Economic growth is not an entitlement

That is the title of my column in MINT today. I call the downward revision to global growth forecasts by the International Monetary Fund good news. Spontaneous economic growth ended after about twenty five years since the end of WW II. After that, it has been mostly sporadic. But, financial leverage has propelled economic growth. That is why there have been so many attendant problems  – climate change, environmental and ecological damage, workplace stress, mental health issues for individuals and for families, income and wealth inequality, etc.

Hence, a period of sub-par economic growth for the world economy would be a bitter but necessary medicine for the world economy. Yes, it won’t be easy. But, when the body has become dysfunctional and unhealthy, how can any medicine cure it without side effects and painful and long side effects, at that?

Elsewhere in the column, I wrote that India needs an adult-like conversation on its economy but that it lacks a quorum. It is true of global economy too.

Read my column here.

Two classic understatements

China’s policies have focused on addressing the economy’s significant and longstanding financial vulnerabilities. But the shift in priority toward stabilizing growth may mean slower progress on deleveraging and heightened medium-term risks for China and the entire region. – Emphasis mine [Link]

This one from Barry Ritholtz:

You can have a committee of 10 geniuses that proves collectively to be a moron [Link]

The quote is attributed to Cliff Asness by Barry Ritholtz.

What did America do between 2014 and 2016?

My column in MINT on Tuesday 9th October:

Bloomberg Business Week broke the story of the “Big hack” — how a tiny chip (the size of a pencil tip or a grain of rice) was embedded in servers bought by America’s big technology companies on 4 October. A week earlier, The New York Times wrote that the Chinese government had issued instructions to stop the reporting of negative news in print media and online forums, etc. The directive sent to journalists named six economic topics to be “managed”. Two of them carry interesting implications. One is “local government debt risks” and the other is “the risks of stagflation, or rising prices coupled with slowing economic growth”. It is reasonable to assume that these two remain live issues or risks in China. However, China is not alone in wanting to suppress reality.

I have long been puzzled by the turnaround in the global economy and asset markets in 2016 when it appeared that the bottom was about to fall off for the global economy and asset markets. Everyone assumed that China’s credit taps were opened and that the world was saved. The truth is slightly trickier than that. There are reasonable grounds to suspect that the US had fudged data from 2014 to 2016 to prevent official data from showing an economic recession and that the stock market too was manipulated. The supporting arguments follow.

Between the summer of 2014 and spring 2016, stock prices in many markets declined sharply. Stock indices developed by Morgan Stanley Capital International for the European Monetary Union, Asia-ex-Japan, Japan, Switzerland and emerging markets had declined anywhere between 20% and 40% in that period. Emerging market bond spread doubled. However, the S&P 500 stock index traded sideways. Was it because earnings by S&P 500 companies were stellar? No. For about seven to eight quarters from December 2014 to September 2016, year-on-year (yoy) growth of earnings per share’ (EPS) of S&P 500 companies was negative. Quite how the S&P 500 stock index remained stable in the face of a global sell-off in risk assets and contraction in earnings remains a mystery to be solved.

What happened to the real economy in the US? In the same period, industrial production and manufacturing recorded more months of negative change than positive change—both on a month-on-month and on a yoy basis. Capacity utilization declined. Consumer confidence—University of Michigan consumer confidence indices—declined. Import prices—from China and Mexico—recorded declines on an annual basis. Consumer price inflation came down from 2% to around 0%. All these indicators suggested a recession in America. Real gross domestic product (GDP) growth slowed, but there was no recession.

The price of crude oil declined sharply in this period. It must have helped Asian stock indices and corporate earnings since Asia is largely an oil importer. But, as mentioned above, Asian stock indices fell sharply. The balance sheet troubles of oil producers and companies in related industries eclipsed the positive effects of lower oil prices. None of this showed up in American stocks. In fact, excluding oil stocks, the S&P 500 would have been up. Of course, excluding profits of oil companies, S&P 50 EPS might have experienced growth. That might explain the resilience of the index. However, this does not sound right because the rest of the economy was reflecting the strains that the oil industry was facing. But, not the stock market. Why did the US have to do this?

By 2015, had official statistics reflected the slowdown in the economy fully, it would have been a big indictment of the policies pursued since the crisis of 2008. Short-term interest rates at 0% and three rounds of quantitative easing and repurchase of maturing treasury assets could not produce a recovery that lasted longer than six years. It would have been a huge embarrassment to the Fed and would have emboldened the likes of Ron Paul to demand drastic changes to the charter of the Fed and the trimming of its sails. The other motivation is political.

