Sunday, April 4, 2010

A Grand Unified Theory of Small Business Malinvestment

This is an extension of my last two posts. You might want to read them first (see below). Please forgive me for blatantly copying and pasting previous commentary, but if the shoe fits...

Let's start with a theory that there is a constant ratio between the equity in noncorporate business to the replacement-cost value of durable goods. No matter what the government tries to do, this ratio cannot be altered. It can be temporarily distorted but it cannot be permanently changed.



Unlike my previous posts, the linear trend line seems to be down. Hello Wal-Mart? Goodbye mom and pop?

That said, let's use the average ratio to make a trend line for the following chart.



The trend line is simply the replacement-cost value of durable goods times a fixed average ratio of 1.87. According to the chart, we fell off that trend line when the replacement cost-value of durable goods reached about $1.2 trillion. That happened in 1984. Perhaps George Orwell wrote the wrong book.

There was a brief glimmer of hope at the height of the recent real estate bubble, but unfortunately that was just an illusion. Is it any wonder small businesses are struggling?

PNC study: Small business owners don't expect uptick

Small and midsize business owners across Pennsylvania aren’t expecting any uptick in expectations for sales, profits and hiring over the next six months compared to projections they made last fall, according to an economic outlook survey released Thursday.

See Also:
A Grand Unified Theory of Stock Market Malinvestment
A Grand Unified Theory of Real Estate Malinvestment
Trend Line Disclaimer

Source Data:
FRB: Flow of Funds

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