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The present-day tariff-trade-war conflicts boil down to Neocolonial strategies to gain control of markets for exports and resource extraction on terms that are only favorable to the Neocolonial power. The title of today's essay pays homage to the inimitable John D. MacDonald's novel The Girl, the Gold Watch & Everything in which the gold watch has the power to stop time. In the context of today's keening cries of tariff-trade-war agony, let's use this imaginary power over time to return to the ancient world's many long, dangerous and immensely profitable trade routes, for example the (mostly) sea route from Rome to the ports and riches of the southern coast of India, an enduringly profitable trade bonanza ably described in The Roman Empire and the Indian Ocean: Rome's Dealings with the Ancient Kingdoms of India, Africa and Arabia. Let's start by dispensing with the conveniently pliable fantasy of "free trade." Though some reckon the author's estimate that 30% of the Imperial...
3 months ago

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More from oftwominds-Charles Hugh Smith

Tariffs Are Not Enough

The tariff sledgehammer has a role, but it's a limited one. There's an inherent tension in State-Corporate Capitalism. Proponents of the free market hold that any state Industrial Policy will fail because the State cannot pick the winners and losers as effectively as The Market. Yet Corporate Capitalism continually lobbies the State to lower interest rates and taxes, weaken the currency to make corporate products cheaper in overseas markets, erect tariff / trade barriers against mercantilist global competitors, etc. In other words, the State should butt out of the free market except when it serves our purposes. The other source of inherent tension is the State's responsibility for more than boosting private-sector profits. Enterprises have the luxury of focusing on one thing: boosting profits and "shareholder value." Governments have responsibilities far broader than boosting profits--for example, national security, which has been gutted by de-industrialization and the wholesale transfer of supply chains overseas. Steep tariffs are now being deployed to correct the corporate offshoring that boosted profits so wondrously. The problem is tariffs are not enough to reverse offshoring to reshoring. Tariffs act as a useful sledgehammer but a sledgehammer has a limited scope of utility. There are more moving parts in the decision to reshore than tariffs. What few realize is every State has a de facto Industrial Policy set by the entirety of State policies and regulations. This Industrial Policy is implicit rather than an explicit set of goals and policies, and so various pieces of this implicit Industrial Policy may actually be contradictory. Just as the State doesn't have the luxury of focusing solely on profit, corporations don't have the luxury of gambling the company's future based on one State policy that's likely to change. Enterprises must consider a great many factors before committing billions of dollars to moving supply chains and production facilities. These include: 1. Tax structures 2. Regulatory burdens 3. Environmental requirements 4. Workforce availability and cost 5. Cost of capital 6. Availability of credit 7. Cost of healthcare for the workforce 8. Automation / AI 9. Domestic and global market conditions and competition 10. Public sentiment The State's policies set many parameters that affect decisions about reshoring: the complexity of tax codes, the cost of healthcare, the cost of capital, environmental regulations, the relative ease or difficulty of doing business, the availability and skills of the workforce, and so on. The de facto Industrial Policy of the U.S. has incentivized hyper-globalization and hyper-financialization, to the detriment of the national interests and security. Wall Street, the political class and Corporate America benefited from these de facto policies while the bottom 90% lost ground. The New Cost of American Inequality: $80 Trillion Measuring the Income Gap from 1975 to 2023 (RAND) $1 Trillion of Wealth Was Created for the 19 Richest U.S. Households Last Year The richest of the rich in America control record slice of nation's wealth. (WSJ.com) These are not the result of "market forces," they're the result of State policies. The point is all of these State policies have to be changed if we as a nation are serious about reshoring critical supply chains. Tariffs are not enough. I have long advocated here for a radically simplified corporate tax structure that's a flat tax of 5% paid on whatever profits are reported pro forma quarterly. Corporate taxes could be reduced for companies that source all components and assembly of their products in North America. There many ways to incentivize reshoring that are more reliable and actionable than tariffs alone. I've advocated shifting the tax burden from workers and employers (Social Security and Medicare taxes paid by all workers and employers) to capital via transaction fees on all capital transactions and the elimination of tax giveaways / breaks for capital. Since the top 10% own / control 80% to 90% of all income-producing capital, a policy shift from labor / employers to capital would transfer the tax burden to the wealthiest Americans, those who have benefited so richly from the de facto policies of hyper-globalization and hyper-financialization. I've also noted here many times that the current healthcare system will bankrupt the nation all by itself. Radical reforms are required to improve the overall health of Americans and reduce skyrocketing costs, many of which qualify as profiteering, fraud or needless paper-shuffling. The tariff sledgehammer has a role, but it's a limited one. If we're serious about reshoring strategic supply chains, we have to tackle all the hard stuff that the wealthiest class wants to leave as-is because they've benefited so mightily from existing policies. None of these reforms will be easy. There are many competing interests and complex trade-offs that must be negotiated so whatever pain is required will be distributed primarily to those who can best afford it. These are the folks with the wealth and incentives to lobby the hardest for their exclusion from any pain, and therein lies the political challenge: do we leave the status quo intact because it favors the most powerful few, or do we put national security above private-sector spoils? New podcasts: Dismantling the Economic Divide (1 hour) (hosts Emerson and Amy) Retirement Lifestyle Advocates w/ Charles Hugh Smith (host Dennis Tubergen) My recent books: Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site. The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $18, (Kindle $8.95, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF) Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF) The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF) When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF) Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF). A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF). Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World (Kindle $5, print $10, audiobook) Read the first section for free (PDF). The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF) Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free Become a $3/month patron of my work via patreon.com. Subscribe to my Substack for free NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency. Thank you, Mark S.C. ($70), for your wondrously generous subscription to this site -- I am greatly honored by your steadfast support and readership.   Thank you, Jeff T. ($70), for your marvelously generous subscription to this site -- I am greatly honored by your support and readership. Thank you, Tempos L. ($70), for your magnificently generous subscription to this site -- I am greatly honored by your support and readership.   Thank you, Ohio Chris ($7/month), for your superbly generous contribution to this site -- I am greatly honored by your support and readership. Go to my main site at www.oftwominds.com/blog.html for the full posts and archives.

