Sunday, March 30, 2014

Ridiculous! Tackle rising inequality through college education and professional association reform ...

Ridiculous! 498% college inflation is OK?

If we want to start looking at how to change growing inequality, and the effect that has on not your children, but also your grandchildren, then there's probably no two easier places to start than:

1] The cost of a college education; and
2] The tie-in to professional organizations 'self-regulating' ridiculous degree requirements.

According to many sources, the cost of a college education continues soar at a crazy level - typically two to two-and-a-half times the inflation rate since the 1980s. According to data from www.inflationdata.com this means that while overall inflation in the 1986-2011 period rose by 115%, the college education inflation rate increased by 498% over that period of time. This information closely mirrors data from other sources, and similar changes in Canada and the U.K. over that same time.

This puts not only the dream of a good life further and further away from the lower middle class and the working poor, but nearly extinguishes it for those children whose parents suffer from long-term mental or physical disabilities. This further embeds multi-generational inequality, with its many serious personal and societal downside. It also treats those children in less wealthy homes as if they were somehow the authors of their own fate, and thus deserving of an inferior socio-economic status. 

With the rise of the internet and many alternatives to 1800s teaching methods (ugg, me teacher in classroom, you listen in classroom) costs of college education should be legitimately falling at this point, if not in absolute terms, at least in real (constant dollar) terms. However, both students and their parents are a captive audience to colleges' rapacious appetites. This is a failure of both the marketplace, and government regulation.

So how does government regulation come into play as a failure? In my opinion, this is by granting many professional organizations the ability to 'self-regulate'. This is done on the theory that only those in the profession have sufficient knowledge to know what and how to regulate within that profession. It also conveniently washes the government's hands of much oversight. This system has directly led to a marketplace failure.

While self-regulation has much to be said for it, it also accounts for a significant failure to society in general, and marketplace users of that service in particular. The failure of the government in this instance is to be willfully blind to the self-interest of the professional organizations membership. Professional organizations control the flow of new members into the profession (typically through educational requirements) and it's in each member's economic interest to choke that supply chain as much as possible. To the extent that every lawyer and psychologist have an undergrad degree before actually beginning much learning about their intended profession is obvious proof of this. For if it was about having BETTER lawyers or psychologists, then the specific learning around this would be strengthened - and that most likely would be done through an extended and structured apprenticeship, or a series of practicums.

Furthermore, the whole cost of the undergrad degree is inflated to the extent that non-core courses (which will typically add one-half to nearly one whole year to what is really a three-year degree, plus fancy 'accessories') are a required part of the degree curriculum. Through the direct cost of student tuition/books, etc., and lost employment productivity, this likely adds (or costs, including so-called 'opportunity costs, another $25,000-$50,000 to the cost of a college degree).

Want to deal with some inequality of access to the legal system and why it costs a ridiculous $300 an hour for a divorce attorney (or an attorney needed to get a dead-beat dad to pay up on the child support front ["I'll need a $2500 retainer", the lawyer says to the single mom])? Want to provide more reasonably priced access (i.e. less than $150 to $200 an hour) to psychological services so society can better deal with the mental health crisis?

Then the federal governments of all three countries mentioned above should begin some serious oversight of these professional organizations, as well as looking at eliminating 'non-core' courses (in life, we call these 'hobbies') required to gain most college degrees. And if they are unwilling to do so, then the government needs to step in and apply all the needed moral, financial and legal means to force this change upon them. And the colleges themselves should be looking to reinvent themselves to be true to their higher ideal.

Idealistic? Maybe. Realistic? Definitely.

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Sunday, January 09, 2011

Avoiding obvious errors is an important part of investing

Random Roger has written often about avoiding overvalued sectors as an important "value add" that he brings to the investing table on behalf of his clients. He often stated that the banking sector valuation in the 2003-2008 period was out of whack to its traditional ratio of the value of the US stock market. Thus, he avoided that sector during the later part of its run-up and the subsequent decimation of values.

I was similarly reminded of the importance of avoiding obvious investing errors by a recent Globe and Mail article regarding Priszm Income Fund (QSR.UN - Toronto Stock Exchange). This fund owns many KFCs, Taco Bells and Pizza Huts in Canada. When the initial offering was made in 2003 (at $10/share), I remember thinking about the growing discussion of healthy food choices and wondering how in the world a fund like this (focused on fatty fast-foods) could possibly have a sustainable, long-term, future.

After peaking at $13, the fund has declined ever since. They have recently missed several franchise and debt payments, and their future looks bleak, to say the least.

When you buy a stock, ETF, or other investment product, give some thought to the future, and never ignore what you think might happen there. Eyes wide open, so to speak.

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Priszm Income Fund (QSR.UN); closed Friday at $0.15. 
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On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Sunday, September 19, 2010

Please rethink your bond purchases ... please think ...

