Month: April 2017

Submitted by Pedro Nicolaci da Costa

I once asked Janet Yellen a rather straightforward question that would echo for much longer than I expected.

It was March 2015, and the Federal Reserve was under pressure from Congress to reveal details about an internal investigation into how key details of its interest rate policy deliberations had made their way into a report by a private sector firm.

I was a reporter at the Wall Street Journal*, and I asked the following at a press conference:

Let's make something clear: Like any journalist, I love a good leak. But this was not your typical leak of important information to a journalist who then reported it to the public.

This was the sharing of private, market-sensitive details with a private party — Medley Global Advisors — which then shared that information with its clients. The leak, it should be noted, happened all the way back in 2012 but it was still being discussed in 2015 because — despite the Fed's internal investigation — nobody seemed to have gotten to the bottom of what had happened.

And back in 2012, any read on what the Federal Reserve might do to suppress interest rates as the US economy continued to crawl out of the Great Recession, could lead to huge profits for the traders who bet on such things. These days, traders are thinking about the next rate hike. Back then, interest rates were already at zero and the real insight gleaned from Medley's report was how aggressively the Fed would work to keep them there by using its balance sheet.

My question to Yellen had to do with basic public trust in the Fed. Why should the American people believe the central bank is working in its best interests if policymakers chat privately with movers and shakers on Wall Street? This was an alarming trend I had been reporting on since 2010, when I co-authored a report for Reuters entitled "Cozying up to big investors at Club Fed."

In it, my colleagues and I detailed other instances of market-moving information inappropriately being shared with investors, a trend we first observed when Fed officials speaking to bankers and hedge fund managers at conferences would suddenly go silent when a reporter walked by.

After the Yellen press conference, I took two weeks of paid leave for the birth of my daughter. When I returned, my editor at the paper told me I would no longer be attending Fed press conferences. No reason was given, and I left the job a few months later.

Market bloggers speculated the Fed had "banned" me from the press conference. I have no reason to think that was the case because the central bank let me back in as soon as I changed news organizations.

Fast-forward to April 4, 2017: Richmond Fed President Jeffrey Lacker resigns abruptly after admitting he was a source of the leak.

As soon as I saw the news, the whole press conference incident flashed before my eyes.

But Lacker's admission that the Medley leak originated with him doesn't entirely settle the matter.

We know Yellen also met with Medley herself. Why? What did she say to them? Former Fed economist and Treasury official Seth Carpenter was also under scrutiny on the issue. What were the results of the Fed's own investigation? And of Congress'?

Also: Why did it take Lacker so long to come forward?

I'll have to keep asking.

*I'm identified in that transcript as a reporter for Dow Jones Newswires, even though I was working for The Wall Street Journal, because both publications are part of the same company and, by tagging me as a Newswires reporter, Dow Jones could get more than one person in the room.

 

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Silicon Valley’s newest celebrity chef goes by just one name, Sally, and as Bloomberg reports, this chef has just one specialty: salad.

Still, Sally will make you the most perfectly proportioned salad you’ve ever eaten: through science.

Bloomberg goes on to note that Sally occupies about the same amount of space as a dorm room refrigerator, and uses 21 different ingredients – including romaine, kale, seared chicken breast, Parmesan, California walnuts, cherry tomatoes, and Kalamata olives – to craft more than a thousand types of salad in about 60 seconds, while the customer watches the process. The machine weighs in at 350 pounds, making it more appropriate for industrial settings than for home kitchens at the moment. “Sally will be going on a diet,” said its creator, Deepak Sekar, 35, founder of Chowbotics Inc., looking into his and Sally’s future.

The benefits of Sally are manifold, according to Sekar. “Sally is the next generation of salad restaurant,” he claims, comparing it to chains such as Chopt and Fresh & Co. For one thing, a robot can make salad faster than a human can. Also, you will know precisely how many calories your salad is delivering; there won’t be the problem of consuming one piled high with garnishes that turn out to be more fattening than a burger. And it’s more hygienic to have a machine prepare your salad than to have multiple people working on a line—or worse still, a serve-yourself salad bar.

