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Bernard's Top 10 at 10: 'At some point this is going to snap'; Corporates stash the cash; The madness of share buy-backs; The flawed shareholder-driven model; Dilbert

Bernard's Top 10 at 10: 'At some point this is going to snap'; Corporates stash the cash; The madness of share buy-backs; The flawed shareholder-driven model; Dilbert

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 #6 from the FT on the way shareholder-driven capitalism is restricting growth.

The glory days are over? - Ambrose Evans Pritchard at The Telegraph always does a nice, colourful walk around the global financial traps.

Now he's detecting signs that the end of the golden wether of cheap and easy money from central banks might be ending.

He points to a blip up in US bond yields and growing talk about the end of the money printing in the United States and Britain.

The implications for financial markets are big, he reckons.

Really? How many times have we heard this in the last six years? Suddenly the structural problems in the global economy are solved and central banks won't step in to rescue banks?

I'll believe it when I see it. We shouldn't also forget that Europe is about to begin printing and Japan is nowhere near finished. And this idea that China is serious about letting the chips fall where they may? I simply don't believe it.

Here's Ambrose though and he's always worth a good read:

Bank of America has warned clients that the glory days of "maximum liquidity" we have enjoyed in the post-Lehman era are coming to an end, with sweeping implications for asset markets across the world.

The yield on 10-year US Treasuries - the benchmark price of global money - has already jumped 20 basis points to 2.54pc since mid-August as it becomes clear that the US economy has survived its Winter wobble and is moving into an incipient boom. Growth reached 4.2pc in the second quarter, with the ISM manufacturing gauge near 30-year peaks.

Bank of America expects yields to jump to 3.1pc this year, and 3.75pc by the end of 2015 as the Federal Reserve raises interest rates in earnest.

This implies a torrid rally in the US dollar akin to the Fed tightening cycles of the early 1980s and the mid-1990s, a stress test for the vast edifice of dollar debt in Asia and the developing world.

2. Complacency rules OK? - Ambrose goes on to warn about the dangers of central banks turning off the printing presses and sovereign wealth funds starting to sell all these bonds back into markets.

Really? Do we really think that consumer price inflation is rising again? It is a bit in America, but it seems dead as a doornail in China and Europe. And do we really think central banks and Governments won't intervene again to rescue banks and markets?

If we've learned one thing in the last six years, it's that central banks and Governments will always intervene to stop too big to fail banks from failing. They can do it by using government balance sheets to bail out banks and by using central bank balance sheets to flood markets with liquidity.

They've done it at various times and they would again.

So many people have warned about the doom loop finally imploding and they've been wrong every time.

You can't fight the Fed. Yes, it's the worst kind of moral hazard, but I've yet to see a single politician or central banker say anything like that they'd be happy to let the chips fall just to teach us a lesson. It's never going to happen and those central bank balance sheets are limitless. Also, the structural forces in favour of very low inflation or deflation are firmly in place, including the globalisation of services, ageing populations, corporate cashpiling, low investment rates, and the depressing effects on growth of rising inequality in many parts of the developed and developing world.

I can't see what forces would overwhelm the masters of the universe at the central banks.

But here's Ambrose again with the dark and stormy night story:

The commodity bloc and Asia's rising powers, among others, have amassed $12 trillion of foreign reserves, gobbling up the supply of Treasuries, Gilts, Bunds or gold, displacing huge sums into every asset market, a form of world QE. Holdings have risen from 5pc to 13pc of GDP since 2000, or 22pc including sovereign wealth funds. If they start selling, the global financial structure is turned on its head.

This wall of money was a key cause of the pre-Lehman asset boom and continues to drive new bubbles everywhere, what the Bank for International Settlements calls the "puzzling disconnect between the markets’ buoyancy and underlying economic developments globally”. The BIS says the Tobin's Q measure of US equities is more stretched today than it was just before the storm broke in 2007.

Hans Redeker, currency chief at Morgan Stanley, advises clients to batten down the hatches and buy the dollar, expected to hit $1.15 against the euro next year. "The world's biggest and second biggest economies are tightening and we know what that means for asset markets. At some point this is going to snap," he said.

3. Stash the cash  - One of the reasons why the global economy never seems to fire on all cylinders any more is that companies seem structurally reluctant to invest a lot in new ways to make and do more things and services, other than simply to make the existing things and services more cheaply and with fewer people.

The FT has a useful piece here on how European companies have increased their cash piles to 1 trillion euros in the last seven years, including a further 50 billion euros in the last year.  They don't trust banks much anymore and they don't have much to invest in.

“Companies have quite clearly taken a step up in the size of their average cash balances,” said Gareth Williams, corporate economist at Standard & Poor’s, the credit rating agency. “Something structural has happened. If conditions turn and get difficult again, banks won’t be there as they have been historically to supply liquidity to companies.”