An economic recession and a stock market decline would have sealed the verdict on the Barack Obama presidency and would have effectively nullified the chances of the election of a Democrat as president in the 2016 elections. Perhaps, a Republican victory coming on top of an official economic recession and stock market collapse would have made Democrats unelectable for a long time to come. In the end, they did not succeed because public sentiment could not be manipulated. They were hurting because of the sham recovery. Hence, apart from the traditional Democrat bastions along the coasts, the rest of the country voted Donald Trump to the office of the president.

What are the implications of this? By not allowing the American stock market to correct meaningfully in that period, policymakers have not allowed the pressure valves to function. Pressure has built up as the stock market then began to climb from 2016 onwards. So, the “bottled up” pressure is now immense. Stock market stability followed by a steep ascent since end-2016 means that excess risk had been taken by companies, funds and investors. We cannot pinpoint before the fact where they are. We will all be wiser after the fact as we were, after 2008 only to forget the lessons in short order. Recently, the chief economist of the European Central Bank expressed fears about the degree of leverage in the financial system because of shadow banking. It had taken just 10 years to come back a full circle. A truly bizarre world.

V. Anantha Nageswaran is the dean of the IFMR Business School. These are his personal views. Read Anantha’s Mint columns at http://www.livemint.com/baretalk.

 

First Published: Mon, Oct 08 2018. 09 09 PM IST

Breaking the hiatus: RBI, Michael Pence

I had joined the IFMR Business School as its Dean, as of October 4.  It is located at Sri City in Andhra Pradesh. I arrived at Sri City campus on October 1 and the last week has been a blur. But, blogging is a refuge. I think I had mentioned it once before.

You can watch the interview I gave to ET NOW Television on RBI monetary policy decision on Friday. I was part of a panel. I did not fault their rate decision on Friday. It was a fine call. They took their chances. The stock market appeared not to like it. But, it has fallen the day before too. In any case, it was so rich in valuation that it deserved to fall. Establishing causation for such short-term action when the market was anyway overvalued is problematic. Did the market expect RBI to cut rates or raise rates?

But, I felt that they should have offered more substantive comments on the IL&FS, if not on Friday, but on another occasion.

Before the interview, I managed to go through the monetary policy report and the press statement in the long car ride from Chennai city to Navalur in Kancheepuram District (OMR).

Michael Pence’s speech on China requires careful reading. I had not done so yet. It is an  important and calculated escalation.

We can do without headlines of this nature. The Federal Reserve Chairman does not exist to serve the stock market investors.

 

Soulless capitalism is now global

In the last three years, CEOs’ combined compensation has expanded at a compound annual growth rate (CAGR) of 18.3 per cent, against 13.3 per cent growth in corporate earnings, 4.8 per cent CAGR in net sales and 10.1 per cent annual rise in the total salary and wages bill. [Link]

There are at least seven top executives among listed companies who earn more than a thousand times the compensation of their median employees….The gap at the very top of this ranking was actually higher in this larger sample, with the top executive earning over 25685 times the pay of the median employee.

The top companies in terms of this difference for 2017-18 include information technology, auto and engineering companies.

There are also no women in the top ten list of remuneration multiples for either year. [Link]

The above two are from Indian corporate sector!

Nearly 50% of the US Foreign Direct Investment Income for the United States come from five tax havens. In other words, profits-shifting by US corporations overseas is rampant. [Link]

Gabriel Zucman, Professor at University of California, Berkeley, author of the paper above, has this to say:

If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam. It doesn’t work. [Link]

Check out this discussion of a paper by Thomas Piketty published in April 2018. The link to the paper is here.

Piketty says that both the Left and the Right mainstream parties have been captured by elites – intellectual or moneyed or both. He takes three countries – US, UK and France. So, the only option left for the people is to go with the populists because there is no consideration for their concerns in the mainstream parties of the Left and the Right. It is not about the Left vs. Right but Globalists vs. Nativists. Makes sense.

Instead, both the left- and right-wing parties have come to represent two distinct elites whose interests diverge from the rest of the electorate: the intellectual elite (“Brahmin Left”) and the business elite (“Merchant Right”). Piketty calls this a “multiple-elite party system”: the highly educated elite votes one way, and the high-income, high-wealth elite votes another.

