FT : Piketty’s (unintended) advice for investors

Piketty’s (unintended) advice for investors

In macroeconomics, this has indisputably been the year of Thomas Piketty. Rarely, if ever, has a single book so profoundly influenced the public discourse on a central topic, the inequality of wealth and income in the developed economies over many centuries. In an age of tweets and sound bites, the fact that a Herculean intellectual work can have such influence is surely uplifting [1].

The financial markets, however, have largely ignored the book, seeing it as outside the realm of their direct interests. This is a mistake since, whatever one might think of Prof Piketty’s policy recommendations, he has written a major treatise on the economic process that generates wealth in our societies, and that is exactly what most investors are trying to understand.

On Friday last week I was on a platform with Prof Piketty at the London Business School, and the slides from my presentation are attached here. The LBS does not plan to upload the video of the presentations on the web until early next year, so this blog contains my main points.

Parts of this are inevitably a bit technical. Skip to the final section for the bottom line. Much of this is still very controversial; debate is welcome.


Prof Piketty’s work is frequently said to have “dismal” implications for the future of capitalism, and he does indeed conclude that inequality will increase inexorably, given the current tax code. But the other side of the same coin is that Prof Piketty’s analysis has bullish implications for long-run returns on asset classes. Abstracting from distributional issues, which may need to be handled through the tax system, that surely does not constitute a “dismal outlook” for capitalism. High returns on assets can, in principle, make everyone better off.

Actually, Prof Piketty’s prediction on the future path for what he calls “capital” (ie, the market capitalisation of household financial wealth plus housing) is a good deal more optimistic for asset returns than some asset pricing models would imply. These models suggest that asset markets today are “expensive”, so future returns are predicted to be below average. Prof Piketty disagrees.

The generation of wealth in Prof Piketty’s framework follows the steady state path in Robert Solow’s classic 1956 growth model. You cannot get much more conventional than that, especially since Prof Solow himself says that “Piketty is right”. As Prof Solow explains in simple English, the steady state wealth/income ratio in Piketty’s model is equal to s/g (where s is the net savings ratio and g is real growth in national income). Prof Piketty shows that this simple relationship appears to explain both the rise in global wealth since 1980, and the pecking order among major countries, rather well.

Crucially, he sees the rise in wealth in recent decades as a return to normal after capital was destroyed by the wars in the middle of the last century. Rather than being an aberration that has taken capital to unsustainably high levels, he views it as part of a fundamental process that is deeply embedded within capitalism.

He also thinks that this process is likely to continue well into the future. His explanation centres on the future path for g, which he predicts will fall as population growth and productivity growth slow [2]. Since g is in the denominator of the Solow equation, a drop in g results in a higher wealth/income ratio in steady state.

A key question for investors is whether this rise in the wealth/income ratio would impact total returns on financial assets. Prof Piketty addresses this somewhat obliquely. His relationship does not track total wealth or real wealth, only wealth/income. If income growth slows, the ratio may rise without total wealth rising. Also, his definition of wealth, quite rightly, includes housing, which he sees as particularly important in recent decades.

This can lead to many short-term distortions. As a broad generalisation, though, it seems likely that, if Prof Piketty is right about the future of “capital”, then returns on financial assets in general, and risk assets in particular, will probably be very attractive for investors.

So is he right? The most serious criticism of his theory comes from Per Krusell and Tony Smith, who have made waves in academia by suggesting that the correct expression for the wealth/income ratio should include depreciation on the capital stock (d). Therefore the expression should be s/(g+d), not s/g. This increases the denominator, and therefore reduces the wealth/income ratio in steady state [3].

The Krusell/Smith criticism seems justified [4] but it could still be consistent with a large rise in the wealth/income ratio from here, especially if Prof Piketty is right about the variable that is really central to his entire case, the rate of return on capital (r). He argues that the real pre-tax rate of return has been about 4 per cent since the dawn of time, and he thinks that this is likely to continue into the future, even if g slows sharply.

So the key, in his mind, is whether we can expect r to be significantly greater than g indefinitely.

The bottom line….

