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VIX confirms, "Sell in May and go away"

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A Bloomberg story about the fall in the Volatility Index shows investors (at least in the US) are becoming slightly less fearful of the imminent demise of the financial system.
This is probably true - much as I would like to believe that we will be living in caves, trying to figure out if rocks are edible, we know nothing other than a disintermediated financial world.

The division of labor implies credit - the line worker in Adam Smith's day, making the head of pins, did not demand payment for every pinhead, "Oi! Gee us another penny fer them last 50 pins!". No business could function this way. So the worker is implicitly floating his labor until he gets his paycheck. Landlords collect rent monthly (or quarterly, or weekly), and vendors expect payment sometime after delivery.

So there is "float" built into the most primitive of financial systems. Take away this float - e.g. no more bank credit - and the simplest of economic tasks becomes virtually impossible. Try running a business that makes 20% gross margins (a good business!) without bank lines. Anything beyond the size of a lemonade stand would never scale up - with $100k in seed money at 20% growth, annual sales would be $620k in 10 years. This is not how a business should work.

Credit is still stalled - a local manufacturer here in Taiwan describes how incremental unit demand for GPS devices normally would be filled in 2-3 weeks. Because of the lack of credit, this takes 10-12 weeks (despite lots of spare capacity).  So the ability of business to grow by leaps and bounds is still sevrely constrained.

My view has and will continue to be:
1. We made $100, we bought $100 of goods
Things crap out
2. We make $70, we buy $70 of goods
Bankruptcies take their toll and wipe out underfinanced manufacturers
3. We make $70, we pay $100 for goods

We will become poorer, with a real decline in purchasing power as a result of this debacle. This will be reflected mostly in much higher risk premiums for capital, which right now cannot be passed onto consumers.  Another way to explain this is that the velocity of money will continue to decline.

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Guest Monday, 25 May 2020