Bye, bye Miss American Pie?
It may be heretical to say it, but I find Warren Buffett a bit of a bore. His folksy style might suit the communication of his message – and what a message – but something about it grates on me almost as much as the fawning media coverage he attracts.
But, his business partner Charlie Munger? Now there’s someone worth a trip over the Pacific.
So it was that on an early morning in May 2010 I found myself in an English pub in Pasadena, a plate of sausages, bacon and eggs and a pint of bitter before me. The breakfast of champions was ideal preparation first for Tottenham’s vital game against Manchester City, thoughtfully screened on banks of TVs in the bar, followed by the Wesco AGM around the corner.
Munger, less eager to please than Buffett, was just as engaging. When asked a question on the US’s ability to build on its economic power, his reply has stayed with me. “Well, we have the best universities. The smartest people from around the world want to come here. And in California, at least the weather is nice. I don’t see why not.”
The quote popped into my mind this week whilst reading a review of economist Tyler Cowan’s new book, The Complacent Class: The Self-Defeating Quest for the American Dream. The now mandatory wordy title gives it away, but this quote does a colourful takedown of Munger’s position:
“Over the last forty years, America has become the land of the ossified … static, crumbling on the edges, but soothed. In Colorado and Washington, even stoned. Content and comfortable with 5G streaming but tired standards of living, a virtual paradise, but a physical purgatory. NIMBY’ed into an exitless cul-de-sac of repeating repeal and replace policy debates. Trigger-warned in a safe space with heart-emojis all around. Child-proofed for $60k a year in tuition. Segregated by income, zip code, and college degree. Ask your doctor. Read our ad in Good Housekeeping. Did you get the Eventbrite from the protest planner for today’s riot?”
How to ruin the start of a good weekend, right? Or are you still thinking about a full English breakfast?
To enforce the point, a post this week on Cowen’s excellent blog Marginal Revolution witheringly refers to a Bluetooth connected salt shaker called – what else? – Smalt, which is a “multi-sensory device” that “elevates the dining experience”. Please Lord, take me now.
Inert innovation like this isn’t an aberration. A Silicon Valley start-up called Juicero has raised US$120m to produce a US$400 juicer that wields enough force “to lift two Teslas” – because, you know, a tonne of Tesla exerts more force than a ton of Ford. The purpose is to extract more juice from the vegetable bags supplied by Juicero.
Except it isn’t. In a mini-scandal reminiscent of Theranos, which took investors for a far more impressive US$400m, it turns out that squeezing the bags by hand produces as much juice as using the juicer. Look! My hands have Tesla power!
If this is what America’s best-and-brightest can manage, doesn’t Cowen’s depressing description nail it? I’m cherry picking, of course. Silicon Valley has created incredible value for investors. Google, Facebook, Amazon and Apple are global monopolies of incredible power and genuine disruptive force, as the journos being laid off at Fairfax might attest.
But, unfortunately for the US, they also employ comparatively few people and pay almost nothing in taxes. Their true social value is to skew our view of America’s disruptive and innovative culture, which, the data indicates, is not going the way of more Amazons but even fewer Juiceros. This chart shows the trend in start-ups from 1978 to 2012 (the thick red line):
Source: Kauffman Foundation, via The Washington Post
Since 1978, the number of start-ups created by people of prime working age, adjusted for population growth, has halved. This wouldn’t be the first time media coverage was inversely proportional to the availability of contradictory data, but it does highlight how Google and Facebook aren’t tentpole companies emblematic of a dynamic entrepreneurial culture. Instead, they’re totemic examples of something slowly ceasing to exist.
The inevitable consequence of an economy with more business deaths than births (see below) is the growing dominance of larger, older businesses.
According to data compiled by Brookings Institute, in the early 90s companies 16 years or older accounted for 22 per cent of total businesses. By 2011, that figure had hit 35 per cent. The proportion of younger companies declined, especially among those less than five years old. This Economist chart makes a similar point, showing the industries where concentration has most increased:
The Economist goes on to say that, “Concentrated industries, in which the top four firms control between a third and two-thirds of the market, have seen their share of revenues rise from 24 per cent to 33 per cent between 1997 and 2012.”
