Home' Trinidad and Tobago Guardian : September 26th 2013 Contents BG14 | STOCKS
BUSINESS GUARDIAN www.guardian.co.tt SEPTEMBER 2013 • WEEK FOUR
Shortly after the Federal Reserve
hinted in May that it might start
to ease its monetary stimulus,
rich-country bond yields shot
up and emerging-market cur-
rencies and stock markets cratered. Was it all
for nothing? On September 18, at the end of
a closely watched meeting, the Federal Open
Market Committee, the Fed s policy-setting
body, chose not to "taper." Instead it said that
it would keep buying $85 billion a month of
Treasury and mortgage bonds with newly cre-
ated money; the policy known as "quantitative
easing" or QE.
Although the Fed had never actually prom-
ised to act in September, all the signals pointed
in that direction. QE would stop, it had said
when the latest bout of bond-buying began
last September, when the labor-market outlook
had improved "substantially." Since then the
unemployment rate has dropped to 7.3 per
cent from 8.1 per cent and private employment
has risen by 2.3 million, or 2 per cent. In June
Fed chairman Ben Bernanke said that the Fed
probably would start to taper by year-end,
and stop QE when unemployment hit 7 per-
cent, which it expected by mid-2014.
So what has held it back now?
First, lately the pace of job growth has
flagged. The drop in unemployment has been
exaggerated by the number of people no longer
looking for work. The labor-market partici-
pation rate sank to 63.2 per cent in August,
a 35-year low.
Second, fiscal policy continues to work at
cross-purposes to monetary policy. Higher
taxes and spending cuts have subtracted at
least a full percentage point from growth this
year. The prospect that spending caps may be
lifted when the new fiscal year begins, on
October 1, has melted away. With Congres-
sional Republicans and President Barack
Obama unable to agree on how to fund the
government or raise the Treasury s statutory
debt ceiling, the risk of a government shutdown
loomed large in the minds of Fed officials.
The third and most important restraint on
the Fed was the unexpected effect on financial
markets of a prospective change in monetary
stance. The central bank had always empha-
sised that tapering did not mean tightening.
Provided that asset purchases remained above
zero, the Fed s balance sheet would keep grow-
ing and monetary policy would still be loos-
ening. Separately the Fed never wavered from
its pledge to keep the federal-funds rate near
zero at least until unemployment had fallen
to 6.5 per cent.
Nonetheless, investors radically repriced
their expectations of Fed policy and fled posi-
tions predicated on a policy of QE ever after.
Bond yields have risen by slightly less than a
percentage point since May, mortgage rates
by slightly more. Bernanke fretted that this
"rapid tightening of financial conditions in
recent months could have the effect of slowing
growth," a problem that would be "exacerbated
if conditions tighten further."
The euphoric market response to the deci-
sion this week would seem to vindicate that
judgment. However, it leaves wide open the
question of when the Fed will taper. The Open
Market Committee trimmed its projections
for growth this year and next by about a quarter
of a percentage point from its June forecast,
to 2.2 per cent in 2013 and 3 per cent in 2014.
It also changed its unemployment projections,
which it now expects to hit 7 per cent early
in 2014 and 6.5 per cent later that same year.
This week Bernanke was at pains to stress
that the 7-per cent unemployment target for
ending QE and the 6.5-per cent threshold for
raising rates have never been automatic triggers.
It all depends on what else is happening in
It is entirely sensible for the Fed not to be
slavishly bound by its guidance, but that raises
questions of how useful such guidance is.
Most Fed officials expect to raise rates by 2015,
for example, but Bernanke said that rates are
unlikely to rise if inflation is below its 2-per
cent target, which the Fed s new projections
suggest could be the case until 2016.
The start of tapering could conceivably come
at the end of October, if data reassure the Fed
that the economy has brushed off higher bond
yields and if a fiscal train wreck has been
avoided. There are no clear signposts, however,
which will irk investors.
Their frustration pales next to that of the
Fed itself, which has blown its balance sheet
up to $3.6 trillion and held rates at zero since
2008 but achieved underwhelming results in
return. On September 17 the federal Census
Bureau reported that real household incomes
in America, which had fallen by 8 per cent
between 2007 and 2011, did not fall further
in 2012. That this counts as good news is
Income inequality, meanwhile, is worsening
on some measures. Emmanuel Saez of the
University of California at Berkeley reckons
that the top 10 percent grabbed its largest
share of total incomes since 1917 last year.
This is partly due to QE, which has been very
good for the stock market and thus the wealthy.
QE works in part by boosting household
wealth and thus spending and jobs, but the
effects have not yet filtered through strongly
to the wider economy. The taps will be open
awhile longer yet.
