On Noticing The Obvious

Sometimes the things that are most important are so obvious that nobody bothers to think about them.

Take air, for example. Since you were separated from your mother's blood supply -- before which you leeched your own oxygenation from her blood to keep you going -- you've been utterly dependent on a ready supply of breathable air for every moment of your life. As a kid, when you thought about all the things you could wish for if you were to find a genie bottle, you probably never even considered "breathable air" as a worthwhile wish. Why prepare for a risk like that? It's not like over three thousand Americans die a year in drownings ...

So let's step back a bit and ask what kinds of things it is that we so take for granted that we wouldn't deign to waste a wish to insure, but without which we'd be so, so screwed. This may end up taking the form of a series -- there are likely lots of nominees for this list -- but I thought I would start with widespread violence and destruction carried on by warlords and would-be tyrants operating without concern for the rule of law or the intervention of outsiders for the protection of the oppressed.

In Africa, where millions have died and more have been displaced in disputes over territories full of natural resources, what do you reckon to be the cost of a homeowner's insurance policy? Maybe in the safer parts of South Africa, there's an insurer that will lend against a home located where the threats are mostly against personal property and life, rather than against the insured homestead. It's possible, of course, that the list of exclusions in a policy issued on property situated in Africa may look a bit different from the list of exclusions in your own homeowner's policy, even if you do have the budget of a war zone security contractor. But suppose you are a local -- what will you be able to afford? Then you have the question of how to buy the house. Except where insurance is available to secure the collateral against losses caused by explosions, fire, and occupation by hostile warlords looking for a regular weekend retreat, would any bank loan against such a property? Heh. But it gets worse. Where illiteracy is high, the rule of law unknown, families large, deaths common, and refugee status a growing problem, how will you prove title? After generations of deedless title transfers, how on Earth will a lender or title insurer acquire confidence the seller has anything to sell at all?

Untangling title can occur when a nominally functioning government enacts measures to make clear declarations of title, but for much of Africa there's no way to prove title. This means there's no way to buy or sell land, only trade occupancy. It means there's no way to pledge the land as security, and no way either to get loans against it for purchase or to unlock equity in the land for use developing a business or improving the fixtures on the land.

So it seems the small businessman in Africa is in trouble: due to endemic poverty, he may own little; what he owns beyond what he can carry, he may be unable to protect; he may be unable to insure what he can prove he owns; he may be unable to prove ownership to land and unable to borrow against it to improve it; he is screwed. Because the public education suffers from undertrained instructors and a preference to shower plums like government employment on political allies rather than to squander such largess on merely competent employees, public health initiatives are likely to be utterly botched -- and infrastructure, and what have you.

Africa isn't alone in this, it's simply a high-profile victim. China pretends to respect the rule of law and the rights of individuals, as it has adopted new constitutional amendments purporting to enshrine them as the highest law of the land, but these have no more effectiveness on their own than the staple-pierced condoms distributed by incompetent anti-HIV workers. Russia's campaign to re-create the police state of the Soviet Union is founded on intimidation, confiscation, and a strengthening partnership between organized crime and government insiders. Venezuela is still working on formalizing permanent unlimited emergency powers in a president-for-life, but in the meantime has driven out competent engineers due to political concerns and is driving its principal national business (petroleum) into the ground through incompetence. In some Central American countries, certain banks and utility companies have been nationalized and privatized so many times as governments sieze profitable enterprises then drive them into worthlessness through mismanagement that it's almost a predictable, cyclical industry.

The Jaded Consumer derives from these observations a few conclusions about what must be working in the United States to keep it as consistently high-performing among the world's various populations. It's not like the United States has different genetics than those of the many countries from which its residents emigrated. It's not like the United States has more oil than Saudi Arabia, or better literacy than Cuba, or smarter bankers than Switzerland. We spend a fortune on education and get results that come nowhere near those of Japan, which spends far less per pupil.

Relatively Low-Risk Environment.
America's murder rate may be consistently higher than Canada's, but it's nowhere near that of Russia, Venuzeula, Mexico, or South Africa. Maybe we haven't got a public works project to protect New Orleans that comes anywhere near the Netherlands' solution in the Delta Works, but we have taken meaningful steps to mitigate storm damage along out most vulnerable coast. Going into business in the United States, you can usually find who owns title to property, and when you buy property you can not only insure the title and the land, but get a lender to help fund the project. Corporate taxes are high -- so high you may want to take advantage of LLCs, LLPs, trusts, or other organizational types that enable one to pass income through the entity tax-free. Income taxes are modest in comparison to many foreign countries, making the United States a relatively low-tax jurisdiction for some businesses.

