April 2011

Why Your Audiophile Addiction Is Due To Get More Expensive… Soon! 
Article By John Evanthes (aka, TheChairGuy from AudioCircle.com)

Note From Editor Steven R. Rochlin: While Enjoy the Music.com is not a financial website nor provides investment advice, it is hard to ignore the facts of the economy and how it affects our luxury goods industry. While the good news is that the well-to-do and getting more wealthy due to various market manipulation from various entities, including the Federal Reserve, the middle class and especially lower end of the scale and being pushed further lower due to real-world inflation. In other words, companies like Tiffany are doing great business, yet lower end stores like Wal*Mart are feeling a bit of crunch from the likes of The Dollar Store. Speaking of Wal*Mart, on March 31 during an interview with CEO Bill Simon he said that inflation is "going to be serious" and "We're seeing cost increases starting to come through at a pretty rapid rate." High-end audio products need top quality parts and highly trained labor, and these are also going up in price. Naturally if parts and labor costs go up on a wholesale level you can count on them appearing at the retail levels in short order. If you are adverse to reading about financial items within an audiophile magazine, by all means please click the back button on your browser and choose one of our many equipment and music reviews.

  In a word, it is "inflation". But, what exactly does inflation mean and why is it happening now? Most would describe inflation as rising prices for all or most things – which, could hardly be argued as incorrect. However, for some Economists and financial types, inflation is primarily a ‘monetary' event where the high prices you see are the result (i.e., byproduct) of monetary activities.

So, what's a monetary event and why do they occur?

In the United States, most monetary events outside of the public markets – that is transactions between people or companies – are begun by The Federal Reserve, or informally known as The Fed. It's the central banker of the United States created in 1913 in response to a series of financial panics that preceded its creation.

If you look at the topmost portion of the front of any denomination of dollar bill in your wallet you will see it is called a Federal Reserve Note. The privately owned  by its members (read: not a government entity just as Federal Express is a private company) Fed determines how much and many Federal Reserve Notes (i.e., United States Dollars) is to be created and to be distributed and the Department of The Treasury acts upon that order. This creation is of course not limited to physical notes as the Fed creates many trillions of United States Dollars electrically. The decision to 'print' Federal Reserve Notes are part of The Fed's charter... to manage the nation's money supply for:

(source: wikipedia)

So, The Fed has been ordering the 'printing' of more FRNs (Federal Reserve Notes), setting low loan rates thru various means, ‘buying' issued debt primarily in the form of United States Treasuries and Mortgage-backed securities (i.e., debts) and a great many other matters in an effort to head off an extraordinary and terrible financial event like we saw in late 2008. To abbreviate further here, The Fed is more concerned about deflation (lower prices) and not as concerned with higher prices that we are now and will be further experiencing. Their actions the few couple years, some might claim since their inception 98 years ago, is primarily to contain deflation at the slight risk of inflation, or higher prices.

So, The Fed's monetary jiggering of various levers have at least in part responsible for the higher prices we are now seeing….because their primary concern is to head off lower prices and lower demands for goods and services. So, the higher prices (ie, inflation) you see are at least partly a by-product of Fed activities – a monetary event.

Steven R. Rochlin chimes in and says, "The Fed seeks to devalue the dollar by 2% annually, which of course does not lead to truly stable (zero inflation) pricing. Worse still, The Fed outright admits to compounded devaluation, so within only 20 years the United States Dollar can lose nearly 45% of its value/buying power. This is a big factor in why many of the truly wealthy do not keep their savings in banks and, instead, seek things with intrinsic value such as rare paintings, important automobiles, farmland with water rights, NOS vacuum tubes, Audio Note UK Ongakus, etc."

A second monetary event is being played out in China. The Chinese are seeing vastly higher prices on shelter, clothing and food of late partly due to a currency that is not allowed to float freely in the world markets. The Chinese are taking steps to allow the Chinese Yuan to be traded more freely worldwide, but as this slow process unfolds, they have allowed their currency to appreciate 3.5% in less than the past year alone. So, merely because of this, we here in the United States are paying 3.5% more for Chinese products than we did at the previous rate of exchange between United States Dollars and Chinese Yuan.