4. Profits without Prosperity - US academic economist William Lazonick (Harvard PHD) has researched the amounts spent by S&P 500 companies on share buybacks over the years. Often the money is borrowed. It betrays lack of confidence in the future and a failure of imagination.

Here's a piece he wrote for the Harvard Business Review:

Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

The buyback wave has gotten so big, in fact, that even shareholders—the presumed beneficiaries of all this corporate largesse—are getting worried. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote in an open letter to corporate America in March. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

5. But what's new about this? - Lazonick explains this surge in share buybacks is linked to the stock-based incentives of executives and is quite different to the pre-Wall St 'Greed is Good' era.

For three decades I’ve been studying how the resource allocation decisions of major U.S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U.S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what I call “sustainable prosperity.”

This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality.

6. Taylorism for the service sector - Simon Caulkin writes at FT.com about how corporates globally seem captured by culture of cutting costs and extracting value, rather than investing more to create value.

Caulkin makes some excellent points about the coming wave of globalisation and productivity-enhancing job cuts yet to hit the services sector in the same way it hit manufacturing.

The management innovation that is needed will not come from hot new communication and co-ordinating technologies (such as big data, the internet of things or social media). In fact, the reverse. In today’s financialised world, these are more likely to be used to accentuate the job-stripping, winner-takes-all trend already seen with previous techniques like outsourcing and offshoring.

As Straub writes: “Instead of liberating the creative and innovative energy of employees [ ... ] blind processes and rigid hierarchies still hold them down. In effect, the emergence of a Taylorism of a sort in non-manufacturing business operations has been enabled by digital technology.”

The invisible link between sluggish innovation, cost-cutting, share buybacks, the jobs and pay squeeze, and neo-Taylorism, is management incentives. What locks them all together in a tight, self-reinforcing paradigm is shareholder value – the assertion that the sole purpose of the company is to maximise returns to shareholders.

An era of management-led growth is both feasible and urgently needed. But the renaissance will not flourish unless a stake is driven through the heart of the shareholder-primacy zombie first.

7. Europe's lost generation. Here's a useful video from Business Spectator with the head of the ILO Guy Ryder. It helps explain the sorts of curious political things sweeping Europe, particularly with these independence votes.

 

8. 'Competition is for losers' - There is a strain of thought in the tech sector that says all the world's problems can be solved by a bunch of coders working 20 hours a day on noodles and the big tech companies should be allowed to do whatever they like once they're dominant.

The argument goes that they earned their dominant position by working harder and smarter than the rest (think Apple, Google and Amazon) and the technology changes so quick there's no point in trying to regulate their monopoly power once they have it (think Xerox, Kodak, Blackberry and Microsoft).

Peter Thiel, the guy behind PayPal and an investor in Facebook and Xero, is a bit of a libertarian who thinks we should all just let Google etc get  on with it.

Here's his thinking on monopolies and capitalism: (brace yourself if you believe in anti-trust authorities and that good things come from competition):

Why are economists obsessed with competition as an ideal state? It is a relic of history. Economists copied their mathematics from the work of 19th-century physicists: They see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that is what's easy to model, not because it represents the best of business. But the long-run equilibrium predicted by 19th-century physics was a state in which all energy is evenly distributed and everything comes to rest—also known as the heat death of the universe. Whatever your views on thermodynamics, it is a powerful metaphor. In business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won't matter to the world; some other undifferentiated competitor will always be ready to take your place.

Perfect equilibrium may describe the void that is most of the universe. It may even characterize many businesses. But every new creation takes place far from equilibrium. In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.

9. Universal Basic Income - Dylan Matthews writes a nice explainer at Vox about "the world's simplest plan to end poverty."

10. Totally John Oliver on The Scottish Independence vote.

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16 Comments

First I heard of this: http://www.macrobusiness.com.au/2014/09/china-clamps-international-dirt…

 

New Zealand is the first place they thought of looking...

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Very interesting. Not at all surprised given our lax Companies Office registration process;  refusal of the government to keep any records on overseas ownership and the unlimited and untaxed ability to buy anything, anywhere in NZ from any location in the world with no questions whatsoever asked.

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From the FT article - you don't want these guys knocking on your front door...

 

"The CCDI reports directly to the Communist party and does not answer to courts or police. Although it technically has no legal power to arrest or convict suspects, in practice it can detain party members indefinitely on suspicion of “violating Party discipline”.

 

Human rights groups have frequently accused it of torture and inhumane treatment of suspects. Now this extralegal entity appears to be seeking extraterritorial reach beyond China’s borders.

 

 

New Zealand’s Ministry of Foreign Affairs and Trade and the New Zealand Police said they had no knowledge of any CCDI investigation inside the country."

