1. David Gelles in the Times has a revisionist perspective on Jack Welch, widely considered the greatest chief executive of all time and described as "manager of the century" by Fortune magazine. Welles has a scathing summary of his deeply unflattering legacy,
Almost immediately after Mr. Welch retired in September 2001 with a $417 million severance package, G.E. went into a tailspin from which it would never recover. His pupils, though, went on to run dozens of other major companies, including Home Depot, Albertson’s, Chrysler and Boeing. Most of them failed. And in the decades since Mr. Welch assumed power, the economy at large has come to resemble his skewed priorities. Wages stagnated and jobs moved overseas. C.E.O. pay went stratospheric and buybacks and dividends boomed. Factories closed and companies found ways to pay fewer taxes. Beyond his enduring influence on the economy, Mr. Welch also redefined what it meant to be a boss, personifying an aggressive, materialistic style of management that endures to this day.... he exerted a powerful and lasting influence on American business, informing how workers are treated, how shareholders are rewarded and how C.E.O.s comport themselves in an increasingly divisive age. When Donald J. Trump is elected president, when Jeff Bezos argues about inflation with the White House, when Elon Musk negotiates his $44 billion deal to buy Twitter by using the poop emoji — this is the world that Jack Welch helped create... In retirement, Mr. Welch continued to hold sway over the business world as an elder statesman, penning books and columns, and appearing on cable news to praise the executives he had groomed and continue his assault on taxation and regulation. Mr. Welch also pursued an unexpected retirement pastime: He became an internet troll... It was a career defined by a ruthless devotion to maximizing short-term profits at any cost, and punctuated by a foray into misinformation. And it opened the door to an era where billionaire C.E.O.s are endowed with vast power and near total impunity...He was a compulsive dealmaker, fueling G.E.’s growth with a relentless series of mergers and acquisitions that took G.E. far from its industrial roots and set in motion a wave of corporate consolidation that would reduce competition in industries as diverse as airlines and media. He closed factories and fired employees by the tens of thousands, unleashing a series of mass layoffs that destabilized the American working class. He devised systems like “stack ranking,” which mandated that the bottom 10 percent of workers be fired each year, and took root at other companies. And he embraced offshoring and outsourcing, sending labor overseas and turning to other companies to provide back-office functions like accounting and printing... But more than the downsizing or the dealmaking, it was Mr. Welch’s obsession with finance that allowed him to steadily inflate G.E.’s valuation in the public markets... By the time he retired, the company derived much of its profit from GE Capital, which was essentially a giant unregulated bank... an amorphous, ever-changing collection of financial assets, capable of delivering whatever adjustments were most advantageous to the parent company in a moment’s notice. The finance division became G.E.’s center of gravity, ultimately accounting for 40 percent of its revenue and 60 percent of its profit. With so much money coursing through the finance division, Mr. Welch used it to his advantage, shifting zeros throughout a sprawling international web of subsidiaries, and extracting whatever he needed to meet or beat analysts’ estimates for nearly 80 quarters in a row, an unprecedented run. It was what one influential analyst called “earnings on demand.”
Never mind the diminution and break-up of GE and the corrosive implications of Jack's legacy, this is yet another example of how narratives endure despite overwhelming evidence to the contrary.
I'm also inclined to believe that Jack Welch was the business counterpart to Milton Friedman in the academia in peddling a false and corrosive ideology that continues to exercise its hegemony.
2. The stock market crash may have wiped trillions off Big Tech valuations, but as this Times story writes, they stand well positioned to widen their market dominance in any recession.
3. Adam Tooze explains the success of Javelin anti-tank missiles which have been critical in the Ukrainian infantry's combat against the Russian tank-mounted cavalry.
The Javelin is a high-tech weapon that kills at ranges often exceeding those of the Russian tank guns. It is the product of breakthroughs in the postwar period that saw hollow charge warheads combined with more powerful rocket propulsion. The more powerful rockets allowed engagement at longer distance, but also raised problems of accuracy. Unlike a shell fired out of a cannon that - due to its extreme velocity, simple aerodynamics and the direction provided by the barrel - follows a predictable path, a rocket is too unsteady to guarantee a hit at long range. A long-range rocket requires guidance, through fins activated either by wire, or as in the case of the Javelin by infrared and a highly sophisticated internal guidance system. It was the combination of long-range rocket propulsion with guidance and shaped charge that created the modernAnti-tank Guided Missile (ATGM) - a weapon that combined the lightness and mobility of a personal anti-tank device - Panzerfaust, RPG - with the long-range striking power of an anti-tank gun.
