The challenges of a disembodied economy

Policymakers must reckon with a world in which companies invest in intangible assets

Martin Wolf



What is new about today’s economy? It is not the role of ideas themselves. The technologies we take for granted — the wheel, fired pottery, the plough or the steam engine — were once brilliant new ideas. What is new about today’s economy is that many of our best ideas remain disembodied. The idea is indeed valuable, but it does not take physical form. This changes almost everything.

That is the theme of an intriguing new book, Capitalism without Capital: The Rise of the Intangible Economy, by Jonathan Haskel of Imperial College and Stian Westlake of Nesta. Their main point is compelling: Apple, the world’s most valuable company, owns virtually no physical assets. It is its intangible assets — integration of design and software into a brand — that create value.

The rise of the intangible economy charts


Perhaps the most surprising facts in a book full of surprises is how large investments in intangible assets — in research and development, software, databases, artistic creations, designs, branding and business processes — now are. Measuring this has become an important intellectual activity. In the US and UK, investment in intangible assets now exceeds that in tangible assets. This is also true in Sweden, but not in Germany, Italy or Spain. (See charts.)

This matters because the properties of intangibles are fundamentally different from those of tangibles. Understanding those differences may explain some of the peculiar features of the modern economy, including rising inequality and slowing productivity.

The rise of the intangible economy charts

The authors explain the features of intangible assets by referring to the “four Ss”: scalability; sunkenness; spillovers; and synergies. Taken together, these subvert the familiar functioning of a competitive market economy.

“Scalability” means that an intangible good can be enjoyed by one person without depriving another of its benefits. Economists call such a good “non-rival”. You cannot eat the same sandwich as I can. But an intangible asset can be used over and over again. In an economy where scalability — frequently turbo-charged by network effects — is important, some businesses will quickly become huge. These winners may also enjoy huge incumbency advantages.

“Sunkenness” refers to the fact that intangible assets tend to have little or no market value, unlike, say, land or a factory. They have value as part of their owner’s business, but not to anybody else. This means that investment in intangible assets is risky. The fact that expectations are insecurely anchored might, argue the authors, also generate asset price bubbles.

The rise of the intangible economy charts

“Spillovers” means that a large part of the benefits of an investment may accrue to others. Even with protection of intellectual property, much of the benefit of investment in an idea is likely to accrue to people other than the discoverers. Imitation (and theft) is a rewarding form of flattery. The presence of such spillovers weakens the incentive to invest. The answer is intellectual property rights, but these are inherently arbitrary and economically costly.

Finally, intangibles exhibit synergies. This goes against the spillovers. Synergies encourage inter-firm co-operation (or outright mergers), while spillovers are likely to discourage it. Who really wants to give a free lunch to competitors? Taken together, these features explain two other core features of the intangible economy: uncertainty and contestedness. The market economy ceases to function in the familiar ways.

The rise of the intangible economy charts

Does the rise of intangibles explain what has come to be called “secular stagnation”? Partly.

This is not, it turns out, so much because growth has been underestimated. But a big issue is the growing gap in performance between leading companies and the laggards. The failure of the latter to benefit from investment in intangibles, by themselves or by others, may partly explain their weak growth in productivity.

Again, the rise in intangibles may also partly explain the increase in inequality. One way it can do so is that workers in the most successful businesses tend to share in their employers’ success.

Furthermore, people with relevant skills do outstandingly well. In addition and intriguingly, intangible-intensive businesses tend to cluster in thriving cities. This not only concentrates opportunity, but raises property values, spreading wealth to those who own these properties.

Finally, intangible assets are mobile, which makes them hard to tax.

The rise of the intangible economy charts

This transformation of the economy demands a rethink of public policy. Here are five challenges. First, frameworks for protection of intellectual property are more important. But this definitely does not mean these protections must be still friendlier to the owners of such property. Intellectual property monopolies may indeed be necessary, but, like all monopolies, they can be costly. Second, since synergies are so important, policymakers need to consider how to encourage them, including via policies on telecommunications and urban development.

Third, financing intangibles is hard. For traditional collateral-backed bank lending, it is almost impossible. The financial system will need to change. Fourth, the difficulty of appropriating gains from investment in intangibles might create chronic under-investment in a market economy. Government will have to play an important role in sharing the risks. Finally, governments must also consider how to tackle the inequalities created by intangibles, one of which (insufficiently emphasised in this book) is the rise of super-dominant companies.

