Posts Tagged ‘finance’
“When the gods want to punish us, they answer our prayers”*…
… So, the estimable Rana Foroohar suggests, American business leaders should be careful what they wish for…
For months now, I’ve been watching with alarm how many top business leaders in the US are buying the line that Donald Trump II would somehow be just like the last time around — loud, but laissez-faire. It was so depressing to see some of America’s top CEOs giggling as the former president joked at his recent Business Roundtable event in Washington. Trump said that he’d polled waitresses and caddies (presumably at Mar-a-Lago) about removing taxes on tips and they were in favour. Sure, there were reports of some grumbling about hardline tariff talk, Trump’s inability to stay on point and his general blow-hardness. But for the most part, tax cuts, deregulation and an utter lack of imagination about political risk seems to be driving business sentiment around him.
It’s not just American business that has the blinders on. I did a Lunch with the FT [gift link] with Lloyd’s of London chief executive John Neal, and I was amazed that when I asked him to think about his top US political risks, he spoke first about Joe Biden’s money printing — rather than the risk to, say, the rule of law under Trump. When I pressed him on the Trump risk, his biggest worry seemed to be the differing policies of the two candidates around things like electric vehicle production, and the decision risk that this might introduce for companies.
Really folks? Let’s have a refresher course on Trumpian economics.
In 2016, Trump talked tough about Made in America and helping working people, but most of his economic policies (aside from tariffs on China) were basically business as usual. He rolled back regulation and lowered taxes on big corporations. Much of the money went to stock buybacks, not Main Street investment. That buoyed short-term stock prices, which were also helped along by low interest rates.
But, it’s VERY unlikely we would see the same phenomenon in a second Trump administration. His tenure marked the apex of financialised growth, which is now largely tapped out. As the Federal Reserve’s End of an Era paper from June 2023 laid out, more than 40 per cent of real corporate profit growth between 1989 and 2019 came from the secular fall in interest rates, and corporate tax rates being cut. That’s what has propelled so much growth in equities in recent years.
Today, the S&P is by some measures more overvalued than it was when the housing bubble burst. In this environment, it’s difficult to see equities rising even if the Fed were to begin cutting rates in the face of a recession. It’s much more likely they’d fall, despite any new Trump tax cuts. And that is the more benign scenario. A more likely possibility is that we’d get a harder-edged, even more insular, xenophobic and paranoid version of Trump this time around.
For starters, few of the more moderate business types that served with him the first time would be willing to come into a second administration given the January 6 2021 Capitol riots and Trump’s ongoing election-loss denial. Some smart people in the business community have concerns about his propensity for fiscal profligacy at a time when rising US deficit levels are worrying investors. It’s fascinating to me that people think about Biden when they think about debt, rather than Trump. Biden’s White House has made record fiscal investment, sure, but it is investing in the real economy, while Trump’s legacy was a classic Republican formula of boosting asset markets with financialisation.
Add to that the prospects of a 10 per cent tariff on imports across the board, and 60 per cent levy on China. This goes to what has been one of the biggest problems with Trump’s trade and economic strategies from the beginning — a tendency to blame China and employ tariffs as a standalone solution to the big, complex problem of slower secular growth and growing inequality in the US. Not that Trump seems to think in such nuanced terms. The fact is that America’s economic and political problems are only partly about the failings of globalisation and the neoliberal trading system in particular. They are also about a lack of investment at home, in basic infrastructure, skills and education, as well as core research and development.
I haven’t seen anything yet that makes me think that Trump or anyone in his orbit has a plan for a multipolar world, or any sense of how to manage complex supply chain de-risking or the politics of friendshoring. And yet, 10 or 60 per cent tariffs depending on the locale would require some kind of reshoring approach. None of that will square with an asset boom, but rather quite the opposite…
A warning to business leaders supporting Trump, from @RanaForoohar @FT.
(Image above: source)
* Oscar Wilde
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As we study self-interest, we might recall that it was on this date in 1972 that an 18-1/2-minute gap appears in the tape recording of the conversations between U.S. President Richard Nixon and his advisers regarding the recent arrests of his operatives while breaking into the Watergate complex.
Still, the tapes were damming. The White House released the subpoenaed tapes on August 5. One tape, later known as the “Smoking Gun” tape, documented the initial stages of the Watergate coverup. On it, Nixon and Haldeman are heard formulating a plan to block investigations by having the CIA falsely claim to the FBI that national security was involved.