@2013 Economist Newspaper Ltd. (Distributed
by the New York Times Syndicate.)
Back in 1987 the rock band Bon Jovi was
top of the pops and the world s third-largest
firm by value was Tokyo Electric Power, aka
Tepco, a utility in Japan that few outside that
country had heard of. Today Bon Jovi still is
churning out No. 1 albums, but Tepco s value
has fallen by 90 per cent and it is teetering
on bankruptcy. It is now known around the
world for the disaster at its nuclear-power
plant at Fukushima.
Like pop charts and Olympic medal rankings,
corporate-league tables are both silly and com-
pelling. They reflect the ups and downs of
firms, which investors amplify by buying or
dumping their shares with less fealty than a
teenage music fan. They also are a crude test
of economic virility.
In 2009 the message was that American
capitalism had lost its way. Only three of the
world s 10 most valuable listed firms were
from America: Exxon Mobil, Microsoft and
Wal-Mart. It was the country s weakest show-
ing since Japan s bubble in the late 1980s. A
new species of big beast had reared its head:
vast, state-controlled oligopolies from emerging
Petrochina, China Mobile and the Chinese
banks ICBC and CCB were all in the top 10
that year. Brazil had a star in the form of Petro-
bras, the state energy company. The year before
Gazprom, a Kremlin-run racket masquerading
as a corporation, graced the list. Suddenly it
seemed as if the best way to create a giant
firm was not to innovate or to win customers
but to adorn a government bureaucracy with
some of the trappings of a private firm, such
as a stock-market listing, and sit back while
investors lapped it up.
Today the picture is once again transformed.
Nine of the world s 10 most valuable firms
are American. America s share of the top 50
is rising too. Why?
A perky stock market is partly responsible,
and the euro crisis has killed off any hope that
more firms from the euro zone might scale
the rankings: The currency bloc has only four
firms in the top 50.
Two deeper factors are also at play, though.
First there s America s mix of resilience and
renewal. Three of its nine biggest firms --
Exxon, General Electric and Johnson & Johnson
-- have their roots in a 16-year period in the
late 19th century. Their durability reflects their
powerful corporate cultures.
The country still does creative destruction,
too, as IBM and Intel have slid down the rank-
ings to be replaced by Apple and Google.
Chevron, an energy firm, has gone from a lag-
gard to a world-beater. Success has been any-
thing but parochial: Six of the nine biggest
firms sell more abroad than at home.
Second, the old rule that buying shares in
state firms is investment suicide has reasserted
itself. The world s 10 biggest state firms in
2009 have lost $2.2 trillion of value, or 60
per cent, from their peaks. Lower commodity
prices are only partly to blame. Investors now
award most state firms stingier valuations
than their private peers. Gazprom is worth
three times its profits, versus Exxon s multiple
Further, although emerging economies have
slowed, nimble private firms are doing fine.
In 2007 investors gorged on shares in Petrochi-
na when it listed in Shanghai, briefly making
it the only firm ever to be worth more than
US$1 trillion. Now China s hottest corporate
property is Alibaba, a private Internet firm
plotting a huge IPO. Government firms are
That is how it should be. The shortcomings
of cozy state capitalism never went away.
Petrochina s ex-boss is under investigation,
probably for graft. Gazprom wastes US$40
billion a year through corruption and ineffi-
ciency, according to the Peterson Institute.
In China the conflict between investors and
officials is stark, with the big banks riddled
with bad debts thanks to a government-spon-
sored lending boom. Minority investors in
Brazil protest that Petrobras is building unprof-
itable oil refineries and favouring local suppliers,
at politicians behest.
These vast organisations are not going away.
Most still make huge profits, often boosted
by cheap public funding. However, govern-
ments must recognise that the slump in their
valuations is a sign that they are allocating
capital badly. That is in no one s interest.
Petrobras has made a baby step by allowing
outside shareholders to appoint a director,
while China sometimes mutters about modest
reforms of its industrial fiefs. However, the
hybrid model of a firm beholden both to
investors and to politicians is as full of con-
tradictions as Karl Marx said capitalism was.
Privatisation is the best way to resolve these
Businesspeople, at least, can now be a little
less dazzled by state firms. To outlast the aver-
age pop star s career, companies need a culture
of innovation, financial discipline and, increas-
ingly, global reach.
These are things that only a few managers
are able to deliver -- and which no government
@2013 Economist Newspaper Ltd. (Dis-
tributed by the New York Times Syndi-
The Fed changes ... nothing
Big isn't beautiful any more
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