Messrs Haskel and Westlake have mapped the economics of a challenging new economy. It is a world in which many of the old rules do badly. We need to reimagine policy, carefully.


Who’s Afraid of Index Funds?

If passive investing creates market distortions, active managers can win big.

By Barbara Novick



Challenges to the status quo—political, economic or social—always evoke strong emotions, from enthusiastic support to fierce criticism. The loudest critics often have the most to lose, even if they acknowledge some benefits of the new regime.

This clash is now unfolding over ascendant investment vehicles: index and exchange-traded funds, or ETFs. The dramatic growth of such products has been revolutionary. More investors are choosing indexing over funds managed by traditional stock pickers, known in the industry as active managers. Since 2009, U.S. index funds have seen inflows of some $1.7 trillion, compared with outflows of nearly $1 trillion for actively managed mutual funds.

Indexing has democratized investing. Today, all Americans can inexpensively and conveniently invest in markets, countries and strategies once open only to institutional investors. Yet a few detractors have compared such passive investing to Marxism and declared it an existential threat to the modern securities market. What exactly do they object to?

As more individuals and institutions invest in index products rather than individual stocks, critics claim, the price of these securities becomes increasingly untethered from the value of individual companies. They argue that companies included in these indexes see their stock prices fly higher and higher regardless of their performance, while non-indexed stocks get ignored like wallflowers at a dance.

But the numbers tell a different story. Despite the popularity of indexing, active managers still dominate the buying and selling of stocks. Indexed assets—including mutual funds, ETFs and institutional portfolios—account for less than 20% of all global equities, according to our analysis. That’s about $12 trillion of a $68 trillion market. The rest is actively managed.

Those actively managed assets trying to beat the market trade much more frequently than indexed assets do. At BlackRock, we estimate that for every $1 of U.S. stock trades driven by investors buying or selling index funds, there are $22 of trades driven by active stock pickers. Combine the effects of greater size and faster turnover, and it’s clear that the price of stocks is overwhelmingly determined by active traders.

Critics of indexing sometimes point to the specter of a 100% indexed market. What would happen, they ask, if indexing replaced stock-picking entirely? Naturally, this would make it impossible to price individual securities properly. But this hypothetical ignores the natural equilibrium created by supply and demand.

If indexing began to distort stock prices, that would create an enormous opportunity for active fund managers to reap big returns—attracting more dollars to those active funds and at least partly reversing the flow toward index management. This process is why active management remains—and will continue to remain—essential.

Indexing is only one component of a diverse, robust and constantly innovating ecosystem. Think of ETFs and index funds as levers that sit alongside individual stocks and bonds, actively managed funds, futures and swaps, private equity and IPOs. Together, they combine to support the smooth functioning of U.S. capital markets and Americans’ ability to confidently buy and sell securities.

What cannot be disputed is that indexing’s success has upended the status quo. The effect will grow as regulatory regimes around the world require the kind of consumer-friendly price transparency that benefits index products.

To be sure, there are still questions to address. For example, investors need to better understand the difference between plain-vanilla ETFs and highly leveraged exchange traded notes, or ETNs, which have more volatile prices. But while debate is healthy, it needs to be based on facts rather than fear. There is a big difference between disruptions to the way traditional asset managers do business, which certainly are occurring, and disruptions to the basic functioning of capital markets, which are not.

Far from undermining the markets, indexing has unleashed new competition, driven innovation and identified new ways to deliver profits. Even active managers are using more ETFs, while everyday investors are saving more. The rise of indexing has changed for the better the way all investors seek returns, manage risk and build portfolios. That’s a development everyone should welcome.


Ms. Novick is a co-founder and vice chairman of BlackRock, a global leader in asset management.

You Know It’s Late In The Cycle When The Yield Curve Starts Generating Headlines

The yield curve is one of those indicators that most people have heard of but few can explain. In part this is because it’s usually a non-issue, only becoming important enough to argue about during the final year of long expansions.

