Newsletter September 18, 2016

Is “Cash” becoming obsolete?

When we speak of “money” we often picture $20 and $50 dollar bills. Or at least we used to. However for most people, the majority of their day-to-day spending now takes place by using debit cards or credit cards. And “spending” on larger ticket items such as cars, furniture, and mortgage payments is rarely done in the form of paper cash.

Transferring money electronically has become the preferred method for both consumers and businesses.

And, we may soon get to the point where money in the form of paper cash dollars becomes obsolete.

The Alberta government no longer accepts cash in payment of income taxes at its payment window in downtown Edmonton. This refusal to accept cash would have been unthinkable 20 years ago. In fact, given the definition of cash as legal tender, I am not convinced that the Alberta government has the right to refuse paper cash in payment of income taxes owing. Nevertheless, this refusal to accept paper cash is part of a trend which is unlikely to be stopped.

If you need to exchange Canadian dollars for U.S. cash, most or all bank branches will no longer accept cash in payment. You must charge the purchase to a bank account and may not pay with cash or even a debit card from another bank. You can still buy U.S. currency with Canadian cash or a debit card at a speciality currency window like Thomas Cook, but not at your bank branch.

Given that electronic money leaves behind what we ironically refer to as a “paper trail” and paper cash does not, governments will be quick to embrace the idea of making paper cash more and more obsolete.

Wealth in Investment Accounts is Not Usually “Money” As Such

Most people will speak of having “money” in their RRSP account or Tax Free Savings Account. Often, that is not really true. Instead, we have investments in those accounts which are measured in terms of money. When you have a need to withdraw cash from those accounts it often becomes clear that the wealth is not “sitting in cash”. Instead you may need to sell shares or mutual funds to convert the investment to cash before you can make a withdrawal. But you may be reluctant to sell an investment that has declined in price.

I am not suggesting that people should hold more cash in their investment accounts. But I am pointing out that only cash is cash. This includes electronic cash. But investments that are not cash despite being worth so many dollars are not cash as such and are not money.

What Gets Measured (Often) Gets Manipulated

Those who seek to improve performance are fond of saying “What Gets Measured Gets Done”. And that is true. But it is also true that one must be careful not to let measurements get manipulated.

It’s dangerous to allow a person who is being rewarded based on a certain measurement to also be the one doing the measuring.

Wells Fargo is currently finding out what happens when you provide huge incentives for bank branch staff to “sell” more bank accounts to customers. And what happens when you provide punishments (such as job loss) to those who don’t sell more accounts. It turns out that a certain percentage of the staff will indeed sell more accounts “by hook or by crook”. With their bonus and perhaps even their job on the line, some branch staff resorted to opening accounts that the customer had not asked for or authorized and some staff even opened accounts for non-existent people.

As soon as any important performance indicator is measured there is a desirable tendency to influence and improve the measure. But there is usually some incentive to manipulate the measurement as well. Whenever rewards or punishments are tied to a measurement there should be safeguards put in place to prevent or at least detect manipulation of the measurement.

When public companies are expected to meet or exceed the earnings per share estimates of analysts I suspect there has to be at least some tendency, by some companies, to manipulate earnings to meet those expectations.

When banks have to report their 90-day delinquency figures I expect that there is pressure on staff to make various arrangements with customers such as officially allowing skipped payments which “coincidently” may mean that the loan is not officially delinquent.

When workers compensation insurance fees are tied to a company’s claims record you can be sure that the company will work harder to reduce lost-time injuries. That is of course a good thing. But you can also pretty much count on the company to begin manipulating its claims record by subtlety or not so subtlety encouraging workers not to report very minor injuries and/or by putting staff with minor injuries on desk duty rather than generating a claim for workers compensation insurance.

When car companies had to meet emissions standards, it turns out that the engineering staff of at least one car company cleverly designed software to trick the emissions testing process.

Investors looking at any kind of corporate performance measures should be on alert for signs of manipulation.

Rail Car Loadings

Rail car loadings provide a useful (and literal) indication of how fast the economy is moving.

The Association of American Railroads publishes a graph showing weekly rail car loadings with a comparison to each of the past three years. Data is separately available for the United States, Canada and Mexico. The data is also available for each of 13 different cargo types such as coal, grain and forest products. When the economy is growing the graph is likely to show a year-over-year increase in most or all of the different categories of freight.

Currently the graph is showing that rail car loadings for each week of 2016 in the United States are running consistently lower than in the corresponding week in each of the past three years. Freight categories that have declined substantially in most weeks include coal and petroleum products. Metallic ores and minerals as well as forest products are also down noticeably. Categories that are moderately down are non metallic minerals, and intermodal (consumer goods). Categories that are up modestly are grain, chemicals, and motor vehicles and parts.

In Canada, rail car loadings have also been running lower than in the past three years in most weeks of 2016. In general, the same categories of freight are up or down as in the United States.

It’s worth keeping an eye on these car loadings as an economic indicator and as an indicator of the economy. Those who own shares in rail companies should be particularly interested in this data.


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