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Tuesday, September 25, 2012

Yet another reason to be optimistic on the USA

Not only we are becoming more competitive (thanks to cheap natural gas, rising labor productivity and increasing labor costs abroad)...

Here is a more compelling reason. We are the most competitive in beer!

According to the Economist chart of the day it takes an american worker about 6 minutes of labor to get a beer...

We should be done for the day in about an hour!!!  Life in India or the Philippines pales in contrast..

Seriously now... The low cost advantage of China is fading.

The prestigious BCG (Boston Consulting Group) projects that by around 2015, the U.S. will have an export cost advantage of 5 percent to 25 percent over Germany, Italy, France, the U.K. and Japan in a range of industries. Among the biggest drivers of this advantage will be the costs of labor, natural gas, and electricity. As a result, the U.S. could capture 2 percent to 4 percent of exports from the four European countries and 3 percent to 7 percent from Japan by the end of the current decade. This would translate into as much as $90bn in additional U.S. exports per year, according to BCG's analysis.

Look at this video from Hal Sirkin at the Boston Consulting Group.

Monday, September 24, 2012

So... How much do companies pay in taxes?

Now that we know how much Mr. Obama and Mr. Romney pay in taxes, one should ask how much do firms pay...

In textbooks, it is always assumed a flat 40% tax rate.

It turns out that this figure is far from realistic. The following chart from FRED, Federal Reserve Bank of Saint Louis shows that the number is much more likely to be in the late teens (17 to be exact).

The picture is not much better on the personal side....Textbooks say it is 35% for top earners and 10% at the bottom.  Look at the following chart prepared using IRS data for 2009, on taxes paid by citizens

Who (besides me off course) is paying taxes?

Use this information wisely.

Friday, September 21, 2012

PIGS vs. BAM !!

Much has been written about the debt levels of the PIGS (Portugal, Ireland, Greece and Spain). THere is not a half decent blogger/economist who has not predicted their collapse.

Here is another angle.. Compare the PIGS against the BAM... (Brazil, Argentina and Mexico)

Look at this chart... Manufacturing labor costs ..I added the US and Germany for reference.

Source: Bureau of Labor Statistics, Division of International Labor Comparisons, International Comparisons of Hourly Compensation Costs in Manufacturing, 2010

Wednesday, September 5, 2012

Stocks, lemonade and pizza

Most companies’ beginnings are humble. Those who survive the treacherous first years find themselves needing money. Remember your sister’s lemonade stand? (If you don’t have a sister, or she did not have a stand, just humor me). They need money to grow (if you want to sell more lemonade you need more lemons, and maybe a bigger blender and eventually a refrigerator, a truck, an accountant and a lawyer). In order to get this money, business owners are willing to split their ownership into smaller pieces called shares or stocks… Think pizza

Before the expansion, your sister owned the whole Lemonade stand, 100% of it.

In our case, your sister  is willing to sell a share of her pizza in exchange for the money needed to grow her business. She will no longer own 100%. Depending on how much money she needs she will have to sell more or less shares.  If this is the first time you sister does this sale, it  is called “going public” or IPO, Initial Public Offering

Your sister’s share on the company after the IPO

A shareholder’s share on the company after the IPO

A share of stock is the smallest unit of ownership in a company. If you own a share of a company’s stock, you are a part owner of the company.

Why would anybody buy share on your sister’s lemonade stand?
Share buyers, AKA investors or shareholders buy shares because they believe in the business, they believe that your sister will be a successful lemonade stand owner. In particular they have two basic reasons;
        a)     Your sister is now obligated to share the profits of the lemonade proportionally with all other shareholders. Your sister will send a quarterly check to shareholders. This is called a dividend.
        b)     The investor hopes he or she may be able to re-sell the share at a higher price than he/she paid for in the future. This is called capital gain.

An alternative way to finance her business
What if your sister did not want to let go control/ownership of her company? Did she have any options? The answer is yes. She could have borrowed the money from your parents (bank). We would call them debt holders. In this case your sister needs not to share profits, only to repay what she borrowed (plus interest). 

Separation of Management and Ownership
After a few years, there would be hundred if not thousand of of owners. This makes it practically impossible for  owners (principals) to  run their own company. They must hire managers (agents) to do the work.  Just imagine how long it would take all owners of Toyota trying to agree on what a new model should look like.
An important conflict arises when managers (the agents) entrusted to look after the interests of others (the principals) use their authority or power for their own benefit instead. 
It is a pervasive problem and exists in practically every organization whether a business, church, club, or government. Organizations try to solve it by instituting measures such as tough screening processes, incentives for good behavior and punishments for bad behavior, watchdog bodies, and so on but no organization can remedy it completely because the costs of doing so sooner or later outweigh the benefits of the results.