We’ve been anxiously anticipating an increase in U.S. interest rates for years now, but instead of going up, they keep going down. Yesterday, they hit a new bottom. Mohamed El-Erian, chief economic adviser to Allianz, told CNBC we should brace ourselves for a 10-year Treasury rate that falls below 1 percent.
El-Erian blames that on Brexit. “While we control our economic destiny, we no longer control our yield curve,” he said. “Our yield curve has been captured by Europe.”
But former Treasury Secretary Lawrence Summers, writing in the Washington Post, questions whether we do, in fact, control our economic destiny. The Fed has been arguing that growth and rising rates are just around the corner. Summers has been pushing an alternative thesis: “secular stagnation,” a persistent excess of supply and weakness in demand that isn’t correcting itself and can’t be addressed by monetary policy.
It may be time to give Summers’ thesis a second look. Something is seriously amiss in the global economic machinery. Brexit chaos only exacerbated the problem, it didn’t cause it. Take a look at G7 10-year bond yields over the last 30 years if you disagree: nearly $12 trillion in government debt worldwide now yields less than zero, but over $10.4 trillion was already doing so before June 23. It would help if policy makers – and those vying for political leadership – would start seriously exploring what to do about it.
More news below.
• Danone Buys Whitewave
Danone is buying WhiteWave Foods Co in a deal that values the U.S. organic foods producer at $12.5 billion, including $2.5 billion in debt. Apart from playing to a now familiar narrative of Big Food bolting on acquisitions in the organic and healthier segments of the market, the deal is also a notable signal of intent from the world’s largest yoghurt maker, which has scarcely been seen in the M&A market since a series of richly-valued deals, often in emerging markets, before the 2008 crash. The deal will nearly double Danone’s business in North America, which will in future account for around 22% of group revenue, compared to a relatively modest 12% at the moment. It is the first major transaction by Emmanuel Faber who took over as Danone’s chief executive in 2014. Another interesting aspect is that the deal is 100% cash, financed by debt. The fact that the ECB is now buying corporate bonds, having virtually run out of sovereign bonds to buy, may have something to do with that.
• Strong ISM Survey Calms Markets
Financial markets have stabilized overnight thanks to a stronger-than-expected ISM survey and hopes for fresh stimulus measures from the Chinese central bank. European stocks appear to have ended a three-day losing streak, while bond yields have bounced a little from all-time lows posted yesterday. Gold is flat and oil futures are back above $48/barrel. However, the economic data from Europe data this morning are disappointing, with German industrial output falling well short of expectations, after equally disappointing new orders data on Wednesday. Signs of stress are still evident: seven funds accounting for around 60% of U.K. retail investments in commercial property have now been frozen, according to Deutsche Bank analysts. Meanwhile, Italian bank stocks are among the few stocks in Europe missing out on the bounce.
• (Tory) Party Like It’s 1992
The one asset that isn’t getting much respite is the pound sterling, which yesterday hit its lowest level against the dollar since Margaret Thatcher took on the country’s miners. Allianz’s El-Erian, who obviously has more than a bit of skin in the game judging by his media blitz, writes today that it may fall to parity with the dollar if the U.K. doesn’t quickly come up with a “Plan B” that keeps free trade with the EU in place. It’s currently hovering just above $1.30. Part of the problem appears to be that the current generation of senior Tories is complacent about the decline, due to old memories of how the pound’s exit from the Exchange Rate Mechanism in 1992 sparked a long-lasting period of economic growth. They forget that a 30% drop in 2008 failed to produce anything similar. Andrea Leadsom, who came second in the first leadership ballot on Tuesday, reassured this morning that her priority will be to secure tariff-free trade with the EU, but she too fell into the trap of calling the pound’s drop “good for exports.” Scotland becoming another country might also be ‘good for exports’, but that doesn’t make it good for overall well-being.
• Samsung Roars Back
In a global market for smartphones that is reaching saturation, this is bad news for somebody. Samsung said its operating profit in the second quarter rose 17% to around $7 billion, its highest level in two years and 4% above forecasts, thanks to its well-received new Galaxy S7 phone. Samsung shipped about 16 million Galaxy S7s in April-June, with a higher-priced curved-screen version outselling its flat-screen counterpart and boosting margins. It isn’t clear yet whether that growth will have been at the expense of Apple, or of Chinese rivals in lower-value market segments like Xiaomi and Huawei.
Around the Water Cooler
• Blair Damned in Iraq War Report
A long-delayed report into the U.K.’s role in the Iraq War damned then-Prime Minister’s Tony Blair for rushing into the conflict before exhausting peaceful options, for over-committing to a U.S. administration already contemplating invasion in the summer of 2002, for failing to equip the army properly and for ignoring the Attorney-General’s urgings to assure a proper legal basis for going to war. It cleared Blair of falsifying the flawed intelligence dossier that he had relied upon to justify the war to parliament, but Blair may still face criminal prosecution for gross misconduct in public office, according to some U.K. lawyers. Of more importance to today’s political environment is that the report strengthens the position of Labour leader Jeremy Corbyn, who opposed the war, against the europhile Blairite lawmakers who are trying to oust him. That will make it harder for Labour to fight an effective rearguard action to stop the Conservative government taking the U.K. out of the EU.
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• Carlson Sues Fox, Alleging Sexual Harassment
Gretchen Carlson sued Fox News Chairman and CEO Roger Ailes, alleging repeated sexual harassment and claiming that she was fired after complaining about the 75 year-old’s behavior. Carlson was moved from her position hosting the widely watched Fox & Friends in 2013 to her own show in an off-peak slot, and also cites “severe and pervasive sexual harassment” by co-host Steve Doocy. The former media consultant to Presidents Nixon, Reagan and Bush senior released a statement calling the allegations “false and defamatory,” saying that the decision not to renew her contract was due to low ratings. Fox said it had “full confidence” in Ailes. It’s not the first time Ailes has faced such claims—a biography published in 2014 claimed that Ailes had offered a producer a raise if he would sleep with her.
• Trump’s Fundraising Kickstart
Donald Trump’s fundraising campaign finally switched into gear in June, as the presumptive GOP nominee raised over $50 million (according to Republican Party sources), of which $3.8 million came from the candidate himself. That’s more than 16 times what Trump raised in May, but it’s still less than half of what Mitt Romney raised in June 2012, reflecting the candidate’s difficult relationship with both the GOP establishment and its traditional backers in business. Trump has yet to run a general election ad, and is leaving the work of building a ground effort to the Republican National Committee, which is the largest beneficiary of the money jointly raised through the victory effort. Hillary Clinton, meanwhile, has run tens-of-millions of dollars in television spots in battleground states and has hundreds of field staffers on the ground. Trump is paying his first visit to rank-and-file congressional Republicans Thursday, in a series of closed-door meetings of the House and Senate GOP caucuses.
• Go and Make Your Robot Tidy Your Room
And finally, an uplifting interview from our series “VC to VC”, in which Rob Coneybeer, an early investor in Nest, among others, gives some strikingly vivid predictions on how AI will permeate our daily lives in future. Coneybeer predicts that today’s physical environments will stay largely recognizable, even while embedded technology revolutionizes the way we experience them. Robots, he says, will unobtrusively clean our homes and fold our laundry, within around 20-25 years from now. You can decide for yourselves whether it’s still worth the breath and energy you’re expending on telling your kids to keep the place tidy today. They’ll never see the issue the way you do now. Maybe Coneybeer can his friends can back a venture that programs humanoid robots to shake stained clothes and broken toys at them with a half-sad, half-reproachful look. Now that would be a valuable labor-saving advance…