Five lessons from 25 years of corporate wealth creation

The rewards of a superstar economy must be shared more equally

Rana Foroohar 

      © Matt Kenyon


The past two and a half decades have been good for big business. 

While the size of the private sector as a percentage of OECD economies has held relatively steady since the mid-1990s, the share of companies with more than $1bn in annual revenue has grown by 60 per cent since 1995. 

The big have got bigger, and the rich have got richer. 

But behind that headline trend, there is a great deal of geographic and socio-economic nuance, as a new McKinsey Global Institute white paper shows.

Researchers examined the economic contributions of both private and public companies in rich countries over the past 25 years. 

Reading the paper, I was struck by five key lessons for policymakers and corporate leaders which should inform the debate over the role of corporations in society.

First, the losses suffered by labour relative to capital are even more extreme than previously thought. 

While productivity gains since the mid-1990s amounted to 25 per cent in real terms, wages grew only 11 per cent. 

Meanwhile, capital income increased by two-thirds. 

If there is any doubt that the link between productivity and wages has broken down, this should put it to rest.


That strengthens the argument for a much broader sharing of capital wealth. 

Right now, the top 10 per cent of households in the US own 87 per cent of equities. 

“It’s crucial that we have more people participating in the capital income pathway,” says MGI director James Manyika, “because while labour income remains the most important for the majority of people, capital income is a bigger and bigger part of where value is going.”

Companies could offer equity ownership to more, or even all, employees. 

But the public sector could also tax corporate equity wealth, something proposed recently by the University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman. 

Or it could pay out a digital dividend to individuals that represents a share of the data wealth gathered by the largest, richest companies, notably the Big Tech platforms.


This points to another key lesson: the intangibles rule. 

Of all the ways in which companies can have an impact on the economy — from wages and the taxes that they pay, through the consumer surpluses they generate with cheaper prices, to negative externalities such as environmental spillovers — the one that has grown most sharply over the past 25 years is investment in intangible assets such as technology, software, patents and so on. 

This is up by 200 per cent. It makes companies more productive, but is also associated with jobless recoveries in the short to midterm — a significant political concern.

That brings me to lesson three, which is that different types of companies have very different impacts on households and economies. 

The MGI paper divides corporations into eight archetypes: discoverers (for example, biotech firms, which push scientific frontiers); technologists, including the platforms that build the digital economy; experts (professional services, hospitals and universities); deliverers, which distribute and sell products; makers (manufacturers); builders; fuellers; and financiers.

For most of the 20th century, makers and builders were pre-eminent. 

Over the past 25 years, they lost ground to the other archetypes. 

While makers represented 56 per cent of large companies in the data set in 1995, they accounted for only 41 per cent by 2016-2018. 

But as they decline, so does good employment. 

Makers contribute 20 per cent more than average to labour income, employ the most people and have the widest geographic distribution of value thanks to their supply chains and need for physical space and investment into tangible goods.

No wonder they are at the centre of the national competitiveness debate. 

Some countries, such as Japan and Germany (where makers haven’t declined at all), have made specific policy decisions to support them. 

Others, like the US and the UK, have not to the same extent.

This is lesson four: countries have very different corporate interests. 

Technologists are driving the US and South Korea, while makers rule Germany. 

Financiers lead in the Netherlands and France is all about discoverers and deliverers, most notably in the luxury goods sector.

While the study doesn’t specifically examine small and midsized companies, it does hint at hard times for them. 

Big companies are paying less as a percentage of revenue to their suppliers now than they did 25 years ago, and many of those suppliers are SMEs. 

Given that such companies are quite labour-intensive, usually more so than large ones, that has important social and political implications.



Which brings me to the final lesson: competition matters. 

We know that we are living in a superstar economy. 

That is in many ways the natural result of globalisation, financialisation and the rise of the platform giants, which are under fire around the world because of the monopoly power they exercise. 

Large companies, particularly in the US, have been the biggest economic winners of the past quarter of a century.

But for the business sector to enjoy another 25 years of unfettered growth, it will need to show that it can enrich a broader range of stakeholders. 

The consumer surplus driven by lower prices on the products and services created by technologists and makers aren’t fully compensating for job losses due to automation. 

High income households, particularly in the US, are taking the lion’s share of business wealth.

