Capital goods are the first derivative of consumer goods

When analyzing product demand, a distinction should be made between consumption goods,  like toys and clothes and capital goods, like machines and trucks.  Capital goods can be defined as goods that are used to manufacture consumption goods.  Demand for capital goods can again be split in demand for growth and demand for replacement. Demand for replacement of Capital Goods is not the issue here: we focus on Demand for Growth. Demand for growth means the production capacity needs expansion.  If the production capacity grows at a constant rate, growth-demand for capital goods is stable. If production capacity is constant, growth-demand of capital goods is zero. If there is overcapacity, growth-demand of capital goods is negative, and because you cannot return machinery, it is zero. This relation is equivalent to the mathematical expression that growth-demand for capital goods is “the first derivative”  of demand for consumption goods. This 4th Law of Flostock may seem trivial or overly mathematical, but it has important implications.

Growth demand for capital goods goes through a peak when the demand for consumer goods merely goes through its inflection point (i.e. the point where the curve goes from stronger and stronger growth to weaker and weaker growth). Since the inflection point is much earlier in the economic cycle than the peak of consumer goods, capital goods peak much earlier. So all companies that produce capital goods go through an earlier cycle than all companies that produce consumer goods.

Labor in this comparison is also a Capital Good and there is supply of labor (hiring) for Growth and supply of labor (hiring) for Replacement. When consumer goods go through their deflection point, supply of labor for growth goes through its peak and starts going down. Supply of labor for replacement continues to take place untill the consumer goods go through their peak, then becomes negative and people are fired. Temporary labor suppliers like Randstad always remind us that they are early-cyclic, therefore they are a leading indicator. This is true, but they are only a good indicator because it is easier to see a peak than to see an inflection point. For the rest temp labor is just the first derivative of the main cycle. 

China is another implication of the 4th law : China has grown strongly over the last 25 years, but mainly in capital goods for the own industry and export of consumer goods. When the export growth slows down (so it is still growing, only slower), Chinese production of capital goods will decline.  If China does not manage to get its population to increase their consumption fast, and it is unlikely that they will, the Chinese industry will decline. This has already started. If the export of consumer goods will reach its peak, so when export markets become saturated, growth demand for capital products will be zero (or negative). In addition, the Chinese industry is young, so there is not yet much demand for replacement. This means that both types of capital goods production will stop.

On the other hand (because I don't want to stop with the word 'stop'), if demand for consumer products starts growing again, as it may be doing in the USA, Japan and Europe, growth demand for capital goods will once again see a strong growth indeed.

The Hoarding Cycle

In an economy that grows year-on-year, for centuries, the total amount of possessions will grow too. There is however a physical limit to what our houses can contain,  so either we stop buying and start saving, or we throw away faster, or we miniaturize our possessions. The miniaturization then is especially the investment  per cubic meter, so we can hoard more cumulative income in the limited space of a house. An iPod takes up less space than a CD-collection, which is again smaller than the same amount of music in vinyl. An Xbox is smaller than a baseball, an e-reader is smaller than a book case, a flat screen takes up less space than a classical TV-set and 100 euros worth of jewelry in gold is smaller than 100 euros worth in silver. But at some point the house is full and we have to throw things away if we want to buy new stuff. Despite the miniaturization and throwing away, the result over the centuries is that the amount of possessions increases. Let’s call this the Hoarding Trend.  

There is a big destabilizing effect of this amassment of goods: people have so many possessions that buying many types of new goods is for a large part discretionary. When a crisis hits, people may  decide to postpone buying new things.  The notorious Men’s Underwear Index describes this phenomenon, but it also applies to many other material goods. Some collections of material goods (“fleets” in Flostock terminology) will age fast and  at some time will need replenishment, whether the crisis is over or not, either because of wear or because of fashion (which could also be seen as a kind of wear).  This applies to cars, underwear, clothing in general and maybe it applies to music as well. But it does not apply so much to furniture, home decorations, books, kitchen utensils, sporting equipment or gardening. For those categories of fleets of material goods fashion is not changing so fast and a little aging is not directly visible (at least not for a middle-aged guy like me J). So in these categories people can postpone the rejuvenation of their hoard, their fleet of possessions over a longer period.

So what is the point? Point is these material possessions are a stock that in a crisis may undergo aging without changing in size, but with a big change in flow. Example:  Suppose the maximum life of a couch was 10 years before the crisis, so the fleet of couches had an average age of 5 years. In the crisis people decide to wait longer with buying a new sofa and thus to let it age to e.g. an average of 6 years. In that case the furniture retailers see a 17% drop in sales.  Underwear sales dropped in the crisis, but you cannot postpone buying new shorts longer than a couple of years, so sales must have recovered by now. So a crisis drives delays in buying for stocks of possessions, which delays worsen the crisis. For goods with a potential long life the effects are biggest.

