IN THIS EDITION
WHY BANKRUPTCY IS THE NEW BLACK
OK, OK, I’m not exactly one to write about fashion, but fashion is about trends, and investment analysis is frequently about identifying trends early, if possible even before they properly begin, to assume the vanguard position prior to a dramatic outperformance of a given asset, or investment style. And so, in exercise of my modest accumulated wisdom and experience, I am predicting a surge in US corporate restructurings and bankruptcies, if not already in 2012, then in 2013. There is just too much corporate capital being wasted and consumed on bloated, inefficient balance sheets. Investors, normally fearful of bankruptcy, will soon learn that it is, in fact, their best friend. Once a corporation is on the edge, the sooner you push it over, the better. Free up that capital, re-deploy it, run it lean and mean and, when the time is right, leverage it up and score the big returns. How best to invest for a world in which bankruptcy makes the front page of Vogue? Read on.
Truth may be the first casualty of war but semantics is the first weapon of debate. As Sun Tzu observed, to win a war without even fighting is the acme of skill. Well, if you entangle your foes in a semantic net, you can win the debate before it even begins. Just define your terms appropriately.
So it is with the foes of capitalism, some of whom continue to take inspiration, knowingly or not, from Karl Marx. Marx and his sidekick Engels defined capitalism as a system designed to “extract the greatest possible amount of surplus value, and consequently to exploit labor power to the greatest possible extent.”1
Well, to define a system, any system, as exploitative is to stack the rhetorical deck in favour of those who disapprove. What Marx fails to mention in this definition, however, is that the capitalist system seeks to exploit the greatest possible amount of surplus value from ALL inputs, be they energy, technology, the existing capital stock, as well as labour. If, for example, paying higher wages (or granting stock options) to hire skilled workers will enable the capitalist to extract more suplus value from, say, a given technology or, better yet, to develop an entirely new one, well then it is the technology that is being exploited here. But the word ‘exploit’ carries a negative connotation, denoting unfairness. I doubt that technology has much of a problem with being exploited, but semantics being what they are, a sensitive individual can still feel their emotional strings being pulled at the thought.
Luddites aside, most people, including those who rely on the government, or charity, or family handouts, or whatever form of assistance from the labour of others, rejoice daily at the exploitation of technology. Take the plow for example, which greatly improves crop yields. Or fertilizer. Or the food processing, transport and preparation network that practically serves up ready meals on your table, day in and day out. I do not belittle the plight of the poor for one moment, but to continue our semantics discussion, in most of the developed world, recall that, less than a century ago, the poor were referred to as ‘starving’. With over 46mn Americans receiving food stamps today, for example, it is difficult to apply the word ‘starving’ to the poor.
So yes, capitalism ‘exploits’ all inputs, as mentioned previously. It does so in pursuit of ‘surplus value’, otherwise known as profit. And it does so, and I cannot stress this point more, it does so in a state of competition. Not managed competition. Not controlled competition. Not subsidised or bailed-out competition. Not rent-seeking, special interest, lobbyist enabled competition. No, it does so in a state of essentially pure competition in which underperforming, uncompetitive firms either restructure core operations, shutter their doors voluntarily, or they go BANKRUPT.
There, I said it. That four-letter word of investing, that act of corporate failure, of poor management, or perhaps just bad luck. But the critical point to remember here, in order to understand why bankruptcy is about to become the new black, is that it is a necessary product of healthy, unfettered, dog-eat-dog competition. No bankruptcy, no capitalism. No capitalism, no … well, little if any economic progress. Just ask a historian.2
Within a capitalist system, it is competition that determines just how all ‘exploited’ resources are going to be originated, distributed and redistributed
It could be argued that the Asian economic miracle of recent decades was a product of ‘managed capitalism’ in that most Asian countries have followed a mercantilist (export-led) growth model. However, that can take you only so far, as Japan demonstrates.
dynamically through time. Firms that invest and grow, presumably because they produce products or provide a service that consumers both want and can reasonably afford, will find that they are ‘exploiting’ more workers. And firms that don’t invest or for whatever reason don’t grow, they will find their slice of the ‘exploitation’ pie shrinks over time. Those that do most poorly in the competition stakes and go bankrupt will no longer ‘exploit’ at all.
Now this is going to strike the reader as a rhetorical leap from mere semantics into a trick of logic, but here goes: If what makes a capitalistic system sub-optimal or, in the eyes of some, just plain evil, is the ‘exploitation’ of labour, then it would be desirable for all firms to go bankrupt, as the ‘exploitation’ would thus cease. Workers would, however, find they were out of jobs.
A Marxist might counter that the goal should not be bankruptcy—after all Marxists do desire a general growth of the means of production so as to better provide for all—but rather for the surplus value, or profit, not to accrue to the capitalist, but rather to the workers themselves, hence their desire that ‘workers of the world unite’, rise up, seize the means of production and establish a ‘dictatorship of the proletariat’, that they can then use to satisfy their various needs and wants without an exploiting capitalist skimming off the top. All you need is a revolution. Easy, right?
Not so fast. What is needed following that revolution is some way to determine just what those needs and wants are. Hmmm… now who (or what) should that be? Well, absent a pricing mechanism in a free, objective market in goods and services, it is impossible to know to what extent an individual desires a given good or service in relation to other goods and services. Production and trade that is not free, but rather reflects the edics or preferences of some individual or group of individuals in particular, is not going to determine the true relative prices prioritising everyone’s myriad needs and wants. Rather it will determine something else. Taken to the extreme, where relative prices are simply mandated by a central authority, then all legal fulfilment of needs and wants will reflect nothing more than the edicts of that authority.3