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In discussing bank leverage, John Hempton recently invoked Warren Buffett’s discussion of Tippy Toes:Warren Buffett describes certain types of business competition as a bit like standing on tippy-toes at a concert-in-the-park. His particular story was in the textile industry of Berkshire Hathaway’s origin – management would come in and sell him on a (very expensive) new set of machinery which would improve productivity by say 30 per cent – and hence have a very high incremental return.
He would – after much arguing – agree to put in the machinery. The same decision was made by every other textile mill in the country. The marginal cost of producing textiles thus falls – and competition ensures that the price falls. The machines thus raise productivity but do not raise profits – indeed shareholder returns [cash flows after compulsory (re)investment] fall. Consumers benefit (which is the joy of competition) but from the textile mill owner’s point of view it would have been better had they just collectively sat on their collective backsides. He likens this to standing at the concert in the park – individually rational perchance – but it is still better if everyone just uses their gluteal muscles.
It seems pretty clear that the same analogy could be applied right now to the world’s central banks. They’re all standing on their tiptoes, trying to devalue their own currencies, and of course, because they’re all doing it at the same time, none of them are getting anywhere. As ZeroHedge noted, even Peru entered the fray today.
The onlyu real effect it seems is that gold is rallying, and people are losing faith in central banks. Not a good state, it would seem, for so little benefit.
So we’ll leave you with this question we posed this morning: could a serious move by China to revalue the yuan end this cycle?