May 20, 2014 5:24 pm

Capitalism thrives by looking past the bottom line

Business cannot solve society’s ills, but it is now the problem, says Lynn Forester de Rothschild

It is no coincidence that the jargon of capitalism borrows so heavily from the language of human relationships: think equity, credit, trust, share, bond and fair value. Capitalism is an extension of these basic human aspirations, and has guided the world economy to unprecedented prosperity.

Yet faith in market institutions has rarely been lower. This is not without reason. Markets mostly encourage a near maniacal focus on short-term financial results, tolerance of disparities of opportunity, and an apparent disregard for the common good. If these tendencies are left unchecked, the public cannot be expected to show faith in capitalism.

Polls show a correlation between public confidence in the system and broad-based income growth. In the 1990s, middle-class US household incomes improved by 14 per cent in real terms, according to official data. In the same decade, opinion polls show, the proportion of people who believed the US was moving in the right direction went from 28 per cent to 51 per cent. But between 2000 and 2012, the average income of this group declined by more than 8 per cent; not surprisingly, the number who believed their children would be better off than they were fell from 71 per cent in 2000 to 15 per cent in 2013.

Disillusioned by the market, voters increasingly demand politicians rein in finance and corporations. In a poll by Populus and the Financial Times, 61 per cent of Britons said they would vote for whichever party is tougher on big business. The mayor of New York was elected on an agenda of being tough on companies and the rich. Although it is not the business of business to solve society’s problems, it is dangerous when business itself is viewed as the problem. To reverse this belief and end the political backlash, it must actively address its failure to deliver for the common good.

This is a tough task requiring leadership and co-operation between businesses, philanthropies, individuals and governments. It will mean investments must be measured not just by short-term returns but by the development of human capital, management of innovative potential, compensation aligned with true value creation, supply chains that are sustainable and measurable evidence of the overall contribution of the enterprise to society.

Businesses are beginning to make a difference. Since abandoning quarterly profit reporting five years ago, Unilever has publicly stated its long-term strategy and adopted plans to expand the consumer goods group while shrinking its environmental footprint. The Tata industrial group has long prioritised its responsibility to communities in India where it invests in schools, hospitals and research institutions. In the US, businesses such as Costco and the Container Store pay workers far more than the legal minimum wage.

These steps can provide financial returns. Higher wages cut employee turnover, sustainable supply chains are likely to cut costs in the long run, and community-conscious firms are increasingly attractive to the skilled workers and devoted customers businesses covet. But their most important contribution is to reinforce the consensus that capitalism can be relied upon as an engine of progress and a source of optimism.

It is not, however, fair to expect chief executives to shoulder all the responsibility for making capitalism more inclusive. Corporate behaviour will not change without a critical mass of investors and customers who demand long-term thinking and higher ethical standards.

This is starting to happen. 

Norway’s nearly $800bn sovereign wealth fund has appointed a committee to advise on both rethinking its investment strategy and principles to improve returns and become more socially responsible. A broader move to reorganise fund management structures and adjust management incentives could drive enormous change. However, no chief executive, asset manager or institutional investor can improve the system alone, so it is vital that key players demonstrate that they manage and invest in a way that expands the benefits of capitalism.

The writer is chief executive of EL Rothschild, and founder and co-host of the Conference on Inclusive Capitalism 2014

Copyright The Financial Times Limited 2014.

Deutsche Bank: "Perhaps The Fed And OtherCentral Banks Are Controlling The Market Too Much These Days"

Yesterday we showed what happens when the Fed takes central-planning a bit too far and leads to a market in which even Fed members say is too manipulated.

Today, it's Deutsche Bank's turn to voice a lament on the topic of uber-manipulated, rigged markets.

From Jim Reid:

Perhaps the Fed and other central banks are controlling the market too much these days with their guidance. In the old days central banks used to like to create an element of surprise to ensure that markets didn't become complacent. With the crisis fresh in people's minds, with the stock of debt still huge and with the recovery still so uncertain they feel they cannot risk creating too much uncertainty at the moment.

The risk to this strategy is clearly that bubbles can build with so much central bank visibility and also that if they do have to change course suddenly it could create more problems due to the surprise factor in markets positioned for stability. Anyway for now low vol rules.

The irony, of course, is that by now "people" know very well that the market crashes when the Fed manipulates it "too much" or as the case is now - is the only price setter - which is why the more the Fed determines what the closing price of the S&P is on any given day, the less actual market participants remain, until finally one block of spoos ends up moving the S&P by basis points, and why market volumes are as pathetic as they are.

In the meantime, central banks can trade with each other: everyone else is happy to sit back, consume popcorn and watch as artificially depressed vol plunges to new all time lows only to blow up as it did last time when the central banks inevitably lose control as they always do. Rinse. Repeat.


Housing Debt Still Traps 10 Million Americans

Tuesday, May 20, 2014 12:53 PM


Nearly 10 million Americans remain financially trapped by homes worth less than their mortgage debts, an enduring drag on the U.S. economy almost seven years after the housing bust triggered the Great Recession.

During the first three months of this year, 18.8 percent of homeowners with a mortgage, 9.7 million, owed more on their loans than their properties would sell for, according to online real estate database Zillow. Though that was an improvement from the 25.4 percent figure of a year ago, the share of such "underwater" homeowners is about four times the historic average.

An additional 18.1 percent of mortgage holders were "effectively" underwater: They had equity, but the proceeds from selling their home would be too low to recoup the sales costs and also put a down payment on a new property.

The consequence is that few Americans are putting their homes on the market, thereby limiting the economic growth made possible by sales. Because of the shortage of homes being listed, bidding wars have inflated prices in parts of the country to levels that squeeze out many first-time and middle class buyers.

The problem is most pronounced among starter homes with prices averaging around $100,000, 30.2 percent of whose owners are burdened by underwater mortgages, sometimes called negative equity.

"The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come," said Stan Humphries, chief economist at Zillow.

The share of mortgage holders with negative equity is projected to drop to 17 percent at the start of next year, according to Zillow.

Several major U.S. metro areas are stuck with residents who have high rates of negative equity. In Chicago, almost 45 percent are underwater or effectively underwater. The rate is 53.1 percent in Atlanta, 50.6 percent in Las Vegas, 46.6 percent in Charlotte, 44 percent in St. Louis, and 43.2 percent in Tampa.

Sales of existing homes have slowed after strong growth in the first half of 2013. Americans bought homes at a seasonally adjusted annual rate of 4.59 million in March, the lowest level since July 2012, according to the National Association of Realtors. It was the seventh drop in eight months.

Nationwide, the median sales price in March was $198,500, up 7.9 percent year-over-year.

There were nearly 2 million homes for sale at the end of March. But at the current sales pace, that's enough to last only 5.2 months, below the 6 months' supply that's considered normal.

The Realtors will release April sales figures on Thursday. Economists surveyed by FactSet expect a slight 2.2 percent increase in the annual sales rate to 4.69 million.

© Copyright 2014 The Associated Press.