The past 25 years have shown that business can generate a tremendous amount of wealth. 

The next 25 must show that it can share that wealth more equally.

Buttonwood

The boundary between crypto and fiat money is becoming more permeable

Crypto may be past the point where it can be considered self-contained


Finance has its squabbling tribes, much like the rest of society. 

A contest that attracts a lot of attention just now is the demographic-cum-digital divide between crypto kids and fiat dinosaurs. 

The crypto kids believe that blockchain-based finance is the future and a haven from the inevitable degradation of fiat money. 

In the opposite corner are the titanosaurs of the fiat world, the central bankers. 

“I’m sceptical about crypto assets, frankly, because they are dangerous,” said Andrew Bailey, the Bank of England’s boss, this week.

This is a good moment for the dinosaurs. 

The dollar price of bitcoin, the mainstay of crypto assets, fell from $58,000 or so in mid-May to around $33,000 in the space of a couple of weeks. 

The steepest part of that decline came after Tesla’s chief executive, Elon Musk, said his firm would suspend its policy of accepting bitcoin for purchases of its cars. 

A pledge by Chinese regulators to crack down on the mining of bitcoin gave the sell-off additional impetus.

The consequences have so far been few. 

Because there has been no visible collateral damage, crypto has been widely seen as a side-show in financial markets. 

This view is too dismissive, though. 

Crypto, like gold, is built on a collective belief about its value. 

But so to an extent are all asset prices. 

And crypto is moving past the point where it can be considered its own self-contained world.

To understand bitcoin’s ascent it helps to go back to the work of Thomas Schelling, a Nobel-prizewinning economist and game theorist. 

Schelling contended that people are often able to act tacitly in concert if they know that others are trying to do the same. 

Many situations throw up a clue, a “focal point”, around which people can co-ordinate without explicitly agreeing to do so. 

For instance, if asked to pick a positive number, people will offer a variety of responses—one, seven, 100 and so on; but if asked to choose a number that others will also select, there is a preponderant choice: the number one.

This insight applies to certain assets that lack intrinsic value. 

The investment case for gold, said Schelling, can best be explained as a solution to a co-ordination game. 

Gold bars have value because enough people tacitly agree that they do. 

Their value is bolstered by their scarcity, and their longevity. 

Willem Buiter, a prominent economist, once aptly called gold the “six-thousand-year-old bubble”. 

Bitcoin is newer, but similar. 

Yes, the technology behind it is ingenious (although Ethereum, the next-most-valuable crypto asset, arguably has the more compelling user case). 

And, yes, bitcoin is used in transactions, if no longer for Tesla’s cars. 

But its selling points are scarcity and fame. 

It is a natural focal point. 

As with gold, you can make a theoretical case that it is proof against paper-money inflation.

The latest gyrations seem to confirm that crypto is a walled garden unconnected with the rest of finance. 

But if you look more closely a different pattern is emerging. 

There is already a pathway linking crypto prices with gold. 

Flows into exchange-traded funds (etfs) that invest in gold started to revive just as money was flowing out of bitcoin futures and etfs, according to a recent analysis by Nikolaos Panigirtzoglou of JPMorgan Chase, a bank. 

That suggests that institutional investors are shifting back into gold after a flurry of interest in crypto, because bitcoin prices had risen too quickly. 

Viewed this way, the fall of bitcoin and the revival of gold are a relative-value trade within the broader set of inflation hedges.

Furthermore, it is hard to shake off the feeling that crypto-crashes now matter. 

This is the third bear market in four years, but a lot more money is now involved. 

The market capitalisation of cryptocurrencies tracked by a specialist website, coingecko.com, was more than $2.5trn in mid-May. 

A fortnight later it had fallen to $1.5trn. 

That is a big loss in anyone’s money. 

Crypto prices are creeping up again, so those losses are already being eroded. 

But at each new peak, the asset class looms ever larger. 

And a dollar lost in crypto investing is the same as a dollar that was once earned or borrowed—even if, at present, it is hard to know precisely who bears the loss.

There is something else to consider. 

Cryptocurrencies are highly speculative assets. 

It is thus hard not to think of their prices as a signal of shifts in risk appetite more broadly. 

Beliefs matter for all sorts of asset prices, whether in dollars or bitcoin. 

