Us vs. Them
By Dr. Ian Bremmer
What's Next
Changing the Model?
Us vs. Them
By Dr. Ian Bremmer
China’s Elitist Collaborators
Juan Pablo Cardenal
HONG KONG – At the beginning of this century, when China launched its “going out” policy – focused on using foreign-exchange reserves to support overseas expansion and acquisitions by Chinese companies – few expected the country quickly to emerge as a leading economic player in Latin America. Yet that is exactly what has happened. The question is whether this is good for Latin America.
In less than 15 years, China has gone from playing a rather marginal economic role in Latin America to being among the top investors and trading partners for most countries in the region, as well as its foremost lender and infrastructure builder. With its economic plans in Latin America cruising along smoothly – a trend that seems unlikely to change anytime soon – China has now set its sights on another goal: expanding its political influence in the region and beyond.
Of course, China’s status as an economic heavyweight already affords it a significant degree of political clout. But the Chinese state and its ruling Communist Party of China (CPC) are also pursuing a more direct, coordinated, and far-reaching strategy to expand its soft power.
That strategy – more “sharp” than “soft” in practice – focuses largely on promoting personal and institutional engagement, cooperation, and exchanges with Latin American elites in four main areas: media, culture, academia, and politics. For example, China produces free media content to be shared locally, provides scholarships to Latin American students and professionals to be “trained” in China, creates partnerships with local universities and think tanks, and opens and operates Confucius Institutes, among other initiatives.
But the single most powerful tool China employs is people-to-people exchange, whereby China seeks to build strong personal relationships with influential individuals from a variety of fields.
To that end, Chinese leaders bring Latin American political figures, academics, journalists, high-ranking government officials, ex-diplomats, and others to China to participate in weeks-long trainings, academic events, or ad hoc exchange programs, and meet their Chinese counterparts.
This “elite capture” is not insignificant. According to President Xi Jinping, China will train 10,000 prominent Latin Americans by 2020. Moreover, the CPC has committed itself to inviting 15,000 members of foreign political parties to China for exchanges in the next five years – initiatives in which many Latin American political representatives are already engaged.
The primary goal of these efforts is to ensure that prominent figures, including current and future leaders of Latin America – typically handpicked by the Chinese leadership – are on China’s side. To put it bluntly, China’s authoritarian regime is subtly and gradually buying Latin America’s elites.
And the plan is working. The luxurious five-star hotels, over-the-top hospitality, and carefully crafted narrative and agendas make a powerful, even hypnotic, impression on China’s foreign guests. Many of them return home believing that China is a fundamentally benign actor, and thus that they have nothing to fear from its engagement in their countries. Many go so far as to become cheerleaders for China.
Their praise for China – expressed through published work, public remarks, or private comments – often, and understandably, focuses on the country’s perceived economic success.
They speak with admiration about the economy’s transition from Maoism to “red capitalism,” its resilience in the face of the 2008 global financial crisis, and its emergence as perhaps the main winner of globalization. And they celebrate China as a valuable source of investments, loans, and market opportunities.
China’s experience proves, according to many of the regime’s newfound friends, that development without democracy is possible. That assessment is almost never qualified by recognition of the potential dangers of becoming too dependent on China, much less any reference to its authoritarian political system or poor human-rights record.
These enthusiasts probably would not want a China-style regime in their own countries. Yet, by accepting and even propagating the CPC-endorsed narrative and abjuring any critical analysis, they are contributing to a worryingly inaccurate image of China across Latin America. With little knowledge about China, many in the region are getting their information from their local elites – the very people whom China’s leaders are trying to attract.
The public, in Latin America and elsewhere, deserves to hear the whole story. They should learn about China’s asymmetric relationships with many of its trading partners, and the stark terms of Chinese loans, which have left many borrowers mired in a debt trap. They should also know the truth about labor conditions at China’s overseas projects, not to mention their environmental and social impact. And they should know about intensifying domestic repression in the age of Xi.
There is no doubt that Chinese engagement has brought major opportunities to Latin America.
But the risks cannot and should not be ignored. The journalists, academics, politicians, and other influential people whom China is courting have a responsibility to avoid being swept up in the charm offensive, and to provide a clear-eyed assessment of the potential pitfalls of engagement. Otherwise, Latin America may soon find itself paying a high price for its blurred visión.