Like now:

             Yield curve flattening maintains relentless momentum
(MarketWarch) – The yield curve flattened this week after the Fed minutes suggested that the December rate increase was a near-certainty, even as senior central bankers held concerns about lackluster inflation. The yield curve refers to the line drawing out a bond’s yield and its respective maturities, with a flatter slope signifying weaker growth Outlook. 
The spread between the 2-year yield and the 30-year yield, one gauge of the curve’s steepness, narrowed to 0.60 percentage point, the tightest span in a decade. 
—————— 
(Zero Hedge) – The US Treasury yield curve collapse continued its unending path to inversion overnight with 2s10s plunging to sub-60bps and 5s30s hits a 65bps handle for the first time since Nov 2007.
2s10s has flattened for 3 days straight, 6 of the last 7 days, and 14 of the last 17 days to a 58bps handle… 

 
As a gentle reminder to all those shrugging this off, BofA reminds that in seven out of seven occasions in the last 50 years an inverted yield curve has been the prelude to recession.
In fact, the last four times the US yield curve was at these levels, the US economy was already in recession.
—————— 
(Zero Hedge) – Currently, the top corp tax rate in the US is 35%. It looks most likely that rate will drop to 20% when tax reform passes. If you are a corp with an underfunded pension fund, you get a tax incentive to fund the pension THIS YEAR vs in the future when the corp tax rate drops to 20%. Why? Because contributions to the pension plan are tax deductible. You get a bigger tax deduction in 2017 then you will get in 2018 and onwards (assuming tax reform happens in something close to its current form…which it looks like it will). 
Multiple primary dealers have reported pension buying in the 30yr sector over the past month, and coincidentally, 30yr bonds have rallied while the front end has sold off for the past month. Pension funds have a favorite bond to buy…STRIPS (30yr zero coupon bonds – higher yield than normal coupon bonds, better asset/liability match..more price sensitive to changes in yield…bigger bang for your buck in a bond rally..and is a flattener to the yield curve). Pension funds don’t trade very much….they tend to buy and hold. 
So these flows will SIGNIFICANTLY flatten the 30yr curve…and that is exactly what we have been seeing. 

US Treasury yield changes (basis points) since Oct 24, 2017  
So, step 1, Mystery Solved.
But Wait, There’s More. If corp pensions are buying 30yr bonds, they are also buying stocks, to keep their relative portfolio weights stable (explains the recent stock rally). 
However, come Jan 1 2018, that buying will evaporate, and then DOWN GOES FRAIZER (Fraizer is the US stock market). 
—————— 
(Mint Partners’ Bill Blain) – The flatter US curve is NOT sending a deep meaningful warning of looming recession. It’s hiding something much worse…. 
The short-end of the US curve reflects what the Fed has done in terms of hiking rates. But, the long end of the US Curve (10-30) is being driven by very different forces. It has flattened because of interest rate differentials between the ZIRP rest of world and the rate normalising US, but also on the fact external investors effectively drive US rates because they are the forced buyers! 
Ongoing QE distortions in Europe and Japan are still driving close to Zero domestic interest rates – forcing investors offshore. Global demand for duration partially explains why the US 10-30 curve appears to have flattened. The transmission effects of $5 trillion QE in last three years is a massive allocation towards US assets – which explains why the 10-yr is sticking round 2.5% and the term premium is negative. Remove these effects of global distortion and the US curve would look much steeper and cause far less fear, panic and mania than the yield curve doomsters perceive. Relax. The yield curve is not the thing to worry about. 
That dark thing is inflation! Over the last 10-years – since the Global Financial Crisis – we’ve seen the main drivers of inflation stagnate across the board. (I’ve argued many times if you want to see inflation then look at financial assets.) While prices and inflation signals have flat-lined, the inflation Central Bank feared they would create through QE has been incubating in massively inflated real assets – stocks and bonds. My Macro Economist colleague Martin Malone reckons an inflation shock is now a 50% plus risk! He points out all the major inflation drivers are coming back on line. 
• Global inflationary expectations have risen dramatically this year 
• Inflation data – which was deflationary 5 years ago, then flat, has now accelerated towards more normal levels 
• Real Asset Prices – particularly housing and real estate rose dramatically over last 3 years 
• Risk Assets – like bond and stocks remain hugely inflated 
• Oil and commodities prices are rising
          • Jobs are being created around the world, and increasing number of countries now looking at supply side fiscal policy means wage inflation looks inevitable! The Philips Curve returns!
Malone has quantified all the inflation drivers and added them up. He reckons in inflation drivers haven’t been this high since 2007! Ask anyone on the street about inflation and they’ll tell you it’s very real. Wages have stagnated for 10-years, but prices are clearly rising.

