Hello DJ, <<No more fish on wine and olive oil for some time>>
I entertained some Mainland Chinese guests with lunch yesterday, in a better times popular restaurant (Zen) situated in one of three largest mall-office-hotel complex (Pacific Mall, home of Conrad, Marriott and Shangri-la hotels) in Hong Kong. In better times a waiting line would form for the dim sums, pastries, seafood and drinks. Now, 20% of the tables were empty.
My wife and I gathered with four friends in a popular but normal times pricey Korean restaurant for dinner. Our table of 6 was not the only table used. The owner and staff used another table for gobble up chow down, or GUCD (gobble up chow down). 40% discount from normal price had been instituted since the beginning of the month.
My guess is the new pricing structure will remain in place for some time, pretend to be normal, and then replaced with a still lower pricing structure.
Cash, idling at the bank, is gaining fast on everything else, relatively.
You must have read the following already, but I attach to save, as a record of our travels:
msnbc.com
What’s wrong with falling prices?
Look to Japan to see the perils of a ‘deflationary spiral’
By Mike Robbins
CNBC ON MSN MONEY
Sept. 5 — Everyone likes low prices. Wal-Mart Stores founder Sam Walton knew it. The folks in line for the early-bird special at Denny’s know it too. So why fret over recent falling prices on everything from apparel to electronics?
ONE REASON CAN be found 5,000 miles west of California. Prices in Japan have been falling so broadly and so consistently that that former economic powerhouse has become mired in a “deflationary spiral.”
Usually when prices fall, consumers decide it’s a good time to buy, and their increased spending helps prices rebound.
In a deflationary spiral, consumers expect prices to continue to fall. So rather than take advantage of low prices, they sit on their wallets and wait for prices to fall further still. Corporations can’t be counted on to end the deflationary cycle, either.
“In deflation, corporations are basically less likely to do anything,” says Don Luskin, chief investment officer with economic research firm Trend Macrolytics. “In a normal world, you want out of money and into something that can make you a profit. In deflation, if you hold onto your dollar, it might be worth the equivalent of $1.10 next year. And holding money is without risk
When you have something that’s risk-free (and) that’s also going to appreciate in value, you’d be crazy to do anything else. Who needs R&D? Who needs employees? When deflationary expectations get going, it becomes self-fulfilling.”
Consumers consume less; corporations produce less; an economy can slow to a crawl. With R&D spending slashed, there’s even a slowdown in new products that might get prices rolling again. It doesn’t take an economist to spot the problems with this trend.
Fortunately, it’s far from certain that the United States is headed for deflation a la the Depression of the 1930s or Japan of the 1990s. But even so, the U.S. economy is enduring a rare period of very low inflation, with some sectors — including computers, telecommunications and steel — struggling to weather the pressure on prices. What does this mean for you? The answer depends on who you are.
PRICES FALL HARDEST ON UNLUCKY FEW
In the short term, lower prices mean paychecks stretch a bit further. Thus, falling prices can be a pleasant development for consumers, assuming deflation doesn’t spiral out of control.
Still, some groups will suffer, starting with seniors. Many retirees depend on income from inflation-indexed pension plans and Social Security. When inflation rates are low, payouts from these sources don’t increase. In theory, these stagnant payouts should be offset by the seniors’ stagnant expenses. But in reality, certain prices continue to rise even when inflation rates in general slow or even reverse. One sector where prices have steamed steadily upwards: medical care, the sector most important to the elderly. “If deflation persists, we’ll see many seniors’ costs rise much faster than their income,” says Chris Orndorff, director of equities with Payden & Rygel, the Los Angeles money management firm. “A lot of these people can’t afford that.”
Homeowners also could be hurt by falling prices. Real estate prices have held up well across most of the country in the last few years, thanks to low interest rates that have boosted prices and let owners refinance mortgages at substantial savings. This happy scenario could change in a serious economic downturn, or, more likely, if a specific market becomes overbuilt with new homes. In Japan, many homeowners now owe more on their mortgages than their homes are worth.
Finally, falling prices figure to hurt individuals who earn their living by producing goods, not providing services. As prices fall, companies must cut costs — including labor costs — to remain profitable. That could accelerate the long-term pattern of manufacturers fleeing the United States in search of cheaper foreign labor. (China’s recent entry into the World Trade Organization won’t slow that trend, either.) But service-sector jobs generally can’t be exported. Service professions that require extensive skills or training — anything from dentistry to automotive repair — are particularly safe from competition. A close look at recent price changes bears these trends out.
Product prices are falling, but service prices are increasing,” says Michael Goldstein, associate professor of finance at Babson College. “The people who stand to lose are the ones whose only training is in the production of goods that can be made at a lower cost elsewhere and shipped in.”
TRICKY ENVIRONMENT FOR CORPORATE AMERICA
Falling prices can damage corporate income statements and balance sheets. “On the income side, falling prices means slowing revenue growth, which tends to squeeze margins,” explains Carl Steidtman, chief economist at Deloitte Research. “On the balance sheet, corporate debt burdens become harder to service, since debt must be repaid with money that’s worth more than it would have been at normal rates of inflation.”
