Weekend reading links

1. On the Taylor Swift economy

It’s been estimated Swift’s Eras tour generated US$5bn in the US economy; the US Federal Reserve even singled her out for stimulating the national tourism industry. “If Taylor Swift were an economy,” said Dan Fleetwood, the president of QuestionPro, the research company that made that estimate, “she’d be bigger than 50 countries.” 

Her impact can already be felt in Australia, where Sydney and Melbourne are busy preparing for her arrival next week. It is expected that Swift’s seven concerts in the two cities – three in Melbourne and four in Sydney – will generate $140m, according to state government modelling. More than 85% of the hotels and motels in Melbourne city are booked during her first two shows; a similar capacity is expected in Sydney. Qantas added an extra 11,000 seats on flights to both cities. Australian bead sales are reportedly through the roof, as Swifties prepare friendship bracelets to exchange at her shows.

On her marketing strategy,

While the Eras tour was moving through the US, one estimate suggested that while every US$100 spent on a live performance would typically result in US$300 in ancillary spending on things like hotels, dining, merch and transport, Swifties were spending US$1,300. Part of this stems from their devotion to her, but also her practice of releasing multiple versions of one item: there are more than 20 versions of her album Midnights available to buy, for instance, with extra tracks and different covers. “If any other artist sold eight different vinyl versions of the same album, people would think they were ripping us off. When it is Taylor, it’s like, ‘amazing, I’ll buy them all’. It’s part of the fan identity in a way that nobody else has really mastered,” says Caroll.

This statement by the Japanese embassy in Washington reassuring fans that Swift would be able to complete her last Eras concert in Tokyo and still be able to make it to cheer her boyfriend Tavis Kelce at the Super Bowl final exemplifies the phenomenon she has become. 

2. As India opens up its G-Sec market to foreign portfolio investors in June, this snapshot of the foreign ownership of Indian bonds.

It's being estimated that with the activation of the inclusion of India into the JP Morgan Bond Index, about $18-22 bn in portfolio flows are likely in the last three quarters of 2024-25. 

3. Tamal Bandopadhyay captures the governance issues at the heart of Paytm Payments Bank Ltd (PPBL).

When a payments bank is being punished for “persistent” non-compliance with regulations, nowhere are its managing director (MD) and chief executive officer (CEO) to be seen. Instead, its majority stakeholder has taken up the responsibility of doing everything – convincing customers to stay put, the regulator to go slow and even the finance minister to influence the regulator.

The RBI's actions are the culmination of a long series of defaults and non-compliances by the Bank despite clear directions by the regulator. 

Serious irregularities have been found with respect to the KYC norms and how much money a payments bank can keep as day-end balance in a customer account. Besides, the RBI has found several instances of a single PAN linked to thousands of customers for transactions worth crores of rupees. This even raises concerns of money laundering as an unusually high number of dormant accounts are prone to be used as mule accounts. On many occasions, PPBL has allegedly submitted false compliance reports, fooling the regulator. Finally, it has not stayed at an arm’s length with the promoter group entities and got involved in significant intra-group and related-party transactions, which have reportedly not been disclosed. Who knows if bank customer data was shared with the group companies?... A diluted KYC norm was followed for people involved in P2P transactions, but many of these transactions turned out to be P2M transactions. They have overshot the limit many times. Ideally, the bank should have filed suspicious transaction reports to the financial intelligence unit, which collects financial intelligence about offences under the Prevention of Money Laundering Act.

The article is an excellent primer om the whole issue.

4. Hong Kong stocks are back to the levels of the 1997 handover!

In the spring of 2019 at the onset of the democracy protests, the Hang Seng index was trading at nearly 30,000. It is now more than 45 per cent below that level at 15,750... a three-year bear market that has taken China’s broad CSI 300 index down more than 40 per cent from its spring 2021 peak. Reflecting collateral damage on Chinese enterprises listed in Hong Kong and the city’s China-sensitive services sector, the Hang Seng has fallen 49 per cent over the same period.

