by Andrew White | February 26, 2020 | Comments Off on Weekly Love-in with my Economist Feb 22-28th 2020
I had the pleasure of spending a week or so in Asia and so I had a little more time to myself to read. This is one of the pleasures of travel with my job. Thankfully my copy of the Economist was full of interesting articles that resonated with me. I wanted to highlight them for you.
This extensive article/leader explores what could happen when the slowdown hits. A slowdown will hit – it is more a matter of when not if. But the implications for firms and employment is startling.
One really important point drawn out is that many firms are highly leveraged with debt. Such firms have gorged on debt during the money easing policy periods that characterize this period of low growth. Many firms will likely then go to the wall. That is, unless policy makers seek to add to the ranks of zombie firms and put naturalloy regenerating creative destruction on hold.
Another point is that cash management has become more complex for firms. Much IT spending has shifted from bulky capital spending to regular monthly cloud-based subscriptions. As such there are fewer ways firms can manage the impact of cash management by delaying large projects as they did in the past.
Finally, things like accounting for good will (currently running at an all times high) and the rash of inconvenient acquisitions (too many are not really value-creating but QE-enabled) over the last few years are called out. The bottom line is that there is quite a number of risks baked into our economy. Ugh.
Buttonwood: The Cash Bug
Earnings are fiction and cash is supposedly fact. But what is the truth?
This pleasant and short article highlights the point that there is no such things as single version of the truth. The article explains how more and more companies are reporting ‘adjusted’ financial data in order to explain their understanding of their business.
The challenge is that there are different adjusted methods for such data. Cash flow and free cash sounds easy to understand, right? Apparently, there are different ways these can be reported. Amazon is called out in that it has used four different methods in their accounting reports. Which is right? Which is wrong? The all are.
So there really is no single version of the truth. As a D&A governance expert this I knew. But in reality, there are many views built upon many forms of data. It’s all about context and objective.
I really find capital flows and the money markets fascinating. Central banks and sovereign states really don’t control these and the size and amount of money sloshing around in these markets dwarf what anyone can understand or even manage, despite what central bankers and policy makers claim. The article calls out how this money moves around in unexpected ways. As such we really don’t know how our economy works nor can we tame it totally.
For example, one such blob of money that moves around is foreign direct investment, or FDI. This has been tracked for years and seems to be rather straight forward: It’s the capital firms send abroad to invest in far off initiatives. Right? Wrong, well maybe. A recent analysis suggests that as much as 40% of FDI is funny money. More precisely it was ‘phantom’ money flowing through subsidiaries. When is capital not capital? When it’s FDI.
Another interesting point: perhaps 12% of Americans’ holding of foreign bonds are in fact domestic bonds. How can such accounting go wrong? The list of data that may not be what it seems to be goes on. As previously stated, single version of the truth is an unreal concept. If you add slight of hand to the mix, it’s just a numbers game. Oh well. All this stuff will keep us gainfully employed forever.
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