Is this a problem? If the reduction in the number of firms in a sector isn’t leading to a decline in competition, not necessarily. Unfortunately, the evidence suggests it is.
A 2016 paper by Grullon, Larkin and Michaely (Are US industries becoming more concentrated?) states that “more than three-fourths of U.S. industries have experienced an increase in concentration levels over the last two decades” and that “our findings suggest that the nature of U.S. product markets has undergone a structural shift that has weakened competition.”
The authors go on to say that “half of the U.S. industries lost over 50 per cent of their publicly traded peers” and that “this decline has been so dramatic, that the number of firms these days is lower than it has been in the early 1970s, when the real gross domestic product in the U.S. was one third of what it is today.”
Blimey. If there is disruption in US industry, it seems to be in the growing domination of large, established companies at the expense of start-ups and smaller companies that no longer offer much in the way of competition. You don’t get that impression from the news though, do you?
Let’s take the next step: If major industries are becoming less concentrated and competitive, is there evidence of growing monopoly power? Well, not exactly, but there is this, via Urbanomics:
Note that this chart excludes privately held companies, which may offer a different picture, although I doubt it, and financial firms, where industry concentration has substantially increased (were it to be included I’d say the rising blue line would be even steeper). And there is this:
This isn’t a problem for investors, at least not yet, but it is for ordinary Americans, who aren’t sharing in the success. As US industry becomes more concentrated it employs fewer people. This chart, from the Journal of Economic Perspectives (my inner life is thrilling, I can tell you) shows that the rate of job destruction is now higher than the rate of creation, which is consistent with higher industry concentration and lower business formation:
It would be easy to conclude that bigger companies dominating many sectors are substituting labour in favour of capital, which would exert downward pressure on wages growth, and, as a result, are becoming more productive and profitable. But only two of those things are true.
The so-called Fourth Industrial Revolution, as it turns out, is a mirage. This week the Information Technology & Innovation Foundation reported that, “technology is disrupting a record number of jobs”. Not a record high but, incredibly, a low.
Its conclusion was that: “If there is any risk for the future, it is that technological change and resulting productivity growth will be too slow, not too fast.” The following chart bears out these fears. Despite Bluetooth connected salt shakers and Uber, the rate of growth in total factor productivity is actually slowing:
Meanwhile, the long-term trend in real wages growth (see above) looks like that annoying Coles ad with Casey Donovan.
So, business formation is down, industry concentration is up, taking corporate profits with it despite negligible productivity growth. Labour is not being substituted for labour to anywhere near the extent we are led to believe, but that isn’t having much impact on real wages growth.
Little wonder that 20.5 million Americans have a drug problem: 30 million are on antidepressants, which has created a boom in happiness books (undermining the actual happiness of all of us when their authors pay us a promotional visit; 2.2 million are in jail (the US incarceration rate is higher than Saudi Arabia’s); and for the first time in decades life expectancy is declining. Still, there’s always Amazon, Google and Facebook, right?
It looks like Cowen and not Munger is right. If the percentage of children earning more than their parents, by year of birth, has almost halved since the 1940s, surely the American dream is fading. For many, a $400 juicer that serves no purpose other than to snare millions from a VC’s bank account is just rubbing their noses in it.
America: Don’t believe the hype.
As for Australia, where we have some of the same problems but nothing like the scale, I’d say we’re still the lucky country.
Enjoy the weekend and plump for the full English breakfast and savour the fat. Unlike the US, for the vast majority Australia still brings home the bacon.
Shane Oliver, AMP Capital
Investment markets and key developments over the past week
- The last week saw mixed results from share markets with US, European and Chinese shares down a bit but gains in Japanese and Australian shares. Eurozone shares saw a bit of profit taking after the French election following very strong gains after the first round result. Bond yields generally rose on the back of better economic data but commodity prices were mixed with oil up (on lower US stockpiles) but copper and iron ore down. The latter and a rise in the $US weighed on the Australian dollar.
