Category Archives: Economics

Financial Times’ Martin Wolf Finally Get’s it Right

In “Fix the Roof while the sun is shining“, on Wednesday December 6th, Martin Wolf reports on how excessive low interest rates and quantitive easing create conditions that lead to rampant and growing debt, and now this might hold our newly growing global economy back. No kidding. It is about time that Mr. Wolf caught up with the rest of us. QE and near-do rates have were useful in saving the economy, but after a very short period of time we should have pushed rates up and had the Fed (and other central banks) withdraw from QE. If we had any form of real global central bank collaboration, this could have been coordinated together and thus no single region would have been subject to any disruption. We don’t have any form of Bretton Woods 2.0 and so we were all left to figure this out alone.

Now the newly recoding and growing global economy is now dunk on debt. We have sovereign states, states, cities and the public sector that have stoked up on cheap money. Worse this cash has not been used to drive growth economy that would have spun off profits to feed the governments, such that recovery would have improved sooner. If your home is anything like mine, the State of Georgia has rebuilt roads that were perfectly good before; and not added valuable new roads or services. The private sector has been buying back shares to drive EPS to feed the bonus needs of executives; and been gorging on M&A activity that was not driven by weak firms failing but hostile acquisitions of reasonably performing assets. On top of this, in some regions of the world (see Italy as a good example), zombie banks and firms have been hogging underperforming assets in the interests of keeping employment going. Thus the Nannie state is alive and well, dressed up in a veneer of free market economics.

Much has been written since the financial crisis about how moribund the state of economics are. It seems we no longer have a core base of trusted economists guiding anyone, let alone our political leaders. The economists are almost as decided as the politicians are. Yet even in the most basic of areas, debt and credit, we have failed. How on earth unrelenting debt, massive imbalances, and market-inflicting Federal involvement in the bond market would be a good idea but for a fleeting while is beyond me. The blind were leading the blind. At least Mr. Wolf has removed his blind. Let’s hope the rest do – and soon.

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One small picture says it all

Standing about 2-3 inches tell and 1-2 inches across, a small chart in page A6 of this last weekend’s Wall Street Journal, sums up our economic predicament. The article, Japan Firms End Yearslong Price Freezes, reports that a growing number of businesses are reporting that labor shortages and increasing demand are leading to price increases. The chart shows a pleasing, gradual but clear rise in prices in Japan over the last year, now approaching 1%. This is important.

Though 1% inflation sounds measly for Japan it could be a short-term boon. The nation has been bedeviled for over 20 years with meager growth, stagnant wages, and tepid productivity growth. In fact some economist suggest that Japan’s fall from economic grace that preceded the West’s financial crisis of 2007, demonstrated early what would happen in a deflationary economy with massive quantitative easing. QE did not drive Japan’s economy to growth; it does not seem to have done so in the west, though it may have saved it from crashing and now we see how it’s persistence has led to financial and investment dislocation.

The news all around us is quite positive:

  • Most recent quarterly GDP in US was restated up to 3.3%, almost unimaginable a year ago.
  • EU economic growth rates are forecasted to grow above their recent meager levels in recent OECD reports
  • ‘Currency war’ reports appear in the press infrequently, even though global trade remains torn by the idea that the US wants a stronger negotiating position (for what is, essentially, a very small part of the US economy).

But inflation remains stubbornly low almost everywhere. If Japan soon demonstrates ongoing growth in inflation, and global commodity prices push up, the result will be a wave of input price increase around the world. Some months later the US and more clearly the EU will see producer price increase and so consumers may see pass-through increases. This will encourage central banks to continue their march toward normality.

The downside with a return to inflation: Debt servicing becomes more onerous as interest rates increase in response to inflation increases. As such, governments and businesses that stocked up on cheap debt during QE and the near-zero interest rate period will have to squirrel away more cash to pay their interest charges. This will reduce what’s available for investment, thus slowing down growth.

The cycle feeds on itself so it can sometimes stabilize or other events can kick it into maddening swings. We will just have to see what happens. It may depend on how fast inflation growth returns. But for now, that little picture on page A6 looks very nice in a chilly autumn morning.

Normalcy is Slowly Coming Back to our Economy

Love Trump or hate him, the one thing you have to say about the economy since around his election, it is starting to show signs of normality. That is, certain data suggest that firm behavior is slowly moving back toward what is more normally expected and widespread before the financial crisis.

