Reading The FT Weekend 7–8 July 2018
Brexit
May wins backing for ‘soft Brexit’
May delivers carefully planned political coup
JLR point man takes a blunt instrument to hard Brexit
Since this article, three ministers have resigned (Boris, David Davis, & Davis’ #2). Good tactics by May in build up (weeks laying groundwork, few details released beforehand, isolating cabinet, no phones, taxi theatrics). ‘Soft Brexit’ here means UK-EU FTA (“common rule book for industrial goods and agricultural products”, “more like Norway than Canada”, “backing of Airbus”) + ‘facilitated customs arrangement’: Britain collecting EU tariffs at ports. The first is not acceptable for hard Brexiteers; the second is unlikely to wash with EU. The implications for the Irish border seem to be along the lines of ‘border down English channel’. Barnier reaction: good, but further movement needed on freedom of movement and ECJ.
Also read today: Jenni Russel’s damning ‘Boris Johnson Has Ruined Britain‘ for the NYT. This attributes Johnson’s resignation to a desire “not to be outflanked” on the Brexit side by Davis, and asserts that his Brexit advocacy has been pure bad-faith self-interest, without any initial expectation or desire of winning the referendum, to bolster his chances of becoming PM.
Ralf Speth, CEO Jaguar Land Rover, warned that hard Brexit would cost £1.2bn in tariffs and threaten UK perations. JLR employs / supports 300k jobs in UK, previous undertaking of £80bn in future investment. JLR acquired by Tata from Ford, Speth put in then. Since then JV in China, large plant in Slovakia (others following, re: tariffs: “This week, Tesla announced its first factory outside the U.S. while BMW is poised to become the first foreign manufacturer to own majority control of a Chinese automobile venture.”).
Social welfare & progress
Clarke calls for new inquiry into UK’s role in rendition
Let me call those who argue that the record on human rights, corruption, foreign adventurism is equally bad (morally if not quantitatively) between the US, UK, EU on one hand, and Russia, China, etc., ‘equivalentists’ (I’m inclined against this view by disposition & superficial readings, but intend to read a bit more Chomsky to further inform). This piece sits to some extent on both sides of the scale. The parliament Intelligence and Security Committee accused Britain of “inexcusable” mistreatment of detainees: 128 incidents where UJ knew of mistreatment by others and “31 examples where Britain planned, agreed, or helped pay for rendition flights.” (So no direct implication that British agents tortured anyone themselves, though that is a distinction without a moral difference, I think). At least there is some effort towards transparency, if not yet accountability.
ONS and BofE staff differ over ‘productivity puzzle’
I didn’t quite follow this but it’s of interest because productivity is such a key concept & metric. The article speaks of Britain’s “dismal productivity record” and then says that the ONS sees few signs of improvement but the BofE is more optimistic. Productivity is measured by output per hour worked. The productivity growth rate has fallen from ~2% a year circa 2008 (pre-GFC) to less than 1%. The agencies don’t seem to disagree on the statistics. The ONS describe the low growth rate as puzzling because the growth rate in Britain has fallen more than elsewhere. BofE said business are beginning to prioritise productivity improvements, especially labour-saving machinery (aided by “major advances in technology”). But ONS says “companies that import and export heavily are more likely to be productivity stars, reflecting work that suggests open borders and trade encourage greater efficiency”. This is described as a contradiction of the BofE analysis. So I guess the contradiction is on the question of whether productivity is improved primarily by improving internal efficiency, or by seeking out & exploiting comparative advantage?
Precis of the link above: the key fact about productivity is that up to 1973, productivity and pay rose in lockstep; since 1973, productivity has risen by ~75% but pay has only risen by ~12%. This is often attributed to union-busting.
Philanthropy group sets out to cajole wealthy to donate more
‘The Beacon Collaborative’ is the likely name for the initiative. “The pair calculated the median level of giving among those with £1m-£10m in investable assets was just £500 a year. Among the ultra wealthy with more than £10m — it is just £240.”
Define ‘robots’ before raising a tax on them
An option to maintain civic infrastructure in the face of automation is mentioned which is to tax at the value of the job replaced. This is shown to be a canard: “specific tasks are automated, rather than the broad bundle of tasks that together constitute a human ‘job'”. A relevant book is mentioned: The Future of the Professions, with many examples of automation including spreadsheets, CT scan analysis, and drafting of legal contracts.
