1. During the pandemic the US and Europe undertook contrasting approaches to support the labour market. There's no logic or theory that can explain whether one is superior to the other. But the US appears to have turned out lucky.
America took a different approach than its European peers when it came to how it designed policy relief for workers displaced by pandemic shutdowns: It paid workers to stay at home, with one-time checks and expanded unemployment insurance, whereas countries in Europe paid workers to stay in jobs. The resulting churn as Americans have sorted themselves into new and better jobs could be leading to the stronger productivity growth that the United States is seeing now, said Adam Posen, president of the Peterson Institute for International Economics, a think tank in Washington, D.C. Ahead of time, “it was not clear which was going to be the better way to go,” Mr. Posen said, noting that many economists had worried that the U.S. approach would actually perform slightly worse. “As always, it is better to be lucky than to be good.”
2. Impact of ultra-loose monetary policy on corporate profits
One of the most profound impacts from the reversal of ultra loose monetary policy turns on the profitability and finances of the corporate sector in the advanced countries. A study by the Fed’s Michael Smolyansky shows lower interest expenses and corporate tax rates explain more than 40 per cent of the real growth in corporate profits from 1989 to 2019 for S&P 500 non-financial firms. That is an eye-catchingly large number and the picture will be similar across the developed world. In today’s fiscal bind, the scope for more corporate tax cuts is minimal and interest rates are not going back to near-zero. So prepare for a long-run slowdown in corporate profits growth and stock returns.
3. In a period of eight years, the US has emerged from exporting nothing to becoming the leading natural gas exporter.
A 2015 paper by Danny Miller of HEC Montreal business school and the University of Rhode Island’s Xiaowei Xu... had initially planned to study the effects of hubris on 444 US chief executives who had scored an admiring cover story in a top US business magazine between 1970 and 2008. But they discovered something far more interesting: the cover story CEOs with an MBA were noticeably worse at sustaining superior performance than the MBA-free ones. MBA graduates were also more likely to expand their companies with acquisitions rather than organic growth, sacrificing earnings and cash flow in the process, yet their own pay rose at a faster rate than that of their counterparts who had outperformed them. When the two researchers then did an even larger study of 5,000 CEOs, they confirmed that those with an MBA degree operated quite differently to the non-MBA bosses, spending less on R&D, say, and using accounting techniques to flatter their firm’s earnings. These ploys prompted a swift jump in profits, followed by a decline that led to a bigger fall in their company’s market value compared with outfits run by CEOs without an MBA — whose pay was again less impressive.
6. Interesting graphic from the last bout of high inflation in the US.
7. The surprising resilience of the Russian economy.
Russia is directing a third of the country’s budget — Rbs9.6tn in 2023 and Rbs14.3tn in 2024 — towards the war effort, a threefold increase from 2021, the last full year before the invasion. This includes not only producing hardware, but also giving war-related social payments to those who fight in Ukraine and their families, as well as some spending on the occupied territories... The Russian finance ministry estimates that war-related fiscal stimulus in 2022-23 was equivalent to around 10 per cent of GDP. In that same period, war-related industrial output has risen 35 per cent while civilian production has remained flat, according to research published by the Bank of Finland Institute for Emerging Economies.
8. The FT has an article on the Italian Adriatic port two on Monfalcone, where the size of foreign population has risen sharply from 3.4% in 2001 to 30.4% in 2023. Nearly two-thirds of babies born in Monfalcone are the children of foreign nationals. The migrants are predominantly Bangladesh Muslims and North Africans. The sudden and sharp rise has naturally stoked local discontent as the Italians even as the religious practices and way of life of the immigrants start to clash with those of the locals.
Polling suggests Italians are deeply apprehensive about the increased presence of foreign people, especially from outside Europe, in their communities. Muslims, who far-right politicians such as Cisint frequently demonise as a threat to the Italian way of life, are viewed with particular suspicion... Muslims across Italy, many of whom worship in makeshift settings or rented properties, are watching the ban in Monfalcone with alarm, fearing it will set a precedent and embolden local authorities to crack down on their own precarious places of worship.
This kind of response is inevitable when faced with such rapid and large immigration. There's no way such spike in people coming from a completely alien culture can get integrated into the society.
9. The outgoing Mexican President Andres Manuel Lopez Obrador has proposed a radical constitutional overhaul of about 20 changes, including a directly elected Supreme Court, smaller legislature, and worker pension equal to their last drawn salary.
10. FT reports that US PE firms are rushing to take advantage of lower borrowing costs by loading debt on their portfolio companies and using it to pay dividends to themselves and their investors. With exit opportunities constrained and investors demanding returns, PE firms have been resorting to such "dividend recapitalisations" to pacify investors.
Univar borrowed $450mn in new term loans to pay a dividend to its private equity owner Apollo, which had closed a more than $8bn takeover of the company six months earlier. Warburg Pincus and Blackstone have borrowed about $800mn since December against InfraFi Network to pay themselves a large dividend. Last month, 1-800 Contacts, owned by KKR, borrowed $565mn in senior debt to repay a higher-cost $315mn junior loan and fund a $250mn payout to itself.
