Stuff that caught my attention (STCMA) – 15th February 2019

Who would have thought that ‘The Economist’ would be forced to write a leader on the love of the millennials for socialism. I think, once again, the diagnosis is correct. But, the solutions are hackneyed. Capitalism has gone to extremes. Share buyback, financed by debt, and its brazen link to executive compensation are just an example.

Pity that an astute observer like James Mackintosh twists himself too much to exonerate or minimise share buyback. It is hard to understand how one has to be mutually exclsuive about these things. That is, one can be critical of share buybacks and one can also be critical of the other stuff that he writes. Why does it have to be EITHER/OR?

This is incredible. The story is about how some of the corporate bonds that the European Central Bank bought went bust barely a year later. Had it happened in India, all hell would have broken loose and the Reserve Bank of India would have either had to close down and then be reinvented or the entire management and the Board would have had to resign. But, there is barely an eyelid batted in Europe. They preach governance to us. Read these extracts:

Scores of banks and bond investors were freely lending to investment-grade rated companies on not particularly onerous terms back in 2016. Yet the ECB determined that jostling its way to the front of this queue would boost investment and create jobs. What it did create were immediate pricing distortions, with companies able to issue negative-yielding bonds for the first time — charging investors for the privilege of lending to them. …

This QE bezzle was sometimes dramatically revealed even while central bank bond-buying was in full swing. Months after the ECB bought Steinhoff’s bonds in 2017, it had to dump the position at half face value amid an accounting scandal at the retailer. [Link]

I do not think Indians are paying attention to what is happening in Italy although folks of Italian origin continue to make the news in Indian politics. Mateo Salvini, one of the two Italian Deputy Prime Ministers,spoke about seizing the gold reserves from the Bank of Italy. Again, had the Government in India spoken like this, the so-called elites will have concluded that India was doomed forever.

In the meantime, the other Deputy Prime Minister did meet anti-government protesters in France:

Italy’s Deputy Prime Minister Luigi Di Maio said he met leaders of France’s “yellow vest” anti-government movement on Tuesday, an encounter likely to further test already strained bilateral relations. [Link]

Interesting, isn’t it?

For economists who see ominous patterns in the world of numbers, one figure — 18 — is giving pause for thought. Last year, China, the world’s second-largest economy, accounted for 18 per cent of the global economy — just like Japan on the cusp of a decade of stagnation, and just like the Soviet Union shortly before it collapsed.

“In different ways, the USSR and Japan both stumbled when they faced the need to generate growth from more bottom-up, entrepreneurial, service- and network-oriented activities,” says Arthur Kroeber, managing director of research company Gavekal Dragonomics. “Despite a strong record of bottom-up dynamism, China is now moving in a much more statist direction.” [Link]

That leads to interesting political battles too:

Last month, the son of 1980s reformist leader Hu Yaobang warned that the USSR’s demise was due to overly centralised power and over-reliance on a planned economy, in a pointed swipe at Mr Xi. The son of reformist leader Deng Xiaoping has similarly warned that the country’s aggressive international stance could lead to danger. [Link]

The Free Exchange blog in ‘The Economist’ argues that a world without Facebook will be a better place. It might be hard to quarrel with that, even for FB users.

Macron bubble and protest vote in Spain

Recent French protests at the Fuel tax has multiple dimensions:

France is a high-tax country; but the question is whom does government provide relief – Macron reduced wealth tax earlier; fuel tax affects all; it is also a climate change issue; the vandalism that the protesters engaged in, targeted affluent communities, cafes and boutiques. Macron’s approval rating is one-fifth. 

Gideon Rachman on the Macron bubble that has burst. A rare piece of candour and correct opinion.

Much to reflect on the global angst and anger, manifested in the protests in France and protest vote in Spain.

Recently, Wall Street Journal has gloated that Thomas Piketty’s work on inequality has been discredited by recent research from the American Institute of Economic Research. May be, they are right. I have not seen their work. But, that makes the global angst and anger an even bigger puzzle. What is the motivation?
Wolfgang Muenchau on how the broken plane that led Merkel to catch an Iberian Air flight to go to Buenos Aires for the G-20 summit meeting is an apt metaphor for Europe. I agree with him. [Link]

John Authers

I used to read Jason Zweig regularly. I have slipped now. Have not kept up with him lately. But, I do read John Authers. He is probably the most thoughtful market commentator writing currently. He was with Financial Times and he has moved to Bloomberg.