Sleep deprived and struggling to stay sane
Claim from British Medical Association that “doctors working more than a 12-hour shift are as impaired as if they had been drinking”. The Today programme on the BBC runs 12-hour day shifts and 14-hour night shifts!
Europe
Germany’s odd couple endure fiery political marriage
Angela Merkel – chancellor since 2005, head of Christian Democratic Union (CDU), amazing politician. Horst Seehofer, head of Christian Socialist Party (CSU), Minister of Interior in the government formed after long negotiations between CDU, CSU, Social Democrats. Long-standing differences over migration (CSU dominates Bavaria, harder line desired against immigrants, AfD on the rise on anti-immigrant platform). Seehofer: “Islam does not belong in Germany”; Merkel: “Oh yes it does”. Seehofer cultivating Orban, Putin. Seehofer: “Migrants already registered at another EU country should be stopped at German border”; Merkel: “No, overruled; that would undermine Schengen & EU unity”.
Current immigration agreement: ‘transit procedures’ to deport incoming refugees already registered in EU to country of registration, but only after proposed bilateral deals with each such country, & proposed new treaty with Austria such that Austria takes those who won’t be taken by country of registration, or in absence of treaty with that country. None of these treaties exist, Austria reportedly not keen.
Poland’s ‘accidental heroine’ buys time for EU
Jaroslaw Kaczynski is head of ruling Law and Order party (president is Andrzej Duda). Jaroslaw is the identical twin brother of the late Polish President Lech Kaczyński. The party has been orchestrating a purge of the judiciary by forcing ~24 Supreme Court Judges out with a new law declaring them retired. But the head of the SC, Malgorzata Gersdorf, turned up and went to work anyway. She will go on holiday next week, thus hopefully postponing a confrontation. The European Commission wants to take Poland to the ECJ to block the law, but once the new SC judges are in, the purge will be irreversible.
US
Calls for Fed to rethink monetary policy framework as it unwinds balance sheet
Q: how to ensure the Fed’s target interest rate stays in desired range while unwinding balance sheet. Unwinding: in 2018 the Fed will be a net seller of assets, for the first time since 2008, planning to sell $400bn assets in 2018. Also ECB reducing Asset Purchase Programme from €60bn / month to €30bn / month. This article is about ‘the technical difficulty of transmitting monetary policy’, i.e. effect of unwinding on markets.
See also ‘Call On Savings Equal To 1.6% Of GDP‘; ‘The case against shrinking the Fed’s balance-sheet‘.
Latin America
Boeing and Embraer trying to get a joint venture approved before Brazil goes to a very unpredictable election after Presidency of centre-right, business-friendly Michel Temer (government has golden share in Embraer). ‘Populists’ (left & right) against, because of the extent of state ownership? Election status: Jair Bolsonaro, far right, leading (possibly not against deal as defence / military component of Embraer not included in JV); Ciro Gomes, centre left, opposed to deal.
Read elsewhere meantime: “Why are there no black people in Argentina?”
China
China financial turmoil revives memories of three years ago
“Weakness in both stocks and the renminbi is sparking comparisons with 2015 rout”. The news is that theShanghai Composite Index has fallen by 5% in past 2 weeks, and one property index has dropped 16% in the same period. The renminbi is down from 6.3 (to the dollar) to 6.65 since the start of the year, which is about a 5% drop.
In 2015, the Shanghai Composite Index fell by over 45% in two months, followed by a 10% drop in renminbi over 5 months. Government intervention in stock market (state bailout / buyout / prop-up investment) initiated too early (‘government panicked even earlier than the market’). This time, the Chinese government is waiting and letting the market absorb news of slowing economic growth and prospect of trade war. Also the bubble, if bubble it be, is smaller: Shanghai stocks at 17x earnings vs 24x in June 2015.
The China Development Bank (main policy lender) is pulling back from subsidy programme for homebuyers, which was driving wild increases in sales & price (especially in regional cities – prices have doubled since 2016 in ‘third- and fourth-tier cities’.). “Even a 10% price decline would ripple through China’s economy where property underpins manufacturing demand, debt collateral and local government budgets.”