After the crisis, when consumer confidence returns, people want to go back to the average age of their hoard and buy a bit more for a while, creating an upturn in the economy and creating a new, young fleet of stuff, ready to be aged again in the next crisis. This we can call the Hoarding Cycle. The Hoarding Cycle waves around the Hoarding Trend. Question is whether the Hoarding Cycle is driven by the long term economic cycle or the other way around. And since the discretionary part of the possessions is getting bigger over time as the Hoarding Trend curve goes up, the amplitude of the Hoarding Cycle might be growing as well, predicting bigger crises in the future.

Lehman Wave explains price swings in the Commodity Super Cycle

The commodity super cycle, with a wavelength of  30 years, has passed its peak, according to several researchers including José Antonio Ocampo of Columbia University and the Worldbank. The peak was in 2007 and prices are now considerably lower. See e.g. FD of 25 May 2013. Expectation is that prices will continue to go down another 15 years. Interesting.

What puzzles most researchers is that the strong dip after the bankruptcy of Lehman Brothers in September 2008 was followed by a new pricing peak which lay for various commodities between 2010 and 2011. Most of the researchers do not have an explanation for this effect. Michael Camachof of J.P. Morgan believes the cycle is not going down and the intermediate peak is the beginning of another decade of price rises.

Maybe the following can help in this discussion: There has been a Lehman Wave that can explain the recent swings in the prices of the Commodity Super Cycle, both the extreme dip down and the rather strong recovery.

The Lehman Wave was first described by us in a Beta publication in 2009 and can be defined as a global destocking wave that went through the industrial supply chains after credit became scarce due to the panic after the bankruptcy of Lehman Brother (hence the name). In the Lehman Wave, companies wanted to reduce their inventory to free up cash: the so-called Active destocking. Based on anecdotical evidence and common sense I have estimated the desired destocking at 10%. For suppliers at the beginning of the supply chain (the "commodity suppliers") the cumulative effect of all this destocking was an unprecedented dip in volume of 50% or more, with on most cases the deepest point around March 2009. When it became clear a bit later that the end market had continued to consume goods at an almost normal level, the supply chain discovered that they had destocked too far and started re-stocking, creating an upward peak in 2009/2010/2011, which sometimes led to severe shortages and stock-outs.

From volume to price: obviously the supply/demand balance reversed between 2007 and early 2009 and reversed again mid 2010. Therefore I dare speculate that it is this upward volume peak of the Lehman Wave that created the intermediate price peak and I therefore propose to call it the Lehman Price Wave. Without the Lehman Price Wave the Commodity Super Cycle over the last 5 years cannot be understood.

Oysters are easier than rabbits

Recently scientists discovered that cooking pots dated some 15.000 year BCE, i.e. from the last Ice Age,  were used to cook fish.
Humans originated from Africa and spread all over the world, in various waves of interbreeding about which the scientists can endless debate. And my family spent many summers with the kids on the French Normandy coast. The connection is that it is easier to catch an oyster than it is to catch a rabbit.
While walking over the beaches and rocky stretches of the European coast line, it is possible to gather a lot of food with little effort, even for toddlers. Oysters, mussels, cockles, crab, fish, snails: they all live there in abundance and only need to be picked up. This is such an easy way of finding high value protein, that I dare say that our ancestors must have spread following the coastlines. People at that time did not have wasabi, lemons or soya sauce, but good fresh shell fish is tasty also without condiments.  The clay pot confirms the hypothesis: in the period when the world was being populated, people foraged the beaches and ate what they found.
I estimate, without any scientific proof, but based on many walks along the coats, that a group of hunter-gatherers consisting of a single family can find enough food along the European coast within a days’ walk. That means they cannot stay long at a single location, but have to keep moving. If I would have to do this I would walk north in spring and south in the fall, with the birds. European coasts have plenty of opportunity to do this. This must have stimulated a rapid spreading of humans over the fringes of the continent.  Only later the centers were populated, when hunting had been improved and people were able to catch rabbits, deer and wild pigs .
Interestingly, if we ignore some islands for a second, there is only one long European coast line: this must have been like a 2-way narrow Neolithic highway, on which bands of foragers constantly bumped into each other, trading, exchanging, fighting and intermarrying. The chance of meeting someone if you are both following the coast is 1000 times bigger than when you spread over the center of the continent. They all must have known each other... This could also be the reason that Neanderthalers were absorbed by incoming waves of new humans.
In stock and flow terms: the stock of humanity in Africa flowed into the Eurasian continent. The passage way were the coastal areas. The feeding capacity of the beaches determined their traveling speed. Bigger groups had to travel faster. Only when the beach highways became too crowded, and stocks of cockles, mussels and crab depleted, people had to move inland to forage.
According to the European committee, there is 89.000 km coastline in Europe.
Assuming a family eats 100 to 150 meter of coast line per day, and it takes 1 year to replenish the stock of crustaceans,  one family needs about 5 km coastline, permanent. This means that Pleistocene Europe could feed about 20.000 families, say 1 million people, on its beaches.

Target to create oscillation

In many industrial companies, December is a not a good month. The sales volume for these companies has an oscillating pattern over the whole year, with month-to-month differences that can be as big as 20%. Demand in December is the lowest of the year because of the Christmas holidays, and because in December demand is reduced by active de-stocking.

