Three Articles

I want to share three articles that I found interesting in my recent reading.  The first discusses the difficulty that the euro-zone faces due to different languages.  The second discusses the traditional model of emerging market growth (and how manufacturing offers less opportunity today).  The third is about John Bogle.  Many sentences are lifted straight from the articles being summarized.

Article 1: Europe’s Crisis of Tongues by Edoardo Campanella

Typically, labor mobility is a key adjustment mechanism in an economy.  Workers move from struggling areas to booming areas.  This isn’t possible in Europe because of the language issue.  (Europe has 13 different languages.)  Instead, people are leaving Europe for countries where they speak the language (often outside of the euro-zone).  Southern Europe is losing talent and northern Europe has job vacancies.

According to EUROSTAT, the EU’s statistical agency, just 18% of people aged 18 – 34 perceive themselves to be proficient in another language (usually English).  Language barriers will also obstruct the political debate about the EU and will prevent the creation of a truly European identity.

Article 2: No More Growth Miracles by Dani Rodrik

Just a year ago, we expected emerging markets to have strong growth.  Yet today, we’re talking about “the great slowdown.”

Except for a few small countries that benefited from natural resources, most successful emerging countries can credit their growth to rapid industrialization.  Countries succeeded in moving labor from the countryside to organized manufacturing.

Manufacturing allows countries to catch up because it’s relatively easy to copy and implement.  While services can be copied, it’s much harder.  Services require a wide array of skills and institutional capabilities.  So, the basic plan is to industrialize while simultaneously attempting to accumulate the human capital necessary for further growth.

This strategy isn’t as effective today.  Manufacturing has become more skill-intensive and capital-intensive.  It can absorb less labor.  In addition, globalization has intensified competition (making it hard for newcomer countries).  Finally, rich countries are fighting back and are intolerant of unfair competition.  The conclusion is that manufacturing will not take emerging markets as far.

Article 3: John Bogle

Jack Bogle founded Vanguard (and has been the biggest advocate of index funds).  He’s also a strong advocate for the small investor.  There was a great article about him in The New York Times last week.  It was titled, “A Mutual Fund Master, Too Worried to Rest.”  Here are some of the most interesting points from the article (and Bogle):

Bogle said, “It’s urgent that people wake up.”  He says that this is the worst time for investors that he has ever seen.  The economy is the ultimate source of long-term stock market returns.  There are clouds hovering over the economy and the financial system has been damaged.  “The risk of a black swan event – of something unlikely but apocalyptic – is small, but it’s real.”

You still need to hold stocks.  They are still likely to produce better returns than the alternative.

Don’t try to outsmart the market (timing the market).  Buy index funds and diversify.

He says that investors need to diversify into bonds, but he says that bonds look horrible.  “What’s so frightening right now is that the alternatives to equities are so poor.”  He also said that “the outlook for bonds over the next decade is really terrible.”

He said that too much money is aimed at short-term speculation.  The financial system has been hurt by innovations that merely promote very rapid trading, market timing and shortsighted corporate maneuvering.

Another problem he cites is the corporate money that is flooding into political campaigns.

He believes that taxes should be used to discourage short-term speculation.  He also thinks there should be limits on leverage, greater transparency for derivatives and more criminal prosecutions for financial crimes.  He thinks that there should be one fiduciary standard for all money managers.

Vanguard has brought in $87.7 billion in cash through June (excluding money market funds).  That’s nearly 40% of the cash flow for the entire mutual fund industry.  (I don’t have the numbers for Dimensional Fund Advisors, but it would be interesting to see the percentage of flows that are going to Vanguard and DFA combined.)

During his peak earning years at Vanguard, he regularly gave half his salary to charities.

He considers himself to be a Republican, but he has voted for Presidents Clinton and Obama.  He says that the regulation of the financial industry is insufficient.

Have a great weekend.

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