In other words, this time may or may not be different. Possible explanations for the flattening yield curve include:

  • A typical late-cycle transition from positive to negative slope (i.e., yield curve inversion), which implies a recession and equities bear market in 2018.
  •  
  • Temporary tax reform distortion, which, when reversed out, will cause an equities bear market in 2018.
  •  
  • Massive global liquidity pouring into long-dated Treasuries, which means spiking inflation followed by, we have to assume, rising interest rates followed in turn by a stock and/or bond crash in 2018.

  • Seems like we end up in pretty much the same place regardless.


    Robert Barro’s Tax-Reform Advocacy: A Response

    Jason Furman , Lawrence H. Summers



    CAMBRIDGE – The United States House of Representatives and Senate have each passed tax cuts that would reduce the corporate rate from 35% to 20%, allow businesses to write off equipment and structures more quickly, and make numerous other changes to business and personal taxation. The official estimates of the bills, carried out by the Republican-appointed Joint Committee on Taxation (JCT), conclude that the bills would raise the long-run level of output by less than 1% – resulting in a growth boost of about 0.1 percentage point annually in the first decade. Several other analyses using established models have found similarly modest growth effects.

    Our Harvard colleague and friend Robert Barro disagrees. He recently co-signed a letter with eight other conservative economists finding that the tax cuts would raise the long-run level of output by 3%. The letter also asserted that “the gain in the long-run level of GDP would be just over 3%, or 0.3% per year for a decade,” an estimate that the US Treasury Department has been pointing to justify its claim that dynamic feedback covers much of the cost of the tax cuts.

    In response to our listing of numerous flaws in this letter, including its serious misuse of the academic literature, the authors backed off the claim that the annual growth rate would rise by 0.3 percentage point and failed to defend many of the other assumptions as well. Notably, the then-chief economist of the Organization for Economic Cooperation and Development weighed in to support our view that the authors had misused an OECD study, one of only three studies they cited to reach their conclusions.

    Now Barro has provided Project Syndicate with an analysis that uses his own estimates to conclude that the long-run level of output would increase by 7%. He maintains that, assuming the economy converges to its long-run steady state at 5% per year, this would mean an additional 0.3-percentage-point increase in the annual growth rate.

    But even at Barro’s growth rate, the dynamic feedback would not pay for the tax cut. (Under his convergence assumptions, the 3% increase in output in his previous group letter would translate into a 0.1-percentage-point increase in the annual growth rate over the next decade. As we argued in our response to that letter, this is also consistent with the annual growth rates implied by the papers Barro and his co-signers cited.)

    Flawed Implementation of a Sensible Model

    We welcome Barro’s explicit calculation and believe in the utility of the type of framework he uses. Unfortunately, he makes errors in modeling the actual tax provisions and in choosing parameters that distort his conclusions substantially upward. Based on our adjustments to his calculations, we believe that Barro’s method, correctly applied, would yield an increase in the level of long-run GDP of about 1%. This works out to a 0.05-percentage-point increase in the annual growth rate, following Barro’s convergence assumption. The fact that this conclusion is similar to the JCT estimate should not be a surprise, because the JCT already incorporates most of the economic relationships that Barro is modeling, but correctly models the actual tax provisions and appropriate economic parameters.

    The table below summarizes the adjustments we made to Barro’s numbers, recognizing that a number of them are – like his own estimates – based on plausible guesses, not hard data. A number of other adjustments could be made, most of which would likely lower his estimate still further.

    Adjustments to Barro's Central Growth Estimate of the Tax Cuts and Jobs Act


    Modeling the Tax Plan

    The first key problem with Barro’s analysis is that it makes the least favorable assumptions about current law and the most favorable assumptions about future policy. Since 2007, businesses have been able to write off at least 50% of the cost of their investment in equipment immediately, although this benefit is scheduled to expire. Under the House and Senate bills, businesses would be able to write off 100% of their spending on fixed investment immediately for the next five years.