Juan Pablo Cardenal is a researcher at The Center for the Opening and Development of Latin America (CADAL).
Gold And Silver: Sell In May And Go Away? Not Exactly
Gold Is Seasonal: When Is the Best Month to Buy?
Many investors, especially those new to precious metals, don’t know that gold is seasonal. For a variety of reasons, notably including the wedding season in India, the price of gold fluctuates in fairly consistent ways over the course of the year.
This pattern is borne out by decades of data, and hence has obvious implications for gold investors.
Can you guess which is the best month for buying gold?
When I first entertained this question, I guessed June, thinking it would be a summer month when the price would be at its weakest. Finding I was wrong, I immediately guessed July. Wrong again, I was sure it would be August. Nope.
Cutting to the chase, here are gold’s average monthly gain and loss figures, based on almost 40 years of data:
Since 1975—the first year gold ownership in the US was made legal again—March has been, on average, the worst-performing month for gold.
This, of course, makes March the best month for buying gold.
Here’s what buying in March has meant to past investors. We measured how well gold performed by December in each period if you bought during the weak month of March.
What does this pattern means for us here at the end of April? Most likely a couple of boring months are in store, in which both upside potential and downside risk are modest. This in turn means that decisions (to stack, take profits, or add to mining share portfolios) can be considered instead of rushed, with good-until-canceled orders being allowed to sit until, in the summer doldrums, some bored trader comes along to make you a good deal.
Prepare for the Last Bull Market of Our Lifetimes
By E.B. Tucker, editor, Strategic Investor
Right now, we’re seeing a set of indicators we’ve never seen before. If someone told me about them 20 years ago, I would have struggled to picture them.
In short, we’re on the cusp of a tremendous bull market.
It’s nothing like what we saw in the 1960s or 1980s. Those bull markets rode on the back of economic growth. In both cases, you would have made more acceptable returns by simply buying the Dow Jones Industrial Average.
The coming bull market looks entirely different. Most people will miss it because they’re used to making “easy money.”
You see, investors dumped $692 billion into passive funds like the Vanguard 500 Index Fund last year. They blindly invested in stocks, and that worked quite well. Now, the average person believes buying the overall market index is his path to steady riches. He’s dead wrong.
Here’s why…
The U.S. stock market is worth $29 trillion today. Twenty years ago, it was worth $12.9 trillion.
That’s an increase of 124%.
U.S. GDP looks similar. Twenty years ago, it was $8.9 trillion. Today, it’s $19.8 trillion—a 122% increase.
And yet, there are half as many publicly listed companies in the U.S. today than there were 20 years ago. You can see what I mean below:
You can see that the number of public companies used to grow in step with the economy. Americans would start businesses, build them up, and take them public when they needed access to more capital.
Public companies also became the lifeblood of the wealth-building process for most investors. And for good reason. You see, there’s a gap between what people earn and what they need to retire. Capital gains from investments usually help close the gap.
But it’s tough to get out and source private investment deals if you sit behind a desk all day. Even if you do, digging into the details takes time. You also need to make sure you avoid crooks and cheats. I know about these headaches because I’ve been involved in many private investments.
Buying stocks is much easier. This is because public companies are required by law to publish detailed financials and operating information. Anyone can look at this.
The problem is that the number of publicly traded companies in the U.S. is falling at an alarming rate.
The good news is that we know why it’s happening. More importantly, we see a way to profit from it.
Pigs Get Slaughtered
Consider this: In 1975, 109 companies produced 50% of earnings. In 2015, just 30 companies accounted for half of all the earnings from all U.S.-listed companies.
That means the earning power of public companies is concentrated in a shrinking number of firms. As a result, investors have fewer choices today than at any other time—maybe ever.
But why? Well, the Federal Reserve has had a lot to do with it. You see, the Fed’s been running an ultra-low interest rate experiment over the past 20 years.
This has made borrowing money easy, even for people who don’t need the money. After all, it’s not too hard to pay interest on a 0% loan. Now, you and I can’t borrow money that cheaply…
But the most connected borrowers can.
As a result, the private equity industry has been one of the biggest beneficiaries of this money experiment.
In case you’re not familiar with the private equity industry, here’s how it works... High-net-worth investors pledge cash to a specific fund. Once the fund raises its target amount of money—say $200 million—it closes to additional investment. It also closes the door for investors to pull money out.
