Category Archives: Finance

Ticking Time Bomb

Many have lamented that the biggest casualty of this election season (aside from civility), is the short-shrift given to some of America’s most pressing issues, notably the debt, and specifically Social Security and Medicare. (See Investopedia’s Election Center)

Fiscal savants Robert Reich, a prominent Democrat, commentator and former Secretary of Labor under the Clinton Administration, and Alan Simpson, a Republican former senator from Wyoming and fiscal hawk, had much to say about both topics, what needs to be done to fix them and what’s standing in the way at this week’s Schwab IMPACT conference in San Diego.

Simpson, who was appointed in 2010 by President Obama to co-chair the National Commission on Fiscal Responsibility and Reform with Democrat co-chair Erskine Bowles of North Carolina.

The response to their report, which said that America was “going broke and needed shared sacrifice to save itself,” was “everyone ran for the exits.”

“We slaughtered every sacred cow,” Simpson said. “But every person had one issue. ‘You can’t touch that,’ they would say.” He said that there were at least 180 items in the tax code that add up to about $1.1 trillion in entitlements, such as municipal bond tax breaks and mortgage interest deductions. All the organizations favoring those entitlements have building in Washington. “AT&T has 100 lobbyists. How do you think that’ll turn out,” Simpson said, referring to its recently announced $85 billion bid for Time Warner, Inc.

“Out of Control”

The biggest issue, Simpson said, was out-of-control healthcare costs via Baby Boomers that have America paying twice as much for the same health procedures in other developed countries but “get 25% to 50% of the results.” (Related: Passing Boomers Will Leave a Big Economic Wake)

Reich agreed, adding that Medicare costs account for up 18% of the federal budget, which is far more than other developed countries. “And we still have a higher infant mortality rate.”

He said that is it imperative to “get a handle of healthcare costs” and that the “biggest single driver is pharmaceutical costs.” He also cited administrative costs; nurses spend about 31% of their time on paperwork, he said.

In all, the Medicare trust fund is expected to reach a strain point sometime in the early 2030s, Reich said.

Simpson added that one big issue, again, was entitlements. Just whispering ‘means testing’ or ‘needs testing’ and politicians get heat from organizations like the AARP.

When asked what the tipping point will be for healthcare, Simpson said that it could be when America’s creditors start saying “‘we want more money for our money,’” pushing lending costs to unsustainable levels. And when that happens, “the guy who gets hurt. Hosed. Is the little guy.

Fixing Social Security

Both Reich and Simpson agreed that Social Security, while under threat, is fixable, and possibly within the next four years, though whether the political will exists to do so is unknown.

What’s clear is that by 2034 Social Security beneficiaries will get a check for 21% less if nothing is done, Simpson said. (For more on this topic and a fact checking of their numbers, see this article from Advisor Perspectives.)

Reich said there are three ways of dealing with Social Security’s solvency. The first is raising the age of eligibility. When the first person claimed Social Security, the age of eligibility was 65 but the average life expectancy was 61.

The second was raising or removing the ceiling on taxable earnings. And the third is means or affluence testing.

Harsh Climate

Another big hurdle, according to both Reich and Simpson, was the incivility that has come to define political discourse in America.

Simpson noted that “some people believe that Hillary [Clinton] should be wearing an orange jumpsuit” and others think that “you could give Donald Trump an enema and bury him in a shoebox.” (Related: What are Donald Trump’s Chances of Being Elected President?)

Both lamented a lack of willingness to compromise and a tribal populism that comes with that stance.

Simpson said that what America is experiencing is dislike, “but hatred. Which is unacceptable and unknown in this country.” He said that much of it is coming from the House of Representatives. He believes that G.O.P Representatives were so tired of being over a barrel for so long during Democratic control that when they gained power they wanted a measure of revenge. Reich narrows the moment to 1995 when Newt Gingrich became Speaker of the House.

“Populism comes from politicians saying we can fix health care, Social Security, defense, education and more without touching a thing,” Simpson said. “That’s what’s known as a terminological inexactitude. A lie.”