2 months ago 31 votes
It Was 20 Years Ago Today I Started this Blog: What Surprises Me

I've managed to maintain a sense of humor and curiosity--or at least the comforting delusion that I've maintained them. It was 20 years ago today--well, actually, yesterday--that I launched this blog into the swirling rapids of the Web. As we know, time flies when you're having fun. In these two decades, I've written 4,854 posts and 745 Musings Reports for my supporters / subscribers, and further amused myself by publishing a number of books and posting a number of original songs. I started with nothing and have reached a state of grace peculiar to the media realm. I am an Untouchable to the Brahmins of the mainstream media, but far from the Media Shambala of being an influencer with hundreds of thousands or millions of avid followers whose devotion generates pasha-scale incomes. Betwixt and between, I've managed to maintain a sense of humor and curiosity--or at least the comforting delusion that I've maintained them. I can relate to Emperor Norton in old San Francisco, who declared himself Emperor and was treated with amusement and respect, a heady combination. I am emperor of the Of Two Minds empire, which exists solely in the confines of my own mind and as an ephemeral dot in the Great Oort Cloud of innumerable websites www.oftwominds.com. Like Emperor Norton, I depend on the financial support of kind supporters--in my case, my subscribers. I've survived the rapids of the Web which began with a Wild West burst of freedom and a sense that anything was possible, to the present domination of a handful of corporate platforms, a peculiarly oppressive mix of Kafka and Orwell--(you have violated our community standards but we won't divulge what triggered your algorithmic trial; you are hereby sentenced to Digital Siberia)--and Huxley (we love your servitude to our platforms, and so do you). The scramble to cash in is the coin of the realm. This offers its own amusements. An attractive person on Only Fans shared the fact that her earnings exceeded $43 million. How can we not gaze in wonderment? I should be cynical enough by now to find nothing surprising, but alas, a number of things still surprise me. I'm still surprised how creating more money is all it takes to keep the status quo from falling apart, a travesty of a mockery of a sham that's been playing to full houses for 17 years. I'm surprised that so great is our fear of losing whatever we have that we accept that the vast majority of this newly created "wealth" flows upward into the hands of the wealthiest few-- $1 Trillion of Wealth Was Created for the 19 Richest U.S. Households Last Year (WSJ.com, paywalled) (Yahoo News)--while 41.7 million American workers (31.3% of the workforce) earn under $12 an hour. The average rent for an apartment in the U.S. is $1,750 per month, which exceeds the take-home pay of full-time workers earning $12 an hour. As the article notes, and I documented in The Winners and Losers in 21st Century America, the top 1% of households own 31% of the net worth and the bottom 50% of American households own 2.5%. Fear is a powerful motivator. So too is hyper-normalization: we all know the system is broken and rotten to the core, but we don't see any alternative or way to change the system, so we play-act that everything's fine as a means of not going crazy. But of course we go crazy anyway. It's just the craziness manifests in ways that are acceptable. I shouldn't be surprised, but I am still surprised at the appeal of simplistic solutions. This is of course a primary feature of hyper-normalization: now that life is so interconnected and complex, there's no way to make sense of it, much less reform it, so we cling to something that does make sense. So if we just returned to sound money, the system would automatically right itself and we'd all be good to go. This sounds reasonable except for one hitch: the system is terminally rotten and corrupt, and so sound money would serve the corrupt, just like unsound money. I'm surprised I have an audience. This is a continuing source of surprise, for I have no credentials, no institutional seal of approval, and I'm indistinguishable from the old guy in front of you in the checkout line who you hope doesn't fumble around with coins to pay the exact amount. A very dear reader in San Francisco posted on social media that he thought he saw me fumbling around in confusion with my phone by a BART subway ticket machine. He kindly went over to help. It wasn't me, though it might have been. I happened to see the post and thanked the reader for his kindness--an increasingly rare treasure--and sent him a copy of my latest book as a gesture. Though my empire-of-the-mind appears disheveled, I do manage to keep up with the technology needed not to tip over in the rapids. In the cut-throat digital media realm, a sufficient grasp of evolving technologies is necessary for our survival. There's always room on the train to Digital Siberia, and always a way to stumble off the cliff into the bottomless canyon of de-monetization. We hear your screams briefly, and then the endless scroll distracts us from your fate. I have found great truth in former Intel CEO Andy Grove's dictum that only the paranoid survive. I don't trust either the state or Corporate America, the married couple who we see feuding in the parking lot over who forgot to buy broccoli but who are absolutely committed to their power marriage. I confess to being surprised by the durability of the duct tape keeping the machinery from flying apart. The fragilities and risks are hidden, but that's not the same as saying they don't exist. It's good to be industrious. It's good to be a producer and not just a consumer. It's good to learn some useful skill, or improve a useful skill. It's good to be curious, especially as things get curiouser and curiouser. I thank you for your kind readership and indulgence. I would be honored if you consider me like the old gent in line fumbling with loose change, mumbling to himself, who suddenly turns to you and says something that you think about afterward. Onward to the next 20-- My recent books: Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site. The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $18, (Kindle $8.95, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF) Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF) The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF) When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF) Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF). A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF). Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World (Kindle $5, print $10, audiobook) Read the first section for free (PDF). The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF) Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free Become a $3/month patron of my work via patreon.com. Subscribe to my Substack for free NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency. Thank you, John K. ($100), for your outrageouslu generous subscription to this site -- I am greatly honored by your steadfast support and readership.   Thank you, Robert B. ($32), for your marvelously generous subscription to this site -- I am greatly honored by your steadfast support and readership. Thank you, Joseph R. ($32), for your magnificently generous subscription to this site -- I am greatly honored by your support and readership.   Thank you, Lucky Lizard ($32), for your superbly generous contribution to this site -- I am greatly honored by your support and readership. Go to my main site at www.oftwominds.com/blog.html for the full posts and archives.