Sally does require a human set of hands to prep the ingredients that go into its canisters, which are then installed in the robot. (Sekar called the process of chopping ingredients in the machine "too complicated right now," although it's something he promises for the future; he offered an analogy: "It's like paper getting stuck in a printer; it shuts down the process.")

This spring, Sally will debut in Silicon Valley, at Mama Mia’s, a fast-casual restaurant in Santa Clara, Calif., and at the corporate cafeteria at H-E-B Grocery Co. in Texas. The public launch will come on April 13 at co-working space Galvanize in San Francisco, whrre the public will be able to order Sally's salads. Sally’s current list price is $30,000; there will be an option to lease one for about $500 per month. Chowbotics will start delivering pre-orders of Sally in the third quarter.

Sekar also brought in Google’s original chef, Charlie Ayers to be Chowbotics's executive chef.

“A few of the things that I love about robots is that they don’t come in late, they don’t talk back, and they’re always accurate,” said Ayers over the phone. “And the labor savings.”

At Google, Ayers said, he first entertained the idea of a food robot. Ayers doesn’t lose sleep over the inevitable loss of kitchen jobs in Silicon Valley

“I don’t feel like I’m betraying my brothers and sisters by replacing them,” he said, resolutely.

 

“It’s happening in every industry now. You can either fight it, or be on the team that makes it happen.” He added: “People will find other things to do. Like fixing salad-making robots.”

Easy for the 56th Google employee to say now…

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Authored by Lance Roberts via RealInvestmentAdvice.com,

Over the last couple of week’s (see here and here), I have been discussing the value of Shiller’s CAPE ratio. The Cyclically Adjusted P/E ratio, or CAPE, is often maligned by the media as “useless” and “outdated” because despite the fact the ratio is currently registering the second highest level of valuation is history, the markets haven’t crashed yet.  Of course, the key word is…YET.

In the second article, I shortened the length of the CAPE ratio to make it more sensitive to price movements which sparked a good discussion on Twitter about forward return analysis using a shortened smoothing period. Leave it to my friend John Hussman to do the heavy lifting:

.@ndunivant @LanceRoberts @MebFaber On question about CAPE5 vs CAPE10: CAPE isn't our own preferred metric by a longshot, but here you go. http://pic.twitter.com/M8rNB3gdUC

— John P. Hussman (@hussmanjp) March 27, 2017

Of course, the obvious question is what are his favorite metrics? Here you go.

@drenerbas @ndunivant @LanceRoberts @MebFaber Metrics w/ higher and more stable correlation w/ subsequent returns have clearer implications. http://pic.twitter.com/riXyQKMd68

— John P. Hussman (@hussmanjp) March 28, 2017

 

Within all of this is a simple point. No matter how you cut it, slice it, dice it, twist it, abuse it, or torture it – valuations matter in the long run.

But therein lies the problem, valuations are NOT, and never have been, a market timing tool. It is about the value you pay for something today and the return you will receive in the future, and a point that Research Affiliates recently took a very interesting approach to in a recent report:

“Academics have suggested various reasons for sustained higher equity valuations, from the microstructure benefits of improved participation and lower transaction costs to the macroeconomic benefits of larger profit shares. We examine the explanation put forward by Lettau, Ludvigson, and Wachter (2008) that rising valuations are propelled by the large reduction of macroeconomic risk in the US economy. Their intuition is simple—investors require lower returns from equity markets when the aggregate volatility of the economy is lower. It should come as no surprise that investors are glad to pay a higher price and accept a lower return for investing in a stock market that delivers less uncertainty.

 

Today’s economy is drastically different from just a few decades ago, and radically different from a century ago. Judging from the volatility of two major macroeconomic variables—real output growth and inflation—it has changed for the better. From the days before the US Federal Reserve Bank until today, the annual volatility of the economy has tumbled about 80%.

