1. The disconnect between rising executive compensation and declining shareholder returns continued in 2018. WSJ writes,
The chiefs of banking and financial institutions in the S&P 500 received a median raise of 8.5% last year, compared with 5.6% for CEOs in the broader index, according to a Wall Street Journal analysis. Meanwhile, firms in the sector posted a median total shareholder return—or stock-price changes plus dividends—of negative 17% in 2018, while the median return for the index as a whole was negative 5.8%. Median pay for finance CEOs was $11.4 million for the year, $1 million below the overall S&P 500 median. The Journal analysis uses total compensation as specified by Securities and Exchange Commission regulations, which includes salary, annual bonuses, and long-term equity and cash incentives. It also includes perquisites and the value of pension gains and some increases in deferred compensation accounts.
2. Fascinating chronicles of the debt-driven growth and fall of self-made corporate empire builders in China. For decades, the scorching pace of economic growth masked the pitfalls of debt accumulation and aggressive expansion into over-crowded and unfamiliar sectors. The country's overall debt quadrupled over the past decade, with corporate debt forming two-thirds.
Corporate bonds outstanding has exploded from negligible baseline a decade back to $1.72 trillion outstanding as of end-2018, coming second to the US companies which carried $5.81 trillion. And since the government initiated measures to control excessive lending in 2017, including allowing companies to fail by asking lenders not to restructure, there has been a rise in corporate bankruptcies,
Now with the economy slowing and government taking steps to dial-down excessive lending, more stories like this are emerging,
When she was a teenager in the 1970s, Zhou Xiaoguang peddled trinkets city to city and slept on trains, a formative chapter in her creation of the world’s largest costume jeweler, Neoglory Holdings Group Co. Leveraging her empire of baubles, China’s “fashion-accessory queen” added hotels, offices and malls. The magnate took a seat in China’s national parliament, accepted business accolades, including Ernst & Young’s “Entrepreneur of the Year,” and erected the tallest skyscraper in Yiwu, a trading city south of Shanghai... Neoglory fueled its evolution into a conglomerate through expansive borrowings, which ballooned to $6.8 billion, even as financial filings show cash was tight and profits were weak. Behind the scenes, the company was taking on new risks to borrow, including ever-shorter payback schedules. The troubles burst into view in mid-September when Neoglory defaulted on a bond payment. Several more defaults followed... Neoglory said it embarked on a rollout of retail outlets when online selling was more promising, and it overbuilt real estate in undesirable locations...
Ms. Zhou has attributed her entrepreneurialism to a hardscrabble upbringing near Yiwu when the area was rural: Lacking shoes as a teen, she made a pair; to save money on trips to sell embroidery, she took night trains. She set up a sales booth in 1985 in Yiwu, and Neoglory began production in 1995. Inside a decade, Ms. Zhou was the richest woman in Zhejiang province and a symbol of the country’s breathtaking industrial rise. She and other exporters made Yiwu a global giant in low-price merchandise. The trading city is centered on a vast complex that snakes along 4 miles where wholesalers sell goods, from socks to Christmas ornaments. Neoglory necklaces and earrings sell around the world, including on Amazon.com Inc. and at J.C. Penney Co. in the U.S., often fitted with crystals from Austria’s Swarovski AG. Ms. Zhou built a massive factory compound that included apartments for her family and quarters for employees, at one point numbering 7,000. “The whole industry in Yiwu was brought up by her,” said Wang Wei, a former Neoglory employee who owns one of the 4,500 costume jewelry shops in the city’s wholesale center.
Such stories raise the question of whether such excesses and pain are inevitable accompaniments of spectacular growth episodes.
