...."Another way of looking at the data is to assume that profits are cyclical and return to the mean as a proportion of GDP; since they are currently at a post-war high relative to GDP, this implies profits (and thus dividends) will grow more slowly than GDP in the long-term.
And finally, should we assume that valuations remain unchanged? The evidence suggests that buying when the Shiller p/e is high reduces long-term returns since the ratio tends to return to the mean; see this paper from Clifford Asness of AQR. When the p/e is at its current levels, future ten-year real returns have averaged 0.9% a year.
Now one can assume that dividends will rise faster than in the past, or that profits will stay high (the workers will be crushed or the competitive laws of capitalism will be suspended), that valuations will remain above the historical norm. Things may be different this time. But these are optimistic assumptions, not the baseline."
Keywords: GDP, Price Earnings Ratio, Shiller PE
..."That’s one downside: Cheap money is hard to reverse gracefully. The larger problem is that central banks are trying to do things beyond their powers. Says Stephen Cecchetti, the chief BIS economist: “Monetary stimulus alone cannot put economies on a path to robust, self-sustaining growth, because the roots of the problem preventing such growth are not monetary.” In the annual report, he argues that low interest rates might even be counterproductive. They make it easier to finance large budget deficits and may delay needed, though unpopular, cuts"...
Keywords: Monetary Policy, Easy Money
Here is an excerpt about crisis roots in the Euro Area:
..."Recognizing the need to find new sources of growth, the United States towards the end of Jimmy Carter's term, and then under Ronald Reagan, deregulated industry and the financial sector, as did Margaret Thatcher's United Kingdom. Competition and innovation increased substantially in these countries. Greater competition, freer trade, and the adoption of new technologies, increased the demand for, and incomes of, highly skilled, talented, and educated workers doing non-routine jobs like consulting. More routine, once well-paying, jobs done by the unskilled or the moderately educated were automated or outsourced. So income inequality emerged, not primarily because of policies favoring the rich, but because the liberalized economy favored those equipped to take advantage of it.
The short-sighted political response to the anxieties of those falling behind was to ease their access to credit. Faced with little regulatory and supervisory restraint, sometimes based on the faith that private incentives worked best in this best of all worlds, the financial system overdosed on risky loans to lower middle class borrowers, aided and abetted by very low policy interest rates.
Continental Europe did not deregulate as much, and preferred to seek growth in greater economic integration. But the price for protecting workers and firms was slower growth and higher unemployment. And, while inequality did not increase as much as in the US, job prospects were terrible in the Euro periphery for the young and unemployed, who were left out of the protected system.
The advent of the euro was a seeming boon, because it reduced borrowing costs and allowed countries to create jobs through debt-financed spending. The crisis ended that spending, whether by national governments (Greece), local governments (Spain), the construction sector (Ireland and Spain), or the financial sector (Ireland). Unfortunately, spending pushed up wages, especially but not exclusively in the non-traded sectors like government and construction. Without a commensurate increase in productivity, the heavy spenders became increasingly uncompetitive and indebted and started running large trade deficits.
Of course, it did not seem at that time that countries like Spain, with its low public debt and deficits, were overspending. But as Andrew Crockett foresaw, the boom masks lending problems. Spanish government revenues were high on the back of the added activity and the additional taxes, and so spending seemed moderate. However, if spending was adjusted for the stage of the cycle, it was excessive"....
Keywords: Monetary Policy, Financial Crisis
“While financial crashes, recessions, earthquakes and other extreme events appear chaotic, Didier Sornette’s research (done at Swiss Federal Institute of Technology, Zurich) is focused on finding out whether they are, in fact, predictable. They may happen often as a surprise, he suggests, but they don’t come out of the blue: the most extreme risks (and gains) are what he calls “dragon kings” that almost always result from a visible drift toward a critical instability. In his hypothesis, this instability has measurable technical and/or socio-economical precursors. As he says: “Crises are not external shocks.”
Keywords: Financial Crisis, Forecasts, Predictions, Crisis Indicators
Keywords: Self-Driving Cars, Robots
Keywords: Innovation, Technologies, Disruptive Technologies
a must read!
Keywords: Monetary Policy, Central Banking
..."Right now there are 4,062 new regulations at various stages of implementation, of which 224 are deemed "economically significant," i.e., their economic impact will exceed $100 million.
The cost of all this, Mr. Crews estimates, is $1.8 trillion annually—that's on top of the federal government's $3.5 trillion in outlays, so it is equivalent to an invisible 65% surcharge on your federal taxes, or nearly 12% of GDP. Especially invidious is the fact that the costs of regulation for small businesses (those with fewer than 20 employees) are 36% higher per employee than they are for bigger firms.".. Source: Wall Street Journal
Keywords: United States, Regulation, Cost of Regulation
MIT researcher Wei Pan about why many cities grow more than linearly:
..."There have been plenty of theories. Adam Smith famously figured that people become more productive when we’re able to specialize, each of us honing a separate area of expertise. And when lots of us elbow into cities, we’re able to specialize in ways that we can’t when a rural farmer must also double as his own butcher, accountant and milkmaid. Other economists have suggested that cities become great agglomerators of industry when factories cluster together around economies of scale and communal access to transportation.