 

When we plot the measure of macro volatility with the inverse of a very popular valuation metric, Robert Shiller’s cyclically adjusted price/earnings ratio (CAPE), we find an intriguing and significant positive correlation between expected real equity returns and the aggregate volatility of the economy. Under the restrictive assumption that prices are fair and an appropriate return on retained profits, we assert that earnings yields are an appropriate proxy for an equity market’s future real return. For clarity, we name the inverse of the CAPE, an earnings yield, the cyclically adjusted earnings yield (CAEY). 

Research Affiliates makes some very interesting points and the entire paper is worth reading. However, I was most interested in the concept of the Cyclically Adjusted Earnings Yield (CAEY) ratio and its relationship to forward real returns in the market.

While the statement that lower valuations, inflation, and lower volatility are supportive of higher valuations is true, there have also been other issues as well as I addressed last week:

• Beginning in 2009, FASB Rule 157 was “temporarily” repealed in order to allow banks to “value” illiquid assets, such as real estate or mortgage-backed securities, at levels they felt were more appropriate rather than on the last actual “sale price” of a similar asset. This was done to keep banks solvent at the time as they were being forced to write down billions of dollars of assets on their books. This boosted banks profitability and made earnings appear higher than they may have been otherwise. The ‘repeal” of Rule 157 is still in effect today, and the subsequent “mark-to-myth” accounting rule is still inflating earnings.
• The heavy use of off-balance sheet vehicles to suppress corporate debt and leverage levels and boost earnings is also a relatively new distortion.
• Extensive cost-cutting, productivity enhancements, off-shoring of labor, etc. are all being heavily employed to boost earnings in a relatively weak revenue growth environment. I addressed this issue specifically in this past weekend’s newsletter.
• And, of course, the massive global Central Bank interventions which have provided the financial “put” for markets over the last eight years. 

Furthermore, the point suggesting investors are willing to accept lower returns in exchange for lower volatility is intriguing. 

While academically speaking I certainly understand the point, I am not so sure the average market participant does who is still being told to bank on 6-8% annualized rates of return for retirement planning purposes. 

However, this brings us to the inverse of the P/E ratio or Earnings Yield. The earnings yield has often been used by Wall Street analysts to justify higher valuations in low interest rate environment since the “yield on stocks” is higher than the “yield on risk free-assets,” namely U.S. Treasury bonds.

This is a very faulty analysis for the following reason. When you own a U.S. Treasury you receive two things – the interest payment stream and the return of the principal investment at maturity. Conversely, with a stock you DO NOT receive an “earnings yield” and there is no promise of repayment in the future. Stocks are all risk and U.S. Treasuries are considered a “risk-free” investment.

The chart below, which uses Shiller’s data set, shows the 10-year Cyclically Adjusted Earnings Yield. I have INVERTED the earnings yield to more clearly show periods of over and under-valuations.

With the CAEY currently at the 3rd lowest level in the history of the financial markets, it should not be surprising to expect lower returns in the future. Of course, lower returns is exactly what Research Affiliates suggests you will accept in exchange for lower volatility.

Right?

The chart below shows the CAEY as compared to 10-year forward real returns (capital appreciation only).

Not surprisingly, when the CAEY ratio has reached such low levels previously, forward returns were not only low, but negative. Currently, with the earnings yield nearing 3%, forward 10-year returns are going to start approaching zero and potentially go negative in the years ahead.

Of course, such declines in returns will, as they always have, coincided with a recession and fairly nasty mean-reverting event which has historically consisted of declines in asset prices of 30% on average.

But hey, you are okay with that, right?

I mean, after all, you did agree to lower returns when you bought into overvalued equity markets in exchange for lower volatility.

For investors, planning for future wealth and security relies on reasonable assumptions about future expected returns. No matter how you do the math, returns over the next decade, which can be forecasted with a fairly high level of predictability, will be low.

“Long-term trend of mean reversion implies lower-than-average earnings per share in the future due to a decline in productivity. So, we estimate that EPS growth over the next decade is likely to be at about 1%. In reality, the return for the S&P 500 over the next 10 years could be somewhere between zero to low single digits.” – Chris Brightman, Research Affiliates

Remember, while valuations are not a market timing tool in the short-run. Using fundamental measures to predict returns 12-months out is a fruitless endeavor. However, over the long-term, the math is always the same:

The price you pay today is extremely indicative of the return you will receive in the future. 