Dangerous Countries For Travelling

From the terror attacks in Nice, France to the ongoing spread of the Zika virus, the past year has been a dizzying one in terms of violence and disease outbreaks throughout the world. These factors, among others, increase the likelihood travelers will be required to stay up to date on travel safety advisories. Using 2016 data from the Canadian government and The Global Health Data Exchange, HealthGrove, a health visualization site by Graphiq, created an ascending list of the most dangerous countries to travel to.

The Canadian Travel Advice and Advisories data comprises four major categories — “exercise normal security precautions,” “exercise a high degree of caution,” “avoid nonessential travel” and “avoid all travel.” HealthGrove’s list includes countries with at least an “exercise a high degree of caution” rating or higher and nations are ranked by worsening travel advisories. Ties were broken by using the Travel Mortality Index, which provides an aggregate score representing the likelihood of death caused by traveling to a given country. The higher the index, the higher the probability of traveler death. The causes of death in the Index vary from diseases like Tuberculosis and HIV/AIDS to causes like “interpersonal violence,” “exposure to forces of nature,” “collective violence” and “legal intervention.” The variation in causes explains why you’ll see France, for example, with a score (116.2), which is separated from that of Honduras (120.4) by only a few points.

Dark corporate past

“WE THOUGHT we knew our story, and we knew it wasn’t great,” says Maurice Brenninkmeijer, chairman of COFRA Holding, which owns C&A, a 175-year-old Dutch clothing retailer with over 2,000 stores globally. Yet the full account of how the German branch of his family behaved in the second world war “tore through your heart when you heard it”, he adds. Mr Brenninkmeijer’s ancestors—considered to be genial, virtuous, Catholic and reserved—turned out to have been avid Nazi collaborators. Old letters revealed cosy, corrupt, ties to Hermann Goering. From 1942 onwards C&A and Siemens, a German engineering firm, together exploited forced Eastern European labourers in Germany, keeping them in such a wretched state that malnutrition killed several women and children. C&A profited from “Aryanisation”, grabbing business and property from terrified Jewish owners. Perhaps worst, it used Jewish tailors and leather-workers, corralled in Lodz, a dreadful ghetto in Poland. Of some 200,000 people trapped in inhumane conditions there, only 1,000 survived to liberation.

Such grim details are now public thanks to Mark Spoerer, a historian in Regensburg who specialises in archival research to assess companies’ dark pasts, putting “immoral business behaviour” into historical context. Remarkably, his new book “C&A: A family business in Germany, the Netherlands and the United Kingdom 1911-1961”, was commissioned by the notoriously reclusive family. Mr Spoerer, over five years and with generous funds, was given unrestricted access to private files, conducted interviews freely and had the right to publish all he found.

Being low-profile went from being something worthy, to something strange, and now suspect, says Mr Brenninkmeijer, in a rare interview. Though some relatives were said to be reluctant to confront old horrors, he says all now agree on the need for a sort of corporate therapy, “so we have an understanding of our history, not as a burden but as a platform”. This, he says, helps the family get a deeper sense of itself. A core of 30 family members are active owners and managers of the firm; around 1,300 Brenninkmeijers form an outer circle.

It is rare for a company to confront an ugly past so openly, especially as C&A faced no looming pressure from victims’ relatives, journalists or other outsiders. Firms are most likely to do so if they have a strong international presence and deal directly with consumers, says Mr Spoerer. Another corporate historian, Lutz Budrass, assessed 100 companies that thrived in Germany in 1938 and still exist in some form today. He suggests that only 30 have yet organised a serious scholarly assessment of their wartime activities, while 40 have done nothing at all, including five companies which, he says, “were very heavily involved” in Nazi crimes.

He points to Deutsche Post, a successor of Reichspost, and much of the German steel industry as particularly hostile to the idea of exploring their pasts. Siemens has made only partial efforts to assess its wartime role. In the car industry, Volkswagen, BMW and Daimler have owned up to their intimately close associations with Nazis, but other firms have not. Mr Budrass is especially dismissive of German aircraft companies. He was commissioned in 2002 by Lufthansa to write part of its 75th anniversary, especially in explaining its use of 8,000 forced labourers in 1944. But the firm refused to publish it, acceding only this year once Mr Budrass brought out a separate book on the airline’s past. He also argues that Airbus, the European aircraft-manufacturing group which incorporated old entities including Messerschmitt (one of the largest users of concentration-camp labour), is “trapped by fear of its past” in failing to commission a proper history.