    Strangely, Barro assumes not only that, absent the legislation, the 50% bonus depreciation would expire, but also that the proposed 100% bonus depreciation, which is temporary in the tax bills, would be maintained indefinitely. But one should assume either that both are permanent, or that neither is. In either case, the user cost of capital for equipment would fall by 6%, not the 12% estimated by Barro. Using the share of equipment in total capital, this would reduce Barro’s user-cost reduction and corresponding growth estimates by 12%.

    The second problem with Barro’s analysis is that it mistakenly models the accelerated depreciation of structures, including by assuming that it applies to all structures. The Senate bill included a provision that would accelerate the depreciation of some structures from 39 years to 25 years. Barro estimates that this provision alone, which costs 0.01% of GDP in the tenth year, would boost output by 1.3% – an extraordinary multiplier of more than 100.

    This astonishing figure partly reflects Barro’s failure to account for the fact that, while the accelerated-depreciation provision applies to many types of structures (for example, office buildings and hospitals), many other types of structures already benefit from substantially more accelerated depreciation. As a result, restaurants, most energy facilities, mining facilities, farms, water supplies, and amusement parks, for example, would not qualify for this provision. In addition, much of such investment in structures is heavily leveraged, implying that it already has a very low effective tax rate. A conservative application of all of these adjustments would reduce the portion of Barro’s structures estimate due to accelerated cost recovery by three-quarters, reducing his overall growth estimate by 7%, after taking into account interactions with the rate reduction.

    We would also argue – but do not incorporate in these adjustments – that future depreciation allowances are like a bond and should be discounted at a lower rate. Making this adjustment would lower the marginal tax rate under current law and thus attenuate much of the marginal rate reduction attributed to the legislation. This adjustment would apply to both equipment and especially to structures.

    Third, Barro assumes a growth boost from the gross tax cuts in the bill, but disregards the gross tax increases. As noted above, one provision alone, costing 0.01% of GDP, is assumed to boost the level of output by 1%. But Barro’s analysis ignores provisions such as one that reduces Net Operating Loss Carrybacks, another that eliminates businesses’ ability to expense research and development costs, and yet another that rescinds a tax deduction for manufacturing. Together with other provisions, these changes, according to the JCT, amount to 0.5% of GDP.

    In economic terms, Barro is treating these as lump-sum taxes that do not affect behavior. In fact, they would raise marginal tax rates on R&D, risk taking, and manufacturing (relative to the estimates Barro is using). Very conservatively assuming that these provisions are modeled as being half as impactful, dollar for dollar, as the statutory rate reduction, this would offset 18% of Barro’s growth estimate.

    Fourth, with respect to the capital stock, Barro assumes that C-corporations account for the large majority, especially the long-lived capital stock. Although we lack our own estimates, we believe that his figure is too high for three reasons. First, C-corporations account for only about 40% of total business income. Second, C-corporations tend to have shorter-lived assets than pass-through corporations, meaning that they would benefit less from these tax changes. And, third, because smaller businesses already benefit from expensing provisions, they would not benefit from accelerated depreciation. All told, we would guess that the corporate sector is half as large as Barro’s estimate, but, erring once again on the side of conservatism, we reduce his estimate by only 25%.

    A fifth problem with Barro’s assessment is that, unlike other analyses of the impact of the proposed tax changes, it uses parameters that are higher than the literature it cites. He assumes that the elasticity of capital with respect to the user cost is 1.25 – that is to say, a reduction of the user cost of capital translates into a percentage increase in the capital stock that is 1.25 times larger.

    Barro justifies this estimate by pointing to a recent literature survey by the Council of Economic Advisers. But the CEA cited nine estimates, eight of which were below 1.25 (the ninth was for a small open economy). According to the CEA, “The emerging consensus in the academic literature places the user-cost elasticity of investment at -1.0.” Using what the CEA describes as the “emerging consensus” would lower Barro’s estimates by 20%.

    The final key problem is that Barro assumes that the stock of equipment and structures increases by 15%, or about $3 trillion, but ignores the fact that the additional capital has to come from somewhere – from other sectors, from abroad, or from consumption. If it comes from foreigners, as would follow from the assumption that the United States is a small open economy, then we would need to repay those foreigners a return on their investment. This return would be subtracted from gross national product (GNP), or national income. If the funding comes from domestic sources, it could be diverted from other sectors that do not experience the same reduction in capital taxation, like housing. The economy might still benefit from more corporate investment and less residential investment, but estimates that include the former but ignore the later greatly overstate the total impact.