Just something to consider.

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Despite Obama’s promise of a socialist utopia whereby all of his snowflake, millennial supporters would jump at the opportunity to ‘spread their wealth around’ for the greater good, his one crowning achievement that attempted to implement that vision, Obamacare, has proven to be a complete failure.  As it turns out, while millennials may be naive, they’re not stupid. 

While it may not have been readily apparent to the young Obama voters in 2008, most of whom would have blindly approved of almost any policy he put forward good or bad, Obamacare was always just a gigantic tax, via both off-market premiums and actual taxes (or ‘penalties’ according to the Supreme Court), levied on young people to cover the expenses of older people. 

And perhaps nothing illustrates the cause of Obamacare’s epic failure than the following chart from the Washington Post which highlights the fact that the top 1% of health-care spenders use more resources, collectively, than the bottom 75% combined.  Slice the data a different way, and the bottom half of spenders all together rack up only about 3% of overall health care spending — a pattern that hasn’t budged for decades. 

In other words, the youngest people of this country are paying $1,000s of dollars each year for health insurance that they almost never use…and haven’t for decades.

 

As Tom Miller of the American Enterprise Institute points out, Obamacare solves precisely the wrong problem by taxing young people to provide subsidies to older folks who will then just consume even more healthcare and drive already astronomical healthcare prices even higher.

But Tom Miller, a resident fellow at the American Enterprise Institute, disagreed. He said that the study is based on quick and incomplete snapshots of health and argued that it is yet another way to divert from the health-care discussion we should be having: about how to rein in spending. Using this data to argue about where to get premium dollars from — from the pockets of the well or the sick — simply allows the system to grow ever bigger and prop up an even-more-expensive medical system.

 

“We all get diverted by hoping we can hide the bill under someone else’s pillow,” Miller said. “I think that’s the political argument you hear — these low spenders, we’re scared to death they might catch on to the fact they’re getting taken to the cleaners” by being forced to buy expensive health insurance they don’t need.

But, seemingly no amount of logic will ever convince idealists, like Marc Berk of Health Affairs, that young people somehow have an inherent obligation to “take care of people who are very sick.”

“The key takeaway message really is most people are in good health; they don’t spend a lot of money, and yet it’s important to have them be part of our insurance system. If they’re left out of the system, we’re not going to have the funds to take care of people who are very sick,” said Marc Berk, a health policy researcher and contributing editor of Health Affairs who led the analysis.

And while millennials may shout their verbal support at liberal rallies, they’re apparently much less willing to demonstrate their actual support with their wallets.

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Picking the worst possible time (or perhaps having it picked for it) to demonstratively launch a rocket, just as Trump and Xi are set to discuss the North Korea nuclear threat, with the US president reportedly prepared to announce that ““If China Is Not Going To Solve North Korea, We Will” and take unilateral action to eliminate any potential threats coming out of North Korea’s regime, moments ago South Korea’s Yonhap reported that North Korea on morning Wednesday fired a projectile suspected to be a ballistic missile toward the East Sea, military officials said.

The South Korean Joint Chiefs of Staff announced, “North Korea fired an unidentified projectile in Sinpo, South Hamgyong Province, into the East Sea.”

And while we await more details, as well as news of a potential response by South Korea, Japan, or even the US – recall “US Delta Force, SEAL Team 6 Prepare To Take Out Kim Jong-Un, Practice Tactical North Korea “Infiltration” – it is worth noting that earlier on Tuesday, a White House official said that the clock for resolving the North Korean nuclear issue “has now run out,” and the United States is looking at “all options on the table” to deal with the problem, according to Reuters.

The official, who spoke on condition of anonymity to preview the upcoming summit between President Donald Trump and Chinese President Xi Jinping, also said that how to deal with North Korea is a “test of the relationship” between the U.S. and China.