For renminbi, ‘little sign of rampant capital flight’—which was a problem in 2015, leading to curtailment of foreign dealmaking. Currently policymakers are trying to draw in foreign investment into domestic capital markets, which militates against capital controls.  The renminbi is under pressure because the Fed is raising rates while monetary easing in China is depressing renminbi interest rates; this is a departure from recent years in which interest available on renminbi was higher than that on the dollar. Monetary policy can’t get too relaxed, as that would support property bubble. People’s Bank of China has $3tn dollar reserves (down from $4tn 2016), which leaves limited scope for dollar selloff to support renminbi.
Wang’s death complicates HNA retrenchment efforts
Wang Jian, co-founder & chairman of HNA (airline-to-finance group, $50bn revenue, #170 in Fortune 500) fell to his death in accident on holiday in France. Leaves Chen Feng, other co-founder, and Adam Tan, CEO, to handle company. ‘Retrenchment’ here means the unwinding of foreign investments and holdings: “an international spending spree which ended just a year ago when the political winds in Beijing turned against such expansion.” This included 10% of Deutsche Bank & controlling stake in Hilton Hotels (both since reduced). Wikipedia: “In July 2017, HNA was targeted by the Central Government in a set of new measures that prohibit state-owned banks from lending money to Chinese private companies to curb their foreign investment activities and also over concerns about HNA’s debt levels.”
Africa
Namibia: wildlife tourism (shipwreck-strewn beaches). Uranium, diamonds… and now oil and gas (Total, ExxonMobil coming in). Geological formations in common with Brazil (‘pre-salt fields’). Eco Atlantic Oil and Gas – holds offshore exploration acreage off Guyana and Namibia. Apparently there is now a lot of demand for this exploration acreafe. The ‘Walvis Basin’ is the thing. The first well will be drilled by Tullow Oil in September. “Tullow Oil plc is a multinational oil and gas exploration company founded in Tullow, Ireland with its headquarters in London, United Kingdom; Tullow Oil is a leading independent oil exploration and production company, focused on finding and monetising oil in Africa and South America”. See also Chariot Oil and Serica Energy.
Trump
US labour market draws 600,000 new jobseekers
Percentage of US population in workforce (working or looking for work) at 62.9% (up 0.2%, or 600k – so population is ~300 million). So unemployment rate up to 4%, but it’s a good up. Wage growth only 2.7% on the year, below expectations, due to increased labour availability. Implications: “muted wage growth” softens inflation, so reduces likelihood of Fed rate raise. Dollar dropped, perhaps also due to trade disputes. Markets up, treasuries yield down. “Numbers support view that there is no imminent risk of inflation…but the Fed is going to continue with normalising interest rates”. Proportion of small businesses looking to hire 4th highest in 45 years, suggesting new entrants to jobs market have good odds of getting work.
China retaliates against ‘bully’ Trump
Tariffs at $34bn each way. Trump says he will add $16bn in coming weeks, and could go to full $500bn (all Chinese imports to US). China targeting farm and energy exports (including soyabeans). Jobs numbers (above) suggest econmoy can withstand tariffs, according to US. Idea is to provoke negotiations to get better trade deals, rather than indefinite tariff regime (suggestions this working in Europe).
Investing
Dell relishes the prospect of proving his critics right
Dell is going public again. Notice elsewhere: PC sales are up for the first time in ages, because of Windows 10?
Danske dented as claims of money laundering swirl
Bill Browder (Hermitage Capital, Magnitsky Act) is among those claiming that there has been major money laundering through Danske Estonia (perhaps $8.3bn). Given Browder’s interest, maybe it’s Russian money laundering?
Carrefour and Tesco to join forces to squeeze suppliers
These are the two biggest supermarket groups in Europe. This is to get bigger volumes & hence lower prices on own-brand goods, & thereby to counter / compete with the low prices of Aldi and Lidl. Carrefour already has a deal with Système U, and French supers Casino and Auchan announced a similar deal last month.
This presumably will push for consolidation of agribusiness and larger-scale industrial farming. I wonder do these trends have implications for the CAP? Perhaps small-time farmers will become even more reliant on subsidies?  World dairy commodity prices enjoyed a very strong rally last year (especially butter), which has tapered more recently.
