How to Say “No” to an Economic Frankenfuture

Dear Big Cheeses Who Run the World,

We regret to inform that you’re fired. We’re really, truly sorry about this, but we’re going to have to let you go. It’s time for you to pursue other opportunities.

In case you haven’t noticed (and who can blame you? It’s pretty hard to see it from private jets, mega-yachts, 158th floor boardrooms, and members-only backrooms) times are pretty tough lately, and we’ve got to cut back somewhere. In fact, that we’re beginning to suspect that maybe, just maybe the entire contract between us, you, and tomorrow — the Washington Consensus, yesterday’s blueprint for building economies, communities, and societies — is fatally broken.

Yes, though it did fuel a dismal sort of prosperity, we’d like to aim slightly higher than McGrowth. Because what that seems to have led to, at the end of the day, is a level-five epidemic of austerity. Your solution? Well, it’s all a little too Dr Frankenstein for us, frankly — undead companies, banks, funds, and boards, patched and stitched piecemeal back together, shocked back into life via the electric jolt of yet another bailout, stimulus, or special exemption so they can stagger on into a desolate tomorrow.

Thanks — really — but no thanks. We’d like to pass on your very kind, rather creepy plan for a Frankenfuture. It’s time, instead, for us to take a quantum leap into the 21st century; to, once again, with steadfast determination, unyielding courage, and just a little bit of trembling trepidation, leave the past behind — and furiously pioneer a better tomorrow.

Please don’t worry about us, though — because we’re not worried about you. Gambling away other peoples’ money, glad-handing each other, double-crossing Planet Earth, and driving companies and entire economies into the red — these are highly employable skills, and we’re sure you’ll land on your feet. We’ll be happy to provide a reference spelling out your expertise at being zombie overlords, should you ever need one.

The People Principle. Perhaps the biggest incentive we can give corporations to start getting serious about real innovation again, then, is what might be called humanization. The next item of the Washington Consensus’s moldy agenda is legally protecting the corporation. It’s been taken to an absurd extreme, with the doctrine that corporations must enjoy legal personhood. But (Earth to beancounters) corporations aren’t people — only people are people. The former face few of the obligations citizens do, can’t face the same kinds of punishments, are legally bound to maximize profit in ways that citizens aren’t, and tend to have thousands of times more cash, time, and power, which means they can afford to de facto buy rights almost no person on earth has (like hiring batteries of lawyers to fight cases for decades). Corporations, like hammers, are just tools. And for the same reason we don’t anthropomorphize hammers, nor should we empower corporations with the same rights and powers as people

Just a reminder.   November 5th, 2010, this Friday, is the last day to submit comments on the Volcker Rule. Here is the webpage for this, “Public Input for the Study Regarding the Implementation of the Prohibitions on Proprietary Trading and Certain Relationships With Hedge Funds and Private Equity Funds.”

The rule-making and comment period is going to be the best form of democracy we’ll have in this process. Granted, banks have expensive lawyers on retainer to submit comments for them. But everyone out there, including those in my audience with expertise and the ability to write something like this, can do so. And their comments will at least get a shot at being as influential as a senior lobbyist.  Right now there’s little attention on this part of the process. But the rule-writing and comment period is incredibly important.

And If silo-ing out the riskiest parts of the financial sector from the insurance mechanism and the crucial intermediary functions that the financial sector provides is important to you, make the time to write and submit a comment.  Here is Simon Johnson discussing this.

But China is no Singapore (neither, for that matter, is Singapore): it is not a stable country with an authoritarian regime that guarantees harmony and keeps capitalism under control. Every year, thousands of rebellions by workers, farmers and minorities have to be put down by the police and the army. No wonder official propaganda insists obsessively on the notion of the harmonious society: this very excess bears witness to the opposite, to the threat of chaos and disorder. One should bear in mind the basic rule of Stalinist hermeneutics: since the official media do not openly report trouble, the most reliable way to detect it is to look out for compensatory excesses in state propaganda: the more ‘harmony’ is celebrated, the more chaos and antagonism there is in reality. China is barely under control. It threatens to explode.

We can understand the temptation to believe in the inflation story because of what the CRB index has been doing, but our advice is to resist that temptation and remember what we were talking about, quite unexpectedly by the way, six months after oil hit $140/bbl back in 2008. Deflation.

In many cases, pricing power is hard to achieve and so the bump in commodity costs serves as a margin squeeze as opposed to a sustained source of final stage inflation. For real-life examples as opposed to the data, what did the NYT have to say about Colgate’s profit results? This — “Colgate’s revenues in the United States, which produces 19% of its sales, grew 2%, while the company sold 3% more products. Price cuts reduced earnings in the United States by 1.5%.”

NOTICE THE WORD “PRICE CUTS”?

And, what the NYT had to conclude about 3M’s results? That it “reduced the top end of its full-year forecast and said rising raw materials costs and other pressures were cutting into margins, sending the company’s shares sharply lower.” Margin compression at a time of low single-digit nominal GDP growth does not equate to a $95 operating EPS stream for 2011.

Further on this file of compressed margin pressure, S&P 500 revenue growth is already slowing down, notwithstanding the fact that 80% of the universe is beating their beaten-down profit estimates. The cost-cutting wave certainly did go much further than anyone expected but as the legendary Herb Stein once remarked, “anything that can’t last forever, by definition, won’t.” At some point, the well will run dry on the cost-cutting front and slowing revenue growth will take over — on track for +5.5% YoY in Q3 from 6.1% in Q2 and the consensus now for Q4 is sitting at +4.9%. As an added signpost of how this has proven to have been a revenue-less recovery, the top-line growth since the profits rebound began just over a year ago is running at barely more than half the average pace recorded in the 2002-07 cycle.

For all the talk about profits recovery, sales are still 11% lower now than they were in the spring of 2008. And, if you are wondering why it is that the stock market has still done little more than range trade in 2010, it is because earnings estimates are no longer rising as they were in 2009 — they are falling. The bottom-up consensus now sees 12.9% earnings growth for 2011 from 14.2% a month ago and 20.9% back in the spring. Have a look at the Paul Lim column on page 8 of the Sunday NYT business section — ‘Raising a Caution Flag on Corporate Revenue’.