 

 

 
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Hunting Whales

 

Chinese authorities are cracking down with some interesting side effects

 

The casino industry in Macau is worth $1 trillion per annum, most of the VIP players are mainland chinese, but the question is how do they get the money out of the mainland and into Macau. It's explained in the following article

 

The clampdown by Chinese Authorities is squeezing the Junket operators further afield. Singapore has shut its doors, so the Junket Operators are having to go even further to distant shores, particularly Australia. No mention of NZ (yet). However the hook up last year with a South China Airline to bring junket operators to NZ casinos with "special" dispensation by the NZ government to give visa concessions is a tell-tale to this story

 

http://www.news.com.au/finance/money/organised-crime-linked-to-high-rol…

 

If you have a VPN and can access AU TV you can watch the 4Corners expose here

http://iview.abc.net.au/programs/four-corners

 

memo Bernard: You should get access to a VPN and watch that expose

 

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There's still some money in Macau - just got this in an email: 

"Louis XIII Holdings is buying 30 brand new Rolls Royce Phantoms to transport VIP guests to its new resort at Cotai on the strip at Macau at a cost of $20 million.

In a disclosure statement to the HK Stock Exchange the company says “the customized Rolls Royce Phantoms are the best fit with the standard of luxury the Company is targeting for its hotel in Macau.” Delivery is expected in early 2016."   I suspect SkyCity are licking their lips at the thought of a clampdown in Macau.
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Bernard wrote "central bank balance sheets are limitless"

I think your statement will be tested sometime in the next few years.  If it is found to be untrue the fallout will not be pretty.

 

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Yes - it will only take one creditor to insist on repayment of its loans.

.

Interesting times, indeed.  I hope the people who shoulder the greatest part of the debt burden (the Hoi Polloi) will revolt.

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Bernard: Europe's lost generation.

Anyone in favour of increasing the minimum wage should view this. There's not an economist alive who does not think that the minimum wage, at some level, has an impact on youth employment. John Key has already indicated to raise it, and sacrifice about 2,000 more young to unemployment. He didn't want to raise it too much, else he would sacrifice too many young people.

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You are correct.  In cotton farms in the southern states there was full employment for blacks.  Raising the minimum wage to something would have decimated the jobs.  Unemployment certainly has risen as a result of the abolishment of slavery.  

 

 

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This is from John Maudlin's letter:

O Canada, Where Are You Headed?

My friend Jared Dillian, ex-Wall Street trader and now the editor of a great newsletter humorously titled The Daily DirtNap, has been writing about the problems of Canada for the last several months. Some of it is anecdotal, as in four of the top five major bank CEOs have resigned in the last year, at relatively young ages. Just prior to the Canadian banks getting downgraded by S&P last month. Go figure.

Writes young Jared:

My thoughts: McCaughey is the – not kidding – fourth Canadian bank CEO to retire in the last year. RBC, TD, BNS, and now CIBC. And these guys are not that old. Late fifties, maybe. So it is clear what is going on here – they are cashing out on the highs. It is perfectly rational behavior. Come on – if you were a bank CEO, and you thought that your industry had years of upside left, would you get out? If you were 57? You would not.

The Canadian economy is almost entirely dependent upon its housing market for economic growth. Now, some of my Canadian readers will probably not want to acknowledge that Canadians have an obsession with housing. Debt-to-income levels in Canada are beginning to look a little toppish: $2 million is the new $1 million house. (And in Vancouver it is the half-million-dollar house.) But it has been that way for years. I haven’t written much about Canada lately, because I quite frankly don’t get it. But the country is on my radar screen. Because, I will admit, I really like Canada. At least in the summer.

...

And Canada like Australia and NZ is a famous "destination country" for migrants and famed for it's diversity. Distinguished Professor Paul Spoonley told TV One News "we need their skills" .

I don't suppose there is more to it all is there?

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#8. fontera and its 2001 Dairy Restructuring Act were trailblazers here!

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Apart from not wanting their own economies to implode, the world's main central bankers are likely to be happy with the free global accumulation of assets their money printing has allowed them, at little cost to their own economies. The Germans, Chinese, Japanese, Americans and others will happily play the rest of the world for suckers while they can.

It remains frustrating that our government has determinedly kept its head in the sand on this issue, encouraging through its monetary policy stubbornness, a current account deficit at a time of the best terms of trade in 40 years.

It is also a shame that the issue has not bubbled a little more to the surface in the election campaign, given the marked differences in policies bewteen the parties. However I accept that the mirage of high house prices (even if progressively indebted and or sold to foreigners) and cheap overseas holidays that National offers the electorate can be tough to challenge.  

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as long as rich people are rich, why would bankers (or politicians) care?

its the rest of us who have to get our houses in order

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Tell us more about this "golden wether", Bernard. Seems like there could be a NZ angle here.

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Does anyone still believe Obama Cameron and Abbot, who new who was responsible for MH17 before it hit the ground? Here is a report that has the ring of truth about it and not the ring of we are being muzzled by our political masters.

http://www.vineyardsaker.co.nz

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