Without exception, his columns make you think. In more recent times, I will single out two pieces:

(1) ‘Don’t discount China’s role in the stock sell-off’. He is arguing that China’s economic weakness could be one underlying factor. Perhaps, he might have contradicted himself in the following piece where he writes about investors looking for ‘excuses’. He too might be looking for ‘excuses’ when he attributes a market move of a single day to a larger issue. There is a difference between catalysts and reasons. The reason for market crash: they are too expensive. They just cannot levitate at these levels. Expectations have gotten far ahead of reality. Period. No other reason needed. Everything else is a catalyst for this cause to create the effects.

In any case, I was more impressed with his analysis of Brexit.  He is absolutely right that ‘remainers’ cannot put the genie back into the bottle. He does not say it in so many words but things can never go back to being the same, even if a second referendum were held and it results in ‘Remain’ vote winning this time:

A second referendum seems more likely than it did. A lot has happened in the last two years, and much has been learnt. It seems reasonable to put the question again. But there is a real risk that this would result in a deeper nightmare scenario.

A second referendum might be as close as the first. A narrow victory for “Remain” would leave the country in the EU and almost half of the country with a lasting sense of injustice. A repeat of the first result would leave the country no further forward. Uncertainty would rise during the process. If the polls suggested that the country had now overwhelmingly turned in favor of staying in the EU, this calculation would be different, but there is no such evidence. [Link]

This reminds me of something that I tend to forget: sometimes, we cannot reverse certain decisions, even if we technically reverse them. Once the objective conditions have changed for good, it is impossible to restore them. So, some policy decisions cannot be reversed, even if we are open-minded about evidence and are prepared to swallow pride and reverse them. That puts the onus on getting it right the first time and also teaches us to be humble about unintended consequences and uncertainty in general.

While on the topic of Brexit, you should read Mervyn King’s op.-ed. too on the topic. He asks the UK Parliament not to endorse the deal (or, no-deal) that the British PM has arrived at. He says it is a ‘heads I lose; tails you win’ deal that UK has given the EU. It is a bit hard to sympathise with the plight of the Brits. I am reading ‘The Indian summer: the secret history of the end of an empire’. What one learns makes it hard to feel sympathetic for their travails now.

Apart from that, Mervyn King states publicly what we all know about the European Economic and Monetary Union:

the political nature of the EU has changed since monetary union. The EU failed to recognize that the euro would demand fiscal and political integration if it was to succeed, and that countries outside the euro area would require a different kind of EU membership. It was inevitable, therefore, that, sooner or later, Britain would decide to withdraw from a political project in which it had little interest apart from the shared desire for free trade. [Link]

(2) The second recent John Authers’ piece that I liked is the one titled, ‘Behind the Market Turmoil Lies Nothing But Excuses’. These conclusions are valid:

My best guess is that people were in need of an excuse to buy bonds Monday, catching others in a “short squeeze,” as many had been betting on higher bond yields. Plenty of others wanted to escape the stock market with gains while they could, and that carried on until prices had fallen enough to trigger the algorithms to buy stocks.

After years of central bank quantitative easing, there are lots of positions in markets that make little sense. Their holders have been awaiting for excuses to unload them. Keep tuned to see whether there really are convincing reasons to buy bonds or stocks. This week has been a litany of excuses. [Link]

Searching for fundamental reasons for market action is futile, especially for a market that has been rising for so long on the back of enormous leverage-based stock buyback aided by extraordinary global monetary accommodation. It simply had to end.

The return of robber-barons?

I receive the NBER digest every month and the papers that the Digest features are almost always very interesting. In the October 2018 Digest, I came across this paper:

Are EU Markets More Competitive than Those in the U.S.? 

Since 2000, gross profit rates in the United States have risen and industry concentration has soared, but these trends are not found in the European Union.
Until the late 1990s, most U.S. markets were viewed as highly competitive relative to their international counterparts. Many European countries implemented U.S.-style free market regulatory models during this time period. 