How cleansing is the sunshine?

Perhaps it is not irrational for firms to shy away from difficult memories. And German firms are more transparent than most. Some 6,000 companies and the German state contributed to a €5.1bn ($4.5bn) fund created in 2000 to compensate victims of forced labour. By contrast, it took until 2014 for foreign relatives of holocaust victims transported by SNCF, the French railway, to be allowed to seek compensation from the state. Many Japanese firms can trace their histories back to wartime exploits, including the use of slave labour, but are far less likely to assess what went on than German ones. Similarly it is rare for American financial firms to admit to profiting from businesses related to slavery in the mid-19th century, as Aetna and JPMorgan Chase have. Nor is there any serious discussion to suggest firms which made money in apartheid South Africa should today offer compensation.

Struggles to stay relevant

JUST outside Stanford University’s campus sits the headquarters of Symphony, one of the myriad tech companies that sprout like weeds in Silicon Valley. After a lunch break exercising in a nearby park, a dozen fit-looking employees, still in workout clothes, help themselves from buckets of fruit, energy bars and the food of the day (Indian), before plopping themselves in front of monitors in an airy room bathed in natural light. For the sought-after engineers making up most of the company’s 200-strong workforce, this sort of environment is the norm. Work is supposed to be healthy and relaxed—a far cry from the terrors of a New York bank with its incessant pressure to sell and complex internal politics, not to mention often unappetising, pricey food.

Across the continent, in a newly opened tower within the World Trade Centre, Kensho, a three-year-old company, has a similar feel. Like Symphony but a bit smaller, it is stuffed with talented engineers. In a New York approximation of the West Coast, it boasts “vertical gardens”—rectangular patches of vegetation like framed paintings—and a pool table.

Symphony is a messaging platform, owned by a consortium of investment firms. It offers a critical function at present almost monopolised by Bloomberg: the seamless incorporation of data and communication that makes the terminal the most important conduit in finance since Wall Street went from thoroughfare to metaphor. Kensho screens vast amounts of information—speeches, earnings, earthquakes and on and on—to help investors find correlations among all these data that might move prices.

If the two companies succeed—a big if—their products could become pervasive. They are tiny entities with vast potential. And they are examples of technology firms backed and used by Goldman Sachs, a big investment bank, in its efforts to transform itself, and indeed its industry, at a time when its core business is being pummelled by technology and regulation.

In 2014 Goldman spun out a messaging technology developed internally as a new company, Symphony. Kensho was formed with backing from Goldman in 2013. Early on, the investment bank had a contractual right to be the sole user of its products among brokers. Goldman continues to be the only outside investor with voting rights on the company’s board, but many other banks have taken stakes in it and are customers.

It is possible that these two companies will provide little benefit to Goldman. Cynics are entitled to wonder whether these and similar efforts are merely a way of putting a modern veneer on an old structure. Tech companies are fashionable and widely perceived as helpful; banks are unfashionable and seen as parasitic. The non-cynical take is that Goldman understands that answers to the challenges it faces will have to come, at least in part, from outside its mirrored-glass headquarters in downtown Manhattan. It may have many flaws; a failure to grasp corporate vulnerability is not among them.

Goldman, with its enormous influence, lavish compensation and alumni network in pivotal political roles looks anything but embattled. But the firm—derisively dubbed a “great vampire squid” by Rolling Stone magazine—is in the process of seeing its tentacles severed.

Lost prop

Since 2009 revenues have dropped by a quarter; they remain below where they stood a decade ago (see chart). Even in a good quarter, such as the one just completed, its return on equity barely exceeds single digits. “Principal transactions”, ie, proprietary trading and investments, produced $25bn in revenues in 2009 and $18bn in 2010 but only $5bn in 2015. The decline is a result of new rules that limit these activities—and regulators threaten more.

Fixed income, commodities and currency (FICC), the once immensely lucrative niche that nurtured the careers of Goldman’s chief executive, Lloyd Blankfein, and its president, Gary Cohn, has also been hit hard. Revenues reached $22bn in 2009. In the first three quarters of this year they totalled $5.6bn.

