Opinion

The bull in the China shop: Money managers short on history and long on panic

6 min read

22 January 2016

The money managers have started 2016 in a blue funk – but most are too young to remember what kicked off at the end of the 1980s and the fact that, with the exception of the instigator, we weren’t then doomed to years of economic gloom.

In 1988 some clever statistician worked out that the valuation of the land surrounding the Japanese Emperor’s palace in Tokyo was higher than all the real estate in California. Shortly after this revelation the wheels started coming off the Japanese economy and its GDP has, relative to what went before for several decades, flat-lined ever since.

China now has 12 per cent of the world’s GDP, similar to Japan’s share in 1990 which was also 12 per cent. In common with the China of today Japan back then was propelled by massive investment, an explosive credit growth, a huge trade surplus and an overvalued currency. Its stock markets had become the plaything of the gambling private investor. Japanese bosses indulged themselves in a massive buying spree of foreign assets – everything from art to American steel companies. Now it is the turn of the Chinese to be seen to be just as profligate.

In the same way as we are told China is the great God of all things economic, it is amusing to recall in the 1980s Japan was donning the very same mantel. And did the world stop when it realised the Emperor was not wearing the equivalent of California? No it didn’t. Our young money managers are short on history and long on panic. If it was the other way round they would soon realise the world doesn’t live in an economic hegemony for very long. It moves on.

As if on cue one, our planet’s most savvy company, Apple, is reported in the Financial Times’ 21st January edition, to be shifting its focus to India as China’s smartphone market slows down. “Apple views India as the most likely replacement for the booming sales in China that have powered its rise in recent years,” it stated. “Apple may soon begin to manufacture in India. Foxconn, the Taiwanese contract manufacturer that makes most iPhones announced plans to set up in India last year.”

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I wonder how many are presently worrying themselves silly in Davos about what Chinese flat-lining is going to do to their career prospects, and whether they are entertaining the thought that India could be where it’s at quite soon now. Of course, professor Henry Mintzberg described the Davos gathering as the event “where the people who spend all year causing our problems take a few days pretending to fix them”. 

Most of those strutting round this Swiss mountain emporium are paid handsomely. If you added up the remuneration of all present there, I suspect the total would now buy all of the Japanese’s Emperor’s land together with much choice real estate in California as well. Back in September 2013 I wrote a City Grump entitled “The Cancer of socialism is out of Remission – Why?” I argued “Socialism spreads when it is able to feed off highly visible blatant abuses of financial privilege and right now conditions for its destructive ingress are near perfect. Why? Because there is an intolerable mismatch of the rewards paid to managers at the top of their particular trees and those struggling to cling to the branches.” 

I pointed to KPMG’s 2012 survey of FTSE 100 Directors’ basic salaries, which found that “the average CEO was given over £800k, while other executive directors gained approximately £500k last year. FTSE 250 equivalents gained a mere £450k and £300k respectively. In all 350 companies, KPMG recorded that when you add in bonuses, share incentive schemes, etc, etc, these ladies and gentleman trebled their remuneration.”

I said these people were often referred