 

Managers have targets for running their business, and for many managers that includes a target  –strange enough if you look at it— to have a low level of working capital at the end of the year. The easiest way to achieve that target is to reduce the stocks.  The target is not to have a constant low working capital: it only needs to be low at the end of the year; This is obviously for reporting purposes: it looks good and tidy in the annual report.

A calculation example of the effect: If your customer on average has 60 days of stock, and the customer decides to reduce his working capital with ten percent,  in December he buys less product for the equivalent of 6 days' sales, creating an additional 20% (6 days divided by 30 days) dip in your already low December volume. 

As a result, in January stocks will be too low for normal operations and fast replenishments need to be ordered. This creates a hurried peak in January demand, often resulting again in lower February orders.  So the working capital target is responsible for a considerable part of the oscillating pattern: after a normal November, it creates a deep dip in December, a peak in January and again a dip in February.  The target thus contributes considerably to inefficiencies in the chain.  But you get what you ask: lower inventory.

Depardieu is creating a stronger Europe

Gerard Depardieu, one of our most famous and successful actors, has moved to Belgium to avoid sky-high taxes that were recently announced by the new socialist government of Francois Hollande. Depardieu was criticised from all sites as not patriotic and only interested in money.

I believe Depardieu is a high profile example of a trend that will strengthen the European Union. Free movement of people in the EU allows people to avoid too high taxes, go to where jobs are, get together with like-minded people, to start a business and to do whatever they want to do. We see this with Polish plummers in Belgium, Dutch bankers in London, French engineers in Eindhoven, English pensioners in Spain. And French millionairs in Belgium.

In the Middle Ages, the fractionated landscape and political situation in Europe made it impossible for the ruling aristocracy (the "rent seeking elite" as Fukuyama calls them) to suppress their serfs too strongly. If the serfs were dissatisfied they could leave and seek another lord for protection. Or they could go to one of the growing cities and be free. Tilly described this eloquently in 1990.
 
This lack of oppression, this impossibility to dominate the people in absolute terms is what allowed freedom, democracy and prosperity to develop in Europe, for the first time in history. The free movement has been interrupted for maybe two centuries (the great period of the nation states about which Theirry Baudet is so enthusiastic, but which I would call mainly bloody) and is now coming back.

The free movement of people in the European Union will force the governments of cities and states to compete for the preference of the 500+ million people that have a choice to go and live where they want. These governments will have to provide good living conditions, education, culture, logistics, security, employment, and all the other things people want. If they don't, or if they raise the taxes to a much higher level than other states, people will vote with their feet.

This is a competitive situation that the USA does not have: conditions between cities or states are much more equal there. And Asia is different because they do not have the free movement, the level playing field, rule of law and all the other things Europe has. This internal competition for talent will give a whole new dynamism to Europe.

Is School Killing an unavoidable by-product of freedom?

New discussion in the USA about the recent massacre in Newton CT where 20 young school children and 8 adults were massacred by a lunatic with a sort of M-16 automatic assault rifle that he took from his mother (after killing her).  A tweet today stated that the number of people killed in the USA by gunfire since 1970 is bigger than their losses in the last 4 major wars.

There is so much info on the net that it seems as if newspapers stockpile murder and gun statistics for release after a massacre, like they prepare obituaries of famous people.

The NRA is silent for the moment, but will speak up again when people, horrified by yet another bloodbath, propose laws to restrict the free availability of weapons. The NRA has political cloud based on weapon carrying voters and based on political contributions by the weapon producers. First amendment? Nonsense: it is a skewed prisoner's dilemma: every gun-toting idiot, sorry, every responsible father believes he can better survive armageddon and defend his family form anihilation by their gun-toting idiot neighbours, sorry, from the responsible, but gun carrying fathers next door, when he has the biggest gun.

Today the NYT published ideas from readers to solve the problem: most of them were aimed at arming the teachers or barricading the schools. The US is becoming more and more attractive as a country of destination. The land of the free, home of the brave.

It is probably impossible to convince the "frontier" people of the US, the descendants of the old colonists, that one can live a good life without an assault or riot gun, even without hunting rifle (you búy your meat? argh). Popular opinion on gun laws has become even more liberal the last ten years. We have to assume that it will be impossible to contain the voters, so any politician proposing anti-gun legislation will loose his seat.

From a more practical point it is probably completely unfeasible to collect 280 million guns that are out in the streets. Pandora's Box was opened and cannot be closed again, even if the majority would want that. Although: by collecting one million weapons each year, and no sales anymore, the problems can be solved in the year 2293.
 
A third point is the money behind the political campaigns and behind the lobbying in Washington and elsewhere. As long as the NRA & weapon producers can buy their votes, no proposal for legislation will be accepted. It would require a very courageous president in his second and last term to take on such a challenge.

So unfortunately the most likely outcome will be that guns will stay. Maybe Obama will succeed in banning the most atrocious assault rifles, together with missiles and hand granates. But this will not prevent the next lunatic from taking his freedom rights in his own hands and killing the next, albeit maybe smaller, group of innocent bystanders.