The fund’s managers then take the $200 million in cash and borrow an additional amount. This can turn $200 million into $1 billion of buying power. Keep in mind, the managers receive 2% of the $200 million invested each year. That gives them $4 million to pay their salaries and expenses while they invest the funds.
I’ve seen this play out firsthand.
Just after college, I worked as a sales rep for a manufacturing firm. We produced mattresses in 26 factories across the U.S. The owners sold the company for $800 million to a private equity firm. Within months of taking over, I learned that the private equity firm took out a massive loan against the business.
Here’s what’s interesting. They didn’t use that money to invest in new factories or equipment.
Instead, they paid a huge dividend—equal to almost the entire purchase price—to themselves.
This meant that the business merely had to generate enough income to service the massive loan.
If it could do that, its private equity firm owners had a risk-free investment.
It gets better. These firms also capture 20% of any profit they generate when they sell assets. In this case, if they resold the firm a few years later for $1 billion, they’d collect another $40 million in incentive fees.
This type of investing went mainstream in the 1980s. And it only grew from there. Today, it’s officially out of control. It’s a large part of why there are so few public companies remaining today… and this wave of consolidation is just getting started.
Just look at the chart below. It shows how much cash private equity firms are sitting on today.
You can see that private equity firms are sitting on a staggering $1.7 trillion in cash. That’s equal to 9% of the entire U.S. economy’s annual output… just sitting in cash.
In the coming years, these private equity firms will use this cash hoard to take businesses private, load them up with debt, pay themselves rich dividends, and then leave the companies for dead… just like they recently did with Toys "R" Us.
The good news is that you can turn this market phenomenon into huge profits by buying takeover targets or highly successful serial acquirers.
China warns Chile against blocking $5bn SQM lithium deal
Move to halt sale of stake in miner to Tianqi could ‘leave negative influences’
Henry Sanderson in Santiago
.
SQM lithium mine on the Atacama salt flat: if Tianqi were able to buy the 32 per cent stake, it would have a dominant influence on global supplies of lithium © Reuters
The Chinese government has criticised a move by regulators in Chile to try to block the sale of a $5bn stake in the country’s largest lithium producer to a Chinese company, saying it could harm bilateral relations.
The comments could ease the way for China’s Tianqi Lithium to buy 32 per cent of Chile’s SQM, the world’s second-largest producer of the metal, a key material in batteries, which has been put up for a sale by a Canadian company called Nutrien.
Xu Bu, China’s ambassador to Chile, told local newspaper La Tercera that the opposition to the stake sale could “leave negative influences on the development of economic and commercial relations between both countries”.
The comments add pressure to the new administration of President Sebastián Piñera, who has vowed to attract more foreign investment to Chile. China is the largest buyer of copper from the country, but has invested less in Chile compared with other South American countries such as Brazil.
In January, China said it wanted to extend President Xi Jinping’s Belt and Road infrastructure and investment plan to Latin America.
If Tianqi were able to buy the 32 per cent stake in SQM, it would have a dominant influence on global supplies of lithium, just as carmakers are pouring billions of dollars into ramping up production of electric cars.
Shenzhen-listed Tianqi is already one of the largest suppliers of the battery raw material, through its ownership of the Talison Lithium mine in Western Australia.
SQM is the lowest cost producer of lithium in the world, due to its use of the fierce sunlight in the Atacama Desert to extract the metal from brine. SQM could supply over half of the world’s demand for lithium by 2025, according to analysts at Scotiabank.
On March 9, the last day of former President Michelle Bachelet’s administration, Eduardo Bitran, executive vice-president of Chile’s national development agency, filed a petition with Chile’s antitrust regulator, urging it to block Tianqi’s bid.
Mr Bitran argued that a sale of the 32 per cent stake to Tianqi would give China too much power over the global lithium market.
“Interlocking of . . . companies that represent a significant participation of a given market is a considered a risk to competition according with the law, [and] therefore has to be investigated,” Mr Bitran said in an email to the Financial Times.
Chile’s National Economic Prosecutor’s Office has until August to decide whether to pursue the case. Tianqi officials met with the office on March 29 to discuss the issue, according to Chilean records.
In the interview, China’s ambassador said Mr Bitran’s remarks had turned “this totally commercial action into a political issue”.