    Taking all of these adjustments into account, we believe a reasonable analysis would reduce Barro’s estimate of the tax bill’s impact on US growth by half. His growth estimates would be unchanged if the additional financing for capital accumulation came from reduced consumption; but that would mean that people’s wellbeing increased more slowly than the size of the economy.

    Other Objections

    These adjustments do not encompass all of the doubts we have about Barro’s analysis. In particular, we accept his translation of the capital stock into additional growth, even though it appears to be implausibly high (perhaps by a factor of two or more). For perspective, Barro estimates that the long-run stock of equipment and structures increases by 18.75%. In 2016, the total stock of equipment and structures was $20 trillion, or 107% of GDP. He thus is assuming that an increase in equipment and structures totaling 20 percentage points of GDP (18.75% multiplied by 1.07) could produce 7% more output per year. That is a remarkable 35% return, even before adjusting for the limited size of the C-corporation sector or many of the other issues we discuss above.

    Another, broader shortcoming of Barro’s analysis is that it focuses entirely on the business side of the congressional tax bill. The JCT estimated a modest increase in the level of output over the next decade associated with the individual provisions. This estimate could be added to Barro’s total for a complete assessment of the impact of the proposed tax changes on growth.

    On the other hand, Barro’s analysis does not reflect the negative economic effects implied by higher budget deficits, increased sheltering, marginal tax rates for some pass-through businesses in excess of 100%, and new sources of complexity. All told, our own judgment is that when all of these effects are factored in, long-run GNP would more plausibly decline, not grow, if the tax bill is enacted and its major provisions are made permanent.

    We agree with Barro’s suggestion that the ten-year impact of a corporate tax change is between one-third and one-half of its long-run impact. So, even if our estimates are too low by a factor of 2-3, the impact of the legislation is in the range of what the JCT estimated.

    A Better Approach

    Barro is a serious and careful economist. The fact that his estimates are nearly an order of magnitude off is a reflection of how difficult it is for any single economist, no matter how smart, to use the back of an envelope to estimate the effects of extremely complicated legislation. We do not recommend that anyone use our amendments of Barro’s numbers. After all, our estimates contain many guesses and simplifications that are no substitute for a complete analysis. We offer them in support of our larger point: We should generally rely on the estimates of the official scorekeepers, who already take into account all of the user-cost effects that Barro incorporates in his analysis, but who also correctly apply those effects to the relevant economic sectors and carefully model their interactions with other parts of the tax bill.

    Instead of being used to justify this tax bill, Barro’s insights could have helped to shape a much better tax bill. Such a bill would include permanent instead of temporary expensing, apply expensing to structures as well as equipment, and reduce the statutory tax rate by a smaller margin.



    Jason Furman, Professor of the Practice of Economic Policy at the Harvard Kennedy School and Senior Fellow at the Peterson Institute for International Economics, was Chairman of President Barack Obama’s Council of Economic Advisers from 2013-2017.

    Lawrence H. Summers was US Secretary of the Treasury (1999-2001), Director of the US National Economic Council (2009-2010), and President of Harvard University (2001-2006), where he is currently University Professor.


    Dow 24000 and the Trump Boom

    Companies are bringing cash and jobs back to the U.S. To keep that trend going, tax reform is vital.

    By Maria Bartiromo

    Dow 24000 and the Trump Boom Photo: Phil Foster 



    I’m not in the habit of giving stock tips or making market calls. I’ve never claimed to be an investment strategist. But after spending years reporting on business and finance, I was convinced on the night of Nov. 8, 2016, that the conventional market wisdom was way off target.

    As the night wore on and equity traders began to grasp that Donald Trump would become president, stock markets around the world started selling off. In the U.S., trading in S&P 500 futures would eventually be halted after a 5% decline. After midnight, Paul Krugman of the New York Times opined: “If the question is when markets will recover, a first-pass answer is never.”

    I didn’t see it that way. For years I’d been hearing anguished people at companies large and small bemoan the growing federal burden of taxes and regulations. Now the U.S. would have a president who intended to reduce this hardship and prioritize economic growth.