2 months ago 44 votes
The Terminal Rot in Corporate America

Corporate America took advantage of the Covid shortages and fiscal largesse to profiteer on a scale criminals could only dream of. One of humanity's most pernicious traits is the ease with which we habituate to conditions over time that we would have rejected out of hand if the transition had been sudden. This is the essence of what I term Anti-Progress: over time, what was solid melts away into thin air, what worked no longer works, but we no longer notice because wretchedness and decay have been normalized, i.e. accepted as "the way things are," or hyper-normalized: everyone knows things no longer work but we're unable to change the system, so we play-act that everything's fine as a means of not going crazy. Which brings us to the terminal rot in Corporate America, a rot so deep and pervasive that few recall that Corporate America once had some purpose other than increasing profits next quarter to boost "shareholder value." The moral rot in Corporate America goes unnoticed in a society in terminal moral decay. Why should corporate fraud, profiteering, deception and extortion attract our attention when self-service is the norm, lobbyists write regulations, legislators tell us we'll find out what's in the bill after they pass it into law, tax fraud by the wealthy is accepted practice, and so on in an endless stream of avarice and corruption? But the rot isn't just moral; it's also the rot of reducing the entirety of enterprise to one goal: increase profits by any means available. Correspondent Bruce H. neatly summarized the decay of "the business class": "This is the culture that created the McNamara fallacy (also known as the quantitative fallacy), named for Robert McNamara, the US Secretary of Defense from 1961 to 1968, that one can make policy decisions based solely on quantitative observations (or metrics) and ignoring all others. The Atlantic ran an interesting piece a few years ago, which documented the destruction of the middle class and the disparate wealth imbalance between the top 10% and the rest of the population. It began in the late 1960s with the rise of business schools and how those graduates were hoovered up by consultants who then sent these newly-minted efficiency experts out into the desperate businesses suffering from the stagflation of the '70s to help them become profitable again. Their preferred solution was to fire 'extraneous' staff. The net result of this was the elimination of the lower middle class. The foremen who managed a team of six to ten workers, the lower managers who managed four or five foremen, and so on. Skip to the 80s. The corporations had trimmed employment costs, managers now directly managed between 50 and 100 people and the formerly well-paid foremen and mangers were now unemployed and no longer part of the economy, which started to deflate. At the same time, Jack 'chainsaw' Welch was gutting General Electric and creating 15% ROI for shareholders, year after year. For his tenure, he was hailed as the ne-plus-ultra of business geniuses, regularly on the cover of business magazines and anyone who didn't follow suit was ousted from every other business. Thus the change in orientation from running a business to profit-at-all-costs. The second problem was the hiring of the chainsaw consultants by the very companies they had just cut into, directly into the upper-management level. Thus began a noxious process of business-school graduates going straight into consultancy jobs, then from there into the upper-echelons of businesses without every having worked for those businesses. Thus the people running the businesses were hired for their ability to make money, not their understanding of the purpose and goals of the businesses. My own experience was the quarterly reports stopped talking about what awesome service we were providing while making a profit to gloating over what great profits we were making, and thus it has remained largely so to this day. As a wise businessman said, if you want to make money, you can go do anything, but the business will be a hollow shell. You need to have a sense of purpose, some service to the community to exist to truly have a good business with happy employees. The result of this change can be seen in the people at the top: in the 1960s, 90% of corporate CEOs had started on the shop floor and worked their way up to the top. By the late 1990s, only 10% had done so. The ones in the middle of the 20th Century saw their roles as providing a service or product, by the end of the century, the ones at the top saw their job as making profits and the business was just a means. We don't need a new way of living, we need an old way of living." Thank you, Bruce. Well said. Here we see corporate profits, which leaped 50% (+$1.2 trillion) virtually overnight as Corporate America took advantage of the Covid shortages and fiscal largesse to profiteer on a scale criminals could only dream of. But this stripmining wasn't illegal; it was all legal, of course, as corruption isn't just legal in America, it's celebrated. Did corporate products and services improve in quantity and quality? No, they shrank in quantity and quality declined--but the price went up, and unprecedented profits resulted. "Shareholder value" increased smartly. And who are these "shareholders" who are benefiting so mightily from corporate profiteering? I know you're shocked, shocked, that the top 1% own half of all the shares, and the top 10% own around 90%. No wonder CEOs and corporate "innovators" are busy building private bunkers to protect themselves from the banquet of consequences they've laid out. To say this out loud is unacceptable, for those running the show are, well, shareholders. My recent books: Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site. The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $18, (Kindle $8.95, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF) Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF) The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF) When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF) Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF). A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF). Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World (Kindle $5, print $10, audiobook) Read the first section for free (PDF). The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF) Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free Become a $3/month patron of my work via patreon.com. Subscribe to my Substack for free NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency. Thank you, John K. ($100), for your outrageouslu generous subscription to this site -- I am greatly honored by your steadfast support and readership.   Thank you, Robert B. ($32), for your marvelously generous subscription to this site -- I am greatly honored by your steadfast support and readership. Thank you, Joseph R. ($32), for your magnificently generous subscription to this site -- I am greatly honored by your support and readership.   Thank you, Lucky Lizard ($32), for your superbly generous contribution to this site -- I am greatly honored by your support and readership. Go to my main site at www.oftwominds.com/blog.html for the full posts and archives.

2 months ago 107 votes
25 Years of Higher Interest Rates Ahead?

Interest rates are linked to inflation, but they're also linked to risk. As a result of recency bias, where we assume the recent past is a permanent state of affairs, many believe near-zero interest rates are "normal." They aren't. As the chart of 10-year US Treasury yields--a proxy for interest rates throughout the economy--illustrates, rates in the 3% or lower were an anomaly that only occurred in the relatively brief period of 2011-2022. For the five decades between 1960 and 2007, interest rates of 4% and higher were the norm. These included the glorious decades of stable growth and rising stocks / housing valuations--the 1960s, 1980s, 1990s and up to 2007, just before the financial crisis of 2008-09. For 33 of those years, interest rates of 5.75% or higher were the norm, from 1967 to 2000. No one said that the economy would collapse if interest rates didn't drop to 3%, for it was understood that super-low interest rates would ignite inflation and incentivize destructive speculative excesses. For the 25 years between 1970 and 1994, rates between 5.75% and 8% were normal. The 10-year Treasury yield is now around 4% to 4.2%--far lower than what was considered normal for 25 years. It's long been noted that interest rate cycles tend to run for decades, not years. Interest rates rose for around 25 years, and then declined for 40 years from 1981 to 2020--a period that was longer than average, thanks to the dominance of central bank monetary policies, or perhaps more accurately, the growing dependence of economies on extraordinarily low interest rates for their "growth." If history is any guide, interest rates will rise back to the historic range between 5.75% and 8% and linger there for the better part of two decades. Alternatively, rates break above that range and skyrocket into the realm of debt / inflationary crises. The return of Treasury yields to the historically "normal" range of 4% and higher has doubled the Federal interest payments on Federal debt. It was easily predictable that super-low interest rates would encourage an orgy of borrowing and spending of all that "nearly free money," which is precisely what happened. The interest paid by households has also soared for the same reason: not just because interest rates rose, but because the borrowed money (debt) being serviced exploded higher due to low interest rates. Higher debt / interest payments squeeze out other spending. Debt payments come first, or the entity defaults on its debts and enters bankruptcy--a bankruptcy that tends to bankrupt the lenders who will be lucky to collect pennies on every dollar they lent out. Households are going to have a hard time servicing debt and spending more as rates rise, for wage earners' share of the economy has been in a freefall for 50 years. Less income + higher debt service payments = lower discretionary income to spend + inability to borrow more money to spend = recession. Interest rates are linked to inflation, but they're also linked to risk. The cost of money isn't simply tied to inflation expectations--it's also tied to speculative excesses blowing credit-asset bubbles which implode, destroying the phantom wealth generated by the bubble. The lenders that survive the implosion are wary of lending money to all but the most conservative, risk-averse, creditworthy borrowers backed by ample collateral. That excludes the majority of households and enterprises. New podcast: Adaptability: The Key to Future Success, with the Contrarian Capitalist (53:40 min) New podcast: Trade, Tariffs and Globalization with Richard Bonugli (35:51 min) My recent books: Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site. The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $18, (Kindle $8.95, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF) Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF) The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF) When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF) Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF). A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF). Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World (Kindle $5, print $10, audiobook) Read the first section for free (PDF). The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF) Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free Become a $3/month patron of my work via patreon.com. Subscribe to my Substack for free NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency. Thank you, Keith S. ($100), for your outrageously generous subscription to this site -- I am greatly honored by your support and readership.   Thank you, Lar ($7/month), for your marvelously generous subscription to this site -- I am greatly honored by your support and readership. Thank you, Julius L. ($50), for your magnificently generous subscription to this site -- I am greatly honored by your steadfast support and readership.   Thank you, Daniel L. ($50), for your superbly generous contribution to this site -- I am greatly honored by your steadfast support and readership. Go to my main site at www.oftwominds.com/blog.html for the full posts and archives.

