7 billion

In light of the headlines about the arrival of the seven billionth human being somewhere in the world today, and the inevitable hand-wringing over whether we have enough resources to sustain such a population, we thought it was appropriate to revisit some things we have written previously on the subject.

Back in 2009, we published a post entitled "The dark side of zero-sum thinking," noting that the angst over "overpopulation" has its roots in a zero-sum view of the world which sees resources as limited, like a "fixed pie," and every additional person as having the potential to leave a smaller slice for everyone else.

While declaring the 7 billion milestone as a "victory for mankind," the UN population fund abounds with this type of thinking, and their webpage entitled "Linking Population, Poverty and Development" makes declarations such as "slower population growth" reduces poverty, perhaps because "smaller families share income among fewer people" and "families with fewer children are better able to invest in the health and education of each child."

On a national level, the same page suggests that decreasing the population creates a "one-time only demographic window" in which countries can "spur economic growth" with government spending before the population ages and "dependency increases once more."

This kind of thinking is completely backwards, but it is consistent with the idea that growth is created by government spending (which often goes along with these same zero-sum assumptions) and that, since there is a limited amount of such spending to go around, the best way to maximize it is to create a one-time only "population window" for the fewer citizens who can enjoy the increased funding per person for a limited time.

Similar zero-sum beliefs are reinforced by the stark questions appearing on National Geographic's web site on the 7 billion milestone, such as
  • "Can we feed 7 billion of us?"
  • "Are there too many people on the planet?"
  • "Is there enough for everyone?"
  • "What influences women to have fewer children?"
Another article appears to be serious when it asks whether, in light of the population reaching the 7 billion mark, "the world should adopt a one-child policy" because the increased "demand on resources and the environment" might be "too large a demand for Earth to support."

In contrast to those who see the world as a fixed pie and every additional person as a potential drain on those resources, a few voices recognize that every additional person is actually a potential contributor who can make the pie bigger.

Not surprisingly, these voices tend to coincide with a view that governments and government spending do not grow economies, but rather innovation and entrepreneurial activity grow economies and make countries (and those who live in them) wealthier.

Last week, for instance, the Wall Street Journal's editorial page had an article by chief editorial writer William McGurn entitled "And baby makes seven billion" points out that prosperity is not linked so much to abundance of resources as to the correct view of the human being -- the right view being that "so long as people are free to trade and use their talents, the more the merrier."

For evidence that abundance of "resources" is not the central issue, he offers places such as Hong Kong that have prospered with almost no natural resources, while many countries with abundant resources have not.

This fact shows that the most important "natural resources" are human beings themselves!
Continue Reading

The corporation as a legal person, the stock market, and other things Occupy Wall Street protesters don't like

While it is impossible to state exactly what everyone associated with the "Occupy" movement is for or against, some general themes are emerging, some of which are captured in the above video. Some of the things that emerge in that video include:
  • against: the concentration of wealth among "the 1%" of rich persons and corporations.
  • against: the concept that a corporation can be a legal "person."
  • for: the idea that "corporations" and "the rich" need to "pay forward" by giving "a hunk" of their profits to "the next kid," since "nobody gets rich on their own" but brings their goods to market on streets that "the rest of us paid for" and employs employees who were educated in schools that "the rest of us paid for" as well.
Economist and Professor Emeritus of Economics at Pepperdine University George Reisman recently wrote an extensive discussion which deals with all three of these (especially the first one), entitled "In Praise of the Capitalist 1 Percent." In it, he points out that even if you accept the existence of a 1% / 99% split in the US for the sake of argument, the protesters are failing to realize that "the wealth of the 1 percent provides the standard of living of the 99 percent" (his italics).

By way of explanation, he points out that "in the modern world in which we actually live, the wealth of the capitalists is simply not in the form of consumers' goods to any great extent" but rather the wealth of the capitalists is "overwhelmingly in the form of means of production" and that "those means of production are employed in the production of goods and services" that are sold to voluntary buyers in the market.

He points out that everyone in a capitalist economy benefits from the vast concentrations of wealth that are required to buy the enormous tanker ships that bring oil to those who need to put it into their cars (after it is refined in refineries that also require huge capital investments to build and maintain), or the vast concentrations of wealth that are required to build the massive plants that are required to build those cars, or the vast concentrations of wealth that are required to create the ever-smaller and ever-more-powerful microchips that power their ever-less-expensive mobile connected devices.

