Posts tagged ‘democracy’

Darwin Meets Capitalism & Private Equity

Source: Photobucket

A rising discontent is spreading like wildfire in the wake of a massive financial crisis that erupted in the U.S. during 2008, and is now working its way through Europe. Irresponsible governments across the globe succumbed to the deceptive allure of leverage, and as a result racked up colossal debts and gargantuan deficits. Now governments everywhere are toggling between political gridlock and painful austerity. Citizens are feeling the pain through high unemployment, exploding education costs, crumbling social safety nets, and a general decline in the standard of living.

As a result of these dramatic changes, the contributions of capitalism are being questioned by many, whether it’s the Occupy Wall Street movement attack on the top 1%, or more recently the assault on private equity’s relevancy for a presidential candidate.

Although the media may prefer to sensationalize economic stories and tell observers, “This time is different” to boost viewership, usually the truth relies more on the nuanced evolution of issues over time. If Charles Darwin were alive today, he would understand that capitalism and democracies are evolving to massive changes in globalization, technology, and emerging markets. Darwin would appreciate the fact that capitalism can’t and won’t change overnight. Whether capitalism ultimately survives or goes extinct depends on how it adapts. Or as Darwin characterizes evolution:

It is not the strongest of the species that survives, nor the most intelligent, but the most responsive to change.

Will Capitalism Survive?

Capitalism and democracy fit like a hand in a glove, which explains why both have thrived for generations. Never mind that democracies have been around for centuries and their expansion continues unabated (see Spreading the Seeds of Democracy), nevertheless pundits feel compelled to question the sustainability of these institutions.

I guess the real response to all those experts who question the merits of capitalism is what alternative would serve us better? Would it be Socialism like we see grinding Europe to a halt? Or perhaps Communism working its wonders in North Korea and Cuba? If not that, then surely the Autocracies in Egypt and Libya are the winning formulas? The Occupy Wall Streeters may not be happy with their personal plight or the top 1%, but I don’t see them packing their bags for Greece, the Middle East or China.

There is arguably a growing disparity between rich and poor and the game of globalization is only making it more difficult for rising tides of growth to lift up our middle class. The beauty of capitalism is that money goes where it is treated best. Capitalism sucks money to the areas of the world that are the freest, most open, transparent, and practice the rule of law. Some of these components of American capitalism unquestionably eroded over the last decade or so, but the good thing is that in a democracy, citizens have the right to vote and elect growth-promoting leaders to fix problems. Growth comes from competitiveness, and competitiveness is derived from education, innovation, and pro-growth policies. Let’s hope the 2012 elections get agents of change in office.

Darwin & Private Equity

Republican Presidential primary candidate Mitt Romney has been raked over the coals for his prior professional career at private equity firm, Bain Capital. I’m convinced Charles Darwin would see private equity’s involvement as a critical factor in the process of global commerce. Businesses are like species, and only the fittest will survive.

Private equity firms prey upon weak businesses, looking to restructure and reorganize them to become more competitive. If private equity companies are bullies, then their business targets can be considered weaklings. Beating wimps into shape may not be fun to watch, but is a crucial evolutionary aspect of business. The fact of the matter is that deteriorating, uncompetitive companies cannot hire employees…only profitable, viable entities can createsustainable jobs. So our public policy officials have two choices:

•  Prop up uncompetitive businesses inefficiently with tax dollars that save jobs in the short-run, but lead to bankruptcy and massive job losses in the future. Other unproductive tariffs and bailouts may garner short-term political votes, but only lead to long-term stagnancy.


•  Trim fat, restructure and reorganize now – similar to the swift pain experienced from extracting a rotted tooth. Jobs may be cut in the short-run, but a long-term competitively positioned company will be able to grow and create sustainable long-term jobs.

I can’t say I agree with all of private equity practices, such as leveraged recapitalizations – the practice in which private equity companies load up the target with debt so big fat dividends can be sucked out by the principals. But guess what? By doing so the principals are only reducing their own future exit value through a potential IPO (Initial Public Offering) or company sale. Moreover, if this is such an evil practice, lenders can curb the practice by simply not giving the private equity companies the needed borrowing capacity.