The other part of the inflation equation is rising demand from the other 6 billion individuals on this planet.

Backing up a bit to my January 2008 article in Enjoy the Music.com called ‘Holy Inflation, Batman', you probably should know a bit more about me.

My company has made as many as 800,000 portable outdoor chairs per year in the past... that division was sold in August of 2007 (but my moniker was left as a result). We now make 1,500,000 Magna Cart and Flatform Truck portable carts yearly (here's the plug: www.welcomproducts.com) and are regularly communicating and traveling to our factory in mainland China. I'm an entrepreneur and businessman (with a Bachelor's Degree in Business Administration), not a trained economist by any means, other than by close-to-the-root observation and the need for survival. So if some of this article is bush league to you trained economists, index trader and bankers out there; so be it, just consider the source ;>)

What we experienced in our hobby since 2005 was rising prices – that was short-circuited by a meltdown of the US and worldwide financial system in late 2008. Due to that extraordinary event, demand plummeted worldwide and prices for our hobby have dropped. But, demand by much of the world's other 6 billion folks is now back to robust and even if the US thirst is still sagging…higher prices will be created due to demand while The Fed jiggers levers to create higher demand and a lower value of Federal Reserve Notes (a.k.a. the United States Dollar) relative to our trading partner currencies.

What this will mean is VASTLY higher prices for our audiophile hobby and, likely, vastly higher prices for all things we buy. You may have already noticed the much higher prices for food of late, for gasoline at the pump, for clothing and more. This is the by-product of monetary events created by many Central Banks worldwide and rising, organic demand in other countries.

At this point, let's update a chart I created in ‘Holy Inflation, Batman' to today:

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So, as you can see, we've picked up from where we left off... and then some... on many of the basic materials and barometers used to track inflation for our little hobby. But, there are two factors mostly unsaid in the media today. One is that China is experiencing much higher price rises than we have seen as demand is more robust than the United States. As a net exporter of product, they have the flexibility to export their inflation in the form of higher prices for finished products – and they are.

Labor at most factories year-to-year is now approximately 22%. That is to attract and maintain a factory worker it costs 22% more than a year ago to do it. We're starting from a very low base of perhaps $2200 in early 2010... still a 22% wage increase MUST trickle back into the costs that we all pay for our goods.

The fact is that after 30 years as an emerging economy, China and the Chinese are now voting with their feet in a very democratic and capitalistic way…they are moving on to jobs that pay the most for their skills and preferring office / white collar work to factory jobs. So, the trend here is for MUCH higher wage increases to attract and maintain staff. This is all very good for the Chinese – now enjoying the fruits of their hard labors of 30 years – they are demanding, and increasingly getting, higher wages for the increasingly exemplary products they are producing.

There is nothing wrong with that – unless you are in the United States, the world's largest debtor nation with debts so large they dwarf the world economy and at a time when the value of the Federal Reserve Note (a.k.a. United States Dollar) is being ratcheted lower against foreign currencies for the supposed purpose of perking up our nascent manufacturing and export companies here. The triple whammy of a lower value of the US Dollar, higher food and material prices and much higher wages in China is going to raise the price of your favorite audio products to levels unseen previously.

The Wild Card that could propel the prices even higher is oil. Oil is an ingredient in all fueling (pun intended) all materials – from the machines that roll, extrude and form other materials to powering the trucks and ships that move materials and products to places all over the globe. If there is further disruption of oil supplies with more unrest in the Middle East or elsewhere and oil rises higher... things could get out of hand.

Finally, as discussed in the prior article on inflation penned 3 years ago, there is the subject of export tax rebates.

Tax rebates of two kinds are offered to manufacturers in China. One is essentially to merely exist and produce product(s). The second is an additional tax rebate, also defined by China central government planning, based on sales outside of China. Various industries have different export tax rebates accorded to them. ‘Green' and various hi-tech industries garner the highest export tax rebates as China would like to promote these (especially if market share is weak in these industries)…and ‘basic' and or ‘dirty' industries (i.e., a company that makes mops) would qualify for lower export tax rebates.

