Archive for April, 2010

Another Achilles Heel of modern society- narrow margin

Thursday, April 8th, 2010

From our previous article (An Achilles Heel of modern society- specialisation and division of labour), we talked about one of the Achilles Heel of modern society- excessive specialisation and division of labour. Today, we will introduce another Achilles Heel of modern society- lack of margin.

First, we will delve more on the concept of margin. Let’a look at the examples below:

  1. When you read a book, you will find the text being surrounded by a narrow band of space. What if the publisher of the book decides to maximise the usage of space and print the text right to the edge of the paper?
  2. When you look at the motorway, you will find that many of them have enough space on the edge of the road to fill another car lane. What if the designer of the motorway decides to maximise usage of space and make the lanes so narrow that your car’s wheels are only centimetres from the edge of the road and the next lane?
  3. In the world of aviation, aeroplanes must be separated between each other by a considerable distance. Should two planes come within, say 400 metres of each other, it is considered a ‘near’ miss. Why don’t air traffic controller maximise the usage of airspace by letting planes fly less than 400 metres from one another?

In all these examples, the boundary indicating the limit beyond which something should not go or below which something should not fall is very generous (relatively). That is, there is a wide margin. Margin is the space beyond what is exactly needed. It is the extra and excess buffer beyond what is required. To illustrate this point, let’s have some examples:

  1. Every year, you earn more than what you need to spend.
  2. You arrive at a meeting 15 minutes early.
  3. You have a party for 50 people but you order enough food and drinks to feed 60 people.
  4. You plan your time for next week such that you will have many hours of free time.

In the above examples, you are giving yourself a buffer (margin) far beyond what is solely needed.

If you live life full of margin, wouldn’t that make you a much happier and relaxed person? As you step towards the edge of your buffer, your stress level goes up, your anxiety goes up and you become much more uptight, irritable and impatient. That’s because you are stepping towards the point of no return (e.g. accidents, bankruptcy, late for important appointment, etc). You see, the whole point of a buffer is to give you a margin for error against the unexpected (i.e. the Black Swans).

But look at the reality of modern society:

  1. Back in 2007, when the private equity fashion was in vogue, companies with ‘lazy’ balance sheet (i.e. buffer of cash) are marked for takeover.
  2. Home buyers leverage to the hilt and increase their debt servicing burden to the point that they have very little beyond what they absolutely need.
  3. As one of readers said, there’s a cult of efficiency in this modern world where everything have to be run at maximum efficiency with as little slack as possible.
  4. According to The Ultimate Suburban Survivalist Guide,

    Nothing is stored for very long in a supermarket, but then, with just-in-time inventory, nobody stores anything. Grain is produced and stored in the Midwest and shipped daily to the rest of the United States. The system we have now is a huge contrast to what the US did up until the 1980s. At one time, up to a year’s worth of grain was stored in elevators around the country. But now, very little is stored. We produce what we consume each year. So what’s plan B if somethign goes wrong? There’s no plan B.

  5. Modern retailers uses a just-in-time strategy “that strives to improve a business’s return on investment by reducing in-process inventory and associated carrying costs.”
  6. If you are a professional, you will notice that most people around you have very little time buffer. Every slice of slack time will be eliminated quickly by meetings, deadlines and pressure to produce more and more output in less and less time.
  7. Many investor uses margin lending, CFDs and other forms of leverage to ‘maximise’ their returns.

We can go on and on with more and more examples. As you would have noticed by now, modern society disdains the idea of having any slack. Every buffer must be eliminated and utilised. The usage of every penny and second of time must be maximised to produce some kind of output. Even economies are structured that way. The Australian economy, for example, is one of high leverage. In the labour market, it was not long ago that there were cries of “skills shortage.” Also, as we wrote in Black Swans lurking around Australia?s banking system, Australian banks are concentrating their risk on mortgages, in their quest for maximising profit.

What is the consequence of miniscule margin? As you can see by now, by eliminating every slice of margin in the path towards maximising results, the margin for error increases. The GFC is the result of the elimination of financial margins to the extreme. As margins decrease, the vulnerability to Black Swans increases (see Failure to understand Black Swan leads to fallacious thinking).