3 months ago 18 votes
The Potential Winners and Losers in Reshoring Supply Chains

Until values, priorities and incentives change, "the lifestyle you ordered is currently out of stock and on back order, with no estimate of a future delivery date." The ultimate winners and losers in reshoring supply chains to North America have yet to be determined, and may change depending on the time frame. In the short-term, there are ample reasons to reckon consumers will be the losers as shortages and price-gouging ("it's the tariffs" will be the excuse given for profiteering) take their toll. Matt Stoller has posted two comprehensive essays on these topics: How Monopolies Could Exploit the Tariff Shock How to Prepare for the Coming Supply Chain Shock In the longer term, however, consumers could be winners as reshored supply chains will be more stable and predictable than globalized supply chains. Stability has a value that isn't recognized until it's absent--as do durability and quality. One set of potential winners might be large retail corporations that choose to switch from "horizontal" global supply chains to vertically integrated domestic production, in which raw materials are turned into finished products in one production facility. Ford Motor Company was an early adopter of this model, constructing the immense Ford River Rouge complex from 1917 to 1928 that turned iron ore into finished automobiles in one integrated production process. "With its own docks in the dredged Rouge River, 100 miles (160 km) of interior railroad track, its own electricity plant, and integrated steel mill, the titanic Rouge was able to turn raw materials into running vehicles within this single complex, a prime example of vertical-integration production." While it can be argued that vertical integration is less efficient in terms of cost, once again the value of complete control, stability and predictability is not included in spreadsheets, though it becomes readily apparent when long single-source global supply chains break down or are crippled by bottlenecks, artificial scarcities triggered by geopolitical blackmail or a host of other causal factors. Establishing domestic sources for materials, tooling, robotics, etc. would remove many of the uncertainties that are inherent in a global supply chain breaking down along geopolitical, regional and national lines. Were unions to regain wide public support, industrial unions might be winners should the public support unionizing new production facilities. The sustained erosion of labor's share of the nation's income over the past five decades might finally gain recognition as a core driver of wealth-income inequality and unionized labor might be understood as a necessary rebalancing of an economy that has favored finance and capital over labor for nearly three generations. Were the public to begin valuing local production and jobs over "lower prices" and equally low quality, local supply chains might become winners. Note that I've mentioned the public's values and priorities as key drivers changing economic incentives and policies. In the current zeitgeist, the public is assumed to be "rational economic robots" who respond solely to price. Once the full banquet of consequences of rampant hyper-financialization and hyper-globalization has played out, the public might begin to grasp the importance of valuing something other than low prices (and the low quality that comes with low prices). As a general rule, the public leads the private sector and government, not the other way round. For example, the public might start valuing national security, which is ultimately dependent on stable, predictable domestic production supply chains owned and controlled by domestic companies. Until values, priorities and incentives change, the lifestyle you ordered is currently out of stock and on back order, with no estimate of a future delivery date. New podcast: Adaptability: The Key to Future Success, with the Contrarian Capitalist (53:40 min) New podcast: Trade, Tariffs and Globalization with Richard Bonugli (35:51 min) My recent books: Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site. 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3 months ago 19 votes

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Country Risk 2025: The Story behind the Numbers!

