Pacific Asset Management MD Shawn Mesaros: Why stimulus won’t make gardeners work faster

Why stimulus won’t make gardeners work faster

Created: 2013-3-11 0:45:08

Author:Shawn Mesaros, managing director, Pacific Asset Management.

WE would like to consider what US$6 trillion in stimulus has gotten the USA over the past five years.

Same static joblessness of around 14 percent unemployment and a higher stock market despite a record (48 million) Americans on food stamps.

How can this be?

Service sector economies simply do not respond well to stimulus.

Consider the wisdom of lending money to a runner, expecting him to run faster as a result of being more in debt?

Consider the wisdom of lending money to a shoe shine boy expecting him to personally shine more pairs of shoes?

Consider the wisdom of lending money to a group of gardeners expecting them to clip rose bushes faster as a result of their being further indebted?

Rubbish? Absolutely rubbish. Marginal productivity quickly evaporates in the service sector as employment is added, ravaging profit margins and increasing total costs. History is replete with examples.

Service sector economies are legendary in their ability to reach an efficiency maximum in very short periods of time. They say that “in the long run we are all dead,” but for a service sector economy in search of marginal productivity as a “natural by-product” of more debt the answer may be far different.

You are already dead.

The debt can never be repaid due to falling margins and then increased per unit cost by trying to falsely create more employment in the same service sector.

As the service sector takes over more and more of economic output, displacing industrial production, we have interest rates less effective vis-a-vis economic stimulus. This is because there’s far less potential leverage in low interest rates when expanding service sector economic drivers relative to industrial drivers.

Factor performance may be easily demonstrated in America as we witness the falling benefit of economic stimulus, and as the economy becomes more services based.

Short-swing activities

This also means that the time to “negative economic leverage” is shorter as marginal benefit may quickly fall below zero, just as the banking sector in America is experiencing.

And service sector jobs are, frankly, far more likely to be short-cycle or short-swing activities relative to industrial production opportunities, which employ more tangible resources, engaging more of the real economy.

Simply put, the “work product” may be improved upon as the economy rapidly turns itself over and over again, whereas when I “invest” in more people clipping the same rose bushes my marginal productivity gain trends below zero quickly, because I only have so many roses.

Could it be so simple? Actually not – it gets much, much worse.

When governments both expand to employ more displaced rose-clippers and borrow more money (thus creating more debt) to employ more gardeners, we are stuck with both the incremental debt and the complete lack of marginal utility as likely “permanent systemic costs,” which must be politically reinforced to be justified. That means in order to keep the system afloat, we are effectively now in need of more of what got us into this fine mess in the first place.

Factories need people to produce. They need equipment, they need engineers, they are mechanized, in which case there’s a “depreciable life to assets” for an industrial business. That means that when risks are taken within the confines of an industrial economy, there are known spreads, margins, risk, and a real life cycle approach to investments.

Industrialized economies take on more efficiency by expanding output and so long as more automation and turnover occurs, it is quite a “limitless” opportunity to drive margins and efficiency higher in an almost permanent upward trajectory. By comparison, one can simply not improve on the process of clipping hair for a basic haircut, shining shoes better, flipping burgers faster, or clipping roses any better than 600 years ago.

Final straw

In one business model (industrial economy) we can borrow capital and expand with great efficiency and expected profitability gains. In services model we have market saturation quickly established and then negative marginal contribution also expected as a result of borrowing.

Services sector economies that stimulate through monetary easing and debt creation risk the final straw that PIMCO (Pacific Investment Management Co LLC) has described as a “credit supernova” whereby we have a profits deflation plus a debt inflation, which can only lead to massive monetary inflation as margins will ultimately descend below zero, prompting money printing simply to keep the system alive.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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