‘Deformed’ Bonus Culture
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‘Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor.
He said, ‘“Look, those are the bankers’ and brokers’ yachts.” ‘“Where are all the customers’ yachts?” asked the naive investor.’
This old Wall St joke spawned the title for your editor’s favourite investment book, from which this extract comes - Where are all the Customers Yachts by Fred Schwed Jnr. It first appeared in 1940 and related to Schwed’s brief experience on Wall St as a broker in the early 1920s.
He was the son of a short seller who went bust in the ‘20s. Expelled from Princeton for having a girl in his room he lasted only two years on Wall St but long enough to understand how it works. In defiance of the Puritanical work ethic often associated with America, he preferred golf and drink. Billionaire financial information entrepreneur and New York mayor, Michael Bloomberg called the book a “hilarious classic that proves the more things change the more they stay the same”. His other written credits are few save this and a children’s book - Wacky the Small Boy – who perhaps grew up to become Wacky the prop desk trader, or Wacky the hedge fund manager…
I was reminded of this thanks to a report in today’s Telegraph. As the economic climate deteriorates, the knives are out for the financiers and corporate elite. Brussels is gearing up for an all out attack on bonus culture. The short-term pay structure of such schemes has become “deformed” and encourages excessive risk taking with little thought for the interests of “stakeholders” or “society” according to a confidential document prepared for EU finance ministers. Well, most EU finance ministers… Britain’s Alistair Darling and free market allies from Eastern Europe have been excluded! Curbs on bonuses, stock options and golden parachutes are on the table for the interventionists. Angela Merkel wants a €1m cap on pay… No free marketeer the German Chancellor.
There is no “concrete legislation” on the table notes the Telegraph but the mood is clear enough. After the private sector lash the public sector backlash and unsurprisingly, the proposal is viewed with alarm in the City…and we suspect their yacht brokers too.
Back to the topic of oil for a moment…now $3 down from its $126 peak and never far from our thoughts. The US’s thirst for oil is matched by its increasing dependence on others to provide it. In 1973, the US imported 33% of its oil. Today the figure is nearer double at about 60%. By 2020 it could be importing 70% of its needs says Gideon Rachman in the FT.
Meanwhile, on the other side of the Pacific, the competition continues to intensify. Chinese oil consumption doubled between 1994 and 2003 and will double again by 2010 when the International Energy Agency expects it to be the world’s largest consumer of energy. Overall, the world will need 50% more energy needs by 2030 thinks the IEA. Mr Rachman notes:
“While western politicians routinely worry about globalisation, they have yet to focus on a more plausible threat. It is not the outsourcing of well-paid jobs; or the inflow of cheap goods: it is the globalisation of western patterns of consumption. If the Chinese and Indians eventually eat and drive like Americans and Europeans, the current inflation in fuel and food prices could be just the beginning. The environmental implications are also obvious - and alarming.”
But as China emerges, one stage of its economic development appears to be ending notes a Bloomberg report…
“The end of an era of China’s mighty export industry has begun,” says Tao Dong Asia chief economist for Credit Suisse. A third of the factories in China’s southern Guangdong province which produce 30% of China’s exports will be closed in three years time he reckons.
Vietnam (voted top emerging market destination for manufacturing business by PwC last year), India and other Asian nations are aggressively pursuing foreign investment. Chinese labour is now being undercut by Vietnam and India. Vietnamese labour is more than 40% cheaper and Indian labour cheaper still. This won’t weaken Chinese growth but rather change the shape of it as it moves into higher up the manufacturing food chain into value added businesses such as computer chips, cars and electronics.
An interesting feature of Chinese economic growth is its geographic concentration. Four provinces in the south-east of the country account for 60% of the country’s exports. As such average incomes in the richest regions coastal are ten times those in the poorest in Western China. In spite of money spent on infrastructure, the transportation and other costs make heading West an uncompetitive option for business in comparison to other options such as Vietnam. The spread of prosperity in this notionally Communist country to the 700m in the west of the country is a major issue thinks Morgan Stanley’s Stephen Roach:
“It is absolutely key that China pushes its development model westward. The jury’s out on whether they will pull it off.”
Regards,
Rob Mackrill
The Daily Reckoning
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