And things are likely to get worse. FT reports that the second largest global law firm, Latham & Watkins is cutting off automatic access to its international databases for its HK-based lawyers. HK is effectively being treated by global firms as the same as mainland China. 

5. Meanwhile Chinese deflation, as seen in their export prices, are at their highest since the financial crisis.

BYD, China’s biggest carmaker, recently announced price cuts of between 5 and 15 per cent for its electric vehicles in Germany, after Mercedes-Benz warned late last year that its profits were being hit by a “brutal” price war in electric vehicles. Nearly every other manufacturing company in Germany surveyed by the Bundesbank in the past year relied on Chinese supplies for critical intermediate inputs whether directly or indirectly, the central bank said in a report last month. “China spent 20 years destroying emerging-market competitors in the manufacturing space, or at least squeezing them out of global markets. Now it’s threatening to do the same to advanced economies’ manufacturers,” said Charles Robertson, head of macro strategy at FIM Partners.

5. US market frothiness on the rise, as seen by the Rule of 20 (which suggests market is fairly value when P/E + CPI year/year is equal to 20)!

6. Shyam Saran has a good summary of the economic and political headwinds facing China.

7. David Solomon, the controversial CEO of Goldman Sachs, is rewarded with a compensation of $31 million, and increase of 24%, despite the bank reporting its lowest profits in four years.

Last year was the most challenging of Solomon’s five-year tenure leading Goldman. He faced a string of critical news articles about his leadership style, while the bank also cut thousands of jobs and suffered from a slowdown in investment banking activity... His remuneration was up from $25mn in 2022, making 2023 his second-most lucrative year running Goldman behind the $35mn he earned in 2021. Solomon’s pay rose more than overall expenses on remuneration at Goldman, which were up only 2 per cent last year. The bank’s headcount fell by 3,200 employees in 2023 to just over 45,000 and average pay expense per employee was up almost 10 per cent... Net income at the bank fell 24 per cent in 2023 to $8.5bn, the lowest since 2019. Goldman also reported a return on equity, a key gauge of profitability, of 7.5 per cent, well short of the bank’s target of 14 per cent to 16 per cent.

What was the justification for such increase despite the poor performance?

But the board rewarded Solomon for paring back a lossmaking push into retail banking, re-emphasising Goldman’s strategy around its core investment banking and trading business and expanding in asset and wealth management... “While these strategic actions negatively impacted short-term performance, the compensation committee believes that the actions of senior management were critical to reorienting the firm with a much stronger platform for 2024 and beyond,” Goldman wrote in the filing announcing Solomon’s pay.

How did other banks reward their CEOs?

JPMorgan’s Jamie Dimon, whose bank reported record profits for 2023, had his pay rise about 4 per cent to $36mn, while Morgan Stanley’s James Gorman, who stepped down as CEO at the start of 2024, was paid $37mn, up 17.5 per cent. Bank of America cut the pay of its top executive Brian Moynihan by 3 per cent, or $1mn, to $29mn.

One executive compensation in the top US companies has nothing to do with performance. It's more a cartel of price fixing where the compensation stays in a small band. 

Instead of free-market and talent competition, the market for executives is a closed cartel of price fixing with no correlation with outcomes.

8. FT has an article which points to the reversal of trend in the covid-induced shift towards online apparel retail in the UK. Since the pandemic though the trend has reversed - physical shops have rebounded and the fortunes of the online retailers have dipped. This is reflected in the sharply dipped share prices of online retailers (Asos, Boohoo, Sosander, Zalando) and strong increases in that of physical stores (Marks & Spencers, Fraser). Offline-online apparel retail share is 60:40.

Nobody knows with any reasonable certitude as to the fate of the online-offline battle.