We just saw money flow out of domestic funds for 19 straight weeks…who is selling? Those who can’t imagine an improving economy, or better investor sentiment, or new and exciting innovations. Certainly there are hardship cases forcing people to cash in stocks to pay expenses, but with prices the same that tells us someone has accepted the risk that the sellers can no longer take.


Posting here



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Sunday, September 12, 2010

Inflation begins - food inflation is the start

When does serious inflation really start? Well, if you had to pick a point, it might be at a point when many pundits believe deflation is likely, as has been widely discussed this spring and summer by professional money managers.

Two to three years ago, many investment talking heads (myself included) spoke of the potential for emerging and developed countries stock markets to diverge in, at least, the strength of their upward market trend. The idea being that the developed country markets would move sideways, while emerging markets would continue to thrive.

The credit crisis which culminated in the stock market plunge of 2008/2009 of course showed how correlated these markets could be during times of panic. However, there is nothing wrong with the general divergence thesis during normal times, with many emerging markets getting close to re-testing their 2007/2008 price levels. Divergence is or will be here, and remains as real a prospect as ever.

However, there is one place where divergence currently exists: the "anticipation" of inflation/deflation. In developed nations, the worry is that future deflation will set these rich economies on a two-decade Japanese-style slump. In developing economies, the worry is the opposite and, rather than an intellectual debate about the future, the issue is immediate and proximate: inflation, which IS (t)here. Especially food inflation.

Large developing nations, such as India, China, and Russia, have all recently reported jumps in their inflation rates, headlined by significant jumps in food inflation (see here, here, and here). This has even resulted in an overall significant jump in global food inflation too (see here). This is the result of climate change generally, which of course plays out via specific "natural events", such as drought, flooding, and "rainfall dosing" (which is a term I am using to describe the phenomenon of growing season rainfall remaining relatively the same, but is concentrated in far fewer days [but does not consist of "flooding", per se]). This is in addition to the lower yields that are produced from heat-stressed plants. Climate-change induced food issues are here, and they are here to stay for some time.

The only reason that inflation remains off the radar screen of many professional investment types is that, in the western world at least, the food budget typically consists of a very low proportion of overall income. Whereas, however, the opposite is true in the developing world (or more so, even, in the undeveloped world), food budgets constitute a much higher proportion of the total income. So, food inflation has a much greater effect in those countries and feeds into the total inflation picture very quickly. In food, the principle of substitution (the idea that, during inflationary times particularly, folks substitute cheaper but roughly similar items for more expensive ones) has only limited applicability: after all, everyone needs to eat.

Food inflation also enters the general inflation cycle very quickly too (especially farther down the income ladder a country is) because, aside from an inflationary element of its own, the inflation knock-on effect is very pernicious, as the factory worker, et.al, marches into the boss' office, and demands a raise to deal with his deteriorating ability to feed his family. This scene plays out exactly the same way, hundreds of millions times, in hundreds of thousands of bosses offices.

The dream that (some may have that) food inflation emanating in one part of the globe won't spill over somewhere else is likely to be met by the insistent ringing of the morning's alarm clock: free trade in food. As pricing for food rises - there and here - the knock-on effect will also be felt as like looking into a mirror - here and there.

Climate change, and its resultant outputs, will have effects ranging from the evisceration of the capital value of, particularly, long-dated low-yielding stripped bonds, to the more pragmatic, of the renewed popularity of the high-yielding home garden.

So, the weather issues of this summer's northern hemisphere's growing season provide a glimpse into the future: a future which is coming fast. For those who want to understand it better, there's no better place to point your binoculars than at the emerging market countries.

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Saturday, September 11, 2010

Emerging Markets - Are you sufficiently exposed?

Pounding the point home, once again.

I have written a great many times (e.g. 1, 2, 3, 4 or all, 5) since this blog started over four years ago, about the need for any forward-looking, growth-oriented investor to have a very serious weighting in emerging markets. A recent article in the Financial Post, highlighting information from Goldman Sachs Global Economics Paper No. 204, makes the point worth repeating, once again.

They point out that the emerging markets now total some 31% of the global stock market capitalization, and suggest that this will expand to 55% by 2030. Is that shocking? Hardly. According to the OECD, a global club of rich countries, emerging markets already have 49% of the global GDP, on a purchasing power parity basis; and they appear slated to continue growing rapidly. Is it a surprise to think that their stock market valuations are slated to follow their growth?

What is shocking, is that against that, Goldman Sachs estimates that developed market investment funds hold just 6% in emerging market equities, out of their total equity allocation. They believe this will rise to 18%, by 2030. In other words, if you are a typical rich country investor, a peek behind the curtain of investments that YOUR investment advisor has gotten you into, would reveal that you are sitting at just 20% the emerging market exposure you should be at, assuming you simply want to mirror the world economic powers (e.g. 6% divided by 31% = 20% exposure). By 2030, the situation gets somewhat better, but your exposure would still be wildly low, compared either to world GDP then, or emerging market stock market capitalizations.