“We would like to work on North Korea together. There is an opportunity,” the official said during a conference call briefing. “We’ve been … trying pretty much everything to bring about a safe and denuclearized peninsula. So this is some ways a test of the relationship.” The official stressed the urgency of the problem, saying, “The clock is very, very quickly running out.

“We would have loved to see North Korea join the community of nations. They’ve been given that opportunity over the course of different dialogues and offers over the course of four administrations with some of our best diplomats and statesmen doing the best they could to bring about a resolution,” the official said.

Needless to say, random gratuitous ballistic missile launches will not help, and if anything, may prompt the US to retaliate now that both Trump and Tillerson have said any provocation by North Korea will be met with a response.

On Sunday, Trump said in an interview with the Financial Times that China should help with the North Korea problem by using the “great influence” it has over Pyongyang, warning that if it doesn’t, the U.S. will solve the problem on its own, and that won’t be good for anyone. Trump also said he will use trade as an incentive for China to take action on the North.

On Tuesday, Trump said the North is a “humanity problem,” and he will talk about the issue with China’s Xi.

“North Korea clearly is a matter of urgent interest for the president and the administration as a whole. I think the president has been pretty clear in messaging how important it is for China to coordinate with the U.S. and for China to begin exerting its considerable economic leverage to bring about a peaceful resolution to that problem,” the White House official said.

“Certainly, it is going to come up in their discussions. Somewhere in the order of just shy of 90 percent of North Korea’s external trade is with China. Even though we hear sometimes that China’s political influence may have diminished, with North Korea, clearly its economic leverage has not. It is considerable and so that will be one of the points of discussion,” he said.

The Trump-Xi meetings will also be watched closely as to whether the U.S. stands up to China for bullying South Korea for hosting the U.S. THAAD missile defense system designed to defend better against ever-growing missile threats from North Korea.

The White House official said that the deployment will go ahead as planned.

“We are familiar with China’s objections to THAAD. The United States will always act to defend our allies and to defend our homeland against any threat, particularly one of the nature of the North Korean regime with the kinds of terrible weapons that they’re developing. There will be no move away from protecting our South Korean allies and the United States,” he said. The official also said that China’s retaliation against the South is “disturbing.”

“South Korea is a responsible, friendly, economically dynamic democracy that is seeking together with its ally, the United States, to put in place defensive systems. It doesn’t make much sense and at some levels even is disturbing to be punishing South Korea for wanting to do that,” the official said.

“If THAAD is a problem to other countries in the region, they need to look to North Korea,” he said.

It is unclear if today’s launch provoked Seoul to respond with a THAAD response, one that will be frowned upon be Beijing and other countries in the region.

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Authored by Ryan McMaken via The Mises Institute,

 

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Amidst a cacophony of smug laughter and abject ridicule on the ultra-left leaning Morning Joe panel, Senator Rand Paul managed to weave his way into the discussion and utterly destroy their narrative.

Paul’s claim was the collection of data, ‘backdoor searches’, encroaches on the civil liberties of all Americans and that ‘secret warrants’ by ‘secret courts’ should be eschewed and replaced by standard old fashioned search warrants.

When Paul asserted the White House had used the collection of surveillance for political purposes and that Rice should be subpoenaed and questioned under oath, the panel led by Mika Brzezinski and Bill Press, jeered him.

“They were not spying on these Americans”, said Press. His argument was that foreign agents were being spied on and that Trump and his team just happened to come up in ‘incidental’ intelligence gathering.

Paul then ripped his spine out when he said “I think it’s a mistake to downgrade this and say oh it was just incidental and not a big deal. It’s a HUGE deal that we are collecting millions of Americans phone calls and that someone can go to a keyboard and search for it without a warrant. This is an illegal warrantless search.”

In response to Mika’s opposition, Rand shuts down the conversation, saying “I believe Susan Rice abused this system, and she did it for political purposes, and needs to be brought in and questioned under oath.”