In How EU Markets Became More Competitive Than U.S. Markets: A Study of Institutional Drift (NBER Working Paper No. 24700), Germán Gutiérrez and Thomas Philippon argue that over the last two decades, U.S. markets have gradually become less competitive, and that, because this trend was not echoed in Europe, European markets today are actually more competitive than those in the United States. In many cases, the EU markets exhibit lower levels of industry concentration and excess profitability, as well as fewer regulatory barriers to entry.

The researchers find that starting around 2000, gross profit rates in the United States began to increase while the labor share declined. These developments are much more muted in the EU. A similar trend is observed in measures of industry concentration.

The researchers explore whether industry composition drove the divergence in concentration. They consider whether the emergence of high-tech industries drove the broad increase in concentration observed in the United States. They discount that explanation, noting that “the rise in U.S. concentration since 2000 is pervasive across most sectors, just as the stability/decline in EU concentration is.” Industries that experienced significant increases in concentration in the United States, such as telecom and airlines, did not experience parallel changes in the EU.

In the airline industry, the researchers find, the “rise in U.S. concentration and profits closely aligns with a controversial merger wave that includes Delta-Northwest (2008), United-Continental (2010), Southwest-AirTran (2011) and American-US Airways (2014).”

They suggest that the divergence in market competitiveness between the U.S. and Europe is related to the powers granted to EU regulatory institutions at their inception. They note that both the European Central Bank and the Directorate-General for Competition were given more political independence than parallel institutions in the United States and thus have been able to pursue more aggressive antitrust enforcement in recent years. In the U.S. between 1996 and 2008, they write, the Federal Trade Commission “…essentially stopped enforcing mergers when the number of remaining competitors is 5 or more.” 

In all areas of antitrust the researchers find decreasing enforcement in the United States and increasing enforcement in the EU. The Directorate-General for Competition is more likely to pursue “abuse of dominance” cases than is the U.S. authority, and financial penalties in cartel cases tripled as a share of EU GDP between 2000 and 2016.

The decline in U.S. market competitiveness has had meaningful consequences for U.S. consumers, the researchers point out. Broadband internet prices in the U.S., for example, are significantly higher than in the EU, where the telecom industry is less concentrated. 

They buttress their case for the comparative lack of political independence of U.S. regulatory bodies by noting the higher levels of both lobbying and campaign contributions in the U.S. than in the EU. Political campaign contributions are 50 times higher in the U.S. than in the EU.

Source:The NBER Digest, October 2018

It is often assumed that a capitalist economy is a competitive economy. But, it need not be. Is Capitalism synonymous with competition? In theory, it is. In practice, it is not. The guy with the most market capitalisation wins? Is that capitalism?

Sarah O’ Connor’s piece in FT on how big companies are pushing governments around confirms why market concentration rises. Governments are doing the bidding of companies and not that of real markets. Pro-business is not pro-market. Pro-business is anti-competition and ani-consumer. Even anti-society.

‘The Economist’ now suggests or describes how labour unions are regrouping using technology to re-establish themselves or how technology is allowing workers to regroup themselves. Technological developments might have led to the erosion in their power base. Funny that ‘The Economist’ does not include globalisation and the offshoring of jobs as one of the things that led to the erosion of the powers of labour unions. In any case, it is good for capitalism too that labour unions are coming back.

May be, this is what is needed for the rising tide of market concentration in America to be reversed.

Amusing and priceless

This is the amusing stuff:

“Juncker vows to turn euro into reserve currency to rival US dollar”

He must pay close attention at least the topline results of the PEW Survey I had blogged on earlier.

A quick recap:

Underneath Mr. Macron’s pro-European rhetoric, the French people are only closely behind Italy in their distaste for the European project. Politicians do not command much trust. The public is confused and worried on immigration. Distrust of media is rather high as it is the case with financial institutions.

(2) This is priceless stuff:

“Aung San Suu Kyi defends verdict against Reuters journalists”

This underscores the ‘free lunch’ of being a ‘Liberal’ outside the government and how difficult it is to govern as a ‘Liberal’. Indeed, there is an inherent contradiction being in government and being Liberal.

