Bernard's Top 10: Why do some investors accept such low yields?; Earning US$2.2 mln a day; The slumlords of Queenstown; India's dirty tea leaves; The 'Chairman's flight' Clarke and Dawe; John Oliver

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz. 

See all previous Top 10s here.

My must read is #8 on why all the central bank bond buying is not actually increasing corporate investment much.

1. The coming profit squeeze? - Profits of developed nation companies have increased substantially over the last 30 years, which is one of the complaints of those campaigning to reverse the rise in inequality and the creation of a state-less global elite.

But what if that profit surge was about to be reversed by intense competition from emerging nation companies run by families and Governments who care more about growing their companies than making big profits?

The growth of new global tech firms with massively lower costs and sometimes low profits (Amazon comes to mind) will also pressure profits lower.

That's the thesis of McKinsey in a new report titled: "Playing to win: The new global competition for corporate profits."

The last three decades have seen a trend of rapidly rising corporate profits. Large Western multinationals have been the biggest beneficiaries as vast markets have opened around the world while corporate tax rates, borrowing costs, and the price of labor, equipment, and technology have fallen. Corporate earnings before interest and taxes more than tripled from 1980 to 2013, rising from 7.6 percent to almost 10 percent of world GDP. But this remarkable era may be coming to a close.

Competition is intensifying as hard-charging emerging-market companies go global and technology firms make rapid moves into new sectors. Between now and 2025, the corporate profit pool could decrease from 10 percent of global GDP to about 7.9 percent — practically reverting to its level in 1980, before the boom began.

2. Accepting low yields - One of the surprising things for many New Zealand investors is how low the yields are on assets bought by emerging market investors, and in particular those from China. It's as if they have a completely different investment horizon and investment criteria.

McKinsey Global Institute Director Richard Dobbs talks about this here at The Australian:

“Emerging market players — who by 2025 will represent 45 per cent of the Fortune 500 — are playing by radically different rules and, in many cases, accept a 25-50 per cent lower return than their Western peers,’’ Mr Dobbs said. “Technology and technology ­enabled companies continue to disrupt all sectors, reducing ­profits.”

The powerful new forces of competition — with family and state-owned businesses from the developing world willing to sacrifice margins for scale — could undo within a decade the 30 years of gains multinational company profits have made relative to ­global GDP.

3. 'Come to our beautiful country' - Radio NZ has reported this morning on the appalling state of some rental accommodation in Queenstown, which is still inviting migrants to come to live there. Michael Woodhouse changed the migration rules a few months ago to make it faster for Queenstown employers to hire migrants categorised as low skilled.

Tenants told Radio New Zealand that they were threatened with having their hot water and internet turned off as punishment for complaining about living conditions.

Others told of accommodation infested by rats and mice, as well as broken windows, poor heating and broken floorboards - often during the Queenstown winter when temperatures can stay below freezing all day.

One tenant, who refused to be named for fear of being evicted, said that their landlord refused to provide proper heating but had confiscated extra heaters purchased by the tenants. In the same apartment, housing 17 tenants, some windows were missing entirely, while others were broken or did not close.

Another tenant told of a landlord throwing their passports into the garden because he didn't want to listen to complaints about the property.

4. US$91,666 an hour - It's worth highlighting sometimes just how much some people make. Ken Griffin is a hedge fund manager in New York who makes US$2.2 million a day or US$91,666 an hour, regardless of whether he's awake or asleep. 

The details came out in a divorce case, as reported here on PageSix:

Griffin can afford it. Papers filed in the divorce revealed his monthly gross income “approaches $100 million,” and his net monthly income after taxes “averages more than $68.5 million” — which works out to more than $2.2 million a day.

He recently told the Wall Street Journal that his estranged wife’s claim on his fortune isn’t keeping him up at night. Citing the 2008 crash, when his firm nearly collapsed, he said of his divorce, “Sixteen weeks at the end of 2008 make this look like a walk in the park.”

5. Tea anyone? - We've all heard about the awful working conditions of many people in the likes of Bangladesh who make 'fast fashion'. But what about the humble cup of tea you might be drinking right now?

Here's the BBC expose on working conditions on plantations for Tetleys, Twinings and PG Tips.

The joint investigation by Radio 4's File on Four and BBC News in Assam, north-east India, found workers living in broken houses with terrible sanitation. Many families have no toilets and say they have no choice but to defecate amongst the tea bushes.

Living and working conditions are so bad, and wages so low, that tea workers and their families are left malnourished and vulnerable to fatal illnesses.

There was also a disregard for health and safety, with workers spraying chemicals without protection, and on some estates, child labour being used.

6. How (some) big American capitalism works - United Airlines' CEO resigned overnight after it emerged someone at United arranged to restart flying to a place so a local politician could get to his holiday home faster. The details are extraordinary. This is what happens when your political system becomes wholly reliant on donations from very rich people and companies.

