Here's my Top 10 links from around the Internet at midday today.
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 watches today are #8 and #9 and not for any laudable reason. They're just laugh out loud funny. Thank goodness for the Wiener. #1 is my must read on the US investment drought.
1. A corporate conundrum - Robin Harding looks here at the FT at why US corporate investment isn't rising in line with fast rising US corporate profits.
It's a problem for the global economy, and therefore for us.
This is a cracking read.
It raises some big questions about jobs growth, about hoarding, about the health of stock market-driven capitalism, and helps explain why economic growth just won't kick on.
A whole bunch of reasons crop up, ranging from earnings and bonus-driven CEOs being too short termist, computing power being so cheap, and companies exercising more monopoly power.
Profits in the US are at an all-time high but, perversely, investment is stagnant. According to GMO, the asset manager, profits and overall net investment in the US tracked each other closely until the late 1980s, with both about 9 per cent of gross domestic product. Then the relationship began to break down. After the recession, from 2009, it went haywire. Pre-tax corporate profits are now at record highs – more than 12 per cent of GDP – while net investment is barely 4 per cent of output. The pattern is similar, although less stark, when looking at corporate investment specifically.
This change is profoundly odd. Economic theory says investment is driven by profitable opportunities on one side and the cost of capital on the other. High profits suggest there are decent opportunities to make money; historic lows in interest rates and highs in the stock market mean that capital is dirt cheap. Yet investment does not follow.
“Over time, the pressure for earnings per share becomes so strong.” That leads to a focus on cost-cutting and efficiency, rather than risky investments that take time to pay off, he says. “If you’re gaining market share then you win, even if the market contracts. If you grow the market but lose share then you could lose your job.”
Andrew Smithers, of London-based asset allocation adviser Smithers & Co, claims this change in the culture of large corporations can explain the divergence between investment and profits. In particular, he argues that stock options encourage executives to boost short-term profits, while curtailing investment in favour of buybacks that push up earnings per share.
2. Here comes some Chinese stimulus - After months of pledging not to try to pump up China's economy any more, China's leaders seem to have blinked somewhat in recent days.
Bloomberg reports Li Keqiang has announced an expansion of railway projects.
Chinese Premier Li Keqiang said the nation will speed railway construction, especially in central and western regions, adding support for an economy that’s set to expand at the slowest pace in 23 years.
The State Council also yesterday approved tax breaks for small companies and reduced fees for exporters as it pledged to keep the yuan’s exchange rate “basically stable at a reasonable and balanced level,” according to a statement after a meeting led by Li. China plans a railway development fund, the government said.
China has so far followed in the footsteps of Japan. But its economy is not yet over-indebted. So there is time for China to avoid Japan’s mistakes if it changes course. The lesson from Japan’s experience in the 1970s and 80s is that change drives change and liberalisation becomes unavoidable.
But unless policy is aimed at fundamental structural reform, the temporary solutions of running current account surpluses, budget deficits and spawning bubbles will eventually run out of steam and cause growth to stall. But China is far from having twenty more years to be blowing up bubbles.
4. Just deleverage - Former British banking regulator Adair Turner is one of the most insightful and trenchant commentators on the current weaknesses of global capitalism and banking. Here's some of his latest thoughts via the Institute for New Economic Thinking.
Turner faulted regulators and central banks for enabling a capital regime that allowed the international banking system to become wildly overleveraged. He also faulted the overly complex global regulatory scheme and called for simple rules to help stabilize the financial sector.
Turner described the current situation as “a car without shock absorbers driving along a motorway without crash barriers, and because of that, we’ve crowded a bunch of people into the driving cab to look over the driver’s shoulder.”
A more sensible approach, he suggested, would be to establish simple capital ratios designed to significantly increase the amount of equity banks are required to hold.
“The most fundamental mistake is to allow banks to do too much business on a light level of capital,” Turner said. He called for leverage ratios closer to 20% because of the importance of the financial sector to the economy. “There just wasn’t enough capital in the banking system, [in 2008],” he said. We need to make sure that next time is different.
The improving lithium-ion family of battery technologies is helping with their relatively light weight, compact size, and ability to discharge energy quickly. Their light weight makes the bicycles easier to handle, hence increasing safety. Lithium-ion batteries have the potential to last longer than lead-acid batteries, as well.
“Growing urbanization is contributing to traffic snarls on city streets in many countries, and pushing people toward other options,” says Dave Hurst, principal research analyst with Navigant Research. “The aging global population is seen by many as one driver of e-bicycles’ popularity, but the fact is that more young people are choosing them as well.”
6. Larry Summers for Fed Chair? - The guy most famous for belittling the Winklevoss Twins in The Social Network appears now to be the favourite to take over from Ben Bernanke as US Federal Reserve Chairman.
Trouble is, as the FT reports, he's not a big fan of Quantitative Easing. He's talked privately about 'normalising' interest rates. That's bond market armageddon talk right there, and of course would suggest higher interest rates for everyone (and slower growth) sooner rather than later.
“QE in my view is less efficacious for the real economy than most people suppose,” said Mr Summers according to an official summary of his remarks at a conference organised in Santa Monica by Drobny Global, obtained by the Financial Times.
In his remarks in April, Mr Summers said it was likely either the economy would accelerate, or else estimates of its growth potential would have to come down.
“If we have slow growth, we are not going to keep thinking that 5.5 per cent unemployment is normal,” said Mr Summers. “We are going to decide rightly or wrongly that the potential of the economy is less and therefore we are going to decide that we are closer to that potential and that is going to operate in favour of suggesting that we should normalise interest rates.”
7. Keep an eye on this - Reuters reports American authorities charged Stephen Cohen's SAC Capital, which manages US$15 billion (but not for long you'd suspect), with insider trading overnight.
The government accused SAC Capital Advisors LP of presiding over a culture where employees flouted the law and were encouraged to tap their personal networks of contacts for inside information about publicly traded companies.
The result was "insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry," the indictment said.
While not personally charged criminally, Cohen joins junk bond financier Michael Milken and Galleon Group hedge fund founder Raj Rajaratnam among prominent Wall Street executives who have been linked to insider trading.
9. And there's more...and it's very funny...
10. Totally Clarke and Dawe with an unidentified opposition politiician with a bullying problem
(Wiener cartoons added. Couldn't resist)
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