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| | September 16, 2016 | |
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| | Good morning.
Lots of feedback from readers in the last few days. Since it's Friday, I'm sharing some.
One regular took exception to my endorsement of the Harvard Business School report on competitiveness, saying it had nothing on addressing poverty, nothing on making corporations responsible for their errors, nothing on financial excess. If the nation's politics are to be fixed, addressing these issues will have to be part of it.
Separately, Glenn Hutchins, who has established an eponymous program at Brookings to study such things, says my suggestion last week that the Fed's "free money" experiment needs to end misses some fundamental points:
-If the Fed's policy is misguided, the yield curve should be steeper, and long rates higher, than they are today.
-Long rates are largely determined by the markets' view of inflation, and those are driven by expectations of global growth - not interest rate policy.
-What's important is real (inflation-adjusted) rates, and those aren't as low as they may seem. Moreover, statistics may be overstating inflation (and understating productivity), which means real rates are even higher.
-Negative rates in Japan and Europe suggest this not a U.S. "experiment," but a global economic phenomenon, with solid grounding in ageing populations and slowing innovation.
Meanwhile, multiple readers have instructed me - some using blunt language - to keep politics out of these daily emails. I would love to comply, but can't escape thinking the U.S. election is still the most important business story out there. As evidence, a survey of CFOs by Duke University this week reports one third of them say political uncertainty will put the brakes on their spending plans beyond the election, and could create a significant drag on the economy.
More below.
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| | Top News | |
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| | • DoJ Asks Deutsche For $14 Billion The Justice Department proposed that Deutsche Bank pay $14 billion to settle probes relating to its marketing of mortgage-backed securities before 2008, The Wall Street Journal reported. Deutsche is expected to push back against the DoJ's proposal, and the preliminary estimate is thus likely to be much higher than the final settlement, which some analysts reckon will be between $2-$3 billion. Deutsche has a total of $6.2 billon in litigation reserves as of June, a legacy of multiple conduct-related scandals from the boom days. It is also facing heavy restructuring costs, leaving it as one of the weakest major banks in Europe in terms of capital, and its shares fell 8% on opening in Frankfurt Friday. The DoJ's case is one of the biggest still outstanding from the pre-crisis era, and settlements with Credit Suisse Group and RBS are also possible before the November election, according to JPMorgan analyst Kian Abouhossein. WSJ, subscription required • Unilever in Talks to Buy Jessica Alba's Honest Anglo-Dutch consumer giant Unilever, the company behind Dove soap and Axe deodorant, is in talks to buy The Honest Company, the green/organic products group co-founded by actress Jessica Alba, according to The Wall Street Journal. The WSJ said the price discussed is above $1 billion, but less than the $1.7 billion valuation that The Honest Company got in its latest funding round. The company's valuation may have been hit by the multiple lawsuits earlier this year that claimed its products contained chemicals that it professed to avoid. Alba described the suits as 'baseless' at the time. For Unilever, it would be the second high-profile acquisition of a start-up in three months, following the $1 billion purchase of Dollar Shave Club in July. Fortune • Trump Sr. Revives Birther Theory; Jr. Jokes About Gas Chambers Donald Trump breathed life into the long-debunked conspiracy theory about Barack Obama's place of birth, refusing to acknowledge in an interview with The Washington Post that the President was indeed born in the U.S.. "I'll answer that question at the right time," Trump said. "I just don't want to answer it yet." His campaign later issued a statement saying Trump "believes that President Obama was born in the United States." Trump tweeted earlier this year that people should not believe "biased and phony media quoting people who work for my campaign. The only quote that matters is a quote from me!" Elsewhere Donald Trump Jr, a close confidante of his father, got into hot water for casually joking about 'gas chambers.' Meanwhile, the Huffington Post reported that Silicon Valley billionaire Peter Thiel has been telling friends that Trump will nominate him to the Supreme Court, if elected. More mundanely, House Speaker Paul Ryan again called on the GOP candidate to release his tax returns. Washington Post • If You're Not at the Table, You're on the Menu