Assume for the sake of argument that the real rate of return on capital, r, is close to 4 per cent, as Prof Piketty predicts, and further assume (realistically) that financial assets and housing wealth are similar in scale, and that both produce the same real returns. If half of financial assets are bonds and the rest are equities, and (as now) the real return on bonds is zero, then the real return on equities would need to be as high as 8 per cent, despite today’s high stock market valuations.

That is all very back-of-the-envelope, and is not taken directly from Prof Piketty’s work, but it is why I am making the shorthand claim that “Piketty is bullish”. In fact, if he is not bullish about asset returns, then some of his pessimism about the future of wealth inequality probably falls away.

Finally, though, let us circle back to the real rate of return on capital. Can it really stay indefinitely about 4 per cent, as Prof Piketty suggests, at a time when central banks are setting interest rates at zero, and when the growth rate, g, is slowing down? Boiled right down, he himself says that this is his central claim. But in modern textbook economic models, while the rate of return on capital can remain higher than g in the long term, it is likely to decline when g declines.

Prof Piketty denies that this will be the case, and it is on that claim that his conclusions — whether they should be described as “optimistic” or “pessimistic” — largely rest.

Thomas Piketty has produced an empirical tour de force, but his underlying theory is more controversial [5]. Furthermore, as I have argued previously, there is a different explanation for the empirical facts of recent decades, combining secular stagnation, monetary expansion and some traces of Austrian economics. Prof Piketty’s “inexorable” rise in wealth is less inexorable in these alternative models.

>>> What to look at today - 23rd of December 2014

US Market Closed higher, Investors looking for Equities exposure, favoured Big Caps...Healthcare was weak after Gilead Hepatitis C News... energy sector traded in negative territory throughout the day, pressured by a renewed drop in oil and natural gas prices. WTI crude futures dipped 3.3% to $55.27/bbl while natural gas futures, hit with forecasts for warmer winter temperatures ahead in the northeast, plunged 8.2% to $3.18/btu...Commodities in general were weak on Monday with a stronger dollar pressuring some of the action. To that end, gold futures slipped 2.0% to $1172.60/troy ounce; meanwhile, copper futures fell 0.4% to $2.87/lb...Volume were lighter but still decent for this time of the year @ 772mil shares...VIX @ 15.25 -7.52%...US After Hours VNDA +19% on Fanapt News...Despite new highs in the US indices, Asia indices are trading with a more subdued tone. Materials in Australia and Shanghai are leading the decliners, even though mainland financials remain bid... In Chinese press, a researcher with the PBoC called for the govt to support further easing of policy via a RRR cut. Separately, a PBoC survey showed 91.5% of bankers expecting monetary policy to be "moderate" or "somewhat loose" in next quarter, higher from 86.6% this quarter. A Conference Report on China for the month of November rose 0.9%, but resident economist noted that real estate activity continues to deteriorate, and manufacturing and industrial output both showed significant weaknesses in November as well. Also of note, PBoC decided not to inject liquidity via repos despite the rising short-term demand for funds. Shanghai Composite fell nearly 3% in the opening hour before paring much of those losses going into the afternoon break...Nikkei+0.08% Hang Seng -0.06% Shanghai -1.29%

RUB $55.25 RUB €67.58 Crude WTI $55.69 Crude Brent $60.24

Eur$ 1.2232 S&P +0.11% EuroStoxx +0.38% Dax +0.35% SMI +0.40%

Macro :
- ECB's Hansson (Estonia): Sovereign bond purchases are 'borderline', and ECB must determine whether or not that would be considered illegal Govt financing
- Russia Adds to Gold Reserves in November as Ukraine Cuts: IMF