It’s a measure of how different those times were from ours that, once the “Smoking Gun” transcript was made public, Nixon’s political support practically vanished: the ten Republicans on the House Judiciary Committee who had voted against impeachment in committee announced that they would now vote for impeachment once the matter reached the House floor.
“The function of economic forecasting is to make astrology look respectable.”*…
For as long as there have been markets, there have been those who forecast them. Bob Seawright explains why, for all of that “practice,” forecasting is never– and never can be– a precise nor “perfect” pursuit…
… On our best days, wearing the right sort of spectacles, squinting and tilting our heads just so, we can be observant, efficient, loyal, assertive truth-tellers. However, on most days, all too much of the time, we’re delusional, lazy, partisan, arrogant confabulators. It’s an unfortunate reality, but reality nonetheless.
But that’s hardly the whole story.
We are our own worst enemy, but there are other enemies, too. Despite our best efforts to make it predicable and manageable, and even if we were great forecasters, the world is too immensely complex, chaotic, and chance-ridden for us to do it well…
Eminently worth reading in full for Seawright’s accounts of human nature, complexity, chaos, and chance– and of the ways in which they make confident predictions of the future a “Fool’s Errand.”
As Niels Bohr once said (paraphrasing a Danish proverb), “it is difficult to make predictions, especially about the future.”
(Image above: source)
* John Kenneth Galbraith
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As we seek clarity, not certainty, we might recall that it was on this date in 1983 that Thomas Dolby’s “She Blinded Me with Science” reached #5 on the Billboard Hot 100 chart.
“If someone separated the art of counting and measuring and weighing from all the other arts, what was left of each (of the others) would be, so to speak, insignificant”*…
Mathematics, Bo Malmberg and Hannes Malmberg argue, was the cornerstone of the Industrial Revolution. A new paradigm of measurement and calculation, more than scientific discovery, built industry, modernity, and the world we inhabit today…
In school, you might have heard that the Industrial Revolution was preceded by the Scientific Revolution, when Newton uncovered the mechanical laws underlying motion and Galileo learned the true shape of the cosmos. Armed with this newfound knowledge and the scientific method, the inventors of the Industrial Revolution created machines – from watches to steam engines – that would change everything.
But was science really the key? Most of the significant inventions of the Industrial Revolution were not undergirded by a deep scientific understanding, and their inventors were not scientists.
The standard chronology ignores many of the important events of the previous 500 years. Widespread trade expanded throughout Europe. Artists began using linear perspective and mathematicians learned to use derivatives. Financiers started joint stock corporations and ships navigated the open seas. Fiscally powerful states were conducting warfare on a global scale.
There is an intellectual thread that runs through all of these advances: measurement and calculation. Geometric calculations led to breakthroughs in painting, astronomy, cartography, surveying, and physics. The introduction of mathematics in human affairs led to advancements in accounting, finance, fiscal affairs, demography, and economics – a kind of social mathematics. All reflect an underlying ‘calculating paradigm’ – the idea that measurement, calculation, and mathematics can be successfully applied to virtually every domain. This paradigm spread across Europe through education, which we can observe by the proliferation of mathematics textbooks and schools. It was this paradigm, more than science itself, that drove progress. It was this mathematical revolution that created modernity…
The fascinating story: “How mathematics built the modern world,” from @bomalmb and @HannesMalmberg1 in @WorksInProgMag.
* Plato
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As we muse on measurement, we might recall that it was on this date in 1790, early in the French Revolution, that the French Assembly, acting on the urging of Bishop Charles Maurice de Talleyrand, moved to create a new system of weights and measures based on natural units– what we now know as the metric system.
“We use the term risk all too casually, and the term uncertainty all too rarely”*…
How private-equity giants are overhauling the financial system, and its potential impact on pensions…
A decade or so ago private equity was a niche corner of finance; today it is a vast enterprise in its own right. Having grabbed business and prestige from banks, private-equity firms manage $12trn of assets globally, are worth more than $500bn on America’s stockmarket and have their pick of Wall Street’s top talent. Whereas America’s listed banks are worth little more than they were before the pandemic, its listed private-equity firms are worth about twice as much. The biggest, Blackstone, is more valuable than either Goldman Sachs or Morgan Stanley—and has the confidence of a winner. “It’s the alternatives era,” proclaimed the company’s ebullient Taylor Swift-themed festive video in December. “We buy assets then we make ’em better.”