The Chinese embassy in Santiago did not respond to a request for comment. Canada’s Nutrien has until April 2019 to sell the 32 per cent stake as a condition of the merger last year between PotashCorp and Agrium, which created the company.
The stake sale has raised fears that a new shareholder could seek control of SQM. This month SQM’s other largest shareholder, Julio Ponce Lerou, requisitioned a shareholders meeting to change the company’s bylaws to prevent any new buyer from using the stake to take control.
Mr Ponce, the former son-in-law of Chile’s dictator Augusto Pinochet, has held a controlling stake in SQM through an agreement with Japan’s Kowa, which owns 2 per cent of SQM. But in January, Mr Ponce was forced to give that up as part of a deal to allow SQM to expand its production of lithium.
No (Wall Street) Bank Left Behind!
The Four Biggest U.S. Banks Made $2.3 Billion From Tax Law—in One Quarter
Big banks just cashed in the first installment of benefits corporate America will reap from the new federal tax law.
The haul: more than $2.3 billion.
That is how much the combined earnings of the four major national banks— JPMorgan Chase, Wells Fargo. Citigroup, and Bank of America, — increased in the first quarter because of the lower corporate rates under the tax-overhaul law enacted in December, according to an analysis of the banks’ results by The Wall Street Journal.
That amount is only a modest-size chunk of the banks’ total first-quarter earnings—less than 10% of their combined net income applicable to common shareholders. But it comprises a major chunk of their year-over-year earnings growth.
Without the tax savings resulting from the new lower corporate tax rate, Wells Fargo’s earnings would have declined from a year ago instead of increasing, and much of the year-over-year growth at Citigroup and Bank of America would be gone. At JPMorgan, losing the tax bump would have cut its earnings growth to 28% from 35%.
The $2.3 billion boost isn’t the entire story. For one thing, other provisions of the tax law prompted some of the same banks and many other companies to take big charges against their earnings in the fourth quarter. From that perspective, the first-quarter boosts merely help even things out.
The Journal’s analysis calculated what each bank’s results for the latest first quarter would have been if the effective tax rate from last year’s first quarter was still in effect.
Each bank’s tax rate has declined dramatically since then. Wells Fargo, for instance, had an 18.8% effective tax rate in the latest first quarter, down from 27.5% in the year-ago quarter. Applying a 27.5% effective tax rate to the latest quarter’s pretax income would have shaved about $636 million off earnings, cutting Wells Fargo’s diluted earnings per share to 99 cents from the actual $1.12. (Wells’ first-quarter 2017 earnings were $1.03 per diluted share.)
Citigroup, which had a 23.7% effective tax rate this quarter, would have seen about $452 million cut off its first-quarter earnings if its year-ago 31.1% effective tax rate had been in effect. That would have eliminated most of its roughly $530 million in net-income growth from a year ago.
The tax overhaul added about $798 million to Bank of America’s net-income growth. At JPMorgan, it added about $470 million to its earnings.
While all four banks disclosed the figures for their current and year-ago pretax income, excluding the effect of taxes altogether, Bank of America highlighted them in the headline of its press release, noting that its pretax income had risen 15%, even as its diluted EPS rose 38%.
Mr. Gomatam notes not all companies will see the kind of tax-rate reductions the big banks did, and some tax savings could go to a company’s customers or employees rather than profits. Investors “need to see that all of the tax savings are falling to the bottom line.”
Investors may have looked through the numbers and realized that much of the banks’ earnings growth came from a tax cut, not from operations. In the two trading days since the first big U.S. banks announced earnings Friday morning, Wells Fargo shares fell 3.6%, JPMorgan’s slipped 2.8% and Citigroup’s lost 2.9%.
Farewell at last
Cuba bids goodbye to the revolutionary generation
There will be a new face at the top this month. At first, little else will change
Is the Financial Sector Safe Enough Yet?
Mark Roe
CAMBRIDGE – A decade after the global financial crisis, policymakers worldwide are still assessing how best to prevent bank failures from tanking the economy again. Two recent publications – one from the US Department of the Treasury, and another by Federal Reserve economists – provide an indication of where we are.