Senator Paul says Rice needs to be brought in for questioned under oath for Trump surveillance. http://pic.twitter.com/ptJ90RAxvH

— The_Real_Fly (@The_Real_Fly) April 4, 2017

“This was a witch hunt that began with the Obama administration, sour grapes out the door, and used the intelligence apparatus to attack Trump and I think they did.” — Rand Paul

Watch

Content originally published at iBankCoin.com

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Earlier this morning, Morgan Stanley’s auto team, led by Adam Jonas, offered up a sobering redux of the March auto sales figures released yesterday.  Here is a brief recap of Jonas’ key takeaways (hint: volume down, incentives up, inventories up): 

March auto sales data (16.6mm SAAR vs 16.8mm LY) featured a number of classic signs of a late cycle: falling volume, rising inventory and rising incentives. A drop in used prices may complicate matters.

 

Incentives are up 14.9% y/y (down 0.9% m/m) including a 15.0% y/y increase at the D3.Incentives among the Asian and European OEMs were up 16.8% and 9.9% y/y respectively.

 

Days’ supply at the D3 overall is higher. GM days’ supply is 97 days up from 71 LY. FCA’s days’ supply is down to 83 days vs. 87 LY. Ford’s days’ supply is 80 days this year, flat y/y.

And here is some of the data.  While everyone tends to focus on total N.A. SAAR…

…the ‘retail’ SAAR, which strips out sales to rental companies, paints an even more dire picture with consumer-driven volumes down 17% over the past four months.

 

Meanwhile, tanking sales volumes came despite massive increases in incentive spending versus last year.

 

But, poor sales didn’t stop the D3 from maintaining production volumes which has caused inventory to balloon back to levels not seen since 2009 when sales volumes completely evaporated.

 

And that is the anatomy of a ‘plateau‘…

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Authored by Valentin Schmid via The Epoch Times,

Macquarie strategist Viktor Shvets explains overcapacity, debt, and government intervention

Despite the temporary injection of confidence in the American economy brought about by the election of President Donald Trump, major structural problems continue to lurk beneath the surface. These trends, decades in the making, are so entrenched and intractable that even Trump’s boldest plans may not be able to resolve them.

For many Americans, this is the economy: rising prices for necessities, schooling, and health care; high competition for jobs that don’t pay much; negative interest rates; and the accumulation of increasing influence and power by financial institutions.

It’s no wonder so many feel disenfranchised and upset. The system of capitalism is usually given the blame for income inequality; last year, many identified with Bernie Sanders, a self-described socialist who promised that the government would be able to fix (almost) everything.

The real picture is more nuanced, according to Macquarie Group global strategist Viktor Shvets, who does not propose any easy solutions to the most difficult problems facing the United States and the world. Shvets does note, however, that under a genuine capitalist economy, many of the present imbalances would likely not have become as entrenched in the first place.

Epoch Times: Why are people so unhappy with the economic system right now?

Viktor Shvets: People want to be respected. People want to feel important. They want to feel that they are valuable contributors and useful members of society. But increasingly, most people feel that their contribution is no longer important, relevant, or valued.

We have too much overcapacity and too little labor productivity. The No. 1 problem is technology itself, which is depressing labor productivity and changing how labor inputs are valued. It’s altering how we invest, and it globalizes us much more than we’d like.

But the other problem is what we’ve created for ourselves, and that is global over-financialization and overleveraging, which is a direct consequence of the societal desire for growth, despite stagnating productivity.

All of this leads to stagnating incomes and, perhaps more importantly, disintegration of conventional labor markets and traditional professions and career paths, which feeds into questions like “What do you think of yourself and your contribution?” and “How valuable are you, and how important are you to your employer?” The younger generations, particularly millennials or anybody born from the mid-1970s onward, really feel that they probably got a raw bargain.

So you get the conflict between people’s self-perception—what they would like to be—and the reality of where they actually are. Whenever societies and economies go through these periods, people feel the system doesn’t work for them. And it doesn’t.

Epoch Times: However, in real capitalism, overcapacity and too much debt could have been prevented by periodic cleanups—what Austrian economist Joseph Schumpeter called “creative destruction.”

Mr. Shvets: Theoretically, what should have happened if we had a relatively free economy, is that the only role of government would be to ensure that monopolies were not created, that law and order were maintained, and that basic infrastructure needs were taken care of.