Front page news in today’s US edition of the Wall Street Journal, “Firms cut buybacks as stocks become too expensive“, report that – as the title suggests, stock buybacks are falling again. This is a fall compared to recent record highs, so it is not that we are done with the mischievous side of Quantitative Easing. At a run rate of $500M spend by S&P 500 this year, 2017 will be fourth or fifth highest ever. The growth of which signaled that investors had noting better to do with their money then play with the earnings per share metric in order to pay out bonuses to executives. The negative to all this was the poorly performing capital investment side of the economy.

So here is where the other side of the story adds weight to the early sings of good behavior. The article continues on the inside front cover and there is a graph of capital expenditure. Running at near all time lows for a number of years, it is showing signs of increasing in 2017, This implies new plant, new equipment, new spend on IT and other productivity inducing and growth driving engines. This is what we want to see. It is not that our economy is well, really, it is just that it is a twisted monster. It is to a free market; it is a contorted, overly regulated morass of centrally guided actors. We need to get out from under QA and allow money and investment to find returns that are normal. If we were to couple this with the promised tax reform, we might unleash a new normal for 2018. Let’s see.

EU Intransigence in Brexit Negotiation Echoes Trump: Putting EU First

In today’s US print edition of the Financial Times there was a Comment piece by Jean-Claude Piris, former director-general of the council of the European Union’s Legal Service. It is titled, The Myth and Delusion over Single Market Access. In the piece he argues that Britain does not understand what access to the “free market” means. As Britain seeks a unique relationship, he claims that Britain is ignoring facts and should drop such ideas and focus on what the EU offers. This Comment is political posturing and not in fact true.

His key point is this: “…[T]he single market is based on the free movement of goods, services, capital and people, and choosing among these freedoms is not permitted.” This maybe a rule enshrined in EU law but it is just that. Many other enshrined EU laws, created for its benefit, have been negotiated way – such as France and Germany both violating the budget deficits.

The free market can be whatever it needs to be. It can exist between the free movement of goods and services, and capital. It does not require the free movement of people. That adds a social-cost and social-layer of bureaucracy that is the main reason why Britain left in the first place. It is this argument, that the EU cannot separate the components of this “law”, that will undermine the Brexit negotiations and sits at the heart of the success of the EU.

Before the forerunner of the EU was founded, the EEC, Britain was closely involved in the original concept of the “United States of Europe”. While Churchill may have implied both an economic and political model, he did not imply political union – even though this had been offered in a desperate moment some years before in 1940 to France at the point of collapse under the weight of the German Army.

But just as the original ideas for a barrier-less trade framework was being explored, Britain exited the dialog and so the French and the Germans continued the work. It was still mostly an economic model – but Britain’s withdrawal from those early stages were fatal. The EEC formed up and without Britain to act as a counter weight, France and Germany – for different reasons – pushed forward with ever greater economic and creeping-political alignment.

So it’s disingenuous for EU leaders and others to say what the free market is and is not. All is possible. It is purely a negotiating ploy to try to trump an argument. It is no different than saying, “Put EU First” just as Trump says, “Put America First”. No different.

Warning Noted Re Germany’s Recent Election

William Gibson of the WSJ wrote on Sept 26th in the  WSJ (see The Populist Wave Reaches Germany) an Opinion piece that neatly calls out the major issues now liberated in the recent general election that apparently awarded Chancellor Angela Merkel another four years in office. Mr. Gibson goes beneath the headlines to highlight what are actually disturbing issues.

The news that masks the issues suggest that the share of the popular vote won by the ruling coalition dropped from two thirds in 2013 to just over half. So far, ok. But as a result of declining popularity of the classic parties, the center-left Social Democrats have announced they will not participate in the next government. This is where issues emerge.

To creat a coalition this means Angela Markel has to work with either the Greens and the Free Democrats, or she and her party lead a minority government that limps along one parliamentary vote at a time, aligning with any party that works with her decision at the time. The bad news is the Greens are demanding the phase out of the internal combustion engine; the Free Democrats are skeptical of an ‘ever deeper’ EU. Their leader wants to phase out the European Stability Mechanism. All told its a deal with the devil or devils.