    When I sat down around 10:30 on election night for a Fox News panel discussion, Dow futures were down about 700 points. Markets like certainty; it was understandable that some investors were selling. Mr. Trump seemed to present more uncertainty than Hillary Clinton, who was essentially promising a continuation of the Obama administration. Mr. Trump’s talk about ripping up the North American Free Trade Agreement, for example, created big unknowns and potentially significant risks.

    The election night selloff turned out to be a huge buying opportunity. Companies had been sitting on cash—not investing or hiring. ObamaCare compliance was a nightmare for many business owners. It made them wonder what other big idea from Washington would haunt them in the future. Mrs. Clinton was likely to increase business costs further, while Mr. Trump had vowed to reduce them. Even in the middle of the election-night market panic, the implications for corporate revenue and earnings growth seemed obvious.

    The next morning, with the Trump victory confirmed, I told my colleague Martha MacCallum that I would be “buying the stock market with both hands.” Investors began doing the same.

    U.S. markets have added $6 trillion in value since the election, with investors around the world wanting in on America’s new growth story. The Federal Reserve Bank of Atlanta is now forecasting the third straight quarter of U.S. gross domestic product growth around 3%.

    It’s not just an American growth story. For the first time in a long time the world is experiencing synchronized growth, which is why Goldman Sachs and Barclays among others have recently predicted 4% global growth in 2018. The entire world benefits when its largest economy is healthy, and the vibrancy overseas is reinforcing the U.S. resurgence.

    As the end of the Trump administration’s first year approaches, it’s a good time to review the progress of the businessman elected on a promise to restore American prosperity.

    Year One has been nothing short of excellent from an economic standpoint. Corporate earnings have risen and corporate behavior has changed, measured in greater capital investment.

    Businesspeople tell me that a new approach to regulation is a big factor. During President Obama’s final year in office the Federal Register, which contains new and proposed rules and regulations, ran to 95,894 pages, according to a Competitive Enterprise Institute report. This was the highest level in its history and 19% higher than the previous year’s 80,260 pages. The American Action Forum estimates the last administration burdened the economy with 549 million hours of compliance, averaging nearly five hours of paperwork for every full-time employee.

    Behind these numbers are countless business owners who have told me they set aside cash for compliance, legal fees and other costs of regulation. That money could have been used to fund projects that strengthened their businesses. President Trump has charted a new course, prioritizing the removal of red tape and rolling back regulations through executive orders. The Federal Register page count is down 32% this year. Mr. Trump says red tape becomes “beautiful” when it is eliminated, and people who manage businesses certainly agree.

    The prospect of tax relief is also raising expectations for growth, as the U.S. prepares to reduce the industrialized world’s highest corporate income tax rate. As with regulation, U.S. businesses don’t need to have the lightest burden; they only need one that’s competitive with the rest of the world. As Rep. Jeb Hensarling (R., Texas) told me recently, when Washington simply “stops the beatings,” growth happens on its own.

    For too many years, U.S. businesses have seen mergers and acquisitions—or moving corporate headquarters out of the country for more attractive tax havens—as almost the only path to success. When a firm can’t achieve growth organically, it must acquire it. And when it faces a combined federal, state and local income tax rate of nearly 40% in America, it will often merge with a competitor in Ireland. Moving a company’s headquarters to Dublin means paying only 12.5%.

    Much has changed this year. Companies from Broadcom to Boeing have announced they’ll move overseas jobs back to the U.S. American companies hold nearly $3 trillion overseas and may soon be able to bring that money home without punitive taxation. Businesses have begun to open up the purse strings, which is why things like commercial airline activity are rising substantially as executives seek new opportunities. Companies are looking to invest in growth.

    The promise of tax relief is raising profit expectations for the S&P 500, now expected to rise by double digits in 2018. For pass-through businesses, which employ more than half of private-sector workers, a large tax cut would have a significant effect. On the individual side, much of the tax debate has unfortunately not been about economic growth but about trying to ensure that high-income earners don’t benefit from relief—even though the top 10% of earners paid nearly 71% of federal income taxes in 2016. Stephanie Pomboy of MacroMavens notes that the top 20% spend more than the bottom 60%, and it’s worth remembering that consumer spending is two thirds of the economy.