Keep an eye on :
- European Oil : S&P Takes Various Rating Actions on European Oil Majors
- ACS SM : ACS-Led Consortium Wins EU174m Galicia Project: Expansion
- AFR LN : Afren suitor SEPLAT advised by RBC and Citi on bid approach
- ALO FP : MORE: Alstom Paid $75m in Bribes to Secure $4b in Projects: DOJ, Alstom CEO ‘Deeply Regrets’ U.S. Bribery Problems
- PEL IM : Banca Etruria Plans to Reduce 410 Jobs in Cost Cutting Program
- BKIA SM : Bankia expect to pay cash dividend in 2015 - Cinco Dias
- BMPS IM : Monte Paschi Sells EU380m Bad Loan Portfolio to Fortress
- BMW GY : BMW to Replace Driver-Side Front Airbag on Certain Models
- BO DC : Bang & Olufsen Chairman Says Firm May Need Partners: Berlingske
- CA FP : Carrefour, Cora/Supermarches Match Sign a Purchasing Agreement
- CABK SM : CaixaBank faces EUR 3bn capital shortfall if ECB changes regulations
- CGL LN : Catlin Sale of Box Innovation May Bring Special Divided: UBS
- AFX GY : Carl Zeiss Signs Deal to Collaborate With Oraya: Reuters
- CBK GY : Commerzbank’s Eurohypo to Leave Bank Association: Handelsblatt
- CNP FP : CNP Assurances Sells 50% CNP BVP Stake to Barclays Bank
- DMM SM : Damm Gets Backing from 5 Banks for Bid to Delist: Expansion
- EO FP : Faurecia Fined EU2m by French Regulator Over 2012 Guidance
- GTO NA : Gemalto to Issue Up to 5% Capital Over 5 Years, CEO Piou Exercises Options, Buys 21,000 Shares: Filing
- MAERSKB DC : Maersk Reviews Oil Strategy as Price Falls, CEO Tells Politiken
- NOVN VX : Novartis Says Alcon Treatment Travatan Gets EU Approval
- NUO NA : Cargill Says It Is No Longer Pursuing Purchase of Nutreco-->, Nutreco Takes Note of Cargill Announcement
- PTC PL : Portugal Telecom SGPS Holds 39.73% of Oi: Regulatory Filing
- RNO FP : Russia Considers Changing Car Rebate Program in 2015: Vedomosti
- SCYR SM : Sacyr Creditors Set Interest Rates of as Much As 7.5%: Expansion
- HO FP : Thales Signs EU1.5b Credit Facility With 15 Banks
- UNA NA : P&G Reports Sale of Camay & Zest Brands to Unilever; No Terms

>>> Cargill no longer pursuing acquisition of Nutreco

Cargill no longer pursuing acquisition of Nutreco

Cargill has concluded it will no longer pursue an acquisition of Nutreco. In reaching this decision, Cargill considered all relevant facts, including the attractiveness of acquiring Nutreco relative to alternative potential investments.

Cargill remains committed to building further its global animal nutrition platform through both organic investment and acquisitions.

>>> F2i holds exclusive talks with Ardian over sale of 49% stake in F2i Aeroport

F2i holds exclusive talks with Ardian over sale of 49% stake in F2i Aeroporti

F2i, the Italian infrastructure fund, has opened exclusive talks with private equity fund Ardian for the sale of a 49% stake in F2i Aeroporti, the vehicle that holds F2i's airport assets in Italy , reported Italian language daily Milano Finanza. The report cited a decision by F2i's board of directors made yesterday 22 December.

The report said that Ardian is being advised by Societe Generale.

The item added that the other two bidders are Deutsche Bank and IFM.

F2i Aeroporti is valued at EUR 800m, according to the report.

As previously reported, F2i Aeroporti holds airport assets with an EBITDA in 2013 of EUR 254m and revenues of EUR 1bn, while debt stands at EUR 545m.

Milano Finanza daily edition

(BFW) Cargill Says It Is No Longer Pursuing Purchase of Nutreco


BN 12/23 02:32 Cargill Abandons Race for Feed Supplier, Leaving Field to SHV
CO1 12/22 22:59 Cargill Inc: Cargill no longer pursuing acquisition of Nutreco
BFW 12/22 23:04 *CARGILL SAYS IT IS NO LONGER PURSUING ACQUISITION OF NUTRECO
BN 12/22 23:03 *CARGILL SAYS IT IS NO LONGER PURSUING ACQUISITION OF NUTRECO
BN 12/22 23:01 *CARGILL SAYS IT CONSIDERED ALL `RELEVANT FACTS'
BFW 12/22 23:00 *CARGILL INC: CARGILL NO LONGER PURSUING PURCHASE OF NUTRECO
BN 12/22 22:59 *CARGILL INC: CARGILL NO LONGER PURSUING PURCHASE OF NUTRECO