“What we’re seeing is a rebalancing of the online and in-store channels,” says Tamara Sender Ceron, a fashion retail analyst at Mintel. That has left all retailers with questions about which channel will be more profitable and where to prioritise investment. Even Next, a UK mid-market operator that has been more successful than most at combining stores with online operations, admits it is hard to predict where things will settle. “Our view is that we don’t know,” says its long-serving chief executive Lord Simon Wolfson. “But we don’t want to precipitate a retreat from [physical] retail necessarily, because, you know, it does appear to be stable for now.”... Sender Ceron believes that Generation Z and millennials’ shopping habits were transformed by the pandemic. “They’re hot between channels, so it’s not as clear cut as online and in store anymore . . . They’re using smartphones to compare prices and check stock availability while they’re actually in store.”

... The substantial fixed costs of operating stores have in the past been a millstone for traditional retailers. But many areas in the UK have experienced steep falls in store rents in recent years while business rates — a property tax linked to rents — were recalibrated last year, resulting in reductions for many. At the same time, online retailers have been hit with higher prices for everything from freight to marketing. “Online is a much more expensive place to trade than it’s ever been,” says John Edgar, chief executive of department store group Fenwick. “That’s the Google costs, the logistic costs, and those costs vary with sales.”

The rapid surge in online retail, turbo-charged by the pandemic induced lockdowns, is a feature of new markets. But once the pent-up (or latent) demand is met in a surge, reality sets down. 

But as these companies reach maturity, they face a series of challenges that raises questions about the scalability and longevity of their business models. As physical shops reopened, online orders in Europe’s main markets slowed down for likely the first time in modern retail history, according to Forrester Research. It expects overall online sales in major markets to remain flat in 2023.

9. I have blogged earlier that interest rates will not go back to the pre-pandemic ultra-low levels.

The so-called neutral rate of interest — the borrowing rate that keeps economies growing steadily, with full employment and inflation around 2 per cent. After falling to rock-bottom levels before the pandemic, the neutral rate has, by some measures, edged up more recently. This could suggest official rates will not head as low as their pre-pandemic levels, even as inflation eases... The neutral rate is not directly set by central banks, and they cannot reliably observe where it is. But for many economists the inflation-adjusted neutral rate — known by a range of other labels including the natural or equilibrium rate or R-star — is a valuable guiding light. If the official interest rate sits above it, central bankers consider policy to be restricting economic activity; below it, policy is deemed to be expansionary. The neutral rate’s value is highly contested...

 

The lower neutral rates of recent decades were driven by a range of long-term factors, including subdued productivity growth, a glut of savings swilling around the world and an ageing population that boosted the stockpiles of cash stored away for retirement. One widely used estimate, from the New York Fed, points to a multi-decades-long decline in inflation-adjusted neutral rates in both the US and euro area that shows no sign of reversing... This put R-star in the US at the third quarter of last year at 0.9 per cent before inflation — a big fall from levels approaching 4 per cent at the start of the millennium. Canada’s inflation-adjusted neutral rate was 1.5 per cent and the eurozone’s was -0.7 per cent, according to their model. Other methodologies for estimating the neutral rate point to similar declines... Directly before the pandemic, the so-called “central tendency” estimates for the longer-run federal funds target range lay between 2.4 per cent and 2.8 per cent, implying policymakers believed R-star lay between 0.4 per cent and 0.8 per cent when taking into account the Fed’s 2 per cent inflation goal. But the most recent projections show a range between 2.5 per cent and 3 per cent, or 0.5 per cent and 1 per cent for R-star.

In Europe, the neutral rate appears to have risen more than in the US. 

ECB executive board member Isabel Schnabel told the Financial Times this month: “There are good reasons to believe that the global R-star is going to move up relative to the post-financial crisis period.” She predicted that higher investment to tackle climate change, increased defence spending, the fragmentation of the global trading system and higher government debt would all push up the neutral rate of interest... ECB officials published a paper this week outlining how the median of the various measures of the neutral rate that it tracks had risen 0.3 percentage points since before the pandemic hit in 2020.