At the start of July, I updated my estimates of equity risk premiums for countries, in an semiannual ritual that goes back almost three decades. As with some of my other data updates, I have mixed feelings about publishing these numbers. On the one hand, I have no qualms about sharing these estimates, which I use when I value companies, because there is no secret sauce or special insight embedded in them. On the other, I worry about people using these premiums in their valuations, without understanding the choices and assumptions that I had to make to get to them. Country risk, in particular, has many components to it, and while you have to ultimately capture them in numbers, I wanted to use this post to draw attention to the many layers of risk that separate countries. I hope, and especially if you are a user of my risk premiums, that you read this post, and if you do have the time and the stomach, a more detailed and much longer update that I write every year. Country Risk - Dimensions     When assessing business risk from operating in a country, you will be affected by uncertainty that arises from almost every source, with concerns about political structure (democracies have very different risk profiles than authoritarian regimes), exposure to violence (affecting both costs and revenues),  corruption (which operates an implicit tax) and legal systems (enforcing ownership rights) all playing out in business risk. I will start with political structure, where the facile answer is that it less risky to operate a business in a democracy than in an authoritarian regime, but where the often unpalatable truth is that each structure brings its own risks. With democracies, the risk is that newly elected governments can revisit, modify or discard policies that a previous government have adopted, requiring businesses to adapt and change to continuous changes in policy. In contrast, an authoritarian government can provide long term policy continuity, with the catch being that changes in the government, though infrequent, can create wrenching policy shifts that businesses have to learn to live with. Keeping the contrast between the continuous risk of operating in a democracy and the discontinuous risk in an authoritarian structure in mind, take a look at this picture of how the world looked in terms of democracy leading into 2025: Source: Economist Intelligence Unit (EIU) It is worth noting that there are judgment calls that the Economist made in measuring democracy that you and I might disagree with, but not only is a large proportion of the world under authoritarian rule, but the trend lines on this dimension  also have been towards more authoritarianism in the last decade.         On the second dimension, exposure to violence, the effects on business are manifold. In addition to the threat that violence can affect operations, its presence shows up as higher operating costs (providing security for employees and factories) and as insurance costs (if the risks can be insured). To measure exposure to violence, from both internal and external sources, I draw on measures developed and updated by the Institute of  Economics & Peace across countries in 2024: Institute of Economics & Peace The Russia-Ukraine war has caused risk to flare up in the surrounding states and the Middle East and central Africa continue to be risk cauldrons, but at least according to the Institute's measures, the parts of the world that are least exposed to violence are in Northern Europe, Australia and Canada. Again, there are judgments that are made in computing these scores that will lead you to disagree with specific country measures (according the Peace Institute, the United States and Brazil have higher exposures to violence than Argentina and Chile, and India has more exposure to violence than China), but the bottom line is that there are significant differences in exposure to violence across the world.          Corruption is a concern for everyone, but for businesses, it manifests in two ways. First, it puts more honest business operators at a disadvantage in a corrupt environment, since they are less willing to break the rules and go along with corrupt practices than their less scrupulous competitors. Second, even for those businesses that are willing to play the corruption game, it creates costs that I would liken to an implicit tax that reduces profits, cash flows and value. The measure of corruption that I use comes from Transparency International, and leading into July 2025, and the heat map below captures corruption scores (with higher scores indicating less corruption), as well as the ten most and least corrupt countries in the world:  Transparency International As you can see from the map, there are vast swaths of the world where businesses have to deal with corruption in almost every aspect of business, and while some may attribute this to cultural factors, I have long argued that corruption almost inevitably follows in bureaucratic settings, where you need licenses and approvals for even the most trivial of actions, and the bureaucrats (who make the licensing decisions) are paid a pittance relative to the businesses that they regulate.           As a final component, I look at legal systems, especially when it comes to enforcing contractual agreements and property rights, central to running successful businesses. Here, I used estimates from the IPRI, a non-profit institution that measures the quality of legal systems around the world. In their latest rankings from 2024, here is how countries measured up in 2024: Property Rights Alliance In making these assessments, you have to consider not just the laws in place but also the timeliness with which these laws get enforced, since a legal system where justice is delayed for years or even decades is almost as bad as one that is capricious and biased.  Country Risk - Measures     The simplest and most longstanding measure of country risk takes the form of sovereign ratings, with the same agencies that rate companies (S&P, Moody's and Fitch) also rating countries, with the ratings ranging from Aaa (safest) to D (in default). The number of countries with sovereign ratings available on them has surged in the last few decades; Moody’s rated 13 countries in 1985, but that number increased to 143 in 2025, with the figure below listing the number of rated countries over time: Note that that the number of Aaa rated countries stayed at eleven, even while more countries were rated, and has dropped from fifteen just a decade ago, with the UK and France losing their Aaa ratings during that period. In May 2025, Moody's downgraded the United States, bringing them in line with the other ratings agencies; S&P downgraded the US in 2011 and Fitch in 2023. The heat map below captures sovereign ratings across the world in July 2025: Moody's While sovereign ratings are useful risk measures, they do come with caveats. First, their focus on default risk can lead them to be misleading measures of overall country risk, especially in countries that have political risk issues but not much default risk; the Middle East, for instance, has high sovereign ratings. Second, the ratings agencies have blind spots, and some have critiqued these agencies for overrating European countries and underrating Asian, African and Latin American countries. Third, ratings agencies are often slow to react to events on the ground, and ratings changes, when they do occur, often lag changes in default risk.     