Why Bankruptcy Is the New Black

from Financial Sense / By John Butler 04/19/2012

IN THIS EDITION

OK, OK, I’m not exactly one to write about fashion, but fashion is about trends, and investment analysis is frequently about identifying trends early, if possible even before they properly begin, to assume the vanguard position prior to a dramatic outperformance of a given asset, or investment style. And so, in exercise of my modest accumulated wisdom and experience, I am predicting a surge in US corporate restructurings and bankruptcies, if not already in 2012, then in 2013. There is just too much corporate capital being wasted and consumed on bloated, inefficient balance sheets. Investors, normally fearful of bankruptcy, will soon learn that it is, in fact, their best friend. Once a corporation is on the edge, the sooner you push it over, the better. Free up that capital, re-deploy it, run it lean and mean and, when the time is right, leverage it up and score the big returns. How best to invest for a world in which bankruptcy makes the front page of Vogue? Read on.

Capitalism Defined

Truth may be the first casualty of war but semantics is the first weapon of debate. As Sun Tzu observed, to win a war without even fighting is the acme of skill. Well, if you entangle your foes in a semantic net, you can win the debate before it even begins. Just define your terms appropriately.

So it is with the foes of capitalism, some of whom continue to take inspiration, knowingly or not, from Karl Marx. Marx and his sidekick Engels defined capitalism as a system designed to “extract the greatest possible amount of surplus value, and consequently to exploit labor power to the greatest possible extent.”¹

Well, to define a system, any system, as exploitative is to stack the rhetorical deck in favour of those who disapprove. What Marx fails to mention in this definition, however, is that the capitalist system seeks to exploit the greatest possible amount of surplus value from ALL inputs, be they energy, technology, the existing capital stock, as well as labour. If, for example, paying higher wages (or granting stock options) to hire skilled workers will enable the capitalist to extract more suplus value from, say, a given technology or, better yet, to develop an entirely new one, well then it is the technology that is being exploited here. But the word ‘exploit’ carries a negative connotation, denoting unfairness. I doubt that technology has much of a problem with being exploited, but semantics being what they are, a sensitive individual can still feel their emotional strings being pulled at the thought.

Luddites aside, most people, including those who rely on the government, or charity, or family handouts, or whatever form of assistance from the labour of others, rejoice daily at the exploitation of technology. Take the plow for example, which greatly improves crop yields. Or fertilizer. Or the food processing, transport and preparation network that practically serves up ready meals on your table, day in and day out. I do not belittle the plight of the poor for one moment, but to continue our semantics discussion, in most of the developed world, recall that, less than a century ago, the poor were referred to as ‘starving’. With over 46mn Americans receiving food stamps today, for example, it is difficult to apply the word ‘starving’ to the poor.

So yes, capitalism ‘exploits’ all inputs, as mentioned previously. It does so in pursuit of ‘surplus value’, otherwise known as profit. And it does so, and I cannot stress this point more, it does so in a state of competition. Not managed competition. Not controlled competition. Not subsidised or bailed-out competition. Not rent-seeking, special interest, lobbyist enabled competition. No, it does so in a state of essentially pure competition in which underperforming, uncompetitive firms either restructure core operations, shutter their doors voluntarily, or they go BANKRUPT.

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