The French Ambassador to the US makes sense

The French Ambassador to the United States of America stepped down from his office on 19th April 2019 and he gave a blunt interview to ‘The Atlantic’. Well worth reading. (ht: Nandakumar). Sample these:

I don’t think that anything irreparable is happening in the U.S. I don’t know what would have happened in France if Marine Le Pen had been elected, because our institutions are much weaker.

Let’s look at the dogma of the previous period. For instance, free trade. It’s over. Trump is doing it in his own way. Brutal, a bit primitive, but in a sense he’s right. What he’s doing with China should have been done, maybe in a different way, but should have been done before. [Link]

… The case of Trump for me, it’s not so much Donald Trump, it’s not so much a person, but it’s a political phenomenon…..

…. For me, the identity crisis is the symptom, but it’s not the disease. In France, we optimistically believed that Macron’s election meant that we had found the recipe against populism. He was a new leader, with new ideas, elected on a centrist platform. Apparently we were wrong. ….

…. There is a misconception about Trump which is American and French: saying Trump is an accident, and when Trump leaves power, everything will go back to business as usual. That’s the dream of Washington, D.C. [Link]

McKinsey in Puerto Rico

My friend Rohit Rajendran had shared this long piece from ‘The New Yorker’ on the work of McKinsey in Puerto Rico, a state with restricted ties to the United States mainland.

While it is tempting to conclude that there are plenty of crosshairs and conflict of interest in McKinseys’ work, in this particular instance, the mess that brings McKinsey in, in the first place, was not created by McKinsey or its advice. One has to record that.

The article is full of innuendoes on McKinsey’s real and perceived conflicts of interest but it also gives considerable newsprint to the McKinsey pointman in Puerto Rico. That said, Mckinsey Investment Office and its consulting arm need to be far more than legally separate for the allegations of conflicts of interest to be dismissed.

The real requirements for any resolution of a problem as challenging as restructuring an economy are these: reciprocity, restraint and respect. Reciprocity – all sides share in the pain; restraint: it cannot be ‘business as usual’ and belt-tightening is inevitable, at least for a while; respect – for local knowledge, history, customs and culture (school closures, for example, must be handled sensitively and the University – local intellectual body  – has to be your partner).

Reciprocity, it appears, is missing:

When Puerto Rico made a desperate issue of $3.5 billion in junk bonds in 2014, warnings in the prospectus suggested a default was imminent. But hedge funds snapped up the bonds anyway, enticed by a loophole in U.S. law that seemed to prevent Puerto Rico from declaring bankruptcy. It looked as if the bondholders could seize tax revenues or assets belonging to the island and no one could stop them.

The group of creditors with the strongest legal claim — many of them hedge funds — were set to get around 93 percent of their money back, less a haircut than a slight trim. (Meanwhile, a weaker group of creditors, who are mainly Puerto Rican, were likely to lose about half of their investment.)

These don’t pass the smell test or fairness test even if they are legally in the clear. No wonder these financial types are aptly called vultures and they earn capitalism a bad name.

This is where the challenge for McKinsey’s bona fide comes in. On whose side, is it, eventually?

Then, of course, the question of its own fees is there:

The projected overall fees are more than five times what Detroit spent on its $20 billion bankruptcy, previously the largest local-government default in U.S. history, and higher even than the bill for Lehman Brothers, the $613 billion corporate liquidation that nearly destroyed the world economy.

All those fees are being footed by the taxpayers of Puerto Rico, which is far poorer than any U.S. state, with a median household income of less than $20,000 a year.

Reciprocity, respect and restraint?

The fine art of dentistry

“A team of researchers at ETH Zurich, a Swiss university, asked a volunteer patient with three tiny, shallow cavities to visit 180 randomly selected dentists in Zurich. The Swiss Dental Guidelines state that such minor cavities do not require fillings; rather, the dentist should monitor the decay and encourage the patient to brush regularly, which can reverse the damage. Despite this, 50 of the 180 dentists suggested unnecessary treatment. Their recommendations were incongruous: Collectively, the overzealous dentists singled out 13 different teeth for drilling; each advised one to six fillings.” [Link]

This is in Switzerland! nearly 30% of the sample have recommended unnecessary treatment!

An article worth reading, even if a bit worrisome. Good to be alert. With dentists, it looks like you cannot stop with a second opinion. You need a third and a fourth, no matter which part of the world you live in.

‘Has Asian dominance arrived’ and other links

This Bloomberg story tells us that global debt rose ‘only’ USD3.3trn in 2018 to around USD243trn, about three times the global GDP. If you want to know the background to this news, the link is there in the Bloomberg news-story. It is a research note by the Institute of International Finance.

