The Corporate Rider and Beyond

Between the Great Depression and the late 1950´s the stock market became a bit of a “no go zone” deemed to insecure and volatile, yet after the post-war bonanza and much prosperity investors began to seek higher returns in the stock market.

This is the setting of “The Mayfair Set” a British documentary in 4 parts covering from the rise of the first corporate riders in Britain back in the 1960’s, until de 80’s wall street junk bond market and 90’s British shifting politics, this series may seem to show how this events seem to be linked, but there is also a bigger
picture.

The documentary help me to expand my view over the 80’s boom, by  linking seemingly unrelated events, for example the drop on risk aversion to investment at the stock market, and how this was used to restructure full industries, as we know specialization was unheard among companies in the post war period (like
Japanese companies this days) as most of the large companies were vast industrial empires spread along several numerous industries employing large number of people mainly in manufacturing, this holdings were controlled by powerful people who allowed to direct the economy along cozy links with the government, this allowed to follow national development plans with the private sector this was true in a number of developed countries and several developing ones as the concentration of industries were much higher.

These industrial behemoths were able to reap a large amount of incomes right from the multiple products they offered and their distribution channels but were poorly managed and not quite efficient, by the late 70’s after the oil embargo this figures in the economic model began to suffer a lot this lack of efficiency
despite counting with a very successful business, the lagging ones became a drag to the financial results and restraining quality improvements, in the western world the rise of the Japanese companies didn´t helped too.

The paper of the corporate riders at their time was to inject new strength in to the industries by disposing the unprofitable areas of the companies; this allowed me to understand the real reasons of something I learned at my school classes when the companies became focused in few products or services, in this sense
the corporate rider allowed the companies to become more focused on a narrower set of good where their results and profits were better.

In the bigger picture these leaner, meaner companies boosted results, profits thus lifting price shares making attractive to invest on shares, deregulation played it´s part to make more attractive the selloff of  unprofitable assets further acquired from other firms seeking value from distressed assets, this kind of
transactions changed the industrial landscape, but also explain why the tight knit  stock ownership between companies actually protecting the firms from takeovers, this business model is more or less the rule across Asia, this kind of structure have been more suited to the economic “dirigisme” followed in Asia and being kept to sustain a domestic led industrialization.

At the end this documentary allowed me to link the dots and understand more broadly from the industrial-financial sense, and how the actual globalization phenomenon began to develop, also draws clearer path of where it´s going.

A Roadmap to Stop Bleeding and Start Healing (Part 2)

In my previous post i talked a bit of the current situation in America, and the difference it makes for the economic agents to boost demand and in fact sustain the recovery.


Now as America faced large deficits twin deficits (trade and fiscal) thru the 2000’s, is time to redefine the policies to change such disbalances.

On the fiscal side U.S need urgently a consumption side taxes (VAT), this may not like the overall population but may help to restrain conspicuous consumption, and contain the trade deficit from the demand side.

On the supply side the corporate rate at nearly 40% remains terribly high, (and the OECD second highest), this at the time where revenues fail to hit 2% of the GDP in good times, but nations with lower nominal rates, also fetch more income from their corporations while the higher nominal tax, the less receipts (companies cut their tax bill thru several loopholes, high taxes are an incentive to such distortion) as the graphs show below

Also the countries with higher corporate taxes are more likely to show lower output growth, so higher output gain, less companies cutting artificially their tax bill added to the fiscal incentive to hire and build in America, are strong reasons to slash those rates and bring them in par with the EU at least.

Fiscal simplification could do a lot too, as easier tax fillings could fill the coffers with fresh resources.

All this new money raised from a lighter, simpler tax structure could be used to plug the deficit, improve infrastructure and finally boosting the goods producing industries, a bit like cutting trade deficit cutting demand, and increasing supply by turning more attractive America as a production site, and helping the companies to keep prices of their wares by paying less taxes thus able to absorb partially or totally the VAT, an act that importers wouldn’t be so eager to do.

¿Isn´t this look like a coherent way to raise tax revenue while stimulating production?

http://money.usnews.com/money/blogs/capital-commerce/2008/8/15/us-corporate-taxes-still-second-highest-on-planet-earth.html

A Roadmap to Stop Bleeding and Start Healing (Part 1)

Right now the American economy is sputtering, losing momentum just in the most needed time, with exports failing to propel the way the did early in the year, and jobs hard to come by, pretty much this is how a recovery works.




Either way consumer led or export led kicks (both a source of demand), the spare capacity begin to shrink (from factories to offices and retail), but not until business think they need to, so a sustained rhythm seems necessary, in factories this is pending orders or unfilled orders, and in retail means dropping inventories + more and constantly increasing traffic in store turning in to sales, after the current number of employees begin to seem unable to fulfill upcoming demand, is when the magic happens and hiring unwind, unfolding a virtuous cycle when increasing hiring, led to increasing demand, to increasing investment to expand capacity and so demand keep rising, etc.



In the current recession, few have been able to consolidate a robust demand from exports or consumers, Asia thru a mix of both, as governments help to reassure confidence and opening the grid of credit.

Europe seems to be quickening before and during the debt crisis, and such event sparked a temporary stimulus by making the euro cheaper, the European GDP data proved that PIIGS remain weak, but a lot stronger than consensus, and improving German fortunes may actually send demand shockwaves across the mainland, while at the same time government have been sending confidence to the economic agents thru tightening fiscal policy with still loose monetary one, as well a big 1 trillion dollar support to states in need have quite shored up confidence along the way, even in the current state Europeans are likely to begin to spend a bit more, companies keep tapping Asian demand and even after the budget cuts, mostly because they are not so harsh in most of the nations and spread out across a span of several years.



Meanwhile U.S economic policy remains quite dovish about how to mend the country, the real worry (the same from companies and consumers) is about the sustainability of the country current economic structure, lack of reforms, overspending, and not foreseeable credible plan to return to a more normal path, the current lack of confidence, is denting the ability of the economic agents to take decisions to invest, spend and thus they rather save (¿have everyone seen how much cash is kept by companies and how consumers are saving?) , U.S need reform to strengthen real income grow, a credible plan to restore confidence in the public finances and a way to pave a true recovery road, while at the same time cutting trade deficit and raising competitivity

Why is the keyword “confidence” in this comment? because economic agents will hold their decisions until the future seems more clear, this is keeping most of Americans guessing “what’s next for us” and “in this current environment im unable to spend”