There is a very good summary of the critique of the Piketty paper and other related papers by Thomas Edsall here. But, I personally believe that Piketty is on the ball here, notwithstanding the neglected role of race in Piketty’s analysis, as his critics charge.

I don’t think it is a white vs. black thing in America or white vs. non-white (black or brown). It is about ‘globalists’ and ‘nativists’ as Piketty put it. Globalists are comfortable with racial and religious minorities and immigrants as they see these minorities as similar to them although they are not in economic terms. Far from it. It assuages their guilt at being self-centred globalists, unrooted locally and unconcerned about local issues where they reside.

Thomas Edsall’s NYT article had a link to this very interesting sounding paper, ‘Why Hasn’t Democracy Slowed Rising Inequality?’. The paper is co-authored by four  academics and can be found here. Have not read it yet.

On a related note, the interview with Dani Rodrik, also by promarket.org, a month before the discussion of the paper by Piketty took place is also interesting. In this interview, Dani Rodrik distinguishes between economic populism (‘good’ populism) and political populism (‘bad’ populism).

He defines economic populism, in the context of the United States as follows:

Today in the US, economic populism would take the form of bringing the financial sector down to size, reducing the influence of Wall Street in political institutions, and having much greater regulation of the financial sector. It would mean taking aim at concentrations of power in high-tech and digital industries. It would mean taking aim at our current pattern of trade agreements, which often privilege particular corporate interests and investors. [Link]

Gulzar Natarajan deal with some of the elements of ‘economic populism’, as outlined by Dani Rodrik above, in our forthcoming book, ‘The Rise of Finance – Causes, Consequences and Cures’.

As for market concentration, high-tech and digital power, lest we forget, here is the story of Barry Lynn of (formerly) the New America think-tank who was fired (in 2017) because they had dared mention Google by name:

In the run up to that event, the leadership at New America became very concerned about the fact that some of our work was focused on Google, and they asked us to maybe add different people to the panels, to frame panel discussions in different ways, to give them a heads up, to let other organizations have a say in what we’re doing. That had never happened before and it was very clear that it had to do with Google. Because we’ve done events in which we’ve really hammered Wal-Mart or Anheuser-Busch or Amazon, and there were no problems. But that event, it was the fact that we were mentioning Google by name that got people really upset. [Link]

UNCTAD’s annual report for 2017 presents the evidence for and the consequences of market concentration:

Concentration has increased markedly in terms of revenues, assets (both physical and non-physical), and market capitalization: in 2015, the combined market cap of the world’s top 100 firms was 7,000 times that of the bottom 2,000 firms, whereas in 1995 the same multiple was 31. At the same time, the share of surplus profits grew significantly for all firms in the database, from 4 percent of total profits in 1995–2000 to 23 percent in 2009–2015. For the top 100 firms, the share of surplus profits grew from 16 percent of total profits in 1995–2000 to 40 percent in 2009–2015.

The trend toward concentration, the authors note, has not extended to employment. Between 1995 and 2015, as the market cap of the world’s top 100 firms quadrupled, their share of the job market didn’t even double… [Link]

There is a counter-argument that much of the surplus that accrues to market concentration is not rent but due to technology leadership and productivity. But, it is strange that such critics do not acknowledge that both arguments need not be mutually exclusive.

A former Google Scientist tells Senate to act over Google’s unethical and unaccountable China censorship plan. Bravo!

Finally, this review of Walter Scheidel’s book, ‘The Great Leveler’ is worth a read. I had not heard of the book until my good friend Ajit Ranade mentioned it to me. Walter Schidel, I understand, thinks that violent levelers have been more often the answer to inequality – Four Horsemen’ – warfare; revolution; state collapse; and pandemics – have been the primary mode through which income levelling has occurred throughout history.

Despite overwhelming evidence, this LSE blog expresses the hope that peaceful levelers will achieve the job as they have done sporadically and feebly in a couple of minor instances.

But, let me end this blog post on that hopeful note.

The legend and the myth of Warren Buffett

Fans of Warren Buffett must read these two blog posts. The scales fell from my eyes a long time ago. I am glad that Michael Lebowitz captures the strengths and contradictions of Warren Buffett rather well. Eric Cinnamond is a blogger I like increasingly. It is instructive to read that value investors are tired, very tired. I don’t blame them too. This market cycle has tired me out too. Big time.