You might be able to dismiss this crypto-crash. 

But the next one will be harder to ignore.

10 Ways to Cash In on the Shortage of Just About Everything

By Jack Hough

           Illustration by Doug Chayka


America’s chicken-sandwich war has the combatants scrambling for supplies. 

Breast prices have doubled this year. 

Chick-fil-A has run low on sauce. 

Burger King has had pickle problems—jars, not cucumbers, are hard to come by. 

An isolated supply squeeze? 

Anyone who is building or remodeling a home, or buying or renting a car, or stocking up on pool chlorine or dog food, knows better. 

In the land of plenty, there suddenly seems to be an everything shortage.

In February, when Mitch Hires ordered furniture for a second home he is building in the Florida Panhandle, he was told that delivery would probably be delayed until June. 

Now, the estimate has slipped to August or September. 

“There are things going on now I’ve never seen,” says Hires, who, as CEO of Construction Resources in Decatur, Ga., has supplied builders with flooring and fixtures for 25 years.

Hires says his own business is “in a good place, all things considered.” 

Barely a year ago, he was planning for cash preservation and survival. 

Now, he is challenged to keep up with demand.

Countertops are available, and there have been few hiccups in mirrors and shower doors, but workers are scarce, especially installers. 

Even though he raised entry-level pay, Hires has struggled to increase his payroll, now 726, to his goal of closer to 800. 

Garage door prices have spiked with the cost of steel and freight, but at least units can be found, unlike with major appliances, where shortages stretch from mass-market brands like Whirlpool and Frigidaire to luxury ones like Subzero and Wolf. 

Hires has had to advise some builders, “It’s not really the range you picked, but we have one. 

You need to take this.”

Investors are left wondering what it means. 

If widespread shortages lead to prolonged, hot-running inflation, the Federal Reserve could contemplate raising interest rates, and the mere whiff of an expectation of a signal of that could hamper stocks. 

After all, a decade of near-zero rates has helped plump up the S&P 500 index to about 22 times projected earnings, close to its highest level since the dot-com stock bubble. 

But if supply bottlenecks ease, pent-up demand is satisfied, and economic growth returns to its prepandemic level of meh, rates are likely to remain at historic lows for longer and stock indexes could continue to shine.

Consider a third, more nuanced outcome. 

The causes of today’s shortages are numerous, varied, and changing. 

But one theme unites many of them. 

Companies have spent decades fetishizing efficiency at the expense of investing in resilience. 

Our digital, virtual, shared, asset-light, just-in-time economy has been wonderful for profit margins, but it has left many companies short on stuff—plants, equipment, and, in some cases, inventory. 

This might soon change, grudgingly. Some bottlenecks will last well into next year.


Prices will surge this summer, but then moderate, if bond-market apathy is any guide. 

The uptrend in wages could prove stickier, but most big companies that populate the S&P 500 should cope well enough, for two reasons. 

First, automation and long-term productivity gains have reduced their wage exposure; it takes an average of barely two workers to generate $1 million in revenue today, versus eight in 1986. 

Second, workers are also customers, and healthier wage inflation at the bottom has been a long time coming.

Stock indexes can climb past a summer fling with inflation, and perhaps even a gradual rise in bond yields. 

Jonathan Golub, chief U.S. stock strategist at Credit Suisse, points out that stocks have lately risen on days when inflation and yield expectations have increased. 

Meanwhile, earnings expectations have shot higher so quickly that even with the S&P 500 up 12% so far this year, its price/earnings ratio has fallen a smidgen.



“I actually think that valuations are not going to be an issue at all because the earnings are so good,” says Golub. 

He predicts that the S&P 500 will end the year with a 22% gain, and cyclical stocks will extend a lead they have built since highly effective Covid-19 vaccines were announced in November.

BofA Research is predicting that companies will put part of their surging earnings to work by making up for past underspending on plants and equipment. 

The average age of fixed assets has reached levels not seen since the 1960s. 

Investors who are looking to top up their industrial exposure might want to focus on companies that sell machines and know-how for bolstering supply chains, such as Oshkosh (ticker: OSK) and XPO Logistics (XPO). 

As for go-go growth stocks that have led gains in recent years but have stalled or swooned lately, resist buying ones with questionable cash flows now. 

