Sunday 17 March 2019

More on trade unions and how they are adapting

Useful material about how, in response to stricter legislation on using strikes to achieve goals, unions are now using the courts instead:

Barely a week goes by without a court case on workers’ rights. In a case last month supported by the gmb, a union, the appeal court upheld an equal-pay ruling against Asda, a supermarket. Next week a case begins in the high court, backed by the Independent Workers Union of Great Britain (iwgb) and involving the University of London, concerning the extent to which outsourced workers have collective-bargaining rights at the place where they work. Before long the iwgb will battle Uber in the Supreme Court over whether the ride-hailing firm wrongly classifies its drivers as independent contractors. Unions, it seems, increasingly see the courts as a good way to protect their members.

Britain used to subscribe to a model of industrial relations which Otto Kahn-Freund, an Oxford legal theorist, termed “collective laissez-faire”. The state offered few employment rights, but let unions and employers fight over pay and conditions. That suited the unions. The courts were stuffed with members of the bourgeoisie who would always rule in favour of capitalists. Better, the unions thought, to have the right to bargain collectively and to strike—which they did until the 1980s. Now they realise that litigation can yield results.

The state has also become more interventionist. Equal pay between men and women was legislated for in the 1970s. A national minimum wage was introduced in 1999. Britain’s accession to the European Economic Community in 1973 brought another set of employment rights, including more paid holidays. At the same time, governments from Margaret Thatcher’s on made it harder for unions to strike. The result was a fall in industrial action but a rise in litigation (see chart).

The iwgb, which was founded in 2012, embodies British trade unions’ new legalistic approach. The outfit, which has a handful of staff and little money but an indefatigable general secretary, Jason Moyer-Lee, is hardly averse to the odd strike or demo. Its tiny office in north London is filled with posters and placards. John McDonnell, the shadow chancellor, enjoys going to the iwgb’s rallies.

Yet the iwgb has had more impact in the courtroom. As well as Uber and the University of London, it has battled in hearings with Deliveroo (a delivery firm), Addison Lee (a taxi company) and CitySprint (another delivery firm). So far it has been fairly successful in its battle with Uber. Lower courts have found that Uber’s drivers are not independent contractors, implying that the firm needs to pay at least minimum wages and holiday pay.

The assumption behind unions’ legal strategy is that rulings translate into better conditions. In June 2018 a tribunal found that drivers for Hermes, a delivery firm, had been denied employment rights. In early February the firm offered somewhat improved terms. Mr Moyer-Lee argues that the union’s legal efforts against The Doctors Laboratory, a pathology company, have resulted in the firm’s couriers getting better conditions.

Yet often legal victories have little impact. In June 2018 Pimlico Plumbers was found by the Supreme Court to have wrongly denied rights, including holiday pay, to one of its engineers. The decision “has had zero impact on our business model,” says Charlie Mullins, the firm’s founder. “People are knocking down my door to come on board.” Other gig-economy firms have just tweaked employment practices to skirt round court judgments.

Many British workers find it hard to enforce their legal rights. In 2013 the government introduced hefty fees at employment tribunals, which explains the big drop in applications. unison, another union, challenged the fee rise and in 2017 the Supreme Court struck it down, yet rumours abound that the government wants to reintroduce high fees. And there is little scrutiny of employers who may be flouting the rules, with hmrc, the tax-collecting agency, lacking resources. Rights don’t mean much without a remedy.

China & Trade Balances

Strange though it may seem China is close to a trade deficit. This has wide-ranging implications - make sure you are aware of them:

That china sells more to the world than it buys from it can seem like an immutable feature of the economic landscape. Every year for a quarter of a century China has run a current-account surplus (roughly speaking, the sum of its trade balance and net income from foreign investments). This surplus has been blamed for various evils including the decline of Western manufacturing and the flooding of America’s bond market with the excess savings that fuelled the subprime housing bubble.