Your electronic gear – from speakers to DAC's – is classified as neither high or low tech, and given China's vast market share domination in many of these categories, companies making audio-grade products (video being accorded slightly higher tech weighting) are in the middle. But, these tax rebates are not a consistent thing – they are changed by central planning based on the steam that the Chinese economy has at the time. In early 2008, total tax rebates had whinnied down to an approximate average of 10% China-wide. That is, a manufacturer who sold goods outside of China could sell for a 10% loss and still breakeven for the year.

Unfortunately, our myopic elected officials focus on calling China a currency manipulator – when in fact the real immoral act is these subsistence tax rebates provided to manufacturers. This is the real reason for ‘dumping' of Chinese goods that occur and debated about. These rebates encourage Chinese manufacturers to sell at a loss and make up the difference in tax rebates at the end of the year from their government. By the outbreak of October 2008 worldwide meltdown of the financial system, and resultant loss of demand, China perked up the tax rebates to an average of 13% so that China manufacturers would be encouraged to continue to produce in an effort to keep full employment in China despite the reduced demand.

So, between the reduced demand worldwide, 3% additional tax rebates the manufacturers received and a glut of product since October 2008….we here in the US have had access to fine Chinese products at reduced prices relative to what we paid in earlier 2008. Well, that anomaly is ending now as demand in Asia, with some 3 billion increasingly affluent consumers, will balance out the 700 million in the US and Europe that are experiencing sluggish demands in their countries.

So, we have Asians, anxious to buy hi-end speakers, tube separates (not to mention big screen TV's, air conditioners, cars, etc) and the like and enjoy the good life are willing to and can outbid their increasingly impoverished US and European consumers for these goods. If you're the type that wants the abridged notes of a long article at the end – these are the reasons we will see much higher prices for our little audiophile addiction in the future:

1. Monetary Event 1– Created by The Federal Reserve, this includes printing currency at an increased rate. If our currency is devalued 25% relative to the Chinese currency, then we automatically pay 25% more for the same goods we did when our currency was worth 25% more.
2. Monetary Event 2 – Created by the People's Bank of China (or, PBOC), where currency rates are decided and where the value of the Chinese currency has appreciated 3.5% against the US Dollar in less than the past year
3. Supply & Demand – 3 billion increasingly affluent Asian consumers are able to outbid 700 million increasingly impoverished American and European ones for the same products. This raised prices to us here in the US, or any country with falling currency values.
4. Tax Rebates – In troubled times, such as we saw October 2008, tax rebates to Chinese manufacturers are raised. In good times, such as the world is experiencing (but perhaps not the US right now) these tax rebates are lowered. Lowered tax rebates mean higher prices for everything coming out of China.

This article is being written nearly two weeks after the devastating earthquake, tsunami and ongoing nuclear tragedy in Japan – the world's second largest economy. Such an event will change the trajectory of inflation or deflation for a time. As will uprisings in oil-producing nations or sovereign default as is facing Greece, Ireland, and Portugal now. So, what I've written above may not occur this week or month due to additional bumps in the road... but rest assuredly, you will be paying higher prices, likely much higher prices, for your audiophile products in the coming years for those of us living in the United States.

Prepare yourself for the inevitable now before it happens.

Steven R. Rochlin adds, "I know of one very wealthy person who has an enormous collection of NOS tubes and has already seen his investment gain nearly 300% in value while the currency he used to buy them has, of course, been devalued by the central bank to the tune of 'only' 35%. So choose your investments well and, of course, if you deal in cyber-paper ETFs and whatnot beware counterparty risk. If you don't physically hold it, in a sense you do not really own it. My point is that if you love high-end audio and are seeking something rare and collectable, it is far better to buy it now than putting your earning in a bank. With so little  to no % of interest from a bank as compared to currency devaluation (inflation) by The Fed, you are guaranteed to lose value on your money in a bank. If you buy something high-end of real value, at least the item has intrinsic value that can not be devalued by The Fed's 'printing press'."

Breaking News From Editor Steven R. Rochlin: The State of Utah has officially made gold and silver coins as minted by the United States Mint legal Tender and as a currency to work side-by-side with Federal Reserve Notes. Hopefully more States will follow suit in an effort to reduce the extremely high inflation (currency devaluation of the United States Dollar). So a new law has been passed and signed by the Governor of Utah, see the law/bill PDF by clicking here.