"We think there’s an underlying completely different way of thinking here, which is very different from the economist’s way of thinking," says Pan, a doctoral candidate in computational social science in the MIT Media Laboratory's Human Dynamics Lab. Previous work by researchers at the Santa Fe Institute has proven the math behind the power of cities: As they grow in population, all kinds of positive outcomes like patents and GDP and innovation (and negative ones like STDs and crime) grow at an exponential factor of 1.1 to 1.3.".. Source: The Atlantic
Keywords: Economic Growth, Growth of Cities, Connected Economy, Innovation
.............. "Many believe that a financial crisis will force spending limits. But those probably won’t come until it’s too late to correct the system. The solution is to rebuild the legal restraints on federal activities using the Tenth Amendment and a rewritten debt limit that forces politicians to make spending choices across both discretionary and entitlement accounts." Source: Forbes
Read full article in Forbes
Keywords: Government Power, Government Spending
"We examine the CEO turnover in LBOs backed by private equity funds. When a company is taken private, we fi nd that the CEO turnover decreases and is less contingent on performance. We also find that a higher involvement of the LBO sponsors, who replace the outside directors on the board after transition to private, reduces the CEO turnover and its sensitivity to performance, but improves the operating performance. These findings suggest that more inside information and effective monitoring allow private equity funds to assess CEOs' performance over a longer horizon relative to their publicly-traded counterparts."
Keywords: CEO Turnover, Private Equity, LBOs
"The country's tepid growth in its gross domestic product isn't creating enough good jobs to build a strong middle class, according to a UCLA report released Wednesday.
"Growth in GDP has been positive, but not exceptional," UCLA economists wrote in their quarterly Anderson Forecast. "Jobs are growing, but not rapidly enough to create good jobs for all."
The report, which analyzed long-term trends of past recoveries, found that the long-anticipated "Great Recovery" has not yet materialized.
Real GDP growth — the value of goods and services produced after adjusting for inflation — is 15.4% below the 3% growth trend of past recoveries, wrote Edward Leamer, director of the UCLA Anderson Forecast. More robust growth will be necessary to bring this recovery in line with previous ones.
"It's not a recovery," he wrote. "It's not even normal growth. It's bad." read more in LA Times
Keywords: US Economy, US Recovery
Keywords: Online Education, Coursera, Massively Open Online Classes (MOOCs)
"This speech by Stanford professor and Coursera co-founder Daphne Koller is organized and sponsored by the Calit2 Technology-Enabled Learning initiative and the UC San Diego Education Initiative.
We are at the cusp of a major transformation in higher education: the use of scalable online technology to offer a top-quality education, free to everyone. It is the advent of massively open online classes (MOOCs) from top-notch universities. These courses provide a real course experience, with meaningful feedback, and rich peer-to-peer interaction. We can now offer courses across the range of disciplines -- humanities, science, math, music, medicine, and more. These courses can be used both to support an improved learning experience for our on-campus students, via blended learning, and to provide unprecedented access to education to millions of students around the world. Based on work with Coursera co-founder Andrew Ng, Koller will discuss Coursera and other examples, and cite preliminary analytics." Source: Youtube
By their nature, private equity funds hold assets that are hard to value. This uncertainty in asset valuation gives rise to the potential for fund managers to manipulate reported net asset values (NAVs). Managers may have an incentive to game valuations in the short-run if returns on existing funds are used by investors to make decisions about commitments to subsequent funds managed by the same firm. Using a large dataset of buyout and venture funds, we test for the presence of reported NAV manipulation. We find evidence of managers boosting reported NAVs during times that fundraising activity is likely to occur. However, this behavior is mostly limited to firms that are subsequently unsuccessful at raising a next fund which suggests that investors see through the manipulation. In contrast, we find evidence that top-performing funds under-report returns. This conservatism is consistent with these firms insuring against future bad luck that could make them appear as though they are NAV manipulators. Our results are robust to a variety of specifications and alternative explanations.
Keywords: Private Equity, Venture Capital, Fund Valuation
"BEIJING - China and Switzerland on Friday announced the completion of talks concerning a new free trade agreement (FTA), the first to be signed between Beijing and continental Europe.
A memorandum of understanding was signed during a meeting between visiting Premier Li Keqiang and Swiss President Ueli Maurer. The two sides also announced the establishment of a financial dialogue mechanism. However, they did not reveal when the FTA will be finally signed and put into place.
Xu Tiebing, an associate professor of international studies at the Communication University of China, said in a Friday report by the Beijing News that the FTA will benefit both sides.
Swiss financial businesses, including banks, will enjoy more advantages in obtaining permission to enter China, while China will be able to enter European markets more effectively by building corporate branches or joint ventures, Xu said.
Under the future FTA framework, Switzerland may help reduce trade barriers set by the EU against China, Xu said.
Cui Hongjian, director of European studies at the China Institute of International Studies, said the FTA negotiations have set an example for future negotiations between China and other European nations.