The future of TV

IMAGINE a television which, as in the old days, has only a handful of channels to choose from instead of hundreds, as a typical cable set-up might offer today. In a decade or so TVs will once again have only a few channels, but each will run miles deep, with content that can be viewed on demand. Netflix might be one such offering; Amazon another. Both firms are spending billions of dollars making and buying TV shows and films to sell directly to viewers to watch when they like, and on devices other than the box in the corner of the room. And other rich tech firms may join them.

It is this vision that is now driving the direction of television and media. Broadcasters are willing to pay more to show live sporting events, and to invest more in producing TV shows, to make their networks the must-see choice for viewers. This trend has spurred the largest-ever merger of a telecommunications company with a media firm. AT&T, America’s wireless and pay-TV giant, announced on October 22nd an offer for Time Warner, the owner of HBO, CNN and Warner Brothers studio, worth $109bn. In doing so AT&T is betting that a few vertically integrated platforms will dominate the future of viewing. This huge deal follows the $30bn purchase in 2011 by Comcast, a cable-TV company, of NBC Universal.

If approved, it would not be the last such merger. And the next buyers could be content companies buying distribution platforms. At 21st Century Fox, Rupert Murdoch might go after the rest of Sky, a British pay-TV firm, that he does not already own (Sky is a cheaper target with the fall of the pound). At Disney, Bob Iger mused recently about the need to reach consumers directly in an increasingly uncertain media landscape, leading many to speculate that he wants to buy Netflix, which has a market value of $54bn (almost one-third of Disney’s). At present such a mammoth deal appears to be unlikely, but were it to happen it could trigger a bidding war with Apple and Google weighing in as well.

Some analysts describe AT&T’s strategy as diversification or empire-building, not integration. AT&T is the second-largest wireless carrier in America, behind Verizon Communications. Last year AT&T completed the $48.5bn purchase of DirecTV, a satellite provider, making the company the largest pay-TV distributor in America with 25m subscribers. The new deal adds the biggest available prize in film and television (as Disney is not for sale), with a vast library of films and TV shows including hits such as the “Dark Knight” movies and “Game of Thrones”, besides multiple cable channels.

The backdrop to this is that Americans are watching 11% less television than six years ago, and those aged 12 to 24 see more than 40% less (see chart). In recent weeks a vital bulwark of pay-TV, live sports, has shown unusual weakness; ratings for American football have declined compared with a year ago. Last year traditional pay-TV lost more than 1m subscribers, about 1% of the total in America, as more viewers “cut the cord” to expensive cable and switched to streaming video services.

In the near term AT&T’s business logic for buying Time Warner is not obvious. Cord-cutting will continue to put pressure on profit margins at the combined company, which will also become highly indebted. Nor will AT&T be able to offer Time Warner content exclusively to its customers. It will license it to as many distributors as possible to boost revenue—just as Time Warner does now. And AT&T will not be able to get that content at a lower price for DirecTV because clauses in pay-TV contracts prevent that and regulators would not permit it. Randall Stephenson, AT&T’s chief executive, and Jeff Bewkes, Time Warner’s boss (who would leave under the deal), argue that benefits will come from being able to target advertising better to viewers of Time Warner content, thanks to AT&T’s knowledge of what people are watching. It is unclear how much that will help the bottom line.

Despite all that, regulators will be wary about AT&T wielding a competitive advantage from owning a combination of content, delivery and wireless spectrum (as well as broadband). In a display of the company’s muscle, on October 25th Mr Stephenson announced that a new internet-streaming service in America, DirecTV NOW, will offer more than 100 TV channels (including Time Warner networks) for $35 a month, far cheaper than existing packages. Speaking at a conference in California, Mr Stephenson said he would not have been able to strike such a deal if he did not have DirecTV: “we cannot get the media companies to participate in this until we have scale.” AT&T wireless customers will come off best as they will be able to stream the service without data charges. The Federal Communications Commission, a regulator, is already looking at AT&T and Verizon’s practice of not charging mobile customers more to stream certain video content—called zero-rating. Mr Stephenson has said that the ability to drive down prices shows AT&T’s big acquisitions are good for consumers. Trustbusters might see things differently.