4. The Chinese government has prioritised self-sufficiency in the manufacture of cutting-edge microchips as one of its important prongs in the competition with the US. But there have been doubts about the Chinese ability to master this technology. Sample this
Eric Johnson, the CEO of JSR, one of the world’s largest suppliers of a material critical for semiconductor production, has said a lack of industry infrastructure will make it “very difficult” for China to develop cutting-edge chipmaking technology despite a push for self-sufficiency... Johnson said China would struggle to master the sophisticated chipmaking technology based on a technique known as extreme ultraviolet or EUV lithography... EUV lithography is a highly demanding process using light to etch minuscule integrated circuits on to silicon wafers. Even if China “got a paper on exactly what the chemistries were . . . to manufacture that at the purities, and the precision and reproducibility is really tough”, Johnson said. “It’s not that simple and they don’t have the supply chain to support that, either.”
James Kynge reports of record increases in foreign investors and multinational corporations intending to shift production away from China or limit investments.
5. A fascinating Bruegel data set outlines the responses from 18 European countries to the ongoing increases in energy prices.
It's interesting that very few countries resorted to price, retail or wholesale, regulation. The primary means to mitigate the hardships from the price rises were targeted transfers and reduction in energy taxes.
Interesting also that Spain and France have been the most activist among European countries.
6. The graphic tracks how US CPI inflation and Fed Funds rate have tracked each other over the last sixty years.
The big three South Korean shipbuilders — Korea Shipbuilding, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries — are the dominant producers of LNG ships, controlling more than 70 per cent of the global market. Large-size LNG carrier orders jumped nearly seven-fold in the first four months of this year, with the Korean builders winning 30 of a total of 47 ships ordered, according to shipbroker Clarksons... Prices for building new vessels have been rising for more than a year and are up more than 26 per cent since November 2020 to the highest level in nominal terms in 13 years, according to Clarksons.
8. ESG investing is also Tech washing? Were the high ESG investment returns concealed in their high Technology sector exposures? Alternatively, was the high ESG returns a consequence of their high correlation with growth stocks which benefited most from the market boom?
Private equity firms announced a record 14,730 deals worth $1.2tn globally last year — that is nearly double the previous high in 2007. Employees at buyout firms pocketed $23.4bn for their work — significantly more than their investment banking pals operating on Wall Street.
It's only natural that it gets the attention of competition regulators. Sample this
Critics say the increasing market share of private equity groups in some industries has given them power to control prices and labour costs in ways that are often not in the best interests of consumers and workers... The healthcare sector is an example. Buyout deals in the industry ballooned from about $42bn in 2010 to $120bn in 2019 and many essential services, including emergency room services, mental health clinics and dentistry are now in the hands of private equity. In many areas, prices have gone up and the quality of care has deteriorated, according to multiple studies. The newspaper industry is another sector where private investment firms have expanded their footprint and drawn criticism, with concerns of cost-cutting at the expense of journalism.
10. Ruchir Sharma points to shadow banks as the big financial market risk this time around,
Shadow banks include creditors of many kinds, from pension funds to private equity firms and other asset managers. Together they manage $63tn in financial assets — up from $30tn a decade ago... Though it has pulled back recently under government pressure, China’s shadow banking sector is still among the largest in the world at 60 per cent of gross domestic product — up from 4 per cent in 2009 — and deeply enmeshed in risky lending to local governments, property companies and other borrowers. In Europe, the hotbeds include financial centres like Ireland and Luxembourg, where the assets of shadow banks, particularly pension funds and insurers, have been expanding at an 8 to 10 per cent annual pace in recent years...After 2008, as regulators tightened the screws on public debt markets, many investors turned to these private channels, which have since quadrupled in size to nearly $1.2tn. A substantial chunk of it is direct lending from private investors to often risky private corporate borrowers, many of whom are in this market precisely because it is unregulated. Nothing highlights the frenzied search for yield in private markets more clearly than so-called business development companies. Some of the world’s biggest asset managers are raising billions for BDCs, which promise returns of 7 per cent to 8 per cent on loans to small, financially fragile companies. As one investor told me: swing a stick in Manhattan these days and you are bound to hit someone involved in private lending.
And on the borrowers side,
The borrowers to watch most closely now are corporations. In the US, corporate debt as a share of assets remains near record highs, particularly for firms in industries hardest hit by the pandemic, including airlines and restaurants. A third of publicly traded companies in the US do not earn enough to make their interest payments. Any increase in borrowing costs will make life difficult for these companies, which need easy credit to survive. Many of them rely on expensive junk debt, which has doubled over the past decade to $1.5tn, or roughly 15 per cent of total US corporate debt. Their vulnerability was exposed early in the pandemic, when default risks briefly spiked, but was quickly covered up by massive injections of liquidity from the Fed. The biggest booms are under way in private markets.
