The prospect of a longer period of low interest rates from the Fed has calmed financial markets this week as most of the major indices ended higher. A report from Blackrock blamed rules designed to protect investors from market volatility backfired, instead hurting some investors during the August rout. Blackrock, along with other major ETF providers State Street Global Advisors and Vanguard, have held discussions in recent weeks to discuss how to prevent another August 24th.
The IMF has been busy this week ahead of their Fall meetings set to convene next week. They first issued a warning on the large positions that mutual funds in the United States have built in high-yielding bonds issued by risky US companies and in emerging markets around the world. They also issued a statement regarding the potential for higher US interest rates to trigger a wave of emerging market corporate defaults. Today’s disappointing non-farm payroll report diminished the fear of an October rate rise.
Save the date for the CFP’s next conference on November 11th in Washington, DC co-sponsored by the CFA Institute: The Next Crisis: A panel discussion on fixed income market liquidity and transparency.
Primarily courtesy of Chinese policy communication bungling and China’s slowing economy, turbulence has returned once again to global financial markets. Financial conditions in the U.S. are the tightest they’ve been since the panic of 2007-09. Yet another round of falling commodity prices has raised investor fears that the global economy is slowing, perhaps materially. But, on the home front all is well … or, is it? The Fed didn’t raise rates … perhaps there is reason to worry. Productivity is barely discernible, inflation refuses to rise, and in spite of a plunging unemployment rate, labor wage rates show no sign of acceleration. Is recession around the corner? Probably not just yet, but growth certainly could slow down. Could it be that monetary and fiscal policies are fostering malaise rather than growth? Bill Longbrake ponders these issues and questions and more in this month’s letter.
All eyes were on the Fed this week, but their decision to continue to keep rates on hold means financial markets will continue to scrutinize every speech and piece of economic data until the next meeting.
“In light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States,” Fed Chairwoman Janet Yellen said Thursday at a press conference following a two-day policy meeting.
SAVE THE DATE: On November 11th the CFP and CFA Institute will be hosting a panel discussion on liquidity and transparency in the fixed income market. Details will be posted on the CFP’s website as they become available.
SMITH BRAIN TRUST — Is “quarterly capitalism” a problem for the American economy? Hillary Clinton hopes to make the alleged short-term focus of corporations an issue in the 2016 presidential campaign. In a speech at New York University on Friday, she offered several proposals that would “reward farsighted investors and companies that seek to build up value.” In turn, that might lead to more corporate profits showing up in the paychecks of workers, Clinton and her economic advisers said.
One proposal is to raise the tax on capital gains — for people in the top income bracket — earned in the first five years that an investor owns a stock. (Current tax law treats earnings from stocks held longer than one year the same.) Other proposals include a two-year tax credit for employers that share profits with their workers, as well as unspecified restrictions on “hit and run” shareholder activists.
Coined by a global managing director of McKinsey & Company, in a 2011 article in the Harvard Business Review, the phrase “quarterly capitalism” and the idea we have to do something about it have something of a centrist pedigree.
But Phillip L. Swagel, an academic fellow with the Center for Financial Policy at the University of Maryland’s Robert H. Smith School of Business, and a professor of public policy, is doubly skeptical: First, he doubts that quarterly capitalism poses a great threat to our economic system. Second, even if it were a threat, he doubts that the Clinton proposals would change corporate behavior much.
“The higher tax rate on short-term capital gains is a solution in search of a problem,” he says. “It’s valuable for society to have both short-term and long-term investors. After all, long-term investors eventually sell their holdings and the presence of short-term investors, even high-speed traders, ensures market liquidity that is beneficial for the long-term investors. Market liquidity is also beneficial for society, since it means lower financing costs — it’s easier for a business to raise money — and thus more investment and job creation. Raising capital gains taxes is harmful for growth, period.”
Swagel, who served as assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009, does not dispute that some companies act irrationally in the short term to meet analysts’ expectations, or to boost managers’ compensation, or for other reasons. “But there are mechanisms for those companies that act irrationally to be punished: Investors will sell.” Indeed, that observation renders ironic the Clinton proposal to financially punish people who sell a stock after a relatively short period, he suggests: “Imagine that you buy stock and then discover that the management is terrible? Why would you want to have people locked in?”
In making the case that Clinton was describing a significant problem, the website Vox contrasted the bold activity of Google, whose stock is controlled by its founders, who take a long-term view, with that of Verizon, an entirely public company that acts far more staidly yet pays a steady dividend to investors. Wouldn’t it be “better for America” if more companies acted like Google, Vox asked?
But Swagel responds: “I think anybody who invests in Verizon understands the nature of Verizon’s business, and anyone who invests in Google understands their strategy. They both seem like reasonable ways to invest capital in our society. The bigger-picture view is that there’s no reason to think a political candidate will make better decisions than investors themselves.”
As for tax credits for companies that give workers a stake in the business, Swagel points out that employee-ownership plans “are perfectly legal and feasible now.” The tax breaks “would add a little juice to the package, but it’s modest.” Moreover, although that proposal would shift to some degree the form of employee compensation, from wages to equity, it is unlikely to change productivity, which is the ultimate driver of compensation gains.
The proposal may gain some support in corporate boardrooms, Swagel suspects, where activist shareholders are viewed as bogeymen. “Corporate management doesn’t like being pressured,” he says. “They don’t like ‘corporate raiders.’ And there is a sense in which some activist shareholders do harm and promote short-term thinking.”
But he adds: “I suspect there are many more examples of the opposite — of management doing a poor job and getting pressured effectively.”
“The overall theme of encouraging shared growth and long-term thinking is worthy of public discussion,” Swagel says. “I’m just dubious that minor targeted tax breaks will have a meaningful, or even measurable, impact on the ultimate objectives of stronger and more broadly shared growth. I’m dubious on both objectives: I don’t think the Clinton policies would move the needle on either growth or fairness. They are symbolic.”
– See more at: http://www.rhsmith.umd.edu/news/do-hillary-clintons-attacks-quarterly-capitalism-hold#sthash.2NhVcZkO.dpuf