At the end of week one of the Trump administration, Mohamed El-Erian, the chief economic adviser at Allianz, has taken a stab at describing the new President’s approach to economic policy, and I think he gets it about right. Trump has put higher growth and greater job creation at the top of his agenda, but rather than pursuing a free-market approach like all his Republican predecessors, he’s adopted an “import-substitution-plus” approach that has “elements of an industrial policy.”
The strategy, in El-Erian’s words, combines both “macro” and “micro” efforts. At the macro level, it’s a push for deregulation, tax reform, infrastructure spending, and changing incentives to favor domestic production. At the micro level, it’s using his bully pulpit to persuade individual companies and to advance specific projects.
Will this work? As El-Erian notes, conventional economists tend to dismiss the effects of such “micro” measures as too small to matter. But he believes the “signaling effect could be consequential – through their impact in altering narratives, expectations and behaviors at the more general level. This effect is turbocharged by the president’s repeated emphasis on jobs and the active use of a range of communication tools, including more informal ones such as Twitter.”
As I’ve written before here, Trump is taking an extreme “carrot and stick” approach to negotiating – more like filet mignon and a howitzer – by both threatening 35% tariffs for offenders, and promising “massive” tax and regulatory benefits to those who fall in line. CEOs have little choice but to respond.
Overall, El-Erian says, the approach bears some resemblance to growth models that have been pursued at times in the past by countries like Argentina and Brazil. The unknown is how such a dramatic shift in policy by the country “at the core of the international monetary system” will affect other countries, and the overall global trading system.
For the moment, markets seem content. After the Dow broke 20,000 yesterday, Asian markets rose to their highest level in 3 ½ months.
You can read El-Erian’s full commentary here. More news below.
• J&J Pays up for Actelion
Johnson & Johnson finally persuaded Jean-Paul Clozel to hand over the keys to Swiss-based Actelion, Europe’s biggest biotech company. In the end, it had to raise its original offer of $27 billion by 11% to $30 billion. J&J also had to agree to spin off the R&D unit into a separate company to be listed in Switzerland and run by Clozel, allowing him to continue his passion for early-stage drug development. J&J is using its offshore cash to fund the deal, proving that promises of tax cuts aren’t the be-all and end-all of long-term strategic planning.
• An Infectious Optimism
The Dow Jones Industrial Average closed above 20,000 for the first time ever, forcing CNBC and Bloomberg TV commentators to find something else to hyperventilate about. While Dow 20k is just a number like any other, it’s worth noting that the U.S.’s optimism is infectious. The Euro Stoxx 50 is at a 14-month high, the FTSE 100 at an all-time high, Japan’s Nikkei at a three-month high and Brazil’s Bovespa at a six-year high, to name but four. The J&J/Actelion deal has ratcheted up M&A-based speculation this morning, but it’s clear that for large-cap companies across the world, investors are expecting a rapid trickle-down from the expected acceleration in U.S. growth.
• EBay’s Tax Gain Puts Gloss on a Solid 4Q
Ebay shares surged nearly 9% in after-hours trading after the company reported a fourth straight rise in quarterly revenue and booked a $4.6 billion tax gain from reorganizing its international entities. That more than offset the slightly disappointing guidance it gave for the first quarter of 2017. The figures bolstered confidence that the revamp of its site, coupled with some judicious acquisitions in the ticketing sector (notably StubHub), is paying off. Gross merchandise volume, the total value of all goods sold on its sites, rose 2.2% to $22.3 billion in the key holiday quarter.
• Exxon’s Board Gets a Climate Scientist
While the new President was ordering the Environmental Protection Agency to drop its warnings about climate change, ExxonMobil quietly appointed Susan Avery, a prominent climate scientist, to its board. Avery, who used to head the Woods Hole Oceanographic Institution, told a conference in 2014 that “Clearly, climate science is telling us to get off fossil fuels as much as possible.” Her appointment satisfies a demand from shareholders at their last annual meeting. The company faces ongoing probes as to whether it knowingly concealed the risks of climate change to its business model.
FT, metered access
Around the Water Cooler
• Harvard’s Insiders Aren’t Best in Class
Harvard said it would pass the management of its entire $36 billion endowment fund to outsiders, after four years of disappointing returns from its in-house investment experts. Around half of the staff at Harvard Management Corp., the university’s main investment company, will lose their jobs. It wasn’t immediately clear to what extent HMC would change its investment strategy, in terms of allocating assets to private and public funds, or whether this would lead it to take a shorter- or longer-term view of its investments.
• RBS Ups Mortgage Mis-Selling Provision by $3.8 billion
Royal Bank of Scotland put aside another $3.8 billion to cover the cost of settling Justice Department claims against it for mis-selling mortgage-backed securities. That raises its total provision for the RMBS scandal to $8.3 billion. The DoJ had been rumored to be seeking up to $12 billion from it at the end of last year. Given that Deutsche Bank ended up settling for half of the $14 billion the DoJ initially wanted, Britain’s most scandal-plagued bank might reasonably hope that, if anything, it has now over-provisioned. Its shares rose 3.1% to an eight-month high.
• Xiaomi the Money, Zuck
Hugo Barra, who announced his departure from Chinese smartphone unicorn Xiaomi at the weekend, is heading to Facebook to take charge of its virtual reality business. Facebook’s CEO Mark Zuckerberg said Barra “shares my belief that virtual and augmented reality will be the next major computing platform. Separately, The Wall Street Journal reported that Facebook will make further changes to its Trending Topics box to ensure that only stories reported by multiple credible sources appear there. It hopes the changes will help prick the ‘filter bubble’ that it has helped create by tailoring its algorithm to users’ individual profiles.
• Jose Cuervo Climbs the Worry Wall
After two postponements since Nov. 9, the world’s largest maker of tequila finally confirmed the price range for its IPO. The deal will raise up to $700 million, less than an originally mooted $1 billion but still a decent warchest for a planned global expansion. The crucial development was the agreement of Singaporean sovereign wealth fund Temasek to anchor the deal, taking 20% of the offering. If broader market rallies can sustain themselves. 2017 may be the IPO market’s year of plenty that followed the Great Dearth of 2016, when IPO volumes fell over 30%.
Summaries by Geoffrey Smith Geoffrey.email@example.com;