If you are leery about trusting ratings agencies, I understand your distrust, and there is an alternative measure of sovereign default risk, at least for about half of all countries, and that is the sovereign credit default swap (CDS) market, which investors can buy protection against country default. These market-determined numbers will reflect events on the ground almost instantaneously, albeit with more volatility than ratings. At the end of June 2025, there were about 80 countries with sovereign CDS available on them, and the figure below captures the values: The sovereign CDS spreads are more timely, but as with all market-set numbers, they are subject to mood and momentum swings, and I find using them in conjunction with ratings gives me a better sense of sovereign default risk.     If default risk seems like to provide too narrow a focus on countr risk, you can consider using country risk scores, which at least in principle, incorporate other components of country risk. There are many services that estimate country risk scores, including the Economist and the World Bank, but I have long used Political Risk Services (PRS) for my scores.. The PRS country risk scores go from low to high, with the low scores indicative of more country risk, and the table below captures the world (at least according to PRS): Political Risk Services (PRS) There are some puzzling numbers here,  with the United States coming in as riskier than Vietnam and Libya, but that is one reason why country risk scores have never acquired traction. They vary across services, often reflecting judgments and choices made by each service, and there is no easy way to convert these scores into usable numbers in business and valuation or compare them across services.      Country Risk - Equity Risk Premiums     My interest in country risk stems almost entirely from my work in corporate finance and valuation, since this risk finds its way into the costs of equity and capital that are critical ingredients in both disciplines. To estimate the cost of equity for an investment in a risky country. I will not claim that the approaches I use to compute equity risk premiums for countries are either original or brilliant, but they do have the benefit of consistency, since I have used them every year (with an update at the start of the year and mid-year) since the 1990s.      The process starts with my estimate of the implied equity risk premium for the S&P 500, and I make this choice not for parochial reasons but because getting the raw data that you need for the implied equity risk premium is easiest to get for the S&P 500, the most widely tracked index in the world. In particular, the process requires data on dividends and stock buybacks on the stocks in the index, as well as expected growth in these cash flows over time, and involves finding the discount rate (internal rate of return) that makes the present value of cash flows equal to the level of the index. On June 30, 2025, this assessment generated an expected return of 8.45% for the index: Download ERP spreadsheet Until May 2025, I just subtracted the US 10-year treasury bond rate from this expected return, to get to an implied equity risk premium for the index, with the rationale that the US T.Bond rate is the riskfree rate in US dollars. The Moody’s downgrade of the US from Aaa to Aa1 has thrown a wrench into the process, since it implies that the T.Bond rate has some default risk associated with it, and thus incorporates a default spread. To remove that risk, I net out the default spread associated with Aa1 rating from the treasury rate to arrive at a riskfree rate in dollars and an equity risk premium based on that: Riskfree rate in US dollars       = T.Bond rate minus Default Spread for Aa1 rating                                                             = 4.24% - 0.27% = 3.97% Implied equity risk premium for US = Expected return on S&P 500 minus US $ riskfree rate                                                             = 8.45% - 3.97% = 4.48% Note that this approach to estimating equity risk premiums is model agnostic and reflects what investors are demanding in the market, rather than making a judgment on whether the premium is right or what it should be (which I leave to market timers).        To get the equity risk premiums for other countries, I need a base premium for a mature market, i.e., one that has no additional country risk, and here again, the US downgrade has thrown a twist into the process. Rather than use the US equity risk premium as my estimate of the mature market premium, my practice in every update through the start of 2025, I adjusted that premium (4.48%) down to take out the US default spread (0.27%), to arrive at the mature market premium of 4.21%. That then becomes the equity risk premium for the eleven countries that continue to have Aaa ratings, but for all other countries, I estimate default spreads based upon their sovereign ratings. As a final adjustment, I scale these default spreads upwards to incorporate the higher risk of equities, and these become the country risk premiums, which when added to the mature market premium, yields equity risk premiums by country. The process is described below: Download spreadsheet The results from following this process are captured in the picture below, where I create both a heat map based on the equity risk premiums, and report on the ratings, country risk premiums and equity risk premiums, by country: Download equity risk premium, by country If you compare the equity risk premium heat map with the heat maps on the other dimensions of country risk (political and legal structures, exposure to violence and corruption), you will notice the congruence. The parts of the world that are most exposed to corruption and violence, and have capricious legal systems, tend to have higher equity risk premiums. The effects of the US ratings downgrade also manifest in the table, with the US now having a higher equity risk premium than its Aaa counterparts in Northern Europe, Australia and Canada. A User's Guide      My estimates of equity risk premiums, by country, are available for download, and I am flattered that there are analysts that have found use for these number. One reason may be that they are free, but I do have concerns sometimes that they are misused, and the fault is mine for not clarifying how they should be used. In this section, I will lay out steps in using these equity risk premiums in corporate finance and valuation practice, and  if I have still left areas of  grey, please let me know. Step 1: Start with an understanding of what the equity risk premium measures     The starting point for most finance classes is with the recognition that investors are collectively risk averse, and will demand higher expected returns on investments with more risk. The equity risk premium is a measure of the “extra” return that investors need to make, over and above the riskfree rate, to compensate for the higher risk that they are exposed to, on equities collectively. In the context of country risk, it implies that investments in riskier countries will need to earn higher returns to beat benchmarks than in safer countries. Using the numbers from July 2025, this would imply that investors need to earn 7.46% more than the riskfree rate to invest in an average-risk investment in India, and 10.87% more than the riskfree rate to invest in an average risk investment in Turkey.     