Economics & Finance

Dividend Cuts and Interest Rates

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Recently I wrote about how Interactive Brokers was offering to lend money at 1.25% in order to purchase stocks yielding 5% or more in dividends. I was struck by the low rate that they were able to offer as interest and the fact that there was a large universe of large companies offering such high dividend payouts (and not just companies that had a stock price decline with a dividend cut yet to follow so it was unusually high relative to the stock value).

To give Interactive Brokers some credit, the ad was kind of “tongue in cheek” in that it was made to look like it was written on a napkin like the classic business plan but there were enough elements there to get me thinking about what an odd state of affairs this represented.

Just recently this model started coming under siege. The Fed recently began tightening interest rates, increasing the discount rate to 0.75% from 0.5%. While the Fed has been denying that this is part of a long term policy shift, the markets have started to feel otherwise, as markets went down and yields increased on government debt. This won’t directly impact the 1.25% that they are able to borrow for on the “napkin” today, but it seems to be trending that way, even if this is just a first step.

On the other side, 2 large European firms just cut their high dividends. Daimler Benz (DAI), manufacturer of Mercedes autos, suffered a loss and canceled their dividend, leading to a drop of 4.6% in their stock price in one day. Societe Generale, a large French investment bank, cut their dividend from $1.2 Euros to $0.25 Euros (a drop of 79%) and their stock also fell 7.2% in a day.

The question is – how can companies pay out such high dividends in a sustainable manner when there isn’t much growth in the world economy and many of them are in mature industries? While 2 stocks don’t constitute a balanced statistical survey, they show that dividends are a function of profits and long-term profit view and to talk about them in an “historical” view is backwards.

The other side of this is that investing for yield in such a volatile area as stock prices shows that not only did the long term value of the income stream from dividends drop significantly (in the case of Daimler it dropped to zero, and for Societe it dropped by 79%) but then you can also see the impact on the underlying value of the shares, which dropped 4.6% and 7.9% in ONE DAY.

Cross posted at LITGM and Trust Funds for Kids

The Makers vs the Talkers

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[Note :I wrote this as a comment to this Victor Davids Hanson post but it ran long enough that I think I will make it an actual post.]

Way back in the ’80s the columnist William Raspberry wrote about a conversation he had at a Washington party.

Looking around at the collection of lawyers, bureaucrats, journalists, academics, etc., he turned to a friend and asked:

“Do you know anybody who makes anything?”

It had suddenly occurred to Raspberry that his entire professional and social circle was comprised of people who more or less did nothing but talk for a living. He had no personal contact with anyone who participated in the creation of any material good. After asking around, he found that he didn’t know anyone who even made things as a hobby. He said, “I couldn’t even find anyone who had made so much as a bookcase.”

That little newspaper column opened my eyes up to the most profound division in modern society. It is not rich vs. poor or ethnic-group/race A vs. ethnic-group/race B or male vs. female etc. It is the division between those who create the real physical wealth of our civilization and those who merely manipulate others by persuasive communication.

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Closing Time?

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Here’s Citigroup, with 10 mega-themes that spell the end of Western dominance

On the other hand, here’s Joel Kotkin: Complaints of China’s ascent and the U.S.’ collapse are overly pessimistic

I’m reminded of a point that was made in a 1930s book on military strategy (edited by then-colonel George C Marshall: The enemy always has problems of his own of which you are unaware.

Not that China–still less India–is the enemy. Surely the economic development of the Far East is a good thing…indeed, it is wonderful that so many hundreds of millions of people have been rescued from desperate poverty, and surely it is good for us to have millions of more creative contributors to global economy. I’m more concerned with our own level of economic growth, and whether it can be sustained at a level necessary to deal with our problems without declining living standards and permanant long-term unemployment than I am with scorekeeping vis-a-vis China and India. Economically-dynamic countries should indeed be viewed as competitors, but also as customers, suppliers, and sources of knowledge and ideas. (For military as well as competitive reasons, relative position cannot be totally ignored, given the nature of the Chinese regime.)

So what say you? Who is more convincing, Citi or Kotkin?

(Kotkin link via Newmark’s Door)

Not Good

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Financial Times, 2/4:

Moody’s Investors Service fired off a warning yesterday that the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tougher action was taken to tackle the country’s budget deficit.

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Crucially, projections of the overall debt-to-GDP ratio for the US are seen as rising from 53 per cent in 2009 to 73 per cent in 2015 and 77 per cent by 2020. Moody’s, shopantibioticsonline however, says this understates the US debt level.

“Using the general government measure, including state and local governments as well as the federal government, which is used internationally, this ratio would be well over 100 percent in 2020.”

Mini-Book Review — Easterbrook — Sonic Boom

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Easterbrook, Gregg, Sonic Boom: Globalization at Mach Speed, Random House: 2009, 243pp.

Sonic Boom falls within the genre of the quick-reading airport business book. Using a series of places as exemplars (Shenzhen, Waltham MA, Yakutsk, Erie PA, etc.), the author shows how a globalized economy can create prosperity from swampland, and restore prosperity to Rust-Belt and 19th century industrial hubs. The writing is crisp and smooth. The manner is often witty, and occasionally wise-ass. It’s anything but turgid … which is a great relief from many of the “big think” books which come and go on the bestseller lists.

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