Still, companies can prosper even as prices fall. There are success stories in the semiconductor industry, despite decades of consistently falling prices in that sector. There have been scattered winners in Japan even during that nation’s recent ruinous run of deflation. A small number of U.S. textile and apparel firms are even holding their own, despite the tremendous price pressure created by low-cost foreign competition.
A society can avoid deflation if it can produce goods and services that can expand the economic pie. For this country, in particular, that puts pressure on the private sector to provide the innovation engine that generates new economic activity. Survival and long-term success seem to follow certain patterns, including:
Companies continue to invest in the future. New-and-improved products can demand higher prices even when prices in general are falling, but new product introductions will be less frequent if R&D budgets are cut to the bone. Semiconductor giant Intel has as much experience with falling prices as any company. Despite the current tech slide, the company continues to pour $4 billion a year into R&D. “Technology doesn’t slow down just because the economy slows down” says Intel spokesperson Chuck Mulloy. “It’s not a matter of if the current recession will end, but when. We want to be ready when it does.”
For those worried about deflation, overall U.S. research spending seems to be holding up relatively well, reports Greg Tassey, senior economist at the National Institute of Standards and Technology, though this could change if economic weakness persists. Research expenditures have been particularly strong in the health sciences, thanks in part to the strength of prices in that sector, and in part to medical care’s increasingly large slice of the federal research spending pie. Tassey does have a big concern, however: Companies in all sectors seem to be devoting more of their research budgets to the applied research that will help with next year’s bottom line. There’s less money going to the basic research that will pay off a decade from now. “That raises some long-term questions,” he says.
One semiconductor-industry trend that could find its way into other sectors faced with falling prices: modular design. With modular design, a product is produced from scratch in such a way that it can be inexpensively changed and (at least superficially) improved. “You add a few bells and whistles, a dash of salt, and you can say you’ve got a new product,” says semiconductor industry analyst Jim Turley. “That can give you some pricing power without a lot of expense.”
Companies don’t let their products become commodities. Price pressures are most extreme when companies have no way other than price to distinguish their products from those of competitors. In the semiconductor industry, most successful small firms don’t even try to compete with the big boys; they target the small niches that together make up the larger part of the semiconductor market. Orndorff mentions Zoran, a leading maker of chips for DVD players, digital cameras and other applications with growth prospects better than those of the PC market.
Proper use of a familiar brand name also can de-commoditize a company. “Federal Express initially was in the business of getting packages from point to point,” says consultant and author Andy Birol. “Now they’re in the business of selling assurance. You’re not going to get fired for using FedEx.”
In the textiles industry, a sector particularly hard hit by recent falling prices, Hot Topic profitably produces clothing right here in the United States despite low-cost foreign competition. The company sells apparel in styles worn or licensed by popular musical acts. Hot Topic’s success depends on getting new styles to their stores fast, something that’s harder to do if the merchandise must be shipped from Asia. “For us, the issue is quick turnaround time,” says Jay Johnson, a Hot Topic vice president. Goldstein puts it this way: “They’re essentially selling a rush service that insulates them from the price pressures of globalization in the industry.”
Companies fully use technology to make productivity gains. Looking for that new breakthrough technology that will push prices upward? The best bet might not be a new technology at all, but proper use of existing technologies.
In the 1990s, corporate America was obsessed with using the Internet to reach new customers. This decade, expect to see more attention paid to Internet and software applications that make companies more efficient, such as on-line forms processing and intra-office communications. “We really haven’t seen the full payoff from the tech boom,” says Dorsey Farr, senior economist with Balentine & Co. in Atlanta. “Historically, productivity seems to grow in 20-year on/off cycles. We’re still just halfway through.”
Companies exercise tight controls on inventory. Rapid inventory turnover is particularly important when prices are falling. Reason: Products that sit on shelves too long will be worth less by the time they’re sold. Matthews Funds senior analyst Jason Aitken notes that some of the most successful Japanese companies in recent years have made inventory control a top priority. Discount retailer Don Quijote has such tight controls on inventory that it sells virtually everything it buys, he says. Some business models have no inventory at all. Like eBay, the Japanese used-car-auction company USS doesn’t own the products it sells.
Companies keep their balance sheets strong. Not only does debt become a greater burden when prices are falling, cash becomes a more powerful asset. “A couple of years ago, a small intellectual-property company with one or two good ideas might have been acquired for $400 or $500 million,” says Turley. “These days it’s $4 million or $5 million.” Only firms with money in their coffers can scoop up the bargains.
In the tech sector, Payden and Rigel’s Orndorff notes that Intel and Microsoft have strong cash positions. (Microsoft is the parent of MSN Money.) Another company in good shape: General Electric. “We think it’s a very favorable market for acquisitions,” says GE spokesperson David Frail. “And we think we have the balance sheet and the know-how to make the acquisitions and integrate them into our company.” (MSNBC is a joint venture of Microsoft and NBC, which is a GE company.)
Odds are, prices will return to their usual upward path in the years ahead. In the meantime, falling prices are likely to remain on everyone’s radar screen. “Should we worry about deflation?” asks Luskin of Trend Macrolytics. “You bet we should worry about it. Deflation is a largely unknown territory. And where there’s an unknown, there’s danger.”
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At the time of publication, Mike Robbins didn’t own or control shares in any of the equities mentioned in this column.
© 2002 Microsoft Corp.
Chugs, Jay |