3. The future of retail check-outs being tried out by Tesco - swapping cashiers for cameras.
4. If you thought big-tech was about intangibles like intellectual property and less about hardware, think again. Bloomberg points to the physical infrastructure like computer networks and logistics machines that they command, which raises enormous entry barriers, or "moats",
For all the claims that Amazon copies hot-selling products sold on its websites, or unfairly uses data about shoppers’ purchases and searches for its own ends, it is Amazon’s network of warehouses and its ever-expanding logistics machine that give it an advantage few competitors can match... Amazon isn’t alone in widening its moat. Last week, Alphabet Inc.’s Google announced the latest privately funded undersea cable between Europe and Africa. That kind of infrastructure used to be built by consortia of telecommunications providers, but it has become common for Facebook, Microsoft Corp. and Google to go their own way. This year, Google has saidit will spend more than $13 billion just in the U.S. on data centers and other real estate... In the last 12 months, the five biggest U.S. technology companies recorded nearly $90 billion of combined capital spending — big-ticket item such as computer data centers, internet cables, specialized equipment to build computer chips, warehouses and other real estate.
5. UK accounting watchdog, Financial Reporting Council, is scathing in its indictment of the big auditors in its annual report in a year marked by high-profile accounting scandals at companies like Patisserie Valerie and Carillion,
The Financial Reporting Council warned of an “unsatisfactory” deterioration in inspection results for PwC’s audits of FTSE 350 clients over the past year, after only two out of three of the audits scrutinised met the watchdog’s standard of needing only limited improvement. That was a steep decline from the 84 per cent which passed the threshold the previous year. But the watchdog’s sharpest criticism was reserved for the Big Four’s smaller rival Grant Thornton, which served as the auditor for Patisserie Valerie when a multimillion-pound black hole was discovered in the cake shop’s accounts last year... Grant Thornton now faces heightened scrutiny from the watchdog after only 50 per cent of its audits were found to meet the FRC’s standard, down from 75 per cent in the previous round of inspections... None of the seven firms surveyed — which included BDO and Mazars as well as the Big Four and Grant Thornton — met the FRC’s standard for 90 per cent of their inspected audits to need only limited improvements. The FRC examined a sample of audits for each firm. In every firm, the watchdog found cases where auditors had failed to be tough enough in challenging management on questions of judgment.
6. The case for private management of many infrastructure projects stands on questionable foundations,
Whereas EDF’s current nuke under way at Hinkley Point in Somerset requires a weighted average cost of capital of 9.3 per cent, if you permitted the EDF tax (known in polite society as the “regulated asset base” model) with the next one at Sizewell, then that could fall to 6 per cent. What it doesn’t do is beat state finance. The UK government’s cost of borrowing is less than 2 per cent. So why do it this way?
One classic answer is that the state just cannot borrow all that money. Pile too much on the public sector borrowing requirement and there might be a gilt buyers’ strike. Another is that the private sector brings a magic ingredient: that of extra efficiency. Those dividends can all be afforded through the savings on capital and operational costs that entrepreneurial managers bring. Both claims are suspect. Let’s take the second first; the one about efficiency. It is difficult to find compelling evidence. For instance, England’s private water companies are no more efficient than Scotland’s state-owned one, according to a 2011 assessment by the regulator, Ofwat. That’s despite being privatised 30 years ago. As for finance, there’s surely a distinction between selling bonds to fund current spending, and doing so to create real assets with attached revenues. If you think about it logically, it’s hard to see why a properly constituted national infrastructure fund with its own balance sheet — backed by highly rated assets — couldn’t finance itself at fine rates.
This and this are a good summary of the sophistry and valuation gimmicks that the industry is resorting to in the backdrop of Labour's plans to renationalise water if elected to power. This is a very good case against the industry demand for market valuation and in favour of the regulated capital value (RCV).
7. An emerging natural resource scarcity is that involving sand,
Roughly 32 billion to 50 billion tonnes are used globally each year, mainly for making concrete, glass and electronics. This exceeds the pace of natural renewal such that by mid-century, demand might outstrip supply (see ‘Global scarcity’). A lack of knowledge and oversight is allowing this unsustainable exploitation... Desert sand grains are too smooth to be useful, and most of the angular sand that is suitable for industry comes from rivers (less than 1% of the world’s land)... Most of the trade in sand is undocumented. For example, between 2006 and 2016, less than 4% of the 80 million tonnes of sediment that Singapore reported having imported from Cambodia was confirmed as exported by the latter. Illegal sand mining is rife in around 70 countries, and hundreds of people have reportedly been killed in battles over sand in the past decade in countries including India and Kenya, among them local citizens, police officers and government officials.
