Category Archives: Capitalism

Economic Bullies Are Fattening Up: Where are the Monitors?

When at middle school, some few years ago now, monitors would troll the break-rooms, corridors and playgrounds. If a bully or bully-like behavior was observed, a faithful monitor (sometimes of a more diminutive size) would wade in to neutralize the issue. In industry, economic bullies are getting larger and more powerful and the monitors are missing in action.

What we knew was happening in America is now clearly happening in the UK. In this week’s Economist there is an article titled, “More money, more problems” in the business section. The article reports on new research that suggests industry concentration is well established and getting more pronounced; large, dominant firms are getting larger and more dominant. As a result, a greater proportion of economic profits are being hovered up by the bullies and the rest of each industry is sucking on less and less.

If the market was operating efficiently and freely, the opportunity for start-ups to innovate and create the ‘next big thing’ would help foster creative destruction. But public policy has played a key part in (over?) regulating how business start and operate; and lobbying is running rampant such that, more clearly in America, firms with deeper chests can invest in lobbyists to ensure their masters’ interests are protected; putting more pressure in the smaller guys. The monitors have become the employees of the bullies.

There are implications a-many, some reported in the Economist article, touching innovation and its diffusion (or lack thereof), wage rates, productivity and employment. Larger firms tend to achieve higher degrees of economy of scale; this is a large playground where automation can help drive productivity thus helping the bullies get stronger. Other data from the OECD and other sources suggest that diffusion of knowledge and ideas, needed to help firms share in productivity-inducing work, is slowing down between innovators and followers; in other words between those who already have, and those that already don’t. This reinforces industry concentration or the barriers around the OECD’s ‘frontier firms’.

Employment opportunities and where we collectively go to work changes; and who is able to pay a higher wage becomes self evident. So all in all the controlled environment we live in is a far cry from the free market that was operating 20 or more years ago.

It seems the pundits feel that we need more competition. Can we legislate for more competition or can we undo the constraints that put us where we are today? I think that what is needed is:

  • Less regulation overall and particularly on small and medium business, spanning financials, hiring practices, IP development, and so on
  • Increase investment in primary R&D
  • Increase vocational collaboration with education and industry
  • If you want more regulation, point it at the lobbyists: reduce their spend and power
  • Tinker with the tax code to help motivate investment in smaller firms and Tomory for it, tax larger firms more.

But these items are not even popular topics in politics today. It’s much more likely we will talk about fake news and Russians and Facebook, than economics, growth and hard work. Oh well.

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The Debt Chickens Are Coming Home to Roost

A story it today’s Us print edition of the financial times highlights a building ‘bubble’ of disquieting proportions. The article, ‘Britain’s Pizza Chain Boom Faces Debt Reckoning’, highlights how a large number of restaurant chains have been snapped up over recent years using debt. This might be by a private equity firm or a leveraged buy-out. In either and other cases, many acquisitions were executed using cheap debt which was facilitated by central bank policies such as near-zero interest rates and quantitative easing (QE), both of which massively distorted the price of corporate bonds and debt. Add to this public policy and pressure on banks to increase loans to help drive growth, you can see signs of a perfect storm.

The UK example is specific, but the problem is wide and applicable to most developed economies. The US has just come off a long-run marathon of high and record levels of corporate acquisitions, again much funded by cheap debt. There must be many organizations hanging by a thread, just waiting for interest rates to nudge up resulting in unsustainable debt burdens and interest payments. Unless growth drives the top-line of these businesses at a faster rate, the chances are many such firms will go to the wall.

This situation was created as an unintended consequence of near-zero interest rates for such a long time and massively price-distorting quantitative easing. Though most governments have ceased buying sovereign and corporate debt, the damage is done. Massive, trillion dollar, balance sheets at central banks need to be unwound in such a way as again, not upset the market. The act of creating the balance sheet did upset the market. In reducing their balance sheets, central banks will do it again.

And the sad part about all this, as it will play out? Smart investors with lots of money and a high risk-tolerance will hedge against such business failures and reap huge rewards. The rich investor-class will get richer, and the poor will just lose their jobs or otherwise miss out. Politicians will have a field day, calling out the failure of capitalism. Of course, it’s not a failure of capitalism since central banks and their policies are not part of any capitalist model: central bank operations are closer to a socialist model where the few take decisions to ‘help’ the many, as if they know better and how to help us.

Oh well, such is life. Just buckle down and wait the storm. The debt chickens will soon be home to roost. Maybe not by this Easter but expect them home by next year.

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?