Yet the surplus may soon disappear. In 2019 China could well run its first annual current-account deficit since 1993. The shift from lender to borrower will create a knock-on effect, gradually forcing it to attract more foreign capital and liberalise its financial system. China’s government is only slowly waking up to this fact. America’s trade negotiators, meanwhile, seem not to have noticed it at all. Instead of focusing on urging China to free its financial system, they are more concerned that China keep the yuan from falling. The result of this myopia is a missed opportunity for both sides.

China’s decades of surpluses reflected the fact that for years it saved more than it invested. Thrifty households hoarded cash. The rise of great coastal manufacturing clusters meant exporters earned more revenues than even China could reinvest. But now that has begun to change. Consumers are splashing out on cars, smartphones and designer clothes. Chinese tourists are spending immense sums overseas (see article). As the population grows older the national savings rate will fall further, because more people in retirement will draw down their savings.

Whether or not China actually slips into deficit this year will be determined mostly by commodities prices. But the trend in saving and investment is clear: the country will soon need to adjust to a new reality in which deficits are the norm. That in turn means that China will need to attract net capital inflows—the mirror image of a current-account deficit. To some extent this is happening. China has eased quotas for foreigners buying bonds and shares directly, and made it simpler for them to invest in mainland securities via schemes run by the Hong Kong Stock Exchange. Pension funds and mutual funds all over the world are considering increasing their exposure to China.

But the reforms remain limited. Ordinary Chinese citizens face restrictions on how much money they can take out. If many foreign investors tried to pull their money out of China at once it is not clear that they would be able to do so, an uncertainty that in turn may make them nervous about putting large sums in. China is terrified of financial instability. A botched currency reform in 2015 caused widespread volatility. But the system the country is moving to, which treats locals and foreigners differently, promises to be leaky, corrupt and unstable.

Eventually, then, capital will need to flow freely in both directions across China’s borders. That is to be welcomed. People outside and inside China will benefit from being able to invest in more places. The need for freer capital flows will have the welcome side-effect of forcing China to reform its state-dominated financial system, not least so that it commands confidence among international investors. This in turn will mean that market forces play a bigger role in allocating capital in China.

You might expect America’s trade negotiators to welcome all of this, and urge China to free its financial system. Unfortunately they seem stuck in the past. Obsessed with the idea that China might depress its currency to boost exports, they are reportedly insisting it commit itself to a stable yuan. That is wrong-headed and self-defeating. Rather than fighting yesterday’s currency wars, America should urge China to prepare for the future.

Extension Material - connections across different parts of the economy

Great article selling shipping as an investment - note I am not advocating this, just showing you how many different aspects of the global economy come together in one place. This has got some very interesting elements - capital cycle, regulation, market failure, demand and supply, to name just a few.

Sir John Templeton used to quip that “People are always asking me where the outlook is good, but that’s the wrong question… The right question is: Where is the outlook the most miserable? Invest at the point of maximum pessimism.”

If you want deep value and a wide margin of safety then you have to be willing to venture where others won’t. Maximum pessimism is what creates the asymmetric bets where the risk then becomes time and not price, as Richard Chandler puts it.

Looking across global markets today there is perhaps only one industry that fits this bill. Where the outlook is beyond miserable and the stocks within it have either been dismissed by investors or just outright forgotten all-together. I’m talking about the shipping sector.

Take a look at the following charts showing the prolonged grinding drop in shipping rates. The Harpex Shipping Index has been in a steep rolling bear market for nearly a decade and a half.

The Baltic Dry Index is down to 645. It’s only been lower three other times in the past 35-years for which we have data. Once in 1985, then in 2015 and again in 2016.

Price action drives sentiment which in turn drives price action in a perpetual feedback loop. A decade plus of falling prices and negative investment returns has created a pretty fatalistic consensus towards the industry — which has, in turn, led to some pretty amazing prices…

Many shipping stocks now trade for less than half their liquidation value. And that’s using sale prices in the fairly active second hand purchase market.

This means that companies could liquidate their fleets and after paying off debt there’d be enough leftover cash that equity holders would more than double their money.

So to sum things up, we have (1) maximum pessimism which has driven (2) bargain prices which creates (3) a large margin of safety.

That’s pretty good, but now we need a catalyst.