Summer of discontent in China and Europe

Nikkei Asia Review had some excellent articles on Xi Jinping’s political troubles this summer. He is not executing the trade war well. All the media pundits who ‘egged him on’ cannot really help. The simple math that Trump relied on – I import more from you than you import from me and therefore, I can hurt you more with my tariffs – seems to have eluded many complicated economists and pundits. The summer chastisement of Xi by party elders therefore makes for interesting read. You can read them here, here and here.

This captures a lot of things:

The revised regulations stipulate the importance of “resolutely upholding the core status of General Secretary Xi in the Chinese Communist Party Central Committee and the entire Party.” This sentence holds significant meaning and marks a step forward for Xi. Earlier, the party had only talked about “resolutely upholding the Central Committee with Xi Jinping at the core.” The revised disciplinary regulations strengthen the wording regarding “core,” giving the impression that Xi, not the party’s collective leadership, is being highlighted. Now anyone who makes light of Xi faces punitive action. [Link]

South China Morning Post has a story on how it is not just trade but even Chinese investments that are now threatened because the rest of the world has wisened up.

Some interesting and unresolved long-term dilemmas crop up in the tension between European Union and Hungary. The European Parliament has censured Hungary. The censure motion got the required two-thirds majority. But, does it smack of hypocrisy and inconsistency? Hungarian people had voted him back to office just few months ago with a bigger mandate. He is pursuing policies that he had done before and which the voters have approved. So, is the European Parliament censuring him for being faithful to his people’s preferences?

Interestingly, heard a talk by Dr. S. Jaishankar in Singapore last afternoon. He was India’s foreign secretary. He said that the alliance between Italian Deputy PM Matteo Salvini and Orban of Hungary was the talking point of his meetings in Europe two weeks ago.

A comprehensive survey of people’s attitudes towards public institutions like military, parliament, financial institutions and the media, towards immigrants, etc., was published by Pew just two months ago. Europe is conflicted. For example, majority in many countries say that immigrants contribute to economy. But, the vote for the question of whether immigrants increase terror risk runs very close. Germany, in fact, has a net positive score. That is, the proportion that says immigrants increase terror risk exceeds those that say that immigrants don’t increase terror risk by 9 percentage points, followed by 4% points in Italy. Surprisingly, of the other countries, Sweden has the lowest negative differential: -6%.

On immigration, one has to interpret positive sentiments with a bit of scepticism. Respondents want to project themselves as open-minded. But, the truth is that negative sentiments and scepticism run deeper. The proof of the pudding is in the way the vote has swung in Sweden and in the rising popularity of AfD in Germany. No wonder Europe experienced a heat wave this summer.

Attitudes towards the European Union’s dominance in national policy discourse – more power should be returned to national governments – is uniformly negative. Indeed, 73% in the UK feel that more power should be returned to national governments. Even more than in Italy. Those who want to put Brexit to a second vote should note.

Financial Institutions are not trusted (either not at all or not too much) by a substantial majority in Italy, Spain and France. It is 46% in Germany and in the UK. But, distrust of media is uniformly high in all countries (not trusted at all or somewhat not trusted) with the exception of the Netherlands, Sweden and Germany. In the trust quotient, media scores lower than financial institutions! That is some achievement.

The lesson is that the so-called centrist and mainstream politicians and elites are failing in walking the fine line between acknowledging as real people’s perceptions and grievances and in appearing to be legitimising extremist political parties. The challenge lies in doing the former without doing the latter. It takes a lot of hard work, deft communication and repetitive messaging along with tangible measures on the law and order front, etc. It is hard work and, out of laziness, many mainstream politicians are taking the easy out: lumping all sentiments as xenophobia. So, they turn it into a lose-lose situation. They lose their people and they lose to their more extreme alternatives.

Weekend Levity and Serious stuff

Volkswagen has a ‘Head of Integrity’ [Link]

Mr. Karan Thapar chides the Indian government for not accepting the offer of aid from the Government of the UAE. The newspaper that published his article has a good response.

Amrit Dhillon in ‘Business Standard’ on the ‘End of #metoo’ [Link]

Recycling India’s floral waste. It will be very good if it happens. [Link]

Rujuta Diwekar wonders why chocolates, potato chips and cola have not been called ‘pure poison’ while coconut oil has been? Valid point.