So, in view of all that, we wonder how much margin does our increasingly complex and marginless society has against threats to our modern way of life?

An Achilles Heel of modern society- specialisation and division of labour

Tuesday, April 6th, 2010

Last month, in Hedging against currency crisis with electronic gold, we asked whether you are interested in reading articles with TEOTWAWKI (The End Of The World As We Know It) theme (i.e. survival skills/gears, self-sufficiency, guns, supplies stockpiles, e.t.c). This is the result of the reader poll:

  1. Almost 60% are interested.
  2. Almost 29% are indifferent
  3. Around 11% are not interested

Therefore, it seems that the majority wants to read more on the TEOTWAWKI theme. In future, if there is enough material on TEOTWAWKI, we may spin off those topics to another blog and linking to them from here. That way, we can keep stick to the theme in this blog for new visitors and at the same time, cater to our long-time loyal readers who are interested in the TEOTWAWKI theme.

But before we start the series on TEOTWAWKI, we must prepare the groundwork and establish the premise of this theme. If not, visitors may think that we are a bunch of extremist survival nuts. Our loyal readers will want to be assured that we are not becoming nut cases…

Firstly, we think it is important to start with the correct words to describe this theme. As you can see from our previous articles, incorrect words lead to wrong and fallacious thinking. For example, in Will governments be forced to exit from ?stimulus??, we railed against the economic jargon called “stimulus.” Therefore, as we write this article, it gradually dawned on us that TEOTWAWKI is probably the incorrect word (or rather, acronym) to use- it gives people the impression that we are a bunch of survival nut cases. Instead, we think the better word is “self-sufficiency.” This word nicely encapsulates the idea that we are driving at and is consistent with the general tenor of this blog.

Much of the prosperity and luxury that we enjoy today is possible only because of specialisation and division of labour. That is the opposite of self-sufficiency. As societies get more and more complex, the specialisation and division of labour becomes finer and finer. Consequently, we are all losing more and more of the basic skills that many of our forefathers will find trivial. As we expend more and more effort and energy in getting more and more skilled in our area of finer and finer specialisation, we ‘outsource’ more and more of our basic needs to other people who are specialised in those areas.

While specialisation and division of labour is vital for economic prosperity, there is an Achilles’ Heel- economies become more and more vulnerable to economic shocks. As we explained before in Overproduction or mis-configuration of production?,

This is the key insight from the Austrian School of economic thought. Over-production or over-investment is not the problem. Rather, the trouble lies in the mis-configuration of production and mal-investments.

As labour becomes more and more specialised and divided, it becomes harder and harder to reconfigure the misconfiguration of supply and demand for labour that is the result of economic shocks.

To illustrate this point further, consider this fact: 1% of the US population grows all of the food for all Americans (source: The Ultimate Suburban Survivalist Guide). We have no doubt this is the same for Australia too- that the tiny minority of the population supplies the entire population with food. So, what does the other 99% of the population do? As you would know the answer by now, the working proportion of the other 99% are specialised and divided into their own area of speciality, serving the rest of the population.

The crucial question to ask is this: what is the ‘glue’ that stick together all these specialised and divided labour into a system that we called the “economy?” The answer is: energy. As we wrote in Smart money in alternative energy?Part 1: current energy quandary,

The most important ingredient that drives the efficiencies, comforts, automation and wonders of today?s modern way of life is energy. The trains, cars, ships and aeroplanes that transport massive quantities of people and goods over vast distances quickly require energy in the form of fuel. The heavy machines that do heavy physical work far beyond the scope of human labour require energy too. The powerful computers that process and store vast amount of data and information as well as automate mental labour requires energy in the form of electricity. The heating in winter and cooling in summer of our abode requires energy too. Take energy away and our modern way of life will very much grind to a halt and bring us back to the hard life of our ancestors. In fact, contemporary life rests on the premise of abundant and cheap energy.

In the food example, for the 1% of the population to supply food to the other 99%, there must be a way to distribute them through vast distances. In Australia’s case, some of the final consumers of the food that it produces are overseas, separated by thousands of kilometres of oceans. Not only that, the production of inorganic fertilisers that gives modern agriculture the amazing yields requires a lot of energy. With today’s modern machines and equipment, the farmer today can do the job of multiple ancient farmers at much faster speed. This requires energy.