The shipping industry is a notoriously cyclical industry which follows the classic Capital Cycle . Martin Stopford’s excellent book, “Maritime Economics”, notes that there’s been 23 shipping cycles going all the way back to 1743. Timing here is key. We don’t want to sit in a dead money trade for another 5-years when our capital could be going towards something that’s actually working for us.

Luckily, there’s a number of potential catalysts lining up that could make 2019 the year that the trend finally changes. These are:

A one-two regulatory punch
New banking regs leading to tighter financing and thus lower supply
Capital Cycle: supply and demand in deficit
China/India starting to buckle down on fighting pollution which means they need to import cleaner industrial fuel imports (ie, more shipping demand)

Let’s start with the one-two regulatory punch.

Last year shipping companies were forced to begin installing costly ballast-water treatment systems, thus raising the operating costs on an already struggling industry. And by next year, shippers will have to adhere to IMO 2020.

IMO 2020 is a new global regulation aimed at reducing airborne sulfur pollution by requiring shippers to reduce the sulphur limits in their fuel from 3.5% to 0.5%. There’s a number of ways for companies to reduce their sulphur output and all of them are bullish for the shipping industries’ supply and demand dynamics.

For instance, shipping companies can install scrubbers that will reduce the sulphur from burning bunker fuel. But, these scrubbers are expensive, which means less capital to deploy towards ordering new ships and paying down debt. Also, installation will require significant dock time which means there’ll be less ships on the water, which means a tighter supply market.

Another option, and this is likely to be the more popular one, at least initially, is for shippers to switch to low-sulfur marine gasoil.

But the issue here is that even with no change to the current pricing conditions, switching to marine gasoil will represent a substantial increase in fuel costs and fuel costs already make up the largest portion of a shipper’s operating costs.

According to Wood Mackenzie, shipping industry fuel costs could increase by $60bn next year. This would represent a jump in fuel expenses of around 50%.

In order to economize on fuel costs, ship charterers are likely to begin slow-steaming ships. Here’s the following on what this will mean from S&P Global Platts (emphasis by me):

The simplest way to curtail costs would be to reduce consumption via reducing speed.

"Reducing speed from 12 knots to 10 knots would effectively remove 17% of dry bulk shipping supply overnight," it said.

Ships older than 15 years of age, comprising about 142 million dwt or 17% of the existing fleet would come under maximum pressure and would become ideal candidates for scrapping, as their older engines are not able to burn LSFO.

"In 2020, you are going to have a supply shock either through slow steaming of the entire fleet or a combination of scrapping of some of the older ships and the balance of the existing fleet slow steaming," it said.

Then we have new banking regs.

Basel IV bank regulations mean that the traditional sources of financing for the shipping industry (ie, the credit they use to order more ships) are no longer available.

Under Basel IV, bank’s have to account for the volatility of the asset being loaned against. And, well, shipping is pretty volatile. This means that shipping loans are becoming more capital intensive. Gone are the days of 90%+ loan-to-value construction finance which led to the glut of yore. Now, many new vessel orders require over 30% in equity financing.

European banks, which have long been the primary lenders to the industry for the last 100-years or so, are either drastically reducing their loan books or exiting shipping finance all together.

Bear markets are always the authors of bulls. And it’s for reasons like the above as to why tight financing effectively means tight future supply and tight future supply means higher prices.

And this brings us to our next catalyst: The Capital Cycle.

Dry bulk shipping is an extremely capital-intensive business. With over 10,000 ships, each with an average 25-year lifespan, somewhere between 300-500 new vessels need to be built each year just to counteract natural attrition. That’s not even accounting for growth in demand.

According to Clarksons Research, the global bulk fleet is expected to grow by just 2.2% this year.

This will make 2019 the third consecutive year in which demand growth outpaced the growth in supply, putting the market in deficit.

And by the looks of the current orderbook, this deficit looks set to continue. The current orderbook at just 11% of the fleet, is at its lowest levels since the early 2000s. It takes approximately 2-years from the time of order for a ship to be delivered. So this means that a supply constrained market is practically guaranteed going forward.