Heads of government from all the EU's member states except Britain meet for an 'informal' summit in Bratislava, Slovakia, in what is expected to be a round of intense soul-searching in the wake of the U.K.'s decision to leave the bloc. Donald Tusk, half of the EU's double-headed presidency, told leaders earlier this week it would be a "fatal error" to suppose that the vote represented "a specifically British issue"; rather, he said, it reflected widespread angst about issues of security, migration and cultural heritage. Commission President Jean-Claude Juncker, meanwhile, has tried to dismiss it as the product of 'decades of lies' told by successive British governments. Migration, rather than Brexit per se, is expected to top the agenda, against a backdrop of mixed success in stopping the flow of people into Europe this year. Flows of migrants out of Turkey, which had stopped in the wake of a controversial deal with President Erdogan, have picked up again in recent weeks, while flows across the Mediterranean from Libya continue unabated. BBC | |
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| | Around the Water Cooler | |
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| | • Weak Data Kill September Rate Hike The fading chance of an interest rate hike in September disappeared over the horizon after data showing weaker-than-expected retail sales and industrial output across the U.S. in August. Core retail sales fell 0.1%, in contrast to expectations for a 0.2% rise, and overall retail sales fell for the first time since March. Meanwhile, industrial output fell 0.4% after a 0.6% rise in July, and manufacturing output contracted by 0.4%, reversing July's 0.4% rise. The data confirm a picture of subpar growth and weak inflation pressure that will restrain the Federal Reserve's eagerness to return interest rates to a more normal level. Earlier Thursday, the Bank of England had said it still expected to cut interest rates again later this year despite the apparent stabilization in the U.K. economy after the initial post-Brexit shock. WSJ, subscription required • Apple Scotches Tidal Rumors Apple denied that it is planning any acquisitions in the music streaming business, squashing rumors that it would make a move for the struggling Tidal service owned by the rapper Jay-Z and a cohort of other artists. The Wall Street Journal reported that Apple had looked at buying Tidal in April as Apple's own music streaming service struggled to gain traction. Both Tidal and its larger rival Spotify are still losing money: Tidal lost $28 million on revenues of $47 million last year. Losses have grown at a much faster rate than revenue despite a seven-fold increase in its subscriber base to 4.2 million. Spotify said earlier this week its paying subscriber based had reached 40 million, more than double Apple's 17 million, but the Swedish start-up still lost 173 million euros last year on revenues of just under 2 billion euros. Fortune • Are Banks Really No Safer Than in 2008? Eight years to the day that Lehman Brothers failed, former Treasury Secretary Larry Summers and his fellow Harvard academic Natasha Sarin argued that big banks are no safer today than they were then. In a paper for the Brookings Institute, the two said financial market information "provides little support for the view that major institutions are significantly safer than they were before the crisis, and some support for the notion that risks have actually increased." This may sound counter-intuitive, given the billions raised in capital and the trillions of assets shed under the weight of new regulations since 2008. But tighter prudential requirements and low interest rates have undeniably crimped banks' ability to generate profits, leading investors to take a fundamentally less positive view of bank equity. At the same time, scandals like the one at Wells Fargo are constant reminders of the sector's perennial ability to destroy shareholder value through poor governance. Fortune • Oracle Revenue Misses Oracle shares fell over 3% in after-hours trading after the software company said that declines in its conventional software business more than offset the growth in revenue from cloud-based services in the three months to August. Oracle's sales of new software licenses fell 11% to $1.03 billion, apparently cannibalized by stronger-than-expected growth in cloud-based revenues, which were up 77% to $798 million. Earnings rose by less than expected to 43c a share from 40c a year earlier. Oracle is trying to pep growth with its $9.3 billion bid for Netsuite—a deal that some have said represents a conflict of interest for CEO Larry Ellison, whose family owned nearly 40% of the voting stock as recently as April. However, T. Rowe Price, Netsuite's largest shareholder, argues that the price offered by Oracle is too low, which suggests that any such conflict isn't being egregiously mismanaged. Fortune | |
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