Cargill Says It Is No Longer Pursuing Purchase of Nutreco
2014-12-22 23:06:21.320 GMT


By Vivek Shankar
(Bloomberg) -- Cargill says it remains committed to
buidling global animal nutrition building through organic
investment and acquisitions.
* NOTE: Dec. 5, Nutreco Says SHV Offer Has High Deal Certainty
for Shareholders Link

Link to Statement:Link
Link to Company News:{3091Z US <Equity> CN <GO>}
Link to Company News:{NUO NA <Equity> CN <GO>}
Link to Company News:{SHV NA <Equity> CN <GO>}

For Related News and Information:
First Word scrolling panel: {FIRST<GO>}
First Word newswire: {NH BFW<GO>}

To contact the editor responsible for this story:
Vivek Shankar at +1-415-617-7169 or
vshankar3@bloomberg.net

>>> US After Hours Summary: VNDA +19% on US and Canadian rights to

After Hours Summary: VNDA +19% on US and Canadian rights to Fanapt

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings:  N/A

Companies trading higher in after hours in reaction to news:  VNDA +22.2% (to regain US and Canadian rights to Fanapt; Novartis (NVS) to purchase $25 million of Vanda common stock), OSIR +3.8% (announced that it has entered into an exclusive, worldwide partnership with Stryker Corp (SYK) for the commercialization and development of Osiris' viable bone matrix tissue form), CHK +2.9% (announced the closing of its asset sale to Southwestern Energy Co for net proceeds of $4.975 bln; BoD has authorized a $1 bln common stock repurchase program), PRLS (not trading post-halt) following announcement that co will be taken private for $7.00 per share.

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: SCS -5.1%

Companies trading lower in after hours in reaction to news:  N/A 

>>> Asian Update

Asian Mid-session Update: Shanghai volatile as investors take profits; New Zealand trade deficit shrinks


***Economic Data***
- (CN) CHINA NOV CONFERENCE BOARD LEADING ECONOMIC INDEX M/M: 0.9% V 0.8% PRIOR
- (NZ) NEW ZEALAND NOV TRADE BALANCE (NZD): -0.2B V -0.6BE; 5th month of deficit
- (NZ) New Zealand Nov M3 Money Supply Y/Y: 5.8% v 5.5% Prior

***Index Snapshot (as of 03:30 GMT)***
- Nikkei225 closed, S&P/ASX -0.8%, Kospi -0.1%, Shanghai Composite -0.7%, Hang Seng +0.2%, Mar S&P500 +0.1% at 2,073

***Commodities/Fixed Income***
- Feb gold +0.2% at $1,198, Jan crude oil +1.1% at $57.78/brl, Copper -0.1% at $2.89/lb
- (CN) PBoC won't conduct open market operations (OMO) in today's session (8th consecutive halt)
- (CN) China 7-day repo rate opens at 5.48%, down from 6.17% previous close (largest decline since Apr)

***Market Focal Points/Key Themes/FX***
- Despite new highs in the US indices, Asia indices are trading with a more subdued tone. Materials in Australia and Shanghai are leading the decliners, even though mainland financials remain bid. In the currency market, AUD is down less than 20 pips from the open around $0.8115 contained to a narrow range, NZD/USD is marginally positive around $0.7740, and USD/JPY is consolidating a 5-day rebound above ¥120 handle.

- New Zealand Trade figures are the most notable economic data for the session, printing its 5th month of deficit but a narrower one than expected. A closer look at the components show smaller than expected import volume, even as Exports to China and Australia are down 44% and 11% y/y. Exports of dairly are also off by 27% at NZ$1.23B.

- In Chinese press, a researcher with the PBoC called for the govt to support further easing of policy via a RRR cut. Separately, a PBoC survey showed 91.5% of bankers expecting monetary policy to be "moderate" or "somewhat loose" in next quarter, higher from 86.6% this quarter. A Conference Report on China for the month of November rose 0.9%, but resident economist noted that real estate activity continues to deteriorate, and manufacturing and industrial output both showed significant weaknesses in November as well. Also of note, PBoC decided not to inject liquidity via repos despite the rising short-term demand for funds. Shanghai Composite fell nearly 3% in the opening hour before paring much of those losses going into the afternoon break.