Beyond that, the Austrian school of economics would have allowed businesses and industries to fail and capital to be allocated however the private sector deemed it appropriate. In other words, there would be a purging of excesses, businesses, and industries.

You could have eliminated the overleveraging and associated overcapacity—which, by the way, is now one of the factors depressing productivity—and that would have meant watching banks fail and people losing their deposits, so that the next time around, they would be more careful where they put their money.

The problem is that, since the early 1930s, nobody ever tried to do this because the political and social impact of that scenario would have been devastating.

Epoch Times: So now people look more and more to the government to solve these problems?

Mr. Shvets: Over the last decade, the pendulum has been swinging toward the state and public sectors being more and more proactive. Whether it’s allocation of capital or forcing corporates to invest or not invest in certain areas, the state is becoming much more dominant.

The consensus narrative today is that state-sponsored infrastructure spending is a “good thing,” and that government spending, in general, is something to encourage. Who would have thought in the 1980s and 1990s that people today would be applauding government and infrastructure spending? But that’s exactly what’s happening now. People say, “Look, there’s an alternative.”

Of course, a conventional economist would argue that all we need to do is increase productivity. And they will argue that what is missing from the productivity puzzle is investment—nonresidential, fixed-asset investment.

If we can just invest more money, people become more productive. And higher productivity will feed into higher wages while containing inflation. And that would then feed into higher consumption and growth rates.

The problem with that argument is that there are reasons for why corporates have not been investing for decades, and those reasons today are just as valid as they were decades ago.

Also, most of such investments look likely to be steered, or underwritten, by the public sector. The government is trying to induce the private sector to invest in areas where it never would have invested if left to its own devices. That’s hardly a recipe for productivity enhancement.

To my mind, the traditional argument that all you need is higher investment to kick-start the productivity cycle is faulty.

Epoch Times: In fact, you argue we have too much capital and overcapacity.

Mr. Shvets: Most of the new activities are capital light. You don’t need much capital. And most new private-sector activities today have an almost unlimited scale.

In the 19th and 20th centuries, scalability was very important, and we had a problem with a lack of capital, and most fields were very capital-intensive. We needed lots of labor inputs. We needed to put in more hours. In other words, labor needed to be productively married to machinery and the management’s task was to “sweat labor inputs.”

In the new world of the 21st century, we have plenty of capital, and indeed one could argue that we are drowning in capital while most operations are no longer capital intensive and hours worked are no longer the driver of productivity. There is no reason for corporates to increase investment in traditional infrastructure and factories because that’s not what’s going to drive their businesses forward.

There is a need to raise R&D investment, particularly the “R” portion. There is a need to increase investment in automation and intellectual properties while reducing our energy and biological footprint.

There is also a need to maintain core infrastructure so that there are no accidents, and diseases do not spread. But beyond that, in my view, there is very little physical investment required in most developed markets, and even a large portion of emerging markets.

So it’s a problem that we have so much capital floating around, but it can’t find a home. And because it can’t find a home, it’s just staying in financial institutions, because there’s nowhere else for it to go. It therefore gets allocated into real estate and financial speculation.

Epoch Times: And we have a lot of debt. How do we get rid of that?

Mr. Shvets: The debt that’s been incurred would either have to be whittled down through some form of inflation, which gets harder and harder to generate when you have technology and overleveraging, or it would have to be bought up by central banks. A lot of the debt that has been generated was never meant to be repaid.

Car loans ensure that people who couldn’t afford a car can get one. I don’t see those loans ever being repaid. Student loans in the United States are a consumption support mechanism by the U.S. government. That’s never going to get repaid.

But that’s fine, as long as the ball keeps rolling. As long as the new debt is being pumped in, it’s okay. It’s like surfing—you have to keep standing to stay on the wave, or you’ll fall.

Are people prepared for the consequences of debt default? Of course not. Nobody is prepared to lose their deposits. Nobody wants to lose their jobs. Nobody wants a deflationary bust.

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