In fact, since everyone depends on food and clothing that is delivered by these same trucks powered by this same fuel, it is quite accurate to say, as Professor Reisman does, that "the protesters and all other haters of capitalism hate the foundations of their own existence." Even the corporations that make products that compete with the products that individuals actually buy are helping them, by driving down the prices of the goods that they do end up buying.

One of the biggest reasons for the legal status of corporations as they exist in the US today is to limit liability for entrepreneurs and innovators and others who would otherwise not risk the loss of all their personal property. It is essential to create a tool whereby the legal personal property of a person engaged in business can be separated from the legal property held by the corporation. Without the legal ability to separate that, few if any innovators would risk the losses that often occur when starting a new business.

Without the concept of the corporation, access to capital would be severely limited, and the ability to bring together the resources needed to turn inventions like iPhones or iPads into reality would be severely limited. Professor Reisman explains why the ability to sell shares of corporations in a stock market is critical to this ability in his book Capitalism (available in its entirety on-line). Anticipating by several years the anti-Wall Street tone of the current protesters, he writes:
A widespread misconception is that the stock market is divorced from genuine productive activity [. . .]. It should be realized that the ability to sell their shares provides a major inducement to the purchase of those shares in the first place. If it were not for the existence of the stock market and its continuous trading in already issued stock, any purchaser of newly issued stock would be faced with the prospect of not being able to sell his stock, or of being able to so only with great difficulty. Such a prospect would greatly discourage the initial purchase of stock from the issuing corporations and would greatly reduce the availability of capital to those corporations. 466.
The protesters are thus shown to be squarely against aspects of modern economic life that are extremely beneficial to their own lifestyle -- and in fact to their very survival. It can be argued that governments can also accumulate capital in sufficient quantities to build automotive plants or oil tankers, although after the dismal record of the twentieth century experiment with that alternative, few sane people would recommend it. However, the last bullet point listed above shows that the protesters are indeed "for" the idea of requiring those with wealth (wealthy individuals and wealthy corporations) to "give back" a chunk (after all, as Elizabeth Warren says starting at about 3:30 in the above video, they used the roads "the rest of us paid for" when they were making that money).

Setting aside the fact that if it is true that "the rest of us paid for" those roads and schools, it is also true that the corporations who used those roads also paid for them out of their fairly substantial corporate taxes, the whole idea that the government needs to get involved in forcing certain people or businesses to give up some additional "hunk" to "pay forward for the next kid who comes along" may sound nice in principle but actually leads to all kinds of tyranny in practice. Once widespread redistribution (beyond what is needed to take care of the neediest members of society who might otherwise die without food, clothing or shelter) becomes the accepted role of government, all kinds of evils ensue. Just look at those countries where such a situation prevails, and you will find that people and companies spend their energy figuring out how to get those government (or UN) handouts rather than in coming up with the innovations and production that create growth and new wealth.

While it is not possible to make a blanket statement about the largely amorphous "Occupy" protests as they have developed so far, it is safe to say that the general tenor of many of the positions they are against as well as some of the things that they are for, reveal that many of their ideas would be extremely harmful to everyone if implemented, including to themselves.

Although we are not members of "Wall Street," we feel it is important that investors understand the benefits of the legal concept of the corporation, and the stock market and bond market and other institutions that enable those corporations to assemble the capital they use to bring those goods and services to market on which everyone in society relies.

There are certainly areas where the system in the US could be improved -- most notably in those areas where the government's willingness to benefit one group over another, whether on Wall Street or on Main Street, has created obstacles to innovation, entrepreneurship, and the ability of individuals to improve their situation through the very structures of capitalism that the protesters are mistakenly attacking -- but the institutions that are being attacked in the video above are institutions that actually protect and benefit the 100%, not just the 1%.

Continue Reading

Quick comments from Gerry Frigon, October 24

Here's a little commentary from Gerry Frigon from this morning, discussing the current state of the European situation, earnings season, and this week's GDP report (the advance report for Q3 GDP is due to be released on Thursday).

* At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Caterpillar (CAT).
Continue Reading

Another inspired presentation by Mary Meeker

Mary Meeker's presentation at the Web 2.0 Summit on "Internet Trends" given yesterday, October 18, provided a wealth of data and some insightful analysis regarding the direction and speed with which the networked world is moving.