8. Germany's debt-to-GDP ratio is set to drop below 60% this year, and that is a cause for concern regarding the supply of German bonds, bunds.
If there are not enough of them around, banks could run short of high-quality collateral for lending, while the European Central Bank will struggle to find enough bonds to buy if it wants to revive its quantitative easing programme to combat a downturn... “By the mid-2030s there is a very plausible scenario where German government debt has almost entirely disappeared,” said Christopher Jeffery, a fixed-income strategist at Legal & General Investment Management... For markets, however, there are some uncomfortable implications. Banks rely on a ready supply of highly rated government debt to use as collateral for lending. But the amount of such debt shrank dramatically during the crisis, thanks to a slew of downgrades from credit rating agencies. According to a speech earlier this year by ECB executive board member Benoît Cœuré, triple A-rated sovereign debt in the eurozone amounts to just 10 per cent of GDP, compared with 70 per cent in the US.
9. Inculcating basic literacy and numeracy is just so hard. Sample this from American early grade classrooms,
American elementary education has been shaped by a theory that goes like this: Reading—a term used to mean not just matching letters to sounds but also comprehension—can be taught in a manner completely disconnected from content. Use simple texts to teach children how to find the main idea, make inferences, draw conclusions, and so on, and eventually they’ll be able to apply those skills to grasp the meaning of anything put in front of them. In the meantime, what children are reading doesn’t really matter—it’s better for them to acquire skills that will enable them to discover knowledge for themselves later on than for them to be given information directly, or so the thinking goes. That is, they need to spend their time “learning to read” before “reading to learn.” Science can wait; history, which is considered too abstract for young minds to grasp, must wait. Reading time is filled, instead, with a variety of short books and passages unconnected to one another except by the “comprehension skills” they’re meant to teach.As far back as 1977, early-elementary teachers spent more than twice as much time on reading as on science and social studies combined. But since 2001, when the federal No Child Left Behind legislation made standardized reading and math scores the yardstick for measuring progress, the time devoted to both subjects has only grown. In turn, the amount of time spent on social studies and science has plummeted—especially in schools where test scores are low. And yet, despite the enormous expenditure of time and resources on reading, American children haven’t become better readers. For the past 20 years, only about a third of students have scored at or above the “proficient” level on national tests. For low-income and minority kids, the picture is especially bleak: Their average test scores are far below those of their more affluent, largely white peers—a phenomenon usually referred to as the achievement gap. As this gap has grown wider, America’s standing in international literacy rankings, already mediocre, has fallen... All of which raises a disturbing question: What if the medicine we have been prescribing is only making matters worse, particularly for poor children? What if the best way to boost reading comprehension is not to drill kids on discrete skills but to teach them, as early as possible, the very things we’ve marginalized— including history, science, and other content that could build the knowledge and vocabulary they need to understand both written texts and the world around them?...
For a number of reasons, children from better-educated families—which also tend to have higher incomes—arrive at school with more knowledge and vocabulary... As the years go by, children of educated parents continue to acquire more knowledge and vocabulary outside school, making it easier for them to gain even more knowledge—because, like Velcro, knowledge sticks best to other, related knowledge. Meanwhile, their less fortunate peers fall further and further behind, especially if their schools aren’t providing them with knowledge. This snowballing has been dubbed “the Matthew effect,” after the passage in the Gospel according to Matthew about the rich getting richer and the poor getting poorer. Every year that the Matthew effect is allowed to continue, it becomes harder to reverse. So the earlier we start building children’s knowledge, the better our chances of narrowing the gap.
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