“All of the liquidity that’s been poured into the market has created a lot of development of new companies, but it’s also actually lessened the chance of failure for companies that probably should have failed,” says Ann Miletti, who oversees active stock strategies at Wells Fargo Asset Management.


The Pandemic Effect

To assign blame for shortages, give some one-off events a passing mention. 

Remember the February polar vortex that brought record low temperatures? 

It shut down Texas petrochemical plants, drying up supplies of little-noticed but crucial goods, like the preferred resin for holding together compressed wood strands to make siding for houses. 

Hurricane Laura last August set off a Louisiana factory fire from which chlorine production hasn’t fully recovered. 

This year, uncooperative weather in Brazil and the American Midwest have added to a run-up in corn.

Move on to some obvious pandemic effects, and some less-obvious ones. 

Time spent at home has fueled demand for bicycles, both stationary and mobile. 

A theorized pandemic baby boom never occurred, but a puppy spree did, and it set off a run on kibble. 

Hog farmers and processors are still recovering from last year’s Covid-19 plant closures, just as vaccines and a shift toward outdoor eating point toward a big year for grilling hot dogs.

Some goods have recovered from one bottleneck but look vulnerable to another. 

A toilet paper shortfall early in the pandemic came as manufacturers recalibrated to package fewer rolls for restaurants and offices, and more for grocery stores. 

Hoarding didn’t help. 

Now rolls are plentiful, but there is a shortage of shipping vessels that threatens to disrupt the flow of wood pulp to make them.


Transportation kinks are many and far-reaching. 

Shipping containers that carry most of the world’s goods are suddenly difficult to secure, but at the same time, Daniel Miranda, president of the Longshore and Warehouse Local 94 union that works two massive California ports, sees too many of them. 

“Your goods are on the dock, but who’s going to pick them up?” he says. 

“If you don’t believe me, I’ll take you to L.A., Long Beach, and you can see them stacked eight high.”

The dock backup, says Evercore ISI transportation analyst Jonathan Chappel, has been caused at times by too few chassis used by trucks to pull containers, too little warehouse space, too few warehouse workers, and tight conditions in rail service.


There are also ripple effects from shortages of key components. 

Apple (AAPL) says that semiconductor scarcity will hold back iPad and Mac production and cost $3 billion to $4 billion in forgone revenue this quarter. 

Ford Motor (F) says that problems securing chips will subtract $2.5 billion from operating earnings this year, and General Motors (GM) says $1.5 billion to $2 billion.

Of course, many supply shortfalls are due to producers simply guessing too low on demand. 

Early in the pandemic, lumber yards stopped ordering from sawmills, because who in their right mind would want to build during a pandemic? 

Seemingly everyone, it turns out, and sawmills are struggling to catch up.

The demand surprise, in turn, has been fueled by the wealth effect of a soaring stock market, and a shift in consumption from travel and entertainment to goods.

 Government relief payments have eased hardship for individuals, but in aggregate, they have probably contributed to demand outstripping supply. 

“The level of the stimulus appears to be bigger than the size of the problem,” says Credit Suisse’s Golub.

The Everything Shortage

From pickles to pool chlorine, Jack looks into why so many goods are in short supply.

These are recent effects. 

There is one that has been taking hold since decades before the pandemic. 

Just-in-time manufacturing, developed by Toyota in the 1970s and gradually adopted by companies around the world, has freed up capital and boosted profit margins and shareholder returns. 

There are many variations on the approach, with names like continuous-flow and short-cycle manufacturing, or simply lean manufacturing, and modern supply chain software and tracking technology have taken efficiency to new heights. 

Miranda, the Longshore union president, recalls how shoppers used to ask store clerks whether they have more inventory in the back. 

Today, inventory is stacked on the sales floor. 

Shipping containers serve as warehouses.

This works well enough under normal conditions, or even moderate shocks, when manufacturers can always switch goods from ships to costlier planes to get caught up on orders. 

But the pandemic and, before it, a trade war between the U.S. and China, have exposed risks in focusing too narrowly on efficiency. 

Supply-chain managers now talk about shifting from a just-in-time approach to a just-in-case one. 

In a survey last year published by the Council of Supply Chain Management Professionals, 42% said that supply chains had gotten too lean. 