We have linked to previous presentations by Mary Meeker on the same subject before (2009 and 2010) and explained that the data she is discussing provides powerful and graphic confirmation of an extremely important paradigm shift taking place at a rapid pace, even in the midst of widespread economic angst and unmistakable government ineptitude.

We have also explained previously that paradigm shifts of this magnitude are so powerful that it is difficult for even government blundering to derail them completely (not completely impossible, but very difficult and in fact nearly impossible). In yesterday's presentation, Ms Meeker actually presents one slide which reinforces that theme, in which she shows the adoption by percentage of population of previous communications technologies going back to the AM radio, and includes bars on the graph showing recessions and the Great Depression, to illustrate that even the worst economic environments could not hold back change of this nature.

Finally, Ms Meeker closed her talk with a short but pointed quotation from the justly famous poem If, by Rudyard Kipling (1865 - 1936). She cites the first words of the poem's opening line:
If you can keep your head when all about you
Are losing theirs [. . .]
Her message is that the changes and innovations taking place in certain parts of the economy present a tremendous opportunity, but only if you keep your head about you (especially because there are plenty of talking heads who appear, in our opinion, to be "losing theirs").

Mr. Kipling's poem certainly applies to many other aspects of life, but we agree with Mary Meeker that it applies very well to investing, and particularly to investing at this particular junction of history. Bravo to her for another extremely worthwhile talk, and for sharing her insights so generously with anyone who cares to listen. We believe that every investor should do so.

Continue Reading

More data says "no recession." So why is everyone so uneasy?

The Census Bureau released their data for estimated monthly sales for retail and food services for the month of September this morning, and the numbers came in much stronger than most economists expected.

For the past month or so, many economists and pundits have been growing more and more pessimistic, with many of them declaring that a recession is all-but inevitable.

We have been on record several times saying that all the pessimism is overdone, and that those calling for additional government stimulus (they are often the same as the ones declaring an imminent recession) are mistaken. See for example this post from the end of August, in which we said:
Finally, we would like to point out the fact that economic growth of 1%, while anemic, does not indicate an impending crisis. The commentators in the NPR clip above imply that 1% growth is "just above stall speed," as if an economy that does not grow fast enough will automatically stall, in the same way that an airplane that does not go fast enough will stall. But that is a false analogy. Airplane engines require a certain amount of speed in order to force air into the engine, but there is no law of physics or of economics that says that a country must grow at a certain speed or else it will simply "stall" and go into a recession.

This view comes from the idea that economies are fragile things that will naturally break down unless they are constantly tinkered with and stimulated by governments. In fact, economic activity is the natural state of human affairs. Left to themselves, people will grow crops, start businesses, invent solutions to problems, look for cures to diseases, and generally "do economic activity" that will enable them to make money for their families in greater and greater amounts. It is government tinkering and interference that disrupts this natural pattern. Thus, the cure for the sluggish 1% growth is not more stimulus but rather removal of some of the "persistent drags" that we talked about above.
Today's data, and other economic measurements that have come out since we wrote that, have confirmed our analysis. The economy does not seem to be heading into a double dip, and today's strong retail-sales data makes it virtually impossible to continue to maintain that it is. However, growth could be much stronger, being held back by a host of damaging government policies.

So why is there such a pervasive feeling of economic angst out there? Well, for one thing, because the media continues to serve up pundit after pundit predicting disaster. For another thing, unemployment remains dreadfully high, because businesses understandably are reluctant to hire when government regulations make it more expensive to do so, and when the Fed and the Congress make it hard to predict the future stability of the dollar and of tax rates.

Even more importantly, we believe that these misguided policies are creating an environment very similar to that in the 1970s, when some innovative businesses in innovative industries were able to grow as they paved the way for the major changes that would take place in the next two decades, but when most businesses had a very hard time achieving real growth. We have been discussing this theme for quite some time -- see for instance this previous post and this previous post.

Forbes publisher Rich Karlgaard recently made this point again in an interview on MoneyShow.com, and we agree with many of the points he raised in his analysis of the economic similarities with the 1970s and the implications for technology (click the video in that story to listen to Mr. Karlgaard's interview).

What this means for investors is that you cannot simply "own the market" or "just index" -- an approach that became popular in the more economically friendly environment of the 1990s, when there was not the same kind of performance gap between more innovative companies and everybody else, the way there was in the 1970s.