And lastly, we have the growing importance of combating pollution in emerging markets.

Following China’s recent “Two Sessions”, Li Ganjie, the Minister of Environment and Ecology, declared that “It is necessary to maintain the strength of ecological and environmental protection” and there must be “no wavering, no relaxing” according to Trivium China. Li went on to say that four sources account for over 90% of particulates, with industrial emissions and coal burning the two worst offenders.

The industrial emissions are largely attributed to China’s dirty steel mills. These mills use iron ore that has a high sulphur and ash content. Recent changes in policy will require mills to use less pollutive materials going forward. This means that China will have to import “cleaner” industrial fuel sources (ie, iron ore and coal) from far away places, such as Brazil and Australia.

This is important because iron ore and coal account for over half of the global dry bulk trade (29% and 24% respectively). According to shipbroker Banchero Costa, “China remains very much at the centre of the action, estimated to account for 70 percent of global iron ore imports and 41% of the dry-bulk market all-together”.

Just to show you the outsized impact China has on the shipping market, see the chart below showing Chinese iron ore imports (orange line) and the Baltic Dry Index (blue line).

So the requirement for cleaner industrial fuels is a positive. But this chart also reveals the shipping industries’ achilles heel. China.

Where Chinese iron ore imports go, so too will the shipping industry.

And that’s where the near future for shipping stocks becomes less certain.

I’ve been writing for the last year about how China is slowing down. This slower growth is clearly visible in the data.

And this is putting downward pressure on global trade; hence the recent collapse in the Baltic Dry Index.

But I’m also expecting China to begin pump priming its economy for the 2021 centenary anniversary of the Communist Party in the second half of this year.

If that happens, then we should get a buoyed global market combined with a structurally tight shipping industry; one that appears to be rising from the trough of the capital cycle.

Throw in the secular rising demand from India crossing the Wealth S-curve and brighter days should be ahead for the industry.

If this ends up being the case then there’ll be oodles of money to be made. Not only do we have bargain bin prices currently but these companies also benefit from high operational gearing.

Shipping companies have extremely high fixed costs, so even a tiny uptick in charter rates flows directly through to their bottom lines. Plus, any upturn in the cycle will raise the value of the underlying fleets which are trading at depressed values. This kind of operational gearing combined with the currently low stock prices means that some of these shipping companies could earn their entire market cap in a single year once cash flows mean-revert.

This is why bull markets in shipping tend to be incredibly explosive.

Saturday 16 March 2019

Gender Pay Gap - Great analysis

The gender pay gap: are women getting paid less than men?

Woman holding a baby © Getty Images — Taking time out for childcare may explain much of the gender pay gap

Data on the gender pay gap would suggest that women are getting paid less than men. Does that mean sexism is rife in British society? It’s not quite as simple as that, says Simon Wilson.

What is a “gender pay gap”?

It’s the difference between the median hourly rate of pay for men, and the rate for women, expressed as a percentage of the men’s rate. So if, in a particular company, men are paid on average £30 per hour, and women are paid an average £27 per hour, the gender pay gap is 10%.

Government statisticians, and some media reporting of the issue, use the potentially confusing phrase “negative gender pay gap” to mean a pay gap in favour of women. Thus, if men are paid £30 and women are paid £33, that’s a “negative pay gap” of 10%. It’s important to distinguish the “gender pay gap” from “unequal pay” – ie, paying men and women different rates for the same job. This has been illegal since 1970.

What’s the current gap?

Since last year it’s been mandatory for all public bodies and private companies in Great Britain (but not Northern Ireland) that employ more than 250 people to provide gender pay-gap data to the government. They also have to publish details of the gender split in different pay quartiles and the proportion of men and women who get bonuses.

Last April, the first batch of this data showed an overall gap – in hourly median pay, including part-timers – of 9.7%. There were vast differences between sectors, with the biggest gaps in construction, finance, utilities, communication and education. High-street banks – with a lot of men in highly paid roles and a lot of women in the branches – reported massive gaps of up to 43.5% (at Barclays, which also reported that women earn 73.3% less in bonuses).