The US Treasury report examined whether to replace the 2010 Dodd-Frank Act’s regulator-led process for resolving failed mega-banks – the Orderly Liquidation Authority (OLA) – with a solely court-based mechanism. The Treasury’s study was undertaken under instructions from President Donald Trump, who was responding to pressure from several Republican congressional leaders – such as Representative Jeb Hensarling of Texas, the chair of the House Financial Services Committee – who advocate replacing regulators with courts.
Ultimately, while the Treasury extolled the virtues of basic bankruptcy for failed banks, it rejected repealing regulators’ powers to lead bank restructurings. Hensarling expressed deep disappointment with the Treasury’s conclusion, and he and his colleagues continue to insist that Dodd-Frank is an example of inappropriate government meddling that raises the risks of taxpayer-funded bailouts.
But, as the Treasury recognized, eliminating the regulators is a problematic proposition. Restructuring banks in a crisis requires planning, familiarity with the bank’s strengths and weaknesses, knowledge of how best to time the bankruptcy in a volatile economy, and a capacity to coordinate with foreign regulators. The courts cannot fulfill these tasks, especially not in the time currently allotted for a bank bankruptcy – a 48-hour weekend – without regulators’ prior planning and immediate advice, as well as international coordination.
Moreover, if multiple mega-banks sank simultaneously, bankruptcy courts could not manage the economy-wide crisis that would follow. They lack the training to devise a nationwide recovery plan. And they are in no position to coordinate proceedings with foreign regulators.
Given all of this, eliminating regulator-led restructuring would amount to a big step backward. So the Treasury’s report is good news, especially because, without Treasury support, the House of Representatives may well stop pushing for this change.
Yet the second recent publication – by several Fed economists – suggests that there is work to be done. That report’s main conclusion is that restructuring planning is not yet reflected in the market’s pricing of bank bonds.
After the crisis, studies by International Monetary Fund staff and others concluded that banks needed much more loss-absorbing equity. In 2009, only five cents of every dollar of funding for many major banks came from equity; the rest was debt (deposits, overnight loans, and long-term loans). So if the bank lost six cents in its operations per dollar of debt, some creditor could not be fully paid. Seeking to avoid losses, many creditors would rush to cash out, putting pressure on the entire banking system and potentially triggering a run.
According to the IMF study, most banks could have weathered the crisis effectively if 15 cents of every dollar of funding had come from equity. Yet banks still hold only eight or nine cents per dollar of funding in equity, despite regulators’ pushed for an increase , and the biggest banks have called for reducing even this suboptimal ratio.
Regulators and bankers have sought a middle ground to boost safety. In addition to the eight cents of equity they are holding, banks are now aiming to hold another eight cents per dollar of debt that could be turned into equity in the course of a weekend. In such a scenario, a damaged bank could absorb more losses and remain in operation, diminishing creditors’ incentive to run.
But there is a potential hitch. Under the current plan, certain creditors are designated in advance to absorb a failed bank’s losses once the equity is wiped out. Those creditors’ debts are thus riskier, and should be more expensive to the bank than the debt that is not designated to be turned into equity. Yet the Fed economists conclude that, in the market, this is not the case. Why?
The first possibility is rather optimistic: financial markets don’t think there could be another financial crisis during the life of the existing debt. But could markets really believe that there is zero chance of a crisis in the next decade? The risks of, say, a trade war or a fiscal crisis (when the projected trillion-dollar deficits are reached) are real, apparent, and priced by volatile stock markets.
Another more neutral possibility is that markets aren’t pricing the different types of debt differently because they do not understand that the plan involves hitting some creditors hard and keeping others safe. But this is also unlikely, because the plan has been well publicized in financial circles, and ratings agencies like Moody’s count the loss-absorbing debt as riskier than banks’ regular debt.
The third explanation is more ominous. Maybe financial markets understand the plans, but don’t (yet) find them credible. Weekend restructuring of mega-banks has never been tried, and commentators still see potential hurdles to overcome. Maybe knowledgeable investors assume that, ultimately, banks and the government will not treat the designated loss-absorbing creditors any differently than others. Either everyone will go down, or everyone will get bailed out.
If this is the reason, it is disappointing, given how much work has gone into developing both the regulatory-led and the court-led restructuring mechanisms.
Mark Roe is a professor at Harvard Law School. He is the author of studies of the impact of politics on corporate organization and corporate governance in the United States and around the world.
A Productivity Paradox
By Patrick Watson