- The French presidential election panned out even a bit better than the polls indicated with Macron winning 66 per cent of the vote. Coming on the back of the Spanish, Austrian and Dutch elections it is clear that Eurozone countries continue to reject the nationalism and populism evident in the Brexit and US elections. France under Macron is likely to move down a path of economic reform, openness and working with Germany to strengthen the Eurozone. This is good for France, Europe and the Euro but because the French outcome had largely been factored in after the first round vote there was a bit of "selling on the fact" in the last week. The focus now turns to the June 11 and 18 parliamentary elections in France which are likely to see an outcome where Macron's La Republique En Marche party takes the most or maybe even a majority of seats and a centrist reformist government is supported and then the German election in September where Merkel is looking stronger and support for the nationalist AFD is trivial. So political risk in Europe has declined. It will ramp up ahead of the Italian election next year though - but even there it’s doubtful Italy will leave the Euro. Despite the diminished political risk in Europe for now, the absence of higher underlying inflation pressures means the ECB is unlikely to back away from current supportive monetary policy settings any time soon. As ECB President Mario Draghi has pointed out its "too early to declare success" in lifting inflation. This is all good for Eurozone shares which should benefit from attractive relative valuations, rising economic growth and profits and a stimulatory ECB. Even Greece is looking good by the way.
- In the US the political risk around the Trump Administration rose a notch with the firing of FBI director James Comey in the midst of the FBI's investigation into the links between Russia and the Trump presidential campaign. At this stage this is just a political and not an economic/financial issue. But to the extent that it adds to the risks around the GOP losing the House and Senate after next year's mid-terms and the risk of a Trump impeachment thereafter, if anything it actually increases the pressure on the Republicans to pass healthcare and tax reform quickly. However, while these measures are not planned to require any Democrat support in the Senate, measures that do require Democrat support (e.g., Dodd Frank regulatory changes, ramped up infrastructure related spending) are looking less and less likely to pass.
- In Australia, the Federal Budget signalled a further shift from austerity to populism. The big positives include new spending measures being funded, retention of the target to return to surplus by 2020-21, a further ramp up in needed infrastructure spending and a more comprehensive than expected housing affordability package which may not make much short-term difference but could have a big impact on a 3 to 5 year time frame if the plan to reward states for meeting housing supply targets is implemented. The negatives though include a 12-year run of budget deficits that swamp anything seen in the past (and I worry that increasingly no one seems to really care), very optimistic revenue assumptions which point to another delay in reaching the surplus target, a risk that some of the infrastructure projects will see "good debt" become "bad", a big element of tax and spend and a populist levy on big banks which some say begs the question of which sector might be next?
- The danger is that the focus on levy or tax hikes has opened the door to further tax increases as part of a compromise to pass the Budget through the Senate with the Opposition proposing that the 2 per cent budget repair levy be continued for high income earners on top of a 0.5 per cent increase in the Medicare levy taking the top tax rate to 49.5 per cent. The danger is that the Australian personal tax system is already highly progressive with the top 3 per cent of taxpayers already contributing around 30 per cent of the income tax revenue raised by Canberra. A top rate of 49.5 per cent would be at the high end of comparable countries and compares to just 33 per cent in New Zealand, 22 per cent in Singapore and 15 per cent in Hong Kong. Not great for incentive.
Major global economic events and implications
- US data remained consistent with strong economic conditions with job openings, hiring and people quitting for other jobs remaining high, jobless claims remain ultra-low and small business optimism remaining about as strong as it’s ever been. Meanwhile underlying inflation pressure as evident in producer prices remains tame meaning the Fed can remain gradual.
- A slowing in Chinese export and import growth is consistent with some recent loss of momentum in China (although prior months were a bit too strong to be believed) and slowing producer price inflation as the surge in commodity prices drops out points to a slowing in nominal growth. Chinese data continues to run hot and cold and after the heat of late last year and early this year the authorities have tapped the brakes again. However, there is little tolerance for much of a slowdown so if things do slow too much it won't take much to shift back to the accelerator.