Swiss companies in China have also been encouraged by the success of the negotiations.
Marco Cairoli, deputy president of Shanghai Roche Pharmaceuticals Ltd., a joint venture of Swiss drugmaker Roche Group, said the FTA will be very important, adding that he hopes it will go into effect as soon as possible.
Li said in a signed article published Thursday in Neue Zuricher Zeitung, a German-language Swiss daily, that with the advent of FTA, Switzerland will become the first country in continental Europe and the first of the world's top 20 economies to sign an FTA with China, adding that the implications will be significant.
He said the FTA has demonstrated that China is firmly committed to upholding multilateral trade, vigorously promoting regional trade liberalization and accelerating the implementation of its FTA strategy.
"A high-quality FTA agreement between China and Switzerland will also set a good example. It will not only upgrade our business and investment cooperation, but also send a powerful message to the rest of the world that we reject trade and investment protectionism and instead embrace trade liberalization and facilitation," the article said.
Statistics indicate that two-way trade between China and Switzerland exceeded $30 billion in 2011, a record rise of 50 percent compared with that of 2010. Despite the persistent eurozone sovereign debt crisis and uncertainties in the world economy, bilateral trade volume remained as high as $26.3 billion last year.
China is Switzerland's third-largest trading partner behind the EU and the United States, while Switzerland is China's seventh-largest trading partner in Europe." Source: China Daily
Keywords: China, Switzerland, Free Trade Agreement
Keywords: Electric Car, Tesla
Private Equity News (US and Europe)
peHub (US and Europe)
Private Equity News New York Times (US focus)
Private Equity blog of Wall Street Journal (US Focus)
Blogging Buyouts (AOL) (US focus)
Private Equity Growth Capital Council (US focus)
Private Equity Wire (mainly US and Europe focus)
European Venture Capital Association (EVCA)
Venture Beat (US Focus)
eFinancials on Private Equity (US and Europe)
China Private Equity News (published by China First Capital)
Keywords: Venture Capital, Private Equity
"While losses were accumulating during the 2007-09 financial crisis, many banks continued to maintain a relatively smooth dividend policy. We present a model that explains this behavior in a setting where there are financial externalities across banks. In particular, by paying out dividends, a bank transfers value to its shareholders away from its creditors, who in turn are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks." Source: SSRN
Keywords: Externalities to Banks, Risk-Shifting
"With public confidence in the European project waning, the idea of initiating a ‘civil dialogue’ with the public emerged in the mid-1990s as a way of bolstering the EU’s democratic legitimacy.
Citizens have not been consulted directly, however. Instead they have been ventriloquised through ‘sock puppet’ charities, think tanks and other ‘civil society’ groups which have been hand-picked and financed by the European Commission (EC). These organisations typically lobby for closer European integration, bigger EU budgets and more EU regulation.
The composition of ‘civil society’ at the EU level is largely dictated by which groups the Commission chooses to fund. There has been a bias towards centre-left organisations, with a particular emphasis on those promoting policies that are unpopular with the public, such as increasing foreign aid, restricting lifestyle freedoms and further centralising power within EU institutions.
The EC’s favoured civil society organisations are also marked by a homogeneous worldview and similarity of jargon. The literature and websites of these groups suffocate the reader with vague rhetoric about ‘stakeholders’, ‘sustainability’, ‘social justice’, ‘capacity building’, ‘fundamental rights’, ‘diversity’, ‘equity’ and ‘active citizenship’.
Many of the groups which receive the Commission’s patronage would struggle to exist without statutory funding. For example, Women in Europe for a Common Future received an EC grant of €1,219,213 in 2011, with a further €135,247 coming from national governments. This statutory funding made up 93 per cent of its total income while private donations contributed €2,441 (0.2 per cent) and member contributions just €825 (0.06 per cent).
There is virtually no funding for organisations which seriously question the Commission’s direction of travel. By contrast, groups that favour closer union and greater centralisation are generously funded. The ‘Europe for Citizens’ programme which ‘gives citizens the chance to participate in making Europe more united, to develop a European identity, to foster a sense of ownership of the EU, and to enhance tolerance and mutual understanding’ has a €229 million budget for 2014-20.
Substantial EU funds are also used to support organisations that share the Commission’s environmentalist agenda. The Green 10 represent the largest of Europe’s environmental lobby groups, but dozens, if not hundreds, of like-minded ecological organisations also receive EU funding. The Commission freely admits that funds are given to environmental groups ‘to support policy development’.
Civil society groups in non-member countries are another funding priority for the Commission. In 2012/13, its Neighbourhood Civil Society Facility had a €22 million budget to be distributed to groups in Eastern Europe, North Africa and the Middle East, later increased to €45.3 million. Many Youth in Action grants have been given to projects in potential new member states such as ‘Unite Unite Europe!’ (Serbia), ‘Be Active, Be European!’ (Albania) and ‘Citizen of my country, citizen of my Europe!!’ (Kosovo).The EC’s policy of picking allies and supporting them with taxpayers’ money has made the system more elitist and less democratic."
Keywords: European Union, EU
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