Ever wonder why so many companies organize in Delaware? There's a theory known as the "race to the bottom" (inspiring the name of the blog linked here) that postulates that companies organize where the law offers the best opportunity for managers to oppress minority owners and passive investors, and that the nation is in a cycle of competitive lowering of standards intended to draw incorporation fees from companies whose managers hope to loot their companies with impunity. The theory has some strength -- a comparison of officer responsibility under different states' standards might reveal a preference for incorporation volume where officers were freer to misbehave -- but analysis is complicated by confounders like Nevada's zero-tax status, and so on. The Jaded Consumer points out that Delaware has something even lower-standard-jurisdictions cannot offer: known law. Delaware's courts handle so many questions of corporate governance that there is great certainty among practitioners in the field how the Delaware courts will rule on many common issues -- and the commentary on developing lines of case law offer some insight into the areas in which clear guidance cannot be offered to corporate officers. Delaware courts take pains to rule as consistently as possible, fully knowing that their principal constituents are businesspeople who incorporated in Delaware to enjoy a governing law free of surprises. Elimination of legal risk is one of the reasons to incorporate in Delaware, and may be the only reason to explain incorporation in Delaware in light of the jurisdictions with lower costs (e.g., filing fees and franchise taxes) and lower standards for corporate officers. Incorporation in Delaware isn't the cheapest in the nation by either franchise tax or by filing fee, yet it is awfully common for businesses with no connection to Delaware at all to incorporate in Delaware. Why doesn't everyone just re-incorporate in Nevada? Nevada is a race-to-the-bottom state and has zero taxes and extremely modest filing fees, and so should win on "low standards" or "money", either alone or in combination. The distinctive asset Delaware can offer is stable law.

The avoidance of risk is a nontrivial proposition in the large-scale growth of business. There may be money to be made driving a truck in Iraq -- but would you do it? At any price? Thrill-seekers may be willing to accept (or ignore) terrible risks in exchange for possible financial rewards, but imagine selling the idea to investors. The illiquidity in penny stocks (go look at the bid/ask spreads, and the numbers of shares traded for most of the pink sheet issues in the current market) goes a long way toward proving that high-risk, high-yield opportunities are only of interest to hobbyist speculators or people with "mad money" to blow, and aren't a place to establish a serious portfolio of investments. People hoping to capitalize on opportunity in Russia's illiquid, opaque investment environment have been hit pretty badly, for example, as risk exacts its toll in fearfulness and prices plummet. Earlier this year, the story told to me was that Russia had so much money it didn't need outside investment; now, the story is that Russia's financial institutions are faltering and their outlooks seem poor even in light of government intervention. The United States may not have any prospect of a turnaround in the next six months, even if everything is done right to shore up the ailing financial sector, but for some reason -- and I suspect relative risk is key in this -- the world is buying United States dollars. The Euro never traded so low. A year ago, who'd have guessed? Russia is trying to devalue the Ruble now, in an effort to prevent outright collapse. Only months ago, it was talking about pricing its oil in Rubles; now, it's happy to get hard currency.

Why America Is Good For Business
When I walk down the street I spend very little time worrying about the possibility that thrill-seekers, gang members, militia inductees, or organized crime initiates will swerve off the road to kill me -- or that I will be sniped where I stand, or that some parked car will explode beside me. In the United States, people mostly walk about unarmed because – even where weapons are lawful – they perceive themselves safe. Curious about the cost to prepare one's self for a world in which this safety could not be taken for granted, I tried to price a bullet proof vest. The gun shop owner looked at me like I was from Mars: civilians don't need these things in America. I couldn't get him to tell me what it'd cost to order from him!

The leading causes of death in America are natural causes -- cancers and cardiovascular illnesses. Motor vehicle deaths far outpace suicides, which outpace intentional killings. Americans don't die at a particularly high rate for a high-growth jurisdiction. Property isn't routinely destroyed in riots. Businesses and their employees can buy property by borrowing at fixed insterest for decades. "Normal" in the United States is a pretty good situation for doing business. "Normal" in the United States may not, in this century, mean movement from unindustrialized to industrialized, as is offered by the vast bulk of China, South America, and Africa; however, "normal" in the U.S. does generally mean that large bribes aren't necessary to carry on business, that the laws governing imports and exports are likely to have relatively consistent meaning between amendments, that ownership of companies isn't likely to be refabricated by courts or bought officials in government records offices, that risks to business property are likely to be insurable, that deposits in banks can be withdrawn as promised by the banks, and that sort of thing.

Normal in the United States is ... normal. And that's pretty much the point of this post. Much of the world has a far looser grasp on the rule of law, much riskier environment in which to acquire and use business assets, and a much more expensive environment in which to obtain credit. Especially when fear grips the world, the American idea of "normal" begins looking pretty good.

The quality of the normal business environment in the United States, and its tendency to offer stable law and a lack of unexpected risks (e.g., political risk; we have a revolution every even-numbered year here, but it's fairly tame and little changes), may be part of why Warren Buffett remains consistently bullish on the long term view of the American economy. The fact that the stock market offers current buyers irrationally low prices makes U.S. equities an especially attractive deal.

Normal is good. Mispriced normal? Very good.