Australian economic events and implications
- Risk of another GDP contraction in the March quarter. Australian economic data was a mixed bag with strong readings for business confidence and ANZ job ads but a further leg down in building approvals and very soft retail sales. The peak in building approvals is now well behind us and this will show in slowing growth in dwelling construction activity this year and a contraction next year.
- More immediately, the weakness in March quarter real retail sales (up just 0.1 per cent quarter on quarter), coming on the back of the previous week's data showing that net exports will likely detract from growth again in the March quarter, points to the risk of a very weak and maybe even negative March quarter GDP outcome. Which in turn highlights downside risks to the Government's growth (and wages) assumptions. More importantly with the Budget providing no net stimulus to the economy (in fact it’s a detraction) it still falls to the RBA to do the heavy lifting on the economy and on this front soft recent data and the implications for inflation make it clear that another rate cut in Australia is far more likely than a rate hike this year. With housing set to slow at a time when mining investment is still falling (albeit with a lessening impact), public investment spending and a strong contribution to growth from services exports like tourism and higher education are critically important. The latter points to the ongoing need for a lower $A – which I see falling below $US0.70 by year end.
Shane Oliver is head of investment strategy and chief economist at AMP Capital.
Craig James, CommSec
Jobs data in focus
- After the data deluge in Australia over the past fortnight, including a Reserve Bank Board meeting and the Federal Budget, the coming week continues along the same fashion. New figures on wage growth are released alongside key employment data. Across the globe, investors will focus on the Chinese economic data released on Monday. While in the US, data on the housing market will garner the most interest. Also, inflation data will be released across the Eurozone, Canada and even New Zealand over the week.
- In Australia the week kicks off on Monday with the Australian Bureau of Statistics (ABS) release on housing finance. Despite the tighter lending standards adopted by the banking sector, it is likely that loans for owner-occupiers (those who want to live in the homes) rose by around 2.5 per cent in March after falling by 0.5 per cent in February. And the total value of all new loans may have risen by 1.1 per cent in the month
- On Tuesday investors will focus on the release of the minutes of the last Reserve Bank Board meeting. Board members were decidedly more optimistic at the May meeting compared with the prior meeting., Even the Statement of Monetary Policy - released last week - upgraded near-term growth forecasts. And it is likely that the minutes will convey a similar upbeat tone. Investors will have to wait till the June meeting to see the central banks view on the Federal budget and recent weaker retail data on retail spending.
- Also on Tuesday, the weekly consumer sentiment reading is released by Roy Morgan and ANZ. The sentiment gauge will attract more than the usual attention given it will be the first reaction of Aussie consumers to the Federal Budget.
- And the key economic data on Tuesday from the Bureau of Statistics (ABS) are the estimates of new vehicle sales for April. The industry data from the Federal Chamber of Automotive Industries has already indicated that auto sales fell by 5.1 per cent in April on a year ago, with the result affected by the timing of Easter holidays. The ABS measure should in theory remove the seasonality of the result.
- On Wednesday the ABS releases the March quarter data on wages as well as lending finance figures, while the monthly consumer sentiment survey is also released. Wages grew by 1.9 per cent over the past year to December. In the March quarter wages probably grew by 0.5 per cent, keeping annual growth near record lows. And while the annual growth rate is the lowest on record, it still remains marginally ahead underlying growth of consumer prices. The real wage gains alongside the low interest rate environment on record will serve to support consumer spending over the rest of 2017.
- Arguably the highlight of the weekly finance diary occurs on Thursday when the ABS releases the job market data for April. Figures have been somewhat more upbeat in the last couple of months with the majority of the growth in full-time jobs. In fact over the past two months full-time jobs rose by over 110,000 – that is, if the data is to be believed.
- For the record we expect that jobs growth was more sedate, with a flat result in April. But with slightly fewer people looking for work, the jobless rate may have eased from 5.9 per cent to 5.8 per cent. It should be noted that the recent lift in business confidence and condition and strength in job vacancies bodes well for hiring in the second half of 2017.