This is not, though, the business that has recently boomed for them. Traditional private equity—using lots of debt to buy companies, improving them, and selling or listing them—has been lifeless. High interest rates have cast doubt on the value of privately held companies and reduced investors’ willingness to provide new funds. It does not seem to matter. Core private-equity activity is now just one part of the industry’s terrain, which includes infrastructure, property and loans made directly to companies, all under the broad label of “private assets”. Here the empire-building continues. Most recently, as we report this week, the industry is swallowing up life insurers.
All of the three kings of private equity—Apollo, Blackstone and KKR—have bought insurers or taken minority stakes in them in exchange for managing their assets. Smaller firms are following suit. The insurers are not portfolio investments, destined to be sold for a profit. Instead they are prized for their vast balance-sheets, which are a new source of funding.
Judged by the fundamentals, the strategy makes sense. Insurance firms invest over long periods to fund payouts, including annuities sold to pensioners. They have traditionally bought lots of government and corporate bonds that are traded on public markets. Firms like Apollo can instead knowledgeably move their portfolios into the higher-yielding private investments in which they specialise. A higher rate of return should mean a better deal for customers. And because insurers’ liabilities stretch years into the future, the finance they provide is patient. In banking, long-term loans are funded with lots of instantly accessible deposits; with private assets and insurance, the duration of the assets matches the duration of the liabilities.
Yet the strategy brings risks—and not just to the firms. Pension promises matter to society. Implicitly or explicitly, the taxpayer backstops insurance to some degree, and regulators enforce minimum capital requirements so that insurers can withstand losses. Yet judging the safety-buffers of a firm stuffed with illiquid private assets is hard, because its losses are not apparent from movements in financial markets. And in a crisis insurance policyholders may sometimes flee as they seek to get out some of their money even if that entails a financial penalty. Last year an Italian insurer suffered just such a bank-run-like meltdown…
Funding pension providers with private equity: “The risks to global finance from private equity’s insurance binge” (gift article) from @TheEconomist.
And lest we think that publicly-funded defined benefit pensions are less risky, see “Akin to Fraud” by Mary Willliams Walsh, an account of the sorry state of the public pension fund in New Hampshire (the state with the second-oldest population in the nation).
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As we rethink retirement, we might recall that it was on this date in 1728 that John Gay‘s The Beggar’s Opera premiered. A “ballad opera” (a satirical work with lyrics set to vernacular music), it was a huge hit– it has been called “the most popular play of the eighteenth century“– a watershed in Augustan drama.
The original idea of the opera came from Jonathan Swift, who wrote to Alexander Pope in 1716 asking “…what think you, of a Newgate pastoral among the thieves and whores there?” Their friend, Gay, decided that it would be a satire rather than a pastoral opera.
In 1928, Bertolt Brecht (working from a translation into German by Elisabeth Hauptmann) adapted the work into Die Dreigroschenoper (The Threepenny Opera) in 1928, sticking closely to the original plot and characters but with a new libretto, and mostly new music by Kurt Weill.
“Poverty is the worst form of violence”*…
Two economic historians, Peter A. Coclanis and Louis M. Kyriakoudes, on why about 20% of counties in the U.S. South are marked by “persistent poverty”…
For a brief moment in the summer of 2023, the surprise No. 1 song “Rich Men North of Richmond” focused the country’s attention on a region that often gets overlooked in discussions of the U.S. economy. Although the U.S. media sometimes pays attention to the rural South — often concentrating on guns, religion and opioid overdoses — it has too often neglected the broad scope and root causes of the region’s current problems.
As economic historians based in North Carolina and Tennessee, we want a fuller version of the story to be told. Various parts of the rural South are struggling, but here we want to focus on the forlorn areas that the U.S. Department of Agriculture refers to as “rural manufacturing counties” — places where manufacturing is, or traditionally was, the main economic activity.
You can find such counties in every Southern state, although they were historically clustered in Alabama, Georgia, North and South Carolina, and Tennessee. And they are suffering terribly.
First, let’s back up. One might be tempted to ask: Are things really that bad? Hasn’t the Sun Belt been booming? But in fact, by a range of economic indicators — personal income per capita and the proportion of the population living in poverty, for starters – large parts of the South, and particularly the rural South, are struggling.
Gross domestic product per capita in the region has been stuck at about 90% of the national average for decades, with average income even lower in rural areas. About 1 in 5 counties in the South is marked by “persistent poverty” — a poverty rate that has stayed above 20% for three decades running. Indeed, fully 80% of all persistently poor counties in the U.S. are in the South.