Despite that, President Trump is not happy with Fed Chairman Jerome Powell. He says he is ‘stuck’ with Powell. This is quite wrong and dangerous. I am surprised at US dollar’s resilience in the face of such gibberish.

According to ‘What we are seeing’ (Edition: 22.03.2019), for the first time, globally, the number of 65-year olds has exceeded the number of 5-year olds.

One has to do more detailed work on the claim that Asia has become the world’s largest economic bloc and that its GDP now exceeds the combined GDP of the rest of the world, in PPP $. My simple response is ‘So, what?’. Of course, I could be very wrong here but the obituatry of Western dominance is being written too prematurely. Asia is at very high risk of internecine warfare and the West has a good track record of ‘divide and rule’. I would like to recall my MINT column from nearly four years ago that the 21st century would belong to the West or to nobody.

This blog post from ‘Bank Underground’ (Bank of England blog) says that rising interest rates increase labour share of GDP because productivity might fall faster than wages do. Or, we can add that capital’s share declines faster in an environment of rising rates due to correction in asset prices. Very interesting and important empirical evidence in this. It shows that a reflexive opposition to higher interest rates by the likes of, say, the Economic Policy Institute is wrong.

Tribal war of hypocrisy and not morality

The paragraph below in the article by Rana Foroohar sums up the hollowness of the Democrats’ idealism and ‘moral outrage’ rathr well:

What’s more interesting and also murkier is why Democrats would list Kraft-Heinz as their most favoured company. As both myself and my colleague John Gapper have written, this is a corporation that exemplifies many of the most problematic aspects of capitalism today, including short-termism and financialisation. And that tells you a lot about the challenges for Democrats today. The Clintonian move towards a “market knows best” approach, which dominated the party’s approach to economics until quite recently, created many of the legislative changes that have driven companies like Kraft-Heinz into the ground — not to mention helping to brew up the financial crisis and create a generation of “socialist” millennials. [Link]

What we are witnessing is not a battle between the ‘ideal’ and the cynical nor between the ‘ethical’ and the ‘unethical’. It is a tribal war between two sets of competing interests, cultures and values. If anything, for one side to clothe itself in the vestiges of morality, ethics and higher values is downright hypocritical. At least, with the other side, what you see is what you get.

SOX and Fed conscience

Record high in the semiconductor (SOX) index (with rapidly slowing end markets for semis and collapsing industry fundamentals)! Extreme (manic) speculation is back. Does the Fed have no conscience? (that’s a rhetorical question). [Link]

That was a tweet by Fred Hickey. I learnt about Fred Hickey from the Global Investment Strategy Weekly of Albert Edwards. Fred Hickey’s tweets also pointed me to the rather shocking slide in the quarterly results of Micron Technologies. See their press release here.

As per this article by Martin Wolf, we learnt that the Federal Reserve has done the following:

We learnt this month that the US Federal Reserve had decided not to raise the countercyclical capital buffer required of banks above its current level of zero, even though the US economy is at a cyclical peak. It also removed “qualitative” grades from its stress tests for American banks, though not for foreign ones. Finally, the Financial Stability Oversight Council, led by Steven Mnuchin, US Treasury secretary, removed the last insurer from its list of “too big to fail” institutions. [Link]

It is a good piece. Worth reading.

This is the actual news-story that Martin Wolf refers to, here.

STCMA – 22nd March 2019

Buying Gold and being bearish stocks is the ‘Trade of the Century’ according to a hedge fund. Personally, I hope they are right.

John Authers defends Jerome Powell for shutting the door on any further rate hike in 2019. I beg to differ. Even if he did not mean to raise rates, there was no harm in keeping markets uncertain. If the Federal Reserve Chairman was worried about a recession, he should also be worried about a stock market that betrays no sign of it. This divergence will make the ultimate pain for the economy all the more longer and greater.

As always, established and prominent figures are dovish in their criticisms of a dovish Fed. Here is Mohamed-El-Erian.

The headline of this article says it all: “Over 80% engineers unemployable for any job in knowledge economy”. If one wished to download the underlying report featured in the article, you can find it here. Have not read the full report yet.

While Martin Feldstein is worried about the looming federal debt crisis, John Authers has a good story in Bloomberg on the 12th March about the corporate debt bloat in the ‘here and now’. The story has many good charts and good arguments (ht Rajeev Mantri). But, John Authers fails to evidently connect this story to his latest missive on the Fed signalling no rate hike. A central bank pre-emptively foregoing its rate increase options does nothing to bring down corporate leverage.

Thanks to my IIM batchmates K.N. Vaidyanathan and Subramanian Sharma, I came across this ‘tweet storm’ or ‘tweet thread’ by Jawad Mian. It is equal to a full credit course on market valuations. It is a salutary lesson in investing at today’s prices.