Overseas: US housing sector; China economic data and home prices
- So-called ‘top shelf’ economic indicators are released in China in the coming week. And in the US the focus will be on the housing sector. Inflation data will on the agenda across the Eurozone, Canada and New Zealand. Also over the week a number of Federal Reserve speakers are scheduled, including Bullard and Mester.
- China will actually kick off proceedings over the week – with the release of key ‘top shelf’ indicators on Monday, namely retail sales, production and investment. Annual growth rates are slowing, but that is ‘normal’ for a maturing economy. Also lending and money supply data will be released between Tuesday and Sunday.
- Also on Monday in the US, the Empire manufacturing gauge and the National Association of Home Builders (NAHB) index are both slated for release alongside capital flows figures.
- On Tuesday, US industrial production and two key indicators of the housing sector will be released – housing starts and building permits. Annualised US housing starts are tipped to have lifted from a 1.22 million annual rate to 1.25 million in April. New building permits are expected to have edged higher by 0.4 per cent in the month. Industrial production is forecast to have risen by 0.4 per cent in April.
- On Wednesday, the usual US weekly data on home purchase and refinancing is issued.
- On Thursday in the US the usual weekly data on claims for unemployment insurance is released together with the Philadelphia Federal Reserve business index and the leading index. The leading indicator index is forecast to lift by a further 0.4 per cent in April.
- Also on Thursday, China releases data on property prices for April. There will be a lot of interest in the home price data given that authorities have attempted to use a variety of measures to cool a heated property market. The home price restrictions that have been implemented include restrictions on how many houses people can buy in some regions as well as measures requiring 1 60-80 per cent deposit for second-home buyers. So far the measures have yet to have a significant impact with China home prices up almost 12 per cent on a year ago.
Craig James is chief economist at CommSec.
Readings & Viewings
Firstly, in case you missed it, Intelligent Investor's Gaurav Sodhi and James Carlisle chew the fat on Intelligent Investor's Equity Income Portfolio.
Now, let's talk budgeting and banking. Some think the banks, which have been labelled big bad bullies, should be on tighter budgets. This week some investors decided they no longer wanted to play the banks' ball game, for now anyway. Treasurer ScoMo just slapped Australia’s five biggest banks with a new levy in his Federal Budget, which has naturally been a talking point all week.
Bloomberg explored the new bank levy in detail and decided it won’t break the banks.
Mirroring the Australian experience with housing, here’s some more luck for the Irish.
Zimbabwe is clearing $1.7 billion in debt it owes to the World Bank and African Development Bank.
Luxembourg lurks in the dark when it comes to shadow banking. Some think it’s an even shadier spot than under the palm trees at the Cayman Islands.
Speaking of shade, Elon Musk just keeps throwing it at Apple.
And everyone else is throwing shade at Snapchat founder Evan Spiegel (but he can shield himself with a puppy dog filter). Snapchat has exceeded expectations – for how much money it can lose. And no one liked Spiegel's chart.
But people are loving this chart, which is one of the best we’ve seen in a long time.
Moving along, hello Alice. Introducing Dell’s new artificial intelligence platform for entrepreneurs.
Goodbye International Space Station? Moonwalker Buzz Aldrin wants to close the doors on the Station forever.
We all know department stores are closing up shop already, but it’s a different story at the high-end.
The ‘default effect’ explains a lot of human behaviour, including the ‘probable’ re-election of President Trump in 2020.
Officials have admitted students can gamify the SAT, the US college entrance exam. Aussie kids are still waiting for answers to boost their Bs into As.
Look to Islam to find success, according to this American VC and former hedge fund manager. Sounds controversial, but bear with us.
Stop playing golf. A Harvard Business Review study from last year, that’s doing the round again thanks to The Coppo Report, found that CEOs spending too much time on the green are underperforming.
Sunlight and wind might be Australia’s next big commodities.
Our meat pies are a pretty big commodity export. Qantas CEO Alan Joyce might have put us on the map for lemon meringue too.