A (t)horny issue and other links

The Swiss sure have their problems!! The rest of us will only be too happy to trade ours for theirs. Referendum on cows’ horns is coming up in Switzerland! [Link]

Augustin Carstens called the bitcoin ‘a bubble, Ponzi scheme and an environmental disaster’ way back in February. Well said [Link]. The value of bitcoin has collapsed and I suspect that the benefits of ‘Blockchain’ are vastly overstated.

Paul Tudor Jones sounds the alarm on corporate credit in the United States:

If you go across the landscape you have levels of leverage that probably aren’t sustainable and could be systemically threatening if we don’t have . . . appropriate responses [Link]

IMF had chipped in with its own (eloquent, doubtless) warning on leveraged loans, little realising its own culpability on the matter. It warned central banks against raising rates ‘prematurely’ from 0.0%. The truth was that in 2015-16 the world was in dire straits. Hence, their warnings, perhaps, on premature tightening. But, then, it means that the programme of zero short-term interest rates and QE (which held down long-term rates) were a failure. Why persist with them? So, they created the mess that they are warning against now!

Did they earn their stripes?

Nov. 14 2018 — Stripe Inc.’s $245 million capital raise was the clear highlight of U.S. financial technology fundraising in the month of September, weighing in at more than four times the next-highest raise. Stripe’s massive round even stood out in comparison to other sectors, ranking in the top 15 of all U.S. private placements during the month.


The latest raise values Stripe, a payments company founded in 2009, at $20.25 billion on a post-money basis. The most recent valuation is a massive increase from November 2016, when a $150 million infusion valued the company at $9.15 billion. But on a percentage basis, an even bigger jump in valuation came from May 2012, when the company was valued at about $100 million, to January 2014, when its valuation skyrocketed to $1.75 billion. [Link]

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.

Recent China links

From the story in FT on how fracking in China is leading to polluted water:

Earlier this year, a resident was detained and was still living under de facto house arrest because of his involvement in collecting evidence of pollution and sending water samples to Beijing, according to township residents.

From the story in New York Times on the internet conference in China:

The company has also started working with the authorities in Xinjiang, Mr. Wang said. The goal? To have a database of the irises of all Xinjiang residents within two years, he said.

Chinese banks don’t quite lend to private companies but things must be getting dire and difficult for the economy:

China aims to boost large banks’ loans to private companies to at least one-third of new corporate lending [Link]

Wow! Xi Jinping calls for a level playing field for the private sector! [Link]

‘Game of Chickens’ in the South China Sea:

The American concerns about Beijing’s naval modernization are reflected in a fictional account titled “How We Lost the Great Pacific War,” written by the director of intelligence and information operations of the Pacific Fleet, Dale C. Rielage, and published in a Navy journal.

The article portrays a possibly dark outcome for the American Navy in the Pacific.

Written in the form of a military dispatch from the year 2025, the author laments how the Navy had to “cannibalize aircraft, parts and people” and wonders if it will be able to “claw” its way back in the Western Pacific.

At the heart of this bleak prognosis is an assumption that the United States did not act aggressively enough in challenging China when it still could.

The article describes how an admiral, at the start of his term as chief of naval operations, saw that the Americans’ margin of victory in high-end naval combat had become razor thin — and would continue shrinking. “At the time, he assessed that the margin, though thin, remained ‘decisive.’ In the years following, however, the margin shifted imperceptibly to favor the other side.”

The article never names “the other side,” but makes clear: it is China. [Link]

Peter Nevarro warns Wall Street not to interfere in China-USA trade matters. Quite:

“The game that China has played — and they played people in the Bush administration like a violin — is to do the tap dance of economic dialogue,” Navarro said. “That’s all they want to do. They want to get us to the bargaining table, sound reasonable and talk their way while they keep having their way with us.” [Link]

Then, this incredible story in FT on how China is minding its financial stability risks and that the United States is not! To me, these two lines take the cake:

To counter the economic drag that trade war-related fears were creating, China has loosened its monetary policy in recent months. Its earlier belt-tightening gave it some wriggle room to do so. [Link]

Must read Mike Pence

It is hard for me to pick out the important parts of the speech of Mike Pence, America’s Vice-President, on China, delivered nearly a month ago. It is a MUST READ. I agree that it could be as significant as the speech by Churchill calling the Soviet Union as the country behind a ‘Iron Curtain’.

Brahma Chellaney says that Sierra Leone is the next country to pull out of the Belt and Road Initiative and that India is right to have stayed out of it.

America expresses concern over China’s attempts to take over Taiwan by non-peaceful means. Fair enough.

China’s manufacturing PMI and export data were weak [Link]

Today’s news links

The re-election problems of PM Modi [Link]

Suzuki commits to ‘Make in India’ with electric vehicles [Link]

Suzuki will test run its first electric cars in India in October! This news is from September. I do not know if it happened [Link]. If it did not, then we know how to read the previous link, though.

Japan is still struggling to come to terms with its relaxed foreign worker visa policies. The resolution passed but after a lot of doubts and scepticism were expressed [Link]

Philippines compromises (or, attempts to) with China on South China Sea [Link]

Two well-known Chinese economists-critics of China’s economic growth model actually blame China for the trade dispute with the United States. [Link]

A story in FT on how Mauritius still makes its revenues through assisting tax evasion although the African state confirms that it is compliant with all tax-evasion international laws and treaties. Indeed! India has scrapped its double-taxation treaty with Mauritius. Full capital gains tax will apply on capital gains earned by Mauritius-registered entities from 1st April 2019. Let us see.

China allows share buybacks to boost stock market – when in doubt, ape the West and yet claim superiority to Western model of economics and finance!

American college undergraduate students are now ambivalent on capitalism. Wall Street Journal is alarmed! While most of the points made by James Freeman are valid, he would have been more correct had he also exhorted capitalists to introspect on why things have come to such a pass.