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Terrible news from Apple (AAPL)

Apple just reported their profits for 2011Q4.  It turns out that they made rather a lot of money.  So much, in fact, that they blew past/crushed/smashed expectations as their profit more than doubled on the back of tremendous growth in sales of iPhones and iPads.  [snark] I’ll bet nobody’s talking about Tim Cook being gay now. [/snark]

It’s an incredible result; stunning, really. I just wish it didn’t make me so depressed.

I salute the innovation and cheer on the profits. That is capitalism at its finest and we need more of it.

It’s that f***king mountain of cash (now up to $100 billion) that concerns me, because it’s symptomatic of what is holding America (and Britain) in the economic doldrums.

The return Apple will be getting on that cash will be miniscule, if it’s positive at all, and conceivably negative.  Standing next to that, their return on assets excluding cash is phenomenal.

Why aren’t they doing something with the cash? Are they not able to expand profits still further by expanding quantities sold, even in new markets? Are there no new internal projects to fund? No competitors to buy out? Why not return it to shareholders via dividends or share buybacks?

Logically, a company holds cash for some combination of three reasons: (a) they use it to manage cash flow; (b) they can imagine buying an outside asset (a competitor or some other company that might complement them) in the near future and they want to be able to move quickly (and there’s no M&A deal that’s agreed upon faster than an all cash deal); or (c) they want to demonstrate a degree of security to offset any market perceived risk with their debt.

Apple long ago surpassed all of these benefits.  The net marginal value of Apple holding an extra dollar of cash is negative because it returns nothing and incurs a lost opportunity cost.  So why aren’t their shareholders screaming at them for wasting the opportunity?

The answer, so far as I can see, is because a significant majority of AAPL’s shareholders are idiots with a short-term focus. They have no goddamn clue where else the money should be and they’re just happy to see such a bright spot in their portfolio.  Alternatively, maybe the shareholders aren’t complete idiots — Apple’s P/E ratio has been falling for a while now — but the fundamental point is that they have a mountain of cash that they’re not using.

In 2005 that wouldn’t have been as much of a problem because the shadow banking system was in full swing, doing the risk/liquidity/maturity transformation thing that the financial industry is meant to do and so getting that money out to the rest of the economy.[*] Now, the transformation channel is broken, or at least greatly impaired, and so nobody makes any use of Apple’s billions. They just sit there, useless as f***, while profitable SMEs can’t raise funds to expand and 15% of all Americans are on food stamps.

Don’t believe me?  Here’s a graph from the Bank of England showing year-over-year changes in lending to small- and medium-sized enterprises in the UK.  I can’t be bothered looking for the equivalent data for the USA, but you can rest assured it looks similar.  The report it’s from can be found here (it was published only a few days ago).  The Economist’s Free Exchange has some commentary on it here (summary:  we’re still in trouble).

So what is happening to all that money?  Well, Apple can’t exactly stick it in a bank account, so they repo it, which is a fancy way of saying that they lend it to a bank (or somebody else in the financial industry) and temporarily take some high quality asset like a US government bond to hold as collateral.  They repo it because that’s all they can do now — there are no AAA-rated, actually safe, CDO tranches being created by the shadow banking system any more, they’re too big to make use the FDIC’s guarantee (that’s an excellent paper, btw … highly recommended) and so repo is all they have left.

But the financial industry is stuck in a disgusting mess like some kid’s hair with chewing gum rubbed through it. They’re all just as scared as the next guy (especially of the Euro problems) and so they’re parking it in their own accounts at the Fed and the BoE.  As a result, “excess” reserves remain at astronomical levels and the real economy makes no use of Apple’s billions.

That’s a tragedy.

 

 

 

[*] Yes, the shadow banking industry screwed up. They got caught up in real estate fever and sent (relatively) too much money towards property and too little towards more sustainable investments. They structured things in too opaque a manner, failed to have public price discovery and operated under distorted incentives. But they operated. Otherwise useless cash was transformed into real investment and real jobs. Unless that comes back, America and the UK will stay in their slow, painful household deleveraging cycle for another frickin’ decade.

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To what extent should the media mention that somebody is from a minority?

It turns out that Tim Cook, the new CEO of Apple, is gay.

Felix Salmon suggests that this makes him the most powerful gay man on earth (an idea of which I am sceptical – surely at least one head of state among all the nations of the world has been queer at some point) and that the media ought to be celebrating this fact, or at least making mention of it:

Personally, I don’t care.  Why should I?  Fundamentally, the only relevant facts are those that inform me about his ability to do his job, and knowing whether he’s a member of ethnic group X, holds religious view Y or is turned on by Z is of no use in that regard.

In a completely post-bigotry world, those things might (or might not!) be included in a puff piece that wanted to tell you about Tim Cook, the man, as a sort of background colour (“raised a Catholic, Mary-Anne’s atheism was a source of family friction in her early adulthood, but …”), but they’d play no part in people’s opinion of him as a manager and so would never appear in a serious article about the future direction of whichever company he works for.

Salmon’s point, I believe, is that (a) we’re not in a post-bigotry world and so there is a lead-by-example case for publicising Cook’s sexuality in the same way that people discussed that Hillary Clinton is female and Barack Obama is black; and (b) even if we were, the media is going out of its way to make no mention of it even in the puff pieces, that it’s going out of its way to self-gag and so, ironically, subtly reinforcing the closet.

I dunno.  I think that stuff like this is only relevant to public discourse — even puff-piece writing — if at some point it helped shape the subject’s motivations in life.  Furthermore, I believe that for at least some queer people now, and eventually for all of them, their sexuality (will have) played absolutely no role in shaping their motivations in anything other than who to look for in a partner.

As such, I’m instinctively sceptical of a need to draw attention to it.  Not even the puffiest of puff pieces would spend time discussing people’s preferences over ice cream flavours unless the subject made a point of bringing up their obsession with chocolate-mint.

When it comes to playing a role as a societal leader, I can’t help but feel that it’s up to Mr. Cook to decide for himself.

Dani and I rewatched “Good Will Hunting” last night.  I think there’s a parallel with the kid who’s a genius.  I always get angry when Ben Affleck’s character (the well-meaning, but idiot friend) tells Matt Damon’s character (the genius) that “you don’t owe it to yourself man, you owe it to me … ‘Cause I’d do fuckin’ anything to have what you got. So would any of these fuckin’ guys. It’d be an insult to us if you’re still here in 20 years” [IMDB].  It’s Rawls’ veil of ignorance turned arse-end backwards.  It’s also complete rubbish.

I can see a moral argument for why Rawls’ veil implies that society at large should help people who drew particularly shitty numbers, but why should any one individual be required to do something just because they drew a particularly awesome number?  The whole goddamn point of Rawls’ veil is that nobody consents to it in the first place and so, as a society, we ought to not force people into the pigeon-hole that the lottery put them in.  Just because you were born into a poor family doesn’t mean you have to stay poor.   Just because you’re black doesn’t mean you have to like basketball.  Just because you have an IQ of 180 doesn’t mean you must do research.  Messers Affleck and Damon need to reread “Brave New World”.

Nobody can deny that Barrack Obama is black, but the extent to which he makes speeches to the black community declaring that they can be black, proud and successful is entirely up to him.  People working to bring about racial equality might feel he has an obligation, but he really doesn’t.

If Tim Cook wants to try to improve the acceptance of gay people in society at large, he can, but the idea of saying that he ought to just because he’s gay himself is illiberal.