments to live on (a story for another day)………..

Insights on recent activities can be found in Bill Fleckenstein’s latest piece regarding the role central banks have played in all of this.

Also, other good reads from today are:

• http://www.nytimes.com/2007/08/20/business/20bernanke.html?_r=2&ref=business&oref=slogin&oref=slogin
• Fed’s Cut Not Justified
• Subprime Infects $300 Billion of Money Market Funds, Hikes Risk
• Plunge Protectors on the Job
  

Following the latest from China

For the inaugural article here at the Dismal Scientist I thought some of the latest on the situation with China would be useful. After going through too many news stories this morning regarding the latest recall on products manufactured in China, it seems an appropriate topic.

Today’s China Recall

A person would have to be completely unplugged from all forms of media to not have heard the latest recall. This time Mattel is recalling a large block of toys manufactured in China. The issue, lead paint, parts that could be ingested by children, etc. 9 million toys in total this time, and that’s following another recall earlier this month.
The bottom line with this recall, the latest in a series of blunders out of China, is the fact that safety standards in the US are simply much higher. The serious question is whether or not it’s currently safe to do business with China.

Different points of view

This piece isn’t designed to bash China, so if you’re thinking that, step away from the thought now. Instead, we need to come to understand that there are different points of view regarding safety and hygiene issues between different countries.

Currently China is experiencing and economic expansion and boom that will last for some time to come. The populace is now able to have access to more products and services than ever before. And their economy is still building to provide products and services globally.

And there’s a key. The Chinese economy is just growing into it’s expanding global role. The manufacturing boom that is likely to come in time is only in it’s infancy today. The standards and practices that our manufacturing sector has built is not yet in place in China, even with foreign assistance.

Put another way……

Let’s go back 100 years. The industrial revolution in the US was rolling into full swing. And what did our expansion into a global player look like? How about child labor, unfair wages, hazardous working conditions, and the need for unions to protect workers? Does that sound about right as we worked into our economic growth? The answer of course is yes, very accurate.

Now, take a look at China. There are issues with child labor, poor production standards, lack of attention to safety requirements, etc. Currently they’re in the process that we in the US undertook more than a century ago. We’re bound to see more issues in the coming years, not less.

What we’ve seen so far

Over the course of the past year our nation has been shocked by some serious lapses in the quality of products from China. Deadly pet food, tainted cough syrup hitting the shelves of other nations, issues with tainted tooth paste, and more. Not only defective products, but in some cases deadly products.

The trend will continue for quite some time. There’s no two ways about it. China is still in the throws of rapid expansion, and in such a situation attention to detail is usually bottom of the list. So the question then comes back to us, the consumers of their products. Are the low prices really worth the risk? In most cases, no, but I doubt we’ll walk away from cheap products so easily.

Think it’s not all that bad?

To illustrate the issue another way we’ll get into the story of a good friend of mine.  They work in quality assurance with a medical device manufacturer.  One of the regions they cover is China, as they have a factory there.

Only months ago my friend’s company had a recall due to a safety issue with one of their devices.  It wasn’t an issue with a product manufactured in China, but instead another region.  Still, the company felt the pain of a recall and it should have hit home for all divisions within the organization.  But it didn’t hit home with their Chinese division.

The facility in China had been closed for months.  An issue with the sterility of the product arose, and my friend in QA could not approve of the product from the China plant.  Multiple trips were made by members of QA (and other divisions), and the plant personnel were instructed on proper technique and sterility measures.   With each trip the problems were identified and addressed.

And as soon as the US team left the plant in China, the standard practices that caused the issues were resumed.  The situation went so far that one division of the company installed IP Net Cameras to watch manufacturing, and could observe the issues.  Even with that type of evidence, the plant remains off line months later because they just can’t get the sterility under control.  Oh, and one member of the plant management went so far as to say that standards were set too high.  The response.  Take it up with the FDA.

Keep watching

Going forward I’ll keep watch on the latest news from one of our largest trading partners.  They’re also one of the largest holders of US debt.  We’re locked in with China.  And I do wonder if that’s a positive relationship in the long run.

For further information on today’s latest recall, and the recent issues I suggest the following articles as starters.

• China Begins PR Drive After Spate of Recalls
• Chinese-made toothpaste joins recalls
• How toy recall affects Brand China

Hello world!

Welcome to WordPress.com. This is your first post. Edit or delete it and start blogging!