Now, assuming that energy prices will be getting more and more expensive in real terms in the long run (i.e. Peak Oil, secular rise of Chinese/Indian demand, e.t.c), what will this imply? The conclusion is clear: the real cost of many things that we take for granted today will increase- that includes the cost of food, which is one of our most basic need. With that, it implies that the division and specialisation of labour that underpin the modern way of life as we know it will be fading away. That does not mean we will all return to the stone ages. But it will mean that it will be getting more and more expensive to ‘outsource’ our basic needs to other specialised labour. That means, we will have to be more multi-skilled and self-sufficient, which is the way our forefathers were in the first place.

Should there be any Black Swans (e.g. geopolitical acts, natural disaster) that will disrupt the just-in-time supply of energy to our local area, our modern way of life will be disrupted instantly. If the disruption is too sudden and unexpected, and relief is not on its way quick enough, society can easily descend into chaos simply because the highly specialised and divided labour of today’s society will not have the basic self-sufficiency skills to adjust. Also, having the skills alone is not enough- without adequate stockpiles of essential supplies, all the skills and adaptability will not help much. Think about it: how many of us keep a stockpile of basic supplies that are essential to our daily needs? Many urban dwellers simply buy supplies from the nearest supermarket as the need arises. Should there be a severe disruption of energy and other basic services, many otherwise decent folks will have to resort to looting the supermarket just to survive. As we read The Ultimate Suburban Survivalist Guide, we learnt that during Hurricane Katrina in the United States, some decent folks looted the supermarkets in order to distribute supplies to their neighbourhoods.

In short, the specialised and divided labour of today carries an Achilles Heel. There is another Achilles Heel of modern society. Keep in tune!

MarketClub 2 Week Free Trial

Thursday, April 1st, 2010

We will be clear from the onset: this post is basically a sales pitch for our affiliate partner at Market Club. Also, only those who are into trading may be interested in this sales pitch. Now, you know enough to decide whether to continue reading or not…

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Are you a range trader or trend follower?

Thursday, April 1st, 2010

Remember, back in Explosive gold price movement ahead. But up or down?, we showed you that gold prices had been bound within a range from February 2009 to the day when the article was written (September 2009). As we showed you in the price charts, the range got progressively narrower and narrower as the months go by. That gave rise to a price formation called the ?pennant.? As we wrote in that article,

A pennant is like a spring coiled up, ready to jump [either up or down] at any moment.

Not long after we wrote that article, gold prices broke out of the range and made a record high of US$1,226.37 on 2 December 2009. Today, gold prices are range bound again.

How to buy and invest in physical gold and silver bullionIn 2005, we remembered the headline from the Australian Financial Review (AFR) screaming “gold fever” as gold prices hit US$500 for the first time in many years. As the crowd piled into gold, driving it to a then record high of over US$730 before a major correction threw it down to a low of around US$540. Then gold was range bound for about a year before making another dash to above US$1000 before the Panic of 2008 crashed it to around the US$700 level. Then it recovered, made another dash to US$1000 before being range bound again. The rest of the story you know.

Do you see a pattern? Basically, the story goes like this: range-bound, break out, dash up, correction, range-bound… rinse and repeat. You can visually see this pattern nicely in the Why gold will not make new highs or lows this year video made by our friends in Market Club (which we have an affiliate relationship with). If this pattern repeats itself, we may see gold prices becoming range bound for the rest of this year before making a record high next year.

For those who are into trading, this is a good opportunity to engage into “range trading.” The principle behind this type of trading is very simple- sell when prices reach the upper range and buy when it reaches the lower range.

For traders who engage in “trend following,” they follow a different approach. They wait for break-outs of the range and buy/sell accordingly. For example, if gold breaks out of the trading range upwards, they buy.

Is it possible to be a range trader and a trend follower at the same time? One old trader told us “No, unless you are extremely smart.” Why? When you see gold prices reach its upper range, a range trader will sell (or short sell). A trend follower, on the other hand, will buy.

What if you are trying to be both? Do you buy or sell?