Capitalism and its private equity subset have gotten quite a bad rap lately, but I believe these forces are essential aspects for the rising standards of living for billions of people across the planet. When first introduced, Charles Darwin’s theory of evolution by natural selection was critically examined by many non-believers. Although capitalism will be forced to adapt to an ever-changing world and its merits have been questioned too, the chances of capitalism going extinct are about as likely as the extinction of Darwin’s evolutionary theory.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

January 21, 2012 at 3:47 pm 1 comment

Spreading the Seeds of Democracy

Excerpt from Free March Sidoxia Monthly Newsletter (Subscribe on right-side of page)

As we bathe ourselves in petroleum products, it is moments like these that highlight our deeply engrained addiction to oil. The flames of fundamental human rights, freedom, and democracy are spreading like wildfire throughout the Middle East and North Africa, and as a result, the cost of living and doing business has gone up. What started as a random plea by a Tunisian fruit merchant in response to insidious corruption (26 year old Mohammed Bouazizi burned himself to death in revolt to continuous crooked government bribes) has resulted in a broad wave of protesters removing two authoritarian, autocratic Arab leaders. Egyptian President Hosni Mubarak and Tunisian President Zine al-Abidine Ben Ali have been swiftly cast out by energized protesters, and other repressive leaders are likely bound to topple as well.

Who’s next and when? You’ll have to stay tuned, but Colonel Muammar Gaddafi, the Libyan leader, is on the short list. Leaders in Yemen, Bahrain, Jordan, and Algeria are among the other countries that are feeling the heat too. Even though Egypt, Libya, Tunisia, and other aforementioned countries remain relative oil lightweights, fear over a political contagion spreading to more substantive countries like Saudi Arabia has gotten speculators frothing at the mouth, which pushed oil prices above $100 per barrel and gasoline prices to an average of $3.37 per gallon (about $3.60 in California according to AAA motor club).

Source: - The U.S. population is a fraction of the size of China and India, but we continue guzzling dramatically more crude.

While the bloodshed on the streets has created fodder for great sensationalist headlines for the media outlets, the fact of the matter is that the spread of democracy is nothing new, and the innate desire for basic human rights has never died. Going back to 1900 the world housed about 10 practicing democracies, and today there are arguably more than 100 democratic (and quasi-democratic) countries (see blue line in chart below).

Source: The Financial

In the U.S., our standard of living has exploded for more than a generation. The internet – and applications like Facebook and Twitter – have flattened the planet and connected the rest of the world to the pleasures available to free, transparent, and open societies. As we have experienced firsthand in Iraq, however, regime changes and moves towards democracy can be messy and costly. Ultimately, the native populations must spearhead the drive toward democratic, political change. Regime change solely rammed through by the U.S. will only create temporary change, and with our fiscal wallets empty, we frankly cannot afford it (see Global Babysitter­).

Embracing Alternatives

We didn’t run out of stones in the Stone Age, and we did not run out of steel in the Industrial Revolution. When it comes to oil, the same principle applies. As globalization accelerates the expansion of democratic, emerging middle classes around the world, other oil-rich countries, like Saudi Arabia, understand the havoc that $100-$125 dollar a barrel has on demand destruction. Just like a drug dealer does not want to scare its addicted users, so too oil producers do not want to price consumers out of the market with high prices. Oil may be the lubricant for global commerce, but unlike the empty promises offered by the Jimmy Carter era in the 1970s, technology advancements in the alternative energy industry have reached critical mass. If you don’t believe me, just take a gander at the $17 billion the Chinese are pouring into electric vehicle technology (see Electrifying Profits), or the 20% total energy mandate from renewable sources being instituted in Europe by 2020. Even if we choose to watch from the sidelines and pick our noses, our foreign competitors will wave with delight as they embrace alternative energy resources and race past us. Even if political turmoil temporarily worsens in the Middle East, any additional oil price increases will only make alternative energy resources more economical, and thereby accelerate adoption and make disciples of alternative energy less dependent on some of these oil-rich, corrupt regimes.

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

March 1, 2011 at 3:49 am 2 comments

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