Fixes for that include bringing manufacturing closer to customers, and bolstering inventories, which will require more warehouse space. 

Intel is spending $20 billion to build two new U.S. chip plants. 

GM and its Korean joint-venture partner LG Chem are building a second battery factory in Tennessee for $2.3 billion. 

U.S. warehouse construction starts will climb 8% this year to a record $33.2 billion, according to Dodge Data & Analytics, a market forecaster.

Valuations for many industrial stocks appear elevated, but that is justified by a cycle that is in the early stages of recovery, with upward revisions to earnings estimates likely, according to the industrial analysts at KeyBanc Capital Markets. 

“We think ongoing supply chain challenges could spur long-term investment for more outsourced design, engineering, and manufacturing capabilities, as well as increased utilization of robotics, automation, and [the industrial Internet of Things],” they wrote in a recent report.

One of their stock picks is Oshkosh, a maker of aerial work platforms and specialty trucks including cement mixers, which trades at 17 times projected earnings. 

Another is Wesco International (WCC), at 14 times earnings, whose activities include supplying electrical and automation equipment for capital projects.

Analysts at Credit Suisse say that the warehouse automation market will double by 2026, even as the pandemic fades and consumers return to spending more on experiences. 

Their top stock picks tied to that theme are XPO Logistics, at 22 times earnings, and a pair of industrial conglomerates: Honeywell International (HON), at 27 times, and Germany’s Siemens (SIEGY), at 18 times.

BofA has recommended companies whose sales respond quickly to spending on nonresidential fixed assets. 

Historically, those have included Lam Research (LRCX), 24 times earnings; smart factory supplier Rockwell Automation (ROK), 27 times; Deere (DE), 19 times; and Caterpillar (CAT), 23 times.

Transportation is tricky, because desperate customers have sent prices multiplying and stock valuations ballooning, says Evercore’s Chappell. 

He favors a segment of the trucking market called less-than-truckload, which consolidates small batches of freight at terminals, and enjoys relatively high barriers to entry. 

LTL customers are largely industrial, and demand from them is still catching up to consumer demand, says Chappell. 

His top picks, Old Dominion Freight Line (ODFL), at 32 times earnings, and Saia (SAIA), at 30 times, might give value investors pause, but he’s comforted that new data points continue to send earnings estimates higher.

“I Need a Subzero”

When will shortages clear? 

Chappell says that back in March he would have said by summer, but now it appears that supply chains will remain stretched going into the holiday shopping season, which means the first opportunity they will have to recover might be early next year. 

Golub at Credit Suisse guesses more than two to three months but less than two to three years.

Back at Construction Resources in Georgia, Hires wonders if last year’s toilet paper mentality, where shoppers pulled forward purchases of rolls, is taking hold in appliances. 

Luxury and custom builders have begun placing orders when they break ground on a house, something that his appliance company has never seen. 

Manufacturer order backlogs continue to grow.

“I have people from all over the country call me: ‘Hey, I’m in Texas. 

I went to college with you. Remember me? 

I need a Subzero,” he says. 

“And I’m like, ‘I can’t help you.’ ”

Hires is grateful for the demand, and confident he can work through the shortages. 

“It’s about transparency and honesty,” he says. 

“If we do that, we’re going to be fine.”

Reflation trades pummelled as Fed shift resets markets

Commodities and value stocks hit while dollar surges after US central bank signals earlier rate rise

Robin Wigglesworth, Tommy Stubbington, Colby Smith and Neil Hume

Investors might be starting to question the US Federal Reserve’s commitment to its new more flexible inflation targeting regime © FT montage


The “reflation trade” that has dominated financial markets since the emergence of coronavirus vaccines last year has been pummelled after the Federal Reserve unexpectedly signalled a shift in its stance on inflation.

Commodity prices have tumbled while long-dated US government bond prices raced higher after Fed officials this week reacted to unexpectedly strong inflation data by moving forward their forecasts for when it might start raising interest rates. 

The dollar was headed for its best week since last September on Friday.

The Fed’s shift marks a major setback for investors who this year have rushed to buy securities that might benefit from faster inflation, betting that the combination of exceptionally easy monetary and fiscal policy and a global economy emerging from its Covid-19 lockdown would cause prices to spike.