An audacious business model in the dock
Glencore hit by US probe into bribery and corruption
Glencore (IPO 2011, ~$60bn market cap, $200bn revenues) is the biggest commodity trader in the world. A lot of its business, according to the FT, is brokering between business and sanctioned countries / companies / individuals — built initially on trades with Iran (Bill Clinton pardoned Marc Rich for this offence).
The Democratic Republic of Congo (DRC) is the main source of cobalt (which has doubled in price, to $40, in two years) and a major source of copper. President of DRC is Joseph Kabila; alleged that Glencore using Dan Gertler, an Israeli friend of Kabila, to gain access (Gertler is on US sanctions list). The ins and outs are a bit complex, but “Glencore agreed to pay Gertler [almost $3bn] in euros to avoid falling foul of US sanctions […] The announcement shocked observers: a FTS 100 company paying a sanctioned individual millions of euros seen as a bold challenge to the US”.
Glencore has major oil trading operations in Venezuela and Nigeria. These are both both major oil producers and major importers of refined fuels. Large physical traders such as Glencore (6.5m barrels a day of crude & refined) alleged to have been using inside information, from Venezuela state oil co PDVSA.
M&S meal supplier’s travails highlight perils of price wars
Story is about closure of 2 Sisters Food Group factory in Glasgow. 2 Sisters owned by Ranjit Boparan and is one of the UK’s biggest food manufacturers (23k workers). Boparan sold the Goodfellas brand recently (for £200m). The extraordinary thing is that Boparan Holdings has an operating profit margin of 0.4% (down from 2.8% two years ago). Tight!
A worker is quoted saying that under previous ownership he made £360 / week, dropped to £267 under 2 Sisters (less overtime). The FT is rather exercised by the tales of woe from temporary contract workers (zero-hour contracts) expecting 12-hour shifts but not getting them. People speak of weekly earnings of £200, and rates of £6.50 an hour.
VW loses legal effort to bar use of seized files in emissions case
“VW said it welcomed the decision as it provided legal clarity ‘even though the court did not share Volkswagen AG’s understanding of the law'”. $26bn in penalties so far!
Stobart boardroom battle comes to a head at AGM
This is about the infrastructure group (Southend airport, biomass business, etc.) rather than Eddie Stobart transport. The article is of interest because it’s clear that even at high levels of big business run by serious professionals, the personality clashes can bubble out into a right old argy. Here the issue is that “former chief executive Andrew Tinkler launched a campaign to unseat chairman Iain Ferguson.” William Stobart, son of Eddie, is a friend of Tinkler; Ferguson is not for going. Tinkler was fired as director after efforts to remove Ferguson.
Decom eyes £58bn market to plug North Sea wells
The big business opportunity described here is cleaning up the old oil wells. Poses some interesting challenges; originally Fairfield Energy was going to try to buy up and exploit North Sea oil, but oil crashed in 2014, and they ‘pivoted’ to buying up clapped out fields and seeing them out.
Decommissioning is only getting going — 50 years’ worth of wells, platforms, pipes in North Sea. Big platforms and rough seas. Who pays for decom? It must be a regulatory obligation. The article speaks of the ended viability of ‘spreadsheet decommissioning’.
Segro rides warehouse boom to join real estate big league
The growth of fulfillment centres & warehouse retail has meant that RE holdings in city peripheries are becoming much more desirable & valuable. This article relates that Segro (“which owns warehouses in the UK and Europe”) has overtaken British Land (“one of the largest retail landlords”) to become second-largest REIT (£6.8bn market cap, second to Landsec). Amazon is mentioned, also ‘Yoox Net-a-Porter’ (?), fast-food chains preparing meals in warehouses, and data centres. Capital values for industrial land rising at 15% annually. In Europe, online shopping lags UK but gathering pace: Segro buying up in Italy, Spain, Germany; trading at 1.16 price-to-assets. Smaller players: LondenMetric (1.09), Tritax Big Box (1.07); cf Landsec & British Land at < 0.7.