If you wanted to simply mirror global market returns going forward, then seriously underweighting one of the two most easily visible growth investment themes going forward sure isn't the way to do it. If you wanted outsized returns, then you'd likely seek even more participation in rapidly growing economies, assuming you have decent entry points, e.g. valuations not stretched. (Are they currently too high? Not in my book. They are trading at an average PE ratio of just 12, according to the Financial Times, which compares to a PE on the S&P 500 of 14.7).

The other thing to know here, is that the emerging markets are no longer the wild west. They have solid economic principles they are managing their economies on, and populations of great savers (oh, if only the western world were so lucky now!). This makes it pretty easy to suggest that their stock market volatility is going to continue to move down, especially compared to the overleveraged and overspent rich countries.

If you are a growth investor, go wake up your investment advisor, and demand he or she explain exactly why your emerging market exposure is so darn limited.

Disclosure: Participant in the emerging markets theme via DEM, DGS.

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Thursday, September 09, 2010

And this is how inflation starts ... climate related food price increases

The Russians have recently decided to continue the ban on wheat exports, until late 2011, as the Russian heat wave and associated drought have reduced this year's harvest to what is currently estimated to be about two-thirds a normal harvest (of course, once they actually harvest and weigh the harvest, I suspect they'll likely find that the actual harvest is less than that; just as happened in America following the 2009 harvest).

In a climate-changed world, this is just what will be one of many stories about inflation arising from food issues. Current estimates are for Russian inflation to increase to 7% from the current 5.5%, due primarily to a "price shock" associated with the reduced harvest. 

A very broad view of a long-term climate-change investment strategy, would be to go long on soft commodities - however, expect lots of volatility, sometimes wild volatility, as part of this equation.

Reuters story here

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

Tuesday, September 07, 2010

Dividend Oriented Portfolio Poised to Outperform?

I've recently written about the relatively high dividend yields available from some of the major S&P 500 companies in comparison to the terrible yields in things like US government bonds (10 years at 2.5%) and municipal bonds.

In my opinion, the bull market in bonds is due to come sliding - possibly crashing - down, just as other inflated investments have in the recent past, eg NASDAQ, peak years 2000-2001, US housing market years 2006-2007. Tears are inevitable.

On the other hand, with the idea in mind that you can construct a reasonably safe dividend-oriented, relatively diversified stock portfolio going forward, which provides a yield well above that, AND with decent potential for dividend growth, I screened the S&P 500 for stocks yielding above 3%, in market-leading names I recognize, and with decent (more than 10%) returns on invested capital (ROIC).

Here's the list I came up with, that I think will outperform the S&P500 significantly in total return over the next two years:


The only name that doesn't strictly meet that criteria is General Electric, which has a relatively low return on invested capital, given the capital intensive nature of its business and its past actions as, effectively, a bank.

The dividends all appear reasonably safe with these companies, as they have either relatively moderate payout ratios, or have recently lifted their dividend payments.

The last thing to consider is the potential impact of climate change on these companies over the short to medium term. In my view, none of them have the potential for short-to-medium term implosion, like I detailed for Compass Minerals.

However, some have a bit of climate-change short-to-medium-term risk as I see it, as discussed below:

Altria is a cigarette manufacturer/retailer. It is possible that climate change could affect their business in two ways:

Firstly, smokers tend to be in the lower economic strata; these are the folks who will be most effected  by potential food inflation. If they are spending more for food, then less is available for things like cigarettes which, despite their addictive qualities, are still a discretionary purchase. Some smokers may choose to quit if their budgets become more squeezed, accelerating the already evident trend of sales degradation, or they may trade down to lower margin brands.

Secondly, its possible that there could be some tobacco crop failures going forward (drought or too much precipitation/at wrong time), resulting in higher input costs. This would put Altria in the unenviable position of a margin squeeze, or having to hike prices (resulting in sales loss), or consumers trading down to cheaper brands.

On balance, I would rate their short-to-medium-term climate risk issues as moderate.

Heinz is a food manufacturer who could also be affected moderately over the short-term in a manner fairly similar to Altria. While consumers are unlikely to quit Heinz's type of product (they still need to eat), they may well trade down to cheaper brands with lower margins. Secondly, crop failures could also have a similar impact as described to Altria, above.

Sysco has moderate short-term climate risk, since they are a food distributor who supplies many restaurants. If food inflation picks up, then the general consumer will spend less on restaurant meals, meaning that many of Sysco clients could reduce volumes/orders (lowered revenue for Sysco) and suffer some financial distress (meaning Sysco's accounts receivables could also balloon).

Procter and Gamble is the final one which I believe also has some short-to-medium term climate risk. If food inflation occurs, and leaves fewer dollars on the table of their customers, then their customers may very well trade down from the PG family of premium products, to more economically priced ones.

On balance, I would say that this portfolio probably has average climate-change risk on a go-forward basis.

Disclosure: No positions.

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.