The pivot from central bank officials has raised doubts about how much inflationary pressure the Fed is really willing to tolerate. 

The central bank also signalled that it would soon start discussing when it would taper its $120bn-a-month bond purchases.

“If any time the Fed gets a whiff of inflation and they come in and slap it back down, why would any investor worry about long-term inflation being too high?” said Michael Pond, head of global inflation-linked research at Barclays. 

“The more the Fed is concerned about too high inflation, the less the market should be concerned.” 

US stock markets dropped on Friday morning, with the S&P 500 lower by 1 per cent, despite precious metals rebounding slightly from the previous day’s losses and bond yields little changed.

The declines followed comments from James Bullard, president of the St Louis Fed, about the prospects of an even earlier interest rate increase than current projections suggest. 

In an interview with CNBC he forecast liftoff in late-2022 in the face of higher than anticipated inflation.

The US dollar rose further on Friday, with the dollar index measuring the buck against major currencies gaining roughly 1.9 per cent over the week.



Krishna Guha, vice-chair of Evercore ISI, said Thursday’s violent moves had come as some investors were forced to liquidate reflation trades when markets moved against them.

Raw materials, seen by many investors as a hedge against inflation, took the brunt of the selling this week. 

The Bloomberg Commodity index has fallen more than 4.5 per cent so far this week, heading for its worst week since the start of the pandemic.

Copper, used in everything from fridge freezers to wind turbines, was down roughly 8 per cent on the week while lumber, which has enjoyed an extraordinary rally on the back of a booming US house market, dropped nearly 15 per cent.

Commodities were also weighed down by a strong US dollar, which makes greenback-denominated raw materials more expensive for holders of currencies. 

Metals took a hit from China’s decision to release some of its strategic reserves of metals to help rein in prices. 

“The recent dollar strength has led to a mechanical sell-off in emerging market produced commodities . . . yet our foreign exchange strategists view the impact of the Fed meeting as a transient tailwind,” said Jeff Currie, head of commodities research at Goldman Sachs. 

“They continue to forecast broad US dollar weakness, driven by the currency’s high valuation and a broadening global economic recovery.”

So-called US value stocks — often cheaper, out-of-favour companies that are more sensitive to the pace of economic growth — fell another 1.3 per cent on Thursday to extend the initial drop they suffered on Wednesday, the day of the Fed’s announcement. 

MSCI’s index of global value stocks had already fallen 1.2 per cent on Thursday. 

The Russell 2000 index of smaller US companies declined 1 per cent on Friday — the biggest reversal in more than a month — while the price of a troy ounce of gold slipped to a two-month low of $1,773 on Thursday, before picking up slightly on Friday. 

Other assets have benefited, however. 

The fading chances that the Federal Reserve will let inflation get out of hand helped trigger a rally in long-term US Treasuries and other securities that benefit from disinflationary pressures, such as highly rated corporate bonds, the US dollar and many big technology stocks. 

The yield on 30-year US Treasuries plunged to its lowest level since February, and was at 2.06 per cent on Friday, down from 2.21 per cent ahead of the Fed meeting. 

Yields fall when prices rise.

The scale of the shift in the world’s largest bond market is a sign that investors are starting to question the Fed’s commitment to its new more flexible inflation-targeting regime, according to Guha. 

Since last year, the US central bank has said it will let inflation run above its 2 per cent target to balance out periods of low inflation.

Since Wednesday’s Fed meeting, however, market expectations of inflation extended their recent declines. 

The 10-year US break-even, a closely-followed gauge of expectations over the next decade, traded at 2.25 per cent on Friday, down from 2.39 per cent.

Despite the post-Fed moves, some investors are keeping the faith with the reflation trade. 

Mark Dowding, chief investment officer of BlueBay Asset Management, said the Fed’s plans to taper its asset purchases would eventually weigh on bond prices and force yields higher, adding that the central bank had simply reacted to stronger-than-expected inflation data over the past two months rather than making a fundamental change to its policy.

“The average inflation targeting approach remains intact, as does strong economic growth,” he said. 

“This has been frustrating, but it’s been one of those moments as an investor when we have to stick to our guns.”



Reflation trades pummelled as Fed shift resets markets | Financial Times