Data for this year must be sent in by 30 March (public bodies) or 4 April (private companies). Some has already been published, and shows the gap widening at a significant minority of firms/bodies (as many as 40%), but narrowing a bit overall, in line with the long-term trend.

What other data is available?

The other major source of information on the gap is the Annual Survey of Hours and Earnings (ASHE), published by the Office for National Statistics (ONS). (This survey is constructed from a 1% sample of HMRC data on all PAYE employees.) In 2018, the ASHE data shows a gender pay gap for full-time workers of 8.6%, a fall from 9.1% the year before. In fact, this rate has been falling steadily since the ONS first started measuring it in 1997, when it was 17.4%, and is now lower than ever. But the ONS figures also highlight a big difference between full-time and part time work.

Which is what?

Among part-time workers there is actually a small “negative” gap in favour of women (of about 4%). But, paradoxically, once those part-timers are factored in, the overall gap – ie, for all employees – widens to 17.9%.

The reason for this is that more women work in part-time jobs, which are lower paid (an average hourly rate is £9.36 compared with £14.31 for full-time jobs). This 17.9% gap is bigger than the figure for staff at big organisations with more than 250 employees – suggesting that, broadly, bigger companies have smaller pay gaps. The ONS figures also highlight another striking feature of the pay gap – which is that for full-time workers aged between 18 and 39, the gender pay gap is close to zero.

Meaning what?

Meaning that women and men who work full-time are paid almost exactly the same until their 30s. But for full-timers in their 40s, 50s and 60s, that gap leaps to 12%-15%. Once part-timers are factored in, the gender pay gap increases steadily in every age cohort from 18 to 59 (after which it dips back a bit). In other words, the gender pay gap is closely related to (a) part-time work and (b) age.

Many women who take a career break to care for children subsequently return to work part-time, and they earn less than their male peers even if they return to work full-time. To what extent these facts reflect millions of perfectly sensible individual choices about family life, or a structural sexism that underpins all social and economic activity, is a question of politics. What seems clear is that the gender pay-gap figures are not necessarily a good proxy for “measuring” sexism at work.

Why not?

Take Npower, which has just reported an increased pay gap year-on-year. The reason, it says, is that this year it offered its workers a salary sacrifice benefits package that was taken up by far more women than men. The details of it aren’t public. But if, for example, an employer offers workers more annual leave or higher pensions contributions in lieu of a pay rise – and more women go for it than men – then its gender pay gap will grow. But that doesn’t mean it has been unfair to women.

If it wanted to slash its pay gap, points out Mark Littlewood in The Times, it could offer the package only to men. But that would definitely be unfair to women (and probably illegal). Moreover, those countries with the widest pay gaps also have disproportionately high female participation in the workforce.

Such as?

Analysis by Eurostat shows that in the European countries with the biggest gaps in average pay (such as the UK, Germany and Estonia) about 80% of women are in work. In countries with smaller gaps (including Romania, Italy and Belgium) the rate of women in work is significantly lower (about two-thirds). Clearly, if a big chunk of the female population is not working at all, rather than doing relatively low-paid and/or part-time work, then the gender pay gap will be smaller. But that might not be a good thing – either for the non-working women or for society as a whole.

Conversely, if the UK decided to compel companies to close their pay gaps – say, by making it illegal to employ a woman below a certain salary, or below a certain proportion of the average male salary – it would make the gap smaller, but might also cause a collapse in the number of women employed. That would be in nobody’s interest.

Thursday 7 March 2019

The case for free trade - CapX

3 takeaways for you to assist in structuring an essay on this topic:

A recent study estimates that the full burden of tariffs imposed by President Donald Trump fell on American consumers. As reports claim that the Department for International Trade (DIT) intends to cut 80-90 per cent of the UK’s import tariffs if Britain leaves the EU without a deal, that’s worth remembering. For though there were very different reactions to both stories, they are two sides of the same economic coin.