11. More on the Sri Lankan crisis. A third of the country's debt is owed to foreign sovereign debt holders.
And its share has been increasing sharply since 2013, driven by the entry of China
Sri Lanka’s reserves have fallen from $7.5bn in November 2019 to the point where finding $1mn is “a challenge”, Wickremesinghe, the new prime minister, said in an address last week. This has meant shortages of not only fuel but food and medicine, with hospitals forced to postpone surgeries. The country has the worst inflation in Asia at about 30 per cent in April and the currency has almost halved in value since it was floated in March.
12. The Chinese PM Li Keqiang warns of negative growth this quarter as the country reels from Covid lockdowns in Shanghai, Beijing, and other towns.
13. From nothing, Adani Group has become the second largest cement manufacturer in India with its acquisition of Holcim's stakes in ACC and Ambuja Cements. This is an important driver,
Between January 2003 and May 2022, the bellwether BSE Sensex grew at a compounded annual growth rate (CAGR) of 16.3%. That’s doubling in roughly four-and-a-half years. During the same period, leaders UltraTech, ACC and Ambuja all delivered a CAGR above 17%, with Ambuja leading at 19.1%... One reason for this is the oligopolistic nature of the industry, which has a few firms dominating production and market share.
In keeping with the growing business concentration, the top five manufacturers make up 48% of cement production capacity of 550 mt. However, in terms of production, this is likely much higher since the top manufacturers have higher capacity utilisation, which has languished in the low-60s range.
14. AK Bhattacharya points to the petrol taxes story in India,
From about $105 a barrel in 2013-14, its average price per barrel dropped to $84 in 2014-15 and $46 in 2015-16 before marginally moving up to $47 in 2016-17... For petrol, the excise duty per litre went up from Rs 9.48 in April 2014 to Rs 21.48 in April 2017, and for diesel the increase was equally steep from Rs 3.56 to Rs 17.33 in the same period... The government’s excise revenue from the petroleum sector as a result shot up from about Rs 78,000 crore in 2013-14 to Rs 1 trillion in 2014-15 and to Rs 2.43 trillion in 2016-17... By the end of March 2021, they rose to Rs 32.90 a litre for petrol and to Rs 31.80 a litre for diesel. The Centre’s excise revenue from this sector... by 2020-21, it went up to Rs 3.73 trillion... In 2017-18, the incidence of cess and surcharges accounted for about 56 per cent of the total central levies on petrol and about 35 per cent for diesel. By the end of March 2021, the share of cess and surcharges went up to 96 per cent for petrol and 94 per cent for diesel.Two factors were responsible. One, the surcharge levied by way of special additional excise duty and the agriculture infrastructure and development cess rose to about to Rs 13.5 a litre for petrol and Rs 12 a litre for diesel. Two, the Finance Act of 2018 replaced the road cess with the road and infrastructure cess, imposing a new combined levy of Rs 8 per litre for both petrol and diesel. In the following three years, the road and infrastructure cess was raised to Rs 18 a litre for both petrol and diesel. Thus, by April 2021, the total levy of cess and surcharges rose to Rs 31.5 a litre for petrol and Rs 30 a litre for diesel. But the basic excise duty was kept at only Rs 1.4 a litre for petrol and Rs 1.8 a litre for diesel... the Centre’s revenue from road and infrastructure cess rose sharply from Rs 51,266 crore in 2018-19 to Rs 1.24 trillion in 2020-21 and Rs 2 trillion in 2021-22. Note that the share of road and infrastructure cess rose from 24 per cent in 2018-19 to 33 per cent in 2020-21 and to well over half of the total excise revenue from the petroleum sector in 2021-22... the Centre cut the road and infrastructure cess twice in the last six months — once in November 2021 and again last week. The cess thus declined from Rs 18 a litre to Rs 5 a litre for petrol and to Rs 2 a litre for diesel. As a result, the Centre lost about Rs 50,000 crore of revenue in 2021-22 and is expected to lose another Rs 86,000 crore in 2022-23.
15. In the biggest attempt to address conflicts of interests within audit and advisory firms, EY announced a surprise split of its audit work from its consulting, tax, and deal advisory work.
An EY split would result in two separately owned businesses and would be a much bigger change than the more limited operational separation of the Big Four’s UK audit and advisory functions, which was agreed after corporate scandals at retailer BHS and outsourcer Carillion... The plans envisage an audit-focused firm being separated from the rest of the business... This firm would retain experts in areas such as tax to support company audits... EY’s surprise move... would force its rivals to consider following suit... EY, which employs 312,000 people in more than 150 countries, is structured as a network of legally separate national member firms that pay a fee each year for shared branding, systems and technology.
16. Martin Sandbu writes that deglobalisation does not show up in the statistics. World goods trade continues to grow.
And financial globalisation is going strong
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