North America

Three interesting charts about the US

Another day in Argentina. There’s a general strike today (again), meaning no public transport and major inconvenience for most people. Faced with financial difficulties and a recession, the unions are doing their bit to make it worse. My kids are thrilled though. They got a day off school.

Meanwhile, President Mauricio Macri has legged it to New York. He’s got meetings at the United Nations, and is also supposed to be convincing investor groups that the worst is over in Argentina.

Right on cue, the head of the Argentine central bank, Luis Caputo, resigned today after just three months in the role. Caputo attributed the departure to “personal reasons”, which is the accepted code formulation, all around the world, for being fired but allowed a reasonably graceful exit.

Of course, I don’t know that’s the case. But it’s possible that the International Monetary Fund (IMF) made Caputo’s departure a condition of their amended credit package for Argentina. After all, he’s not been very consistent since he took the role (from one day to the next, Argentina swings from a free-floating currency to heavy intervention from the central bank).

Perhaps the timing, while Macri is in New York, is Caputo’s limited revenge for being pushed. Alternatively, Macri knows that Caputo has lost credibility. His departure could be part of the plan to reassure markets. Or maybe it’s just a good day to bury the news, while the strike is going on. But all this is just speculation on my part.

Meanwhile, I’ve come across a handful of interesting charts about the US that are worth sharing. There’s no particular theme here, but each provides an interesting snapshot of a specific area.

The first gives us a clue about how American workers are doing. We hear plenty about how the economy is growing and wages are rising. But inflation has been above target as well. Real wage increases – meaning ahead of price inflation – are now running at zilch (according to this chart from Grizzle).

At the same time, US corporate net debt levels are now the highest they’ve been since the late ‘90s, in relation to both equity (net assets) and total assets. As shown in the following chart from the Financial Times:

The important thing here is that it refers to net debt, meaning total debt borrowings less cash assets. Due to historical tax treatment, which penalised the repatriation of foreign profits, American multinationals often have big overseas cash assets offset with equally big domestic debts. So it’s the net figure that matters.

Also, it’s net debt relative to other balance sheet items (assets or equity). Absolute numbers are less relevant over long time periods.

Of course, interest rates are much lower now than in the late ‘90s. Ten year US treasury bonds yielded 6.5% at the end of 1999. They bottomed out around 1.4% in July 2016. Nowadays, the yield is back up to 3.1%, but that’s still way down on two decades ago. So perhaps this net debt burden isn’t a big deal. On the other hand, if rates continue to rise and normalise, interest costs will also increase, weighing on profits.

Finally, there’s no question that the US stock market holds a dominant position in the world. By market capitalisation it’s well above half of the planet’s stock markets.

Despite this, the number of companies listed in US markets has plummeted since the mid-1990s (having risen sharply prior to that). There were more than 8,000 listed companies in the US market in 1996. That’s now well below 4,500.

This reduction in investor choice points to corporate mergers and acquisitions outpacing new company listings. Companies have got bigger and bigger, less focused and more like the conglomerates of old.

It’s not necessarily a bad thing for investors, as there’s still plenty of choice for now. But increased concentration of corporate power probably has other ramifications, such as in the arena of political lobbying for regulations that favour the very biggest companies, and block new comers.

If that’s the case, it points to less economic dynamism over time. We’ll see. In the meantime, it’s a reminder that investors always need to be selective with their investments, and also adapt to the changing environment.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.