31 January 2014

Howard's End

Howard Hughes was, arguably, the last truly innovative American capitalist. Today, the likes of Apple are gifted with patents on such silliness as a rounded corner rectangle. The processor in that rectangle was created by a bunch of Socialist Brits, for crying out loud. And built by, titularly Communist, wage slaves. What the hell is going on?

Well, some reporting today lends more weight to the underlying thesis: real investment is, if not dead, on life support.

Apple, and the like, sit on ever burgeoning cash piles. The Icahns, aka The Smartest Guys in the Room, want some/much/all of that extra cash sent to them. So, from one billionaire's idle, unspent cash pile to another's. The net-net, from a macroeconomic point of view, is a big fat zero. Nada. Goose egg. Diddly squat. The whole raison d'etre of capitalists' (as distinct from the capital manifest) power is that they've the smarts to invest the moolah productively. Smarts that The Common Man (or The Common Man's proxy, Gummint) just doesn't have. But not happening. Their taxes haven't been this low in decades. They keep getting extortionate Gummint subsidies (I'm talking to you, Boeing) to keep their factories running. And so on. But they still can't figure out how to allocate that fiduciary capital in productive ways. Why do these guys get such lofty wages?

Floyd Norris on the dark side of emerging markets tells the tale of the markets' failure to capitalists. (Aside: I've no idea whether anyone at The Times gets the Pun; Pink, Floyd, Dark, Moon.) Once again, capital goes hunting for non-productive (thus, assumed to be, low risk), yet high yield, places to stash moolah. "Money for nothin', and the chicks for free".
The widespread worry about emerging markets -- investors are also nervous about Brazil, India, Indonesia, Thailand, Taiwan and Malaysia, to name a few -- can in some ways be traced to the fact that they did remarkably well during the credit crisis that began in 2008. Many of them had hefty foreign currency reserves, and their growth attracted foreign investment.

That investment helped to push up local asset prices, which intensified the boom and brought in more capital. Eventually, money flowed in from investors chasing performance, a sort of "What goes up must keep going up" attitude. The currencies appreciated, and countries began to buy more things from abroad while their industries were losing competitiveness. Current-account deficits began to soar, but that did not immediately matter because the capital was still coming in.

Just like US house prices. And tulips a few centuries ago. And what most Wall Street quants call a stable time series.

At least one, thank goodness, analyst asked the right question. The answer isn't so pleasant.
What, [David A. Rosenberg, the chief economist at Gluskin Sheff, a Canadian research firm] asked, happened to all that capital that poured in? "One can reasonably draw the conclusion that, as we have seen time and again, the foreign capital inflow was squandered either on conspicuous consumption or noncompetitive investments," he wrote.

Figures. Not even a red blooded American; just some failed hockey player with store bought teeth.

If that sounds like housing, government infrastructure, and bridges to nowhere, you'd be hearing right. The notion that non-productive uses of fiduciary capital are self-amortizing is the Great Lie of financial engineering. Only productive uses of moolah (and none are guaranteed to be so) can generate the vig. As The Great Recession demonstrated to anyone who was looking, residential mortgages generate only some psychic income (and, then, only if one holds that such income even exists) to the holder. Paying the vig has to come out of the resident's real income; if rising productivity flows only to capital and none to labor, then such investments must fail for lack of moolah, sooner or later. If said income isn't rising to meet the vig; well, it all falls apart. It did here. It is in China. And it is in the variously acronymed emerging markets. They aren't emerging organically, only sopping up Western (mostly) excess moolah. Natural resource extraction being an exception, of course. But third world resources tend, strongly, to be located in fascist locales, like Texas and North Dakota; the unwashed masses have no right to their country's largesse, resources are, and should be, private. And Idi, or whoever, will use the Army to enforce the property rights.

Yet, our Titans of Industry continue to sit on piles of moolah. Mostly, they use it to buy out competitors, the better to gain market power, i.e. screw the consumer sooner than later. Intel is something of an exception, but it, too, has shuttered work (on a new fab).

Next, is a story that's bizarre: Goldman wants to buy a significant position in Danish national electric power?? What on earth? If you don't care whether investment banks get involved in electric systems, you should: Barclay's and JP Morgan. Goldman has been found with its hand in the cookie jar (aluminum variety). The Danes have cause to not trust Goldman.
Under the terms of the deal, Goldman would invest about $1.45 billion for an 18 percent stake in Dong Energy, the state utility, which has become a green energy exemplar in its push for electricity from wind turbines. Though the deal buys far from a controlling share, the minority stake would come with special privileges.

Goldman would get a seat on the utility's board. And the bank, along with two Danish pension funds, would have veto power over changes in the utility's strategy or its executive suite -- specifically the utility's chief executive or chief financial officer.

Oh, and Lloyd just got his paycheck. I'd be smiling, too, getting paid that much to ride along. As some wag, not I alas, once pointed out: "A sock puppet could run one of these corporations".

Finally, if it's Friday, it must be Krugman. He tiptoes up to the basic question: where does growth come from to pay the vig on investment? Doesn't address it head-on, but
Most obviously, faced with a private sector that wants to save too much and invest too little, we have pursued austerity policies that deepen the forces of depression. Worse yet, all indications are that, by allowing unemployment to fester, we're depressing our long-run as well as short-run growth prospects, which will depress private investment even more.

Once again: they ain't no way to pay interest on money that ain't actually generating new output. That vig has to come from some other productivity generating source, and if wage earners (by far the largest part of the 99%, on smallest of the 1%) aren't garnering any of that growth, then the whole taco falls apart.

If the Titans of Industry can't or won't invest in real capital with zero cost of funds, when will they?

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