Medical
Pfizer risks US backlash with series of price rises
Some medicines (e.g. Viagra) up 20% in price since start of year; most price increases around 9% (cf inflation 2%). Pfizer: increases to less than 10% of drugs. No account of why here. Lower medicine prices was a campaign pledge of Trump, which resulted in a plan in May “dismissed as toothless.”
Misc
Biogen shares soar after clinical trial raises hope for Alzheimer’s treatment
‘Biogen’ is the name of a company, not a term for some sort of biomedical engineering. It’s a big one: 18% increase in shares equates to ~$10bn increase in market cap. Results were obtained with another big medical co, Japan’s Eisai. Seems to reinform ‘beta amyloid plaque build-up’ hypothesis for the cause of Alzheimer’s, after failures from other market participants.
Q: What constitutes a ‘big company’? Global market cap is about $100tn. Apple, world’s biggest, is or has been nearly $1tn. The FT Global 500′ ranks by market cap; the top 5 at latest are Apple, Amazon, Alphabet, Microsoft, & Facebook ($500–$900bn). The ‘Fortune Global 500’ measures by revenue; the top 5 are very different (Walmart, State Grid, Sinopec, China National Petroleum, and Toyota Motors), with revenues from $250–$480bn. Global world product is also about $100tn (that is sum of profits rather than sum of revenues—I must clarify this for myself).
No hosepipe ban for most despite long hot summer
Companies rule out drought despite dry spell
While the Irish experience of privatised refuse collection seems to have been terrible, and the English experience of privatised rail abysmal, the privatised water supply in the UK would appear to have coped better with the current heatwave than our nationalised system. Of course, conditions probably were and are somewhat different in terms of winter rainfall etc. But part of the resilience of the network is attributed to water metering, “which reduces water usage”. There are problems of leakage, especially Thames Water, which “leaks about 40% of the average daily water consumption of a four-person household” — by which I think they must mean ‘40% of the a.d.w.c. of an f-p.h. is waste’? — and the plan is to introduce smart meters, “which can cut household consumption by about 15 per cent.”
Article mentions daily consumpution per person is 141 litres/day, down from 150 litres in 2000. Compare to 115 litres/day in Belgium & Denmark. In 2016, Ireland’s PCC was 118 litres/day [ref]; ‘almost half’ of the water supply is lost to leaks [ref].
World week in review
Soraya Sáenz de SantamarÃa and Pablo Casado battle to succeed Mariano Rajoy as head of People’s Party (‘PP’, conservative, largest party). Winner to lead opposition to recently-elected minority socialist government. Regional elections next year.
Najib Razak (‘Mr. Najib’), ex-PM, pleads not guilty to charges relating to $4.5bn from Malaysian state investment fund (1MDB). Current PM, driving investigation, is Mahathir Mohamad.
Andres Manuel Lopez Obrador, new left-wing Mexico president-elect, called for reconciliation with “crushed” rivals.
Emmerson Mnangagwa succeeded Mugabe as head of Zanu-PF and president. Nelson Chamisa, challenging, wants preparations halted until ballot paper fully agreed. Zanu-PF promise fair election.
Editorial
FT is in favour of EU copyright reform proposals, on the grounds that the platforms were given exemptions from policing content in the early days and have obtained unfair advantage over traditional media (& content producers) thereby. YouTube controls 60% of streaming audio “but only” pays 11% of artist revenues.
Eurozone wage growth up to 2% (5 years into recovery). France & Germany especially, up there with Canada in post-GFC growth, 10% over ten years (US: 5%), in real terms. However this latest increase is just about in line with inflation. Danger that ECB might cite this growth as a reason to normalise monetary policy: raise interest rates and shrink balance sheet (sell assets or let bonds mature without re-issue). OECD: wages are “remarkably more sluggish than before crisis”, at comparable levels of employment (high employment emboldens workers to seek wage rises).
Wage inflation need not mean price inflation; “wages could rise more if productivity growth picks up, or income shifts from capital to labour. Both would represent a desirable reversal of former trends” (right on, FT!). Causes of productivity slowdown: drop in capital investment during crisis. Pre-GFC:, profit share of national income rising (“Germany’s policy in early 2000s to depress the labour share of income bears much of the blame for the financial bubbles in the periphery” — TODO: unpick this).