Import tariffs are taxes overwhelmingly paid by final consumers. They reduce consumer choice. In the longer term, they make the whole economy less efficient too, insulating industries from international competition, diverting resources to less productive sectors, and encouraging lobbying for similar protection. The best thing to do is remove them, irrespective of what other countries do, in turn creating a dynamic for firms to instead lobby for a good general business policy environment.

To an economist then, the reaction to the DIT proposals is perplexing. “Goodbye manufacturing, and goodbye agriculture,” tweeted Laurie Macfarlane, the economics editor of an organisation called Open Democracy. “Sheer lunacy,” “suicide” and “devastating” said others. Former BBC Newsnight editor Christopher Cook dubbed the plan “banana republic stuff.” So why is something so uncontroversial among economists generating so much anger among commentators?

The first explanation is one often heard from trade lawyers. The problem, they say, is that tariffs are no longer the key impediment to trade for a services economy. Tariff reductions are good for consumers, yes, but “disarming” unilaterally will reduce what we have to offer other countries in trade agreements. In effect, we give up “bargaining chips” to facilitate trade deals that benefit our exporters.

Yet there’s little evidence to support this take. Hong Kong has unilateral free trade, but has trade deals with China, New Zealand, EFTA and Chile. Ninety-nine per cent of imports enter Singapore duty-free, but the country has Free Trade Agreements with China, Australia, New Zealand, India, Japan, Korea, EFTA, Turkey and the US.

Economist Doug Irwin has shown two-thirds of the tariff reductions seen globally between 1983 and 2003 were undertaken unilaterally, during a period when major FTAs were signed. Extensive liberalisation was carried out in Chile, Australia, New Zealand too. All have plenty of FTAs.

FTAs have other benefits, such as preventing backsliding from both countries in a protectionist direction. But there is little evidence tariffs are necessary to secure them. That’s not surprising. If everyone knows non-tariff barriers, standards and regulations on service sectors are more important, free-trade agreements (FTAs) are still mutually beneficial even when one side is tariff-free.

A more compelling explanation for the anger we’ve seen then is politics. Keeping imports from the EU flowing into the UK without tariffs requires (under WTO rules) offering tariff-free access to the rest of the world.

Manufacturers and farmers losing their extensive EU protection will feel grievance. There will be losers. Given that the benefits of these tariffs are narrowly concentrated and the costs diffuse, the former’s cries of anguish eclipse consumer cheers. Some therefore see an opportunity to use this story to pressure MPs to vote to prevent no deal (under the backstop, we couldn’t unilaterally liberalise) or to reverse Brexit entirely.

These fears of negative reactions are presumably why tariffs on cars, beef, lamb, dairy and some lines of textiles will be maintained. But it’s worth noting that if reducing tariffs really would have the “savage” effects Remainers claim, this in fact shows consumers are currently greatly harmed by them and they should be removed.

Finally, there’s understandable anger from business at the process. Christopher Cook complains trade policy is being determined “in secret” without consulting those impacted by the policy. There is thus little certainty for firms who could find themselves under much more competitive pressure in just a few weeks.

Ideally, tariff reductions would, indeed, be phased in to give certainty to business and time to adjust. But Brexit itself is now going to be one form of trade shock and policymakers’ responsibility should be to set the best conditions to deal with it. The Treasury is right that the return of tariff freedoms should be used, with tariff-free imports assumed unless there is compelling reason otherwise.

The government should make this a permanent policy aim, deal or no deal. Linking it to “no deal” as if it’s an emergency measure to prevent rising prices is unhelpful, and implies that tariffs could yo-yo with third countries depending on whether we eventually get an EU deal.

But more broadly, they are wise not to open the setting of tariffs and their rates into a public consultation. If the industries learned their protection was to be removed or lowered, they would launch extensive lobbying campaigns; action which no consumer group would undertake. This would create severe pressure to reverse course, undoing the potential upsides.

Brexit is going to be an incredibly complex extrication. It will create winners and losers. But as Martin Wolf has outlined, one clear potential net benefit is cheaper food and manufactures. Free trade is something virtually all economists believe improves living standards.That economics doesn’t change depending on whether we’re talking about Trump or Britain.

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