Wednesday, 24 April 2013

Apple Also Confirms Conjuncture

In a recent post - Gold Price Crash Confirms Conjuncture – I wrote that the gold price crash confirmed the conjuncture as being that between the Spring and Summer Phase of the Long Wave, as I'd previously set out – The Long Wave Summer Has Begun. Yesterday's results from Apple further confirm that analysis.

For the first time in ten years, Apple has recorded a fall in profits. Its profits remain huge, however, and it has a massive balance sheet, containing about $140 billion of cash, some of which it has used to bolster its share price by announcing a 15% increase in its dividend payout, and a large buy back of its shares. Despite that, its shares have fallen now below $400, having been over $700 last year.

The problem for Apple is precisely that I set out in the posts above. What signifies the turn to the Long Wave Summer, is that although the increase in the price of primary products falls, or may even go into reverse, because new supply catches up with and then outstrips demand, the firms that use those inputs, suffer a decline in their productivity gains. That is because this far into the boom, the main advantages obtained from the new technologies and techniques introduced during the Winter and Spring Phases of the Cycle, have been had. Productivity continues to rise, but at a slower pace – what is called the second derivative.

As a result, unit costs reductions slow down. At the same time, the reserve army of labour has relatively been used up, by this stage, so competition for labour-power between capitals raises the price of labour, wages rise. Moreover, for the same reasons as cited above in relation to the slow down in productivity growth, the reduction in the Value of Labour-Power, also slows down, so the growth of Relative Surplus Value slows down with it. The volume of profit generally continues to rise, but at a slowing pace.

But, the other thing that occurs at this point, and which Apple's and other company results have shown, is the other aspect of this change in conjuncture. That is that company's are caught in a typical vice. They can choose to maintain high profit margins, by maintaining high prices for their products, or they can choose to increase their revenues by reducing their prices, and therefore their profit margins. They cannot do both at the same time. The figures for Apple are a classic example of that. Their profit margin has fallen from 47.4% to 37.5%, a 20% reduction.

The reason is again typical of the Summer Phase of the cycle, and Apple has been emblematic of that cycle. During the Spring Phase, a plethora of new products are developed, around the new base technologies brought forward during the Innovation Cycle. There could hardly be a better example of that than Apple. From the late 90's, it brought forward new products one after another, that captured consumers imagination, not to mention their money. These new products were able to sate consumer demand at prices that ensured high profits, in total contrast to all those products that had become mature in the previous phases of the cycle.

But, although, Apple continues to innovate, and new products are forecast to be introduced in the next few months, its clear that the pace of innovation has slowed. But, more than that, of the new products that have been introduced, more recently, instead of adding net new revenue for the company, they have to an extent cannibalised their own demand. Where consumers have not been prepared to pay the higher price for one product, another similar but cheaper product has been launched. But, then many consumers simply decide to buy the cheaper product rather than the more expensive.

Moreover, rather than being totally new products, innovation becomes more a matter of simply a new version of an existing product, or a product that provides much of the same functionality of some other. In order to maintain revenues, prices have to be cut, or not raised so much. That is particularly the case when other large competitors like Samsung are there to steal market share if you get it wrong. That is why profit margins have fallen.

Very large companies like Apple, do not have to expand production, if they do not believe that demand is there to justify it. That is one of the things that distinguishes modern capitalism, from the kind of market driven capitalism analysed by Marx 150 years ago. Indeed, its partly because of that that Apple has $140 billion of cash on its balance sheet, as it has simply hoarded the cash rather than invest it foolishly. Its why, today its using that cash to give to shareholders rather than invest in increased production. But, having geared production to a certain level, such companies are also loathe to cut it back significantly, because that means that billions of dollars of investment would have been wasted.

So, they are caught between two sets of converging forces. To maintain sales and revenues they have to reduce prices, which means cutting profit margins, and at the same time, they face relatively rising costs for labour, and slowing gains from productivity. Profits can continue to grow, but at a slowing pace, and yet, in order to continue to grow the business, which is necessary to avoid losing market share, they have to continue to invest in research and development, and in new production methods to reduce costs and so on.

The consequence is that although the volume of profit rises, the cost of producing that profit rises faster, and so the rate of profit falls. The further consequence at this phase of the cycle is also then that a larger proportion of the profit has to go to cover those costs, and a smaller part is available to be hoarded as cash, paid out as dividends and so on. In short, the demand for capital rises, as the supply of capital falls (relatively). The consequence of that is rising interest rates.

That cannot be altered by central banks printing money, as I will demonstrate in a future post. Banks can print money tokens, but they cannot print capital. Capital has to be created, and the whole point here is that more capital is relatively being demanded, whilst a smaller amount is relatively being supplied. All printing money tokens does under these conditions is to create inflation, which in turn drives nominal interest rates higher.

In fact, if we look back over the last 20 years, what we have seen is precisely that. The prices of commodities have not generally risen. But, that does not mean there has not been inflation. The reason those prices have not risen is because their Values have fallen massively. It is only their Exchange Value against fiat currencies that has not fallen, because the value of those currencies has fallen massively too! In other words, without the money printing commodity prices would have fallen significantly. Some still have.

You can buy a cheap suit made in China today, for the same nominal price I paid for my wedding suit in the 1970's. I bought my first computer in 1985, for £500. It had 512k of RAM. Were it possible to buy the same computer today, it would probably cost something like £50. Put another way, I can buy a computer, 100 times as powerful today, for the same or less nominal price as I paid in 1985. The reason that commodity prices did not rise is because productivity gains, reduced their values, and the increased money tokens were soaked up in a huge increase in the volume of commodities being circulated in the market. In other words, a huge amount of new capital was created.

But, look elsewhere, and you can see that the money printing did cause massive inflation. The property market, the bond market, the share market all rose astronomically. But unlike the real economy, these sectors do not produce any new capital. The rise in prices of these assets its purely fictitious.

No amount of money printing will, therefore, stop interest rates moving higher as this new phase of the cycle progresses, and along with those higher interest rates, will go the bursting of the asset bubbles.

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