It is also worth recognizing how equity risk premiums play out investing and valuation. Increasing the equity risk premium will raise the rate of return you need to make on an investment, and by doing so, reduce its value. That is why equity risk premiums and stock prices move inversely, with the ERP rising as stock prices drop (all other thins being held constant) and falling as stock prices increase.  Step 2: Pick your currency of analysis (and estimate a riskfree rate)     I start my discussions of currency in valuation by positing that currency is a choice, and that not only can you assess any project or value any company in any currency, but also that your assessment of project worth or company value should not be affected by that choice. Defining the equity risk premium as the extra return that investors need to make, over and above the risk free rate, may leave you puzzled about what riskfree rate to use, and while the easy answer is that it should be the riskfree rate in the currency you chose to do the analysis in, it is worth emphasizing that this riskfree rate is not always the government bond rate, and especially so, if the government does not have Aaa rating and faces default risk. In that case, you will need to adjust the government bond rate (just as I did with the US dollar) for the default spread, to prevent double counting risk.   Staying with the example of an Indian investment, the expected return on an average-risk investment in Indian rupees would be computed as follows: Indian government bond rate on July 1, 2025 = 6.32% Default spread for India, based on rating on July 1, 2025 = 2.16% Indian rupee risk free rate on July 1, 2025 = 6.32% - 2.16% = 4.16% ERP for India on July 1, 2025 = 7.46% Expected return on average Indian equity in rupees on July 1, 2025 = 4.16% + 7..46% = 11.62% Note also that if using the Indian government bond rate as the riskfree rate in rupees, you would effectively be double counting Indian country risk, once in the government bond rate and once again in the equity risk premium.     I know that the ERP is in dollar terms, and adding it to a rupee riskfree rate may seem inconsistent, but it will work well for riskfree rates that are reasonably close to the US dollar risk free rate. For currencies, like the Brazilian real or Turkish lira, it is more prudent to do your calculations entirely in US dollars, and convert using the differential inflation rate: US dollar riskfree rate on July 1, 2025 = 3.97% ERP for Turkey on July 1, 2025 = 10.87% Expected return on average Turkish equity in US $ on July 1, 2025 = 3.97% + 10.87% = 14.84% Expected inflation rate in US dollars = 2.5%; Expected inflation rate in Turkish lira = 20% Expected return on average Turkish equity Turkish lira on July 1, 2025 = 1.1484 *(1.20/1.025) -1 = 34.45% Note that this process scales up the equity risk premium to a higher number for high-inflation currencies. Step 3: Estimate the equity risk premium or premiums that come into play based on operations    Many analysts use the equity risk premiums for a country when valuing companies that are incorporated in that country, but I think that is too narrow a perspective. In my view, the exposure to country risk comes from where a company operates, not where it is incorporated, opening the door for bringing in country risk from emerging markets into the cost of equity for multinationals that may be incorporated in mature markets. I use revenue weights, based on geography, for most companies, but I am open to using production weights, for natural resource companies, and even a mix of the two.  In corporate finance, where you need equity risk premiums to estimate costs of equity and capital in project assessment, the location of the project will determine which country’s equity risk premiums come into play. When Amazon decides to invest in a Brazilian online retail project, it is the equity risk premium for Brazil that should be incorporated, with the choice of currency for analysis determining the riskfree rate.  Step 4: Estimate project-specific or company-specific risk measures and costs     The riskfree rate and equity-risk premiums are market-wide numbers, driven by macro forces. To complete this process, you need two company-specific numbers: Not all companies or projects are average risk, for equity investors in them, and for companies that are riskier or safer than average, you need a measure of this relative risk. At the risk of provoking those who may be triggered by portfolio theory or the CAPM, the beta is one such measure, but as I have argued elsewhere, I am completely at home with alternative measures of relative equity risk. The cost of equity is calculated as follows:  Cost of equity = Riskfree rate + Beta × Equity Risk Premium The beta (relative risk measure) measures the risk of the business that the company/project is in, and for a diversified investor, captures only risk that cannot be diversified away. While we are often taught to use regressions against market indices to get these betas, using industry-average or bottom-up betas yields much better estimates for projects and companies. For the cost of debt, you need to estimate the default spread that the company will face. If the company has a bond rating, you can use this rating to estimate the default spread, and if it is not, you can use the company's financials to assess a synthetic rating. Cost of debt =Riskfree Rate + Default spread Harking back to the discussion of riskfree rates, a company in a country with sovereign default risk will often bear a double burden, carrying default spreads for both itself and the country. The currency choice made in step two will hold, with the riskfree rate in both the cost of equity and debt being the long-term default free rate in that currency (and not always the government bond rate). Step 5: Ensure that your cash flows are currency consistent      The currency choice made in step 2 determines not only the discount rates that you will be using but also the expected cash flows, with expected inflation driving both inputs. Thus, if you analyze a Turkish project in lira, where the expected inflation rate is 20%, you should expect to see costs of equity and capital that exceed 25%, but you should also see growth rates in the cash flows to be inflated the same expected inflation. If you assess the same project in Euros, where the expected inflation is 2%, you should expect to see much lower discount rates, high county risk notwithstanding, but the expected growth in cash flows will also be muted, because of the low inflation.     There is nothing in this process that is original or path-breaking, but it does yield a systematic and consistent process for estimating discount rates, the D in DCF. It works for me, because I am a pragmatist, with a valuation mission to complete, but you should feel free to adapt and modify it to meet your concerns.  YouTube Video Paper Country Risk Determinants: Determinants, Measures and Implications - The 2025 Edition Datasets Equity Risk Premiums, by country - July 2025 Country Risk Links EIU Democracy Index Global Peace Index (Exposure to Violence) Corruption Index International Property Rights Index Moody's Sovereign Ratings Political Risk Services (PRS) Country Risk Scores Spreadsheets Implied Equity Risk Premium for S&P 500 on July 1, 2025

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