Here's the Bloomberg report from April 28 that set things in motion:

Halfway through dinner at Novita, an Italian restaurant in Manhattan, Port Authority Chairman David Samson surprised the group with a request of his own. He complained that he and his wife had grown weary of the trip to their weekend home in Aiken, South Carolina, because the best flight out of Newark was to Charlotte, North Carolina, 150 miles away. Until 2009, Continental had run direct service from Newark to Columbia, South Carolina, 100 miles closer.

In a tone described by one observer as “playful, but not joking,” Samson asked: Could United revive that route? An awkward silence fell over the table.

Though the United CEO didn’t agree to the request at the dinner, according to the accounts of some who attended, the airline ultimately added the money-losing route that became known as “the chairman’s flight.” Now federal prosecutors are looking into whether its genesis crossed the line from legitimate bargaining into illegal activity.

7. China selling its US Treasuries - The idea that China would one day unload its US$4 trillion stock of US Treasury bonds built up over many years of generating trade surpluses was one of the things that scared some investors who worry about a sharp rise in global interest rates.

China has started over the last year to sell heavily, but maybe it's not such a bad thing, as Patrick Chovanec points out in this Foreign Policy piece:

A common misconception is that China is using the proceeds from selling U.S. Treasurys to prop up its own slowing economy — by funding infrastructure projects, for instance, or bailing out troubled banks. It’s true that after Japan’s bubble burst in the early 1990s, many Japanese companies sold off overseas assets and brought the money back to plug holes in their balance sheets. But selling private assets and selling central bank assets are two entirely different things. If a Chinese company sells a building it owns the United States, it trades the dollars it receives with China’s central bank (the People’s Bank of China, or PBOC) for yuan. By issuing more yuan, the PBOC adds to China’s money supply and credit.

But when the PBOC sells U.S. Treasurys, the opposite occurs. It can’t spend the dollars it receives in the Chinese economy, and if it exchanges them for yuan, it’s in effect taking money out of the Chinese economy. The PBOC can counter this tightening effect by injecting more yuan, on its own, but selling U.S. Treasurys does nothing to channel more funds into the domestic Chinese economy. Quite the contrary — it is buying reserves that expands a country’s money supply and credit; selling those reserves is (other things being equal) contractionary.

8. Why Europe is increasing its bond buying and why it's not working - Europe just can't get its economy firing, even with massive Quantitative Easing (QE) to push down long term interest rates. Now the European Central Bank is talking about increasing its QE programme even more.

It seems the ultra-low interest rates are not encouraging real investment by companies. They're still worried about the longer term problems of poor demand and ageing populations. And that's on top of a lingering suspicion that the severe financial market volatility will upset their real investment plans.

Here's the FT, which introduced the story with an anecdote about building a wind farm:

“Those [jobs] were not created because interest rates are low,” Ralf Thomas, Siemens chief financial officer, says. “Investments are driven far more by assumptions around growth, potential profit and technological barriers to entry, rather than movements in interest rates . . . We don’t decide to spend more just because interest rates are lower for a couple of years.”

Quantitative easing appears to have lowered the cost of borrowing for smaller businesses and helped spur demand for lending from companies. But interviews with senior European business leaders highlight the challenges facing the ECB as it seeks to create an environment whereconfidence and ready access to capital can spur investment.

“There is no stimulation from cheap money to invest more,” says Kurt Bock, chief executive of BASF, the German chemical group. “We orientate [our spending] towards growth prospects . . . and in Europe those growth prospects are modest.”

This mood reflects a broader debate among central bankers about just how much influence their policies — such as setting low interest rates — can have on investment decisions.

Mohamed El Irian's comments are particularly insightful:

“While central bankers knew there would be a lag between their unconventional measures and the resulting boost in financial asset prices feeding through to real economic activity, they didn’t anticipate that the lags would prove so stubborn and last this long,” says Mohamed El-Erian, chief economic adviser to Allianz. “There are four reasons why, acting on their own, c entral banks have not delivered high and inclusive growth.

“First, the west had invested in the wrong growth model, overemphasising finance rather than real investment. Second, national and regional inequality matters as it drives a wedge between the ability and willingness to spend. Third, firms don’t invest when there is excessive indebtedness. Fourth, if the architecture is incomplete — as it is in the eurozone — this in itself undermines economic recovery and lift off.”

The experience of the US, which began QE earlier, is far from encouraging. It has pushed up stock prices but US companies have often used cheap debt to fund share buybacks and higher dividends rather than hire more employees or expand their businesses.

With interest rates near zero in the US, Europe and Japan, there is a widespread assumption that any company worth its salt should be able to find profitable projects to back. But that does not appear to be happening, and part of the reason why, may lie in how corporate boards give approval for new investment in the first place.

9. Totally John Oliver on the confident lies of history.

10. Totally Clarke and Dawe interview Australia's Minister for the Environment on the need for more coal mines...