11. This is a stunning factoid about Chinese stocks,
After falling almost 10 per cent, Hong Kong’s Hang Seng stock index now trades around the same levels it did in 1997, when Tencent and Alibaba, two of its largest constituents, had not yet been founded and the territory had just returned to Chinese sovereignty.
And this might present a buying opportunity
On valuation alone, there can be little doubt — Chinese stocks are some of the most attractive assets available in global markets. According to Deutsche Bank, the Hang Seng index trades at a forward price-to-earnings multiple of about eight, ie you pay $8 for around $1 of annual earnings, which compares with global equity valuations of more than double that. Its price-to-book value is less than one. Nor are these failing companies. The largest, such as Tencent and Alibaba, are highly liquid and still growing. They are trading on forward price-to-earnings multiples of eight to 13 times, with healthy free cash flow yields, indicating they generate ample flows of cash after covering their investment needs. If these companies reverted to trading in line with their US peers, investors would comfortably double their money overnight.
Robin Harding attributes the low valuation to two factors - the regulatory crackdowns on foreign and private investors; and the uncertainty created by the geopolitics of the new Cold War.
12. Fixed rate mortgages have increased frictions on monetary policy transmission in the west.
In the UK, the share of floating-rate mortgages fell from 70 per cent to 15 per cent in the decade to 2022, according to Capital Economics. In America, 30-year fixed mortgages have long been common, but the share of adjustable rate new mortgages has dropped sharply since the 1980s. Floating-rate US corporate bond issuance has also dropped from about 30 per cent prior to the financial crisis in 2007-08, to about 15 per cent now, Capital Economics adds.
The ultra-loose policy for long coupled with innovations like forward guidance have blunted monetary transmission. They have reduced the disciplining force of financial markets among market participants. They no longer have to work hard to make their decisions, instead relying on the Fed's guidance and the implicit market put. This moral hazard also means that monetary tightening may have to go much higher to generate the same economic impact.
13. Simon Kuper makes a very clear case for taxing billionaires at much higher rates.
Forbes magazine last year identified 2,640 billionaires worldwide, up nearly 19-fold since 1987. Global wealth has grown faster than incomes, and billionaires’ wealth has grown fastest of all, reports the EU Tax Observatory. Billionaires, aided by tax-dodging, pay lower effective income-tax rates than average American and French wage-earners, says the observatory. And wealth taxes barely exist. In short, states should tax billionaires because that’s where the money is. Anyone fleeing a country’s wealth tax, such as the rich Norwegians who recently moved to Switzerland, could be charged an exit levy... The French economist Thomas Piketty proposes tax rates of 90 per cent on wealth of more than €2bn. He notes that the US taxed the various income streams of very rich people at around those rates from about 1950 to 1980, an era of impressive economic growth. Piketty says taxing billionaires would allow governments to cut property taxes, which are, in effect, wealth taxes on ordinary people. Governments could also use the proceeds to create trust funds for people in the bottom half of society, who typically own almost no wealth... Taxing billionaires has recently become more feasible. Since 2017, an automatic, multilateral exchange of bank information, now applied by more than 100 countries, makes it harder to hide money. And taxing so few people is administratively simple. The EU Tax Observatory estimates that a 2 per cent, EU-wide wealth tax would raise $42bn a year from the bloc’s 499 billionaires. A more ambitious tax would extend to the billionaire-adjacent.
He makes an important observation about why there's so much resistance to taxing billionaires,
I suspect that Musk’s desire for the $55.8bn stems from an obsession with “his number” or estimated wealth, currently at about $200bn. A wealthy European friend suggests this obsession is strongest among rich Americans. Their “number” often becomes their identity, whereas rich Europeans probably derive identity more from old-fashioned class markers such as family background, schooling or cultural tastes.
14, As it struggles with technical issues on its 747 Max series, Boeing's market share of the large aircraft duopoly with Airbus has been on the decline.
The European group has held the crown as the world’s largest plane maker by deliveries for the past five years and now holds a market share of 62 per cent in the lucrative narrow-body segment of the commercial market, according to aviation consultancy Cirium.
Boeing launched the 737 Max in 2011 as a competitor to Airbus's popular 320 series (launched in 1987) which was rapidly becoming popular and taking away the market share in the single-aisle large aircraft. Airbus has an order book of 8598, compared with 5626 for Boeing. In the much smaller wide-bodied, two-aisle aircraft, Boeing continues to lead, delivering 132 aircraft in 2023 compared to 96 by Airbus.
The Chinese are heavily backing Comac, with its single-aisle C919 jet, pumping in $72 billion is state support. But it's heavily reliant on western suppliers, and is all but a A320 in name.
1 comment:
Hi Gulzar sir, I wanted to ask what are your thoughts on a PhD thesis by Princeton sociologist Kyle chan which analyzes railway bureaucracy of India and China and their ability to get thing done from a comparativist perspective.
Fast Track: State Capacity and Railway Bureaucracies in China and India https://www.proquest.com/openview/51e70f28e0e001b670d15b42aafbb471/1.pdf?pq-origsite=gscholar&cbl=18750&diss=y
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