If that was not enough, there was a 7.9-point gain by the Alternative for Germany, or AfD, a far-right populist party. The AfD is incredibly the third largest party in Germany, and second largest in the old East Germany. This is more than incredible; this is significant and could be a sign of great and growing dissatisfaction. We all need to keep on guard. This situation can easily and quickly, and quietly, shift further.

Is Warren Buffett Really That Bad?

I read with interest the Economics piece on Wednesday this week by the FT’s Robin Hardin titled, “How Buffett broke American capitalism“.  It was wrong on so many levels and I figured was a slam on one who many hold up as a scion of industry.

First Mr. Hardin praises Mr. Buffett and reminds us of his business acumen- creating wealth out of situations where it does not appear to exist. But then he suggests that Mr. Buffett has a dark side: Buffett seeks to “avoid competition and minimize capital investment in the real economy”. This is a description of darkness, it seems. What does it mean?

The author refers to the growing set of work that suggests out US economy is operating with diminished competition. At the same time corporate profits are running at near all-time highs and capital investment is running at historically low levels. These are all reasonable well known ‘facts’ but are they connected to what Buffett is doing, or is what Buffett doing causing any of these? Does Buffettism have a dark side?

Apparently price mark-ups are increasing over the years and as such contributes to growing margins and so profits. During the recent period capital investment is down- if you have read my blogs regarding the abysmal performance of US productivity (even IT-based productivity) you would know this. Mr. Hardin says hear conditions are central to the success of Mr. Buffett.

Apparently folksy Buffett seeks to ‘widen the moat’ which is code for looking for businesses that have little competition or driving business to do things to distance themselves from their competition. This is not darkness; it is sensible. What the article author is conflating is what is happening in the industry. Mr. Buffett has about the same number of large competitors. What our economy lacks significantly is the turn over in smaller and midsize firms they drive creative destruction and reallocate assets to efficient uses. Yes, there is a lack of completion and innovation from small start-ups. Than Uncle Sam and the federal government and excess regulation and ineffective tax systems for that. Buffett is not dark- left and right leaning politicians are the issue here.

The the article takes another turn. Apparently Mr. Buffett tends to take out all the cash of his acquisitions and jack up the prices. This leads to increased profits and lower capital investment. Go ask any CIO or CFO or treasurer about why firms spend money on capital investment. This is not about economics, it is about financial management. Money seeks money. More money seeks higher returns. If you have not noticed two factors are at play here:

  • Near zero interest rates, even negative interest rates
  • Massive quantities easing whereby trillions of dollars (and Euros) are seeking yield in low-yield market

So CFOs and CEOs have gorged themselves in cheap debt to help increase stock buy-backs to drive EPS (to meet bonus targets) which is quite rational if ‘dark’. The choice was an unproven or unaccountable risk in a long term capital project. Why invest in a 5-year risky investment in plant and machinery and R&D if you can instead just acquire the competitor? That is rational, not dark. And the hand that makes this mess possible is not invisible- it is Uncle Sam again.

Mr. Hardin simply suggests that Buffett buys his way into monopolistic firms and profits. Mr. Buffett is not dark. He is simply playing the cards our dark politicians are playing. They know least about how the world works; they know most about how to retire millionaires with free health insurance for life. What’s wrong with this picture?

UK Election Results Capture Political Schism

In under two years since the country stunningly voted to leave the EU, the same electorate shifted yet again and leant away from the idea of a clean break with Europe and threw the whole thing now into chaos. The youngest of voters sided with Labour, who were selling polices in a throw-back to those last seen in the 70s that, if followed, would lead the country to financial ruin. Corbyn’s plan is not even realistic; yet the youngest among us just have no memory of such irresponsibility. Only the old do, and so they voted Conservative.  

Now hostage to a 10-seat minority of the DUP, Theresa May will be saddled with a back-seat driver at negotiations with the EU. Decision making responsibility will not fall to May; she will have to keep ‘calling home’ to get approval.

Worse of all, the result of this election shows how the entire political system is corrupted. We have the worst of both worlds: a disenfranchised and ignorant electorate (e.g. Most of the young) that falls for platitudes and made-up promises. Of course, the left calls such things as false truths or fake news if the right puts such things out.

Britain will now have a much riskier time with Brexit. All we can hope for is a bank run that requires a bail-out or for the IMF to drop Greece ‘in it’ and a run on the Euro. It’s a matter of time. But now we need it sooner rather than