    House and Senate negotiators are now reportedly planning to cut not just the rates for low-and middle-income taxpayers but the top rate as well. Whether a 37% top rate—without deductions—encourages the top earners to spend more remains to be seen, but the prospect of ending the year with no tax reform at all should focus congressional minds.

    After reaching Dow 24000, where can markets and the economy go from here? I’m not going to make predictions, but it stands to reason that the economy is better off when federal policy doesn’t discourage people who have a demonstrated ability to work, earn, spend and invest.


    Ms. Bartiromo is anchor of “Mornings with Maria” on Fox Business Network and “Sunday Morning Futures” on Fox News Channel.


    Batteries Are Taking Over the World

    The battery industry is surging. But picking investment winners will be exceedingly hard

    By Stephen Wilmot


    CHARGING AHEAD
    Projected Lithium-ion battery demand by sector



    “The storage battery is, in my opinion, a catchpenny, a sensation, a mechanism for swindling the public by stock companies,” wrote Thomas Edison in 1883.

    Today, the battery industry is mustering for exponential growth as car makers electrify their fleets, most visibly at Telsa’s $5 billion factory in Nevada. For investors looking to gain from the battery’s rise, though, the doubts of the 19th century entrepreneur linger. The path to profitability is far from clear, and technological breakthroughs could upset the current competitive order.

    Your mobile phone contains a lithium-ion battery—a technology first commercialized for a Sony camcorder in 1991—and so does every battery-electric or hybrid car. The difference is that cars require vastly more powerful batteries. The industry will need to increase production from 68 gigawatt-hours of lithium-ion cells last year to 1,165 GWh over the next decade, estimates brokerage Berenberg.

    A handful of big East Asian companies have rushed into this supply gap. For all the “gigafactory” hype, Tesla doesn’t make batteries: Cell production is the responsibility of its Japanese partner Panasonic. The other leaders in the field are LG Chem and Samsung SDI , both listed subsidiaries of the namesake Korean conglomerates, which supply the electric-vehicle projects of Nissan, General Motors and BMW , among others.

    Hot on the Koreans’ heels are two Chinese companies determined to supply the ballooning Chinese electric-vehicle market: BYD, 25% owned by Berkshire Hathaway and also an electric-car maker, and CATL, which is planning a $2 billion initial public offering in Shenzhen in the coming months. These five companies and a few newcomers—among whom car makers are conspicuously absent—currently intend to build 24 factories with a total capacity of 332 GWh by 2021, calculates Simon Moores, managing director of consultancy Benchmark Mineral Intelligence.

    Investors looking to benefit from this gold rush need to take a very long-term view. The capital requirements are vast, and the contracts being signed are at wafer-thin margins. Sam Jaffe, managing director of battery researcher Cairn ERA, says the companies are taking “the traditional Asian conglomerate approach” of prioritizing market share over profits.

    Negotiating with car makers will also be tough. Outside China, the automotive industry is highly consolidated, making competition for contracts fierce. And manufacturers are under intense pressure from environmental regulators to sell electric cars even though their cost is uncompetitive. The only solution for car makers will be to pile pressure on battery prices. Big new factories will enable suppliers to cut unit costs, but profits could get lost in the squeeze.

    Investors may be better off looking further up the supply chain. The most valuable component of a battery is its cathode, from which lithium ions scuttle back and forth in the charging and discharging process. The chemistry is sophisticated and fast-evolving, which should offer cathode makers some protection from cost pressures. Japan’s Sumitomo Metal Mining Co. supplies Panasonic for Tesla, while Belgium’s Umicore and a few others cover the rest of the market.


    SELLING CELLS
    Announced investments in battery-cell factories by 2021







    The risk for these companies is that a radically new technology makes existing investments obsolete. John Goodenough, a now 95-year-old professor at the University of Texas considered a founding father of the lithium-ion battery, this year claimed a breakthrough with “solid-state” cells, which sideline various problems by replacing a flammable liquid electrolyte with a hard layer. Toyota expects to sell cars with solid-state batteries by the early 2020s; British engineering firm Dyson has penciled in a 2020 launch date for a solid-state car.

    The battery industry is poised to grow very fast, but the growth will be capital intensive and may be technologically volatile. Batteries may no longer be a trick for swindling amateur stock pickers, but that doesn’t mean they will provide an easy way to make money.