***Equities***
Market Snapshot (as of 03:30 GMT):
- Feb gold -0.3% at $1,177/oz, Feb crude oil +1.7% at $56.20/brl, Mar Copper flat $2.87/lb

US markets:
- PRLS: To be acquired at $7.00/shr in cash by Mobius Acquisition LLC; +24.9% afterhours
- VNDA: To regain US and Canadian rights to Fanapt; +17.6% afterhours

Notable movers by sector:
- Materials: Zijin Mining 601899.CN -4.2% (shareholder cuts stake); Kingsgate KCN.AU -5.9% (shareholder cuts stake)
- Energy: Sundance Energy SEA.AU -13.1% (2015 production guidance)
- Industrials: BYD Corp 1211.HK +2.7%, Geely Auto 175.HK +1.6%, Great Wall Motor 2333.HK +4.2% (Russia Ruble recovers 6%); AVIC International Holding HK 232.HK +24.2% (Li Ka Shing raises stake)

FT : Opec leader vows not to cut oil output even if price hits $20

pec will not cut production even if the price of oil falls to $20 a barrel, the cartel’s de facto leader said, spelling out a dramatic policy shift that will have far-reaching implications for the global energy industry.
In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up Opec’s traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel’s market share at all costs.

“It is not in the interest of Opec producers to cut their production, whatever the price is,” he told the Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.”
He said the world may never see $100 a barrel oil again.
The comments, from a man who is often described as the most influential figure in the energy industry, marked the first time that Mr Naimi has explained the strategy shift in detail.
They represent a “fundamental change” in Opec policy that is more far-reaching than any seen since the 1970s, said Jamie Webster, oil analyst at IHS Energy.
“We have entered a scary time for the oil market and for the next several years we are going to be dealing with a lot of volatility,” he said. “Just about everything will be touched by this.”
Analysts say that Saudi Arabia is throwing down the gauntlet to all the high-cost sources of crude — from the oil sands of Canada and US shale to deepwater Brazil and the Arctic — in an attempt to face down the threat they pose to its market share.
Mr Naimi said that if the kingdom reduced its production, “the price will go up and the Russians, the Brazilians, US shale oil producers will take my share”.
Oil has slumped by nearly 50 per cent since mid-June amid a massive supply glut fuelled by surging US shale output, combined with weakening demand for crude in Europe and Asia.
In the past, Opec has cut production when prices fall, such as during the 2008 financial crisis. But at the cartel’s meeting in Vienna last month, members held output steady at 30m barrels a day, sending prices into a tailspin.

The price plunge has thrown the economies of big oil exporters like Russia and Venezuela into disarray and forced oil companies across the world to rewrite their investment plans.
But it could prove to be a major boon for the global economy. The International Monetary Fund said on Monday that a prolonged price slump could boost global growth by up 0.7 per cent in 2015 and 0.8 per cent in 2016. China would be the biggest beneficiary, with its GDP boosted by up to 0.7 per cent in 2015 and 0.9 per cent in 2016.
Oil prices fell further on Monday as markets digested Mr Naimi’s remarks. Brent crude, the international oil marker, was down $1.08 to $60.30 a barrel, after falling as low as $59.84 in afternoon trading. It is now hovering at five-and-a-half year lows.

In the MEES interview, Mr Naimi said Saudi Arabia and other Gulf oil producers would be able to withstand a long period of low crude prices, largely because their production costs were so low — at only about $4-$5 a barrel.
But he said the pain will be much greater for other oil regions, such as offshore Brazil, west Africa and the Arctic, whose costs are much higher.
“So sooner or later, however much they hold out, in the end, their financial affairs will limit their production,” he said.
“We want to tell the world that high efficiency producing countries are the ones that deserve market share,” said Mr Naimi added. “If the price falls, it falls . . . Others will be harmed greatly before we feel any pain.”
The bluntness of Mr Naimi’s message took even seasoned Opec observers by surprise. “I’m more bearish than most people looking at the oil price, but even I am stunned how aggressive his comments are about this radical departure from policy,” said Yasser Elguindi of Medley Global Advisors.