Persistent poverty is, of course, linked to a host of other problems. The South’s rural counties are marked by low levels of educational attainment, measured both by high school and college graduation rates. Meanwhile, labor-force participation rates in the South are far lower than in the nation as a whole.
Unsurprisingly, these issues stifle economic growth.
Meanwhile, financial institutions have fled the region: The South as a whole lost 62% of its banks between 1980 and 2020, with the decline sharpest in rural areas. At the same time, local hospitals and medical facilities have been shuttering, while funding for everything from emergency services to wellness programs has been cut.
Relatedly, the rural South is ground zero for poor health in the U.S., with life expectancy far lower than the national average. So-called “deaths of despair” such as suicides and accidental overdoses are common, and rates of obesity, diabetes, hypertension, heart disease and stroke are high – much higher than in rural areas in other parts of the U.S. and in the U.S. as a whole…
Although some people think that these areas have forever been in crisis, this isn’t the case. While the South’s agricultural sector had fallen into long-term decline in the decades following the Civil War — essentially collapsing by the Great Depression — the onset of World War II led to an impressive economic growth spurt.
War-related jobs opening up in urban areas pulled labor out of rural areas, leading to a long-delayed push to mechanize agriculture. Workers rendered redundant by such technology came to constitute a large pool of cheap labor that industrialists seized upon to deploy in low-wage processing and assembly operations, generally in rural areas and small towns.
Such operations surged between 1945 and the early 1980s, playing a huge role in the region’s economic rise. However humble they may have been, in the South — as in China since the late 1970s — the shift out of a backward agricultural sector into low-wage, low-skill manufacturing was an opportunity for significant productivity and efficiency gains.
This helped the South steadily catch up to national norms in terms of per-capita income: to 75% by 1950, 80% by the mid-1960s, over 85% by 1970, and to almost 90% by the early 1980s…
By the early 1980s, however, the gains made possible by the shift out of agriculture began to play themselves out. The growth of the rural manufacturing sector slowed, and the South’s convergence upon national per capita income norms stopped, remaining stuck at about 90% from then on.
Two factors were largely responsible: new technologies, which reduced the number of workers needed in manufacturing, and globalization, which greatly increased competition. This latter point became increasingly important, since the South, a low-cost manufacturing region in the U.S., is a high-cost manufacturing region when compared to, say, Mexico.
Like Mike Campbell’s bankruptcy in Hemingway’s “The Sun Also Rises,” the rural South’s collapse came gradually, then suddenly: gradually during the 1980s and 1990s, and suddenly after China’s entry into the World Trade Organization in December 2001…
A sobering read: “Poor men south of Richmond? Why much of the rural South is in economic crisis.”
* Mahatma Gandhi
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As we dive into the dynamics of development, we might recall that it was on this date in 1718 that the famous pirate Edward Teach– better known as Blackbeard– was killed off the coast of North Carolina.
Edward Teach, also known as Blackbeard, is killed off North Carolina’s Outer Banks during a bloody battle with a British navy force sent from Virginia.
Believed to be a native of England, Edward Teach likely began his pirating career in 1713, when he became a crewman aboard a Caribbean sloop commanded by pirate Benjamin Hornigold. In 1717, after Hornigold accepted an offer of general amnesty by the British crown and retired as a pirate, Teach took over a captured 26-gun French merchantman, increased its armament to 40 guns, and renamed it the Queen Anne’s Revenge.
During the next six months, the Queen Anne’s Revenge served as the flagship of a pirate fleet featuring up to four vessels and more than 200 men. Teach became the most infamous pirate of his day, winning the popular name of Blackbeard for his long, dark beard, which he was said to light on fire during battles to intimidate his enemies. Blackbeard’s pirate forces terrorized the Caribbean and the southern coast of North America and were notorious for their cruelty.
In May 1718, the Queen Anne’s Revenge and another vessel were shipwrecked, forcing Blackbeard to desert a third ship and most of his men because of a lack of supplies. With the single remaining ship, Blackbeard sailed to Bath in North Carolina and met with Governor Charles Eden. Eden agreed to pardon Blackbeard in exchange for a share of his sizable booty.
At the request of North Carolina planters, Governor Alexander Spotswood of Virginia dispatched a British naval force under Lieutenant Robert Maynard to North Carolina to deal with Blackbeard. On November 22, Blackbeard’s forces were defeated and he was killed in a bloody battle of Ocracoke Island. Legend has it that Blackbeard, who captured more than 30 ships in his brief pirating career, received five musket-ball wounds and 20 sword lacerations before dying…
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