We have always argued that the kind of businesses you choose as destinations for your investment capital matters a great deal. We believe that message is even more important in times like this, and that the combination of widespread economic unease even when economic data show signs of growth, indicates that we are probably in a period that is more like the 1970s than the 1990s.
Continue Reading

Have you heard of this company? IDXX

In order to explain what kinds of businesses we look for as potential destinations for investment capital, we have published many previous posts describing some of the important criteria. Readers may wish to go back to the series on "Beautiful Growth Companies" (part one, part two, and part three) for some discussion of those criteria, and they may wish to look at individual companies that we have highlighted in previous discussions (many of those discussions of individual businesses are linked in this previous post).

One of the companies we own in the portfolios we manage is IDEXX Laboratories, an innovative provider of diagnostic solutions primarily for use in the animal health industry (serving both companion animals or pets and production animals or livestock).* Their solutions are also being applied in the water and food safety diagnosis field.

IDEXX Labs develops, manufactures, and distributes products that allow animal healthcare providers to test for an impressive array of diseases, from canine heartworm to feline leukemia, from avian leukosis to chicken anemia, from bovine spongiform encephalitis (mad cow) to swine influenza and swine pseudo-rabies. The company has created a wide variety of "assay kits" which can be used right in the field to test animals -- for instance, they market simple tests that dairy owners can use to test milk for antibiotic contamination before shipping it in bulk to a milk plant (where, if it is discovered that their load has contaminated other loads, they may be liable for the losses of the owners of dairies whose milk had to be dumped due to the contact).

Other IDEXX assay kits enable vets to test pets for Lyme disease or parvo or pancreatitis, or allow cattle ranchers to test potential new additions to the herd for bovine viral diarrhea virus (BVDV) through a simple ear-notch test so that they can catch sick animals before they contaminate the rest of their cattle. Many of these assay tests return results in a matter of minutes.

IDEXX also manufactures and sells diagnostic equipment to veterinary offices and diagnostic labs, and they run their own lab business so that vets can send samples to IDEXX for testing with rapid turnaround times.

Additionally, the company develops and markets a range of products used for testing water safety for human consumption and for recreational use (lakes and pools and rivers, for example), including tests that can detect the presence of all coliform bacteria (including E. coli), enterococci, cryptosporidium (which is potentially fatal if ingested), and giardia.

While there are formidable competitors in the vet diagnostic field, we believe that IDEXX has demonstrated that they are extremely innovative and have a reputation for quality, and we also judge that the market that they serve consists of a very fragmented field of veterinary healthcare service providers which may be in the process of undergoing some consolidation, and that some of the companies that are doing the consolidating are IDEXX customers.

We provide these highlights of IDEXX not only because we believe it is an interesting and well-run business and one with which many readers may not be familiar, but even more because we are trying to give our readers an idea of the kind of characteristics that we believe they should be looking for as destinations for their investment capital.

We believe that when it comes to investing money for success over many years and even over many decades, it is vitally important to have a clear idea of what traits in a company investors should look for, so that they can participate in the future success of those companies. While the names of the companies that we own will necessarily change over the years, the characteristics we are looking for generally do not.

* At the time of publication, the principals of Taylor Frigon Capital Management own securities issued by IDEXX Laboratories (IDXX).
Continue Reading

Rest in Peace, Steve Jobs

It is no exaggeration to say that Steve Jobs changed the world and that he was directly responsible for shaping the way we all interact with technology and the way that technology will interact with our lives for years to come -- probably for generations to come.

There are many heartfelt and well-written tributes to him on the web today, and they all deserve to be read thoughtfully. A few we believe deserve special attention include:
Not long ago, we were struck by a video interview of Steve Jobs by the late Louis Rukeyser, apparently from the period between his two turns at the helm of Apple, during a time when both Pixar and Apple were struggling*.

Around 6:01 in the clip, Steve says "I still think Apple has a future."

This in itself is a stunning statement, and reveals the entrepreneur's ability to see things with laser clarity before anyone else around him could. But even more memorable is what he said immediately after that:

"I think the way out is not to slash-and-burn. It's to innovate. That's how Apple got to its glory, and I think that's how Apple could return to it."

These words are so accurate and apply so far beyond one company that they should be memorized.

Vaya con Dios, Steve Jobs. You've made the world a better place.

* At the time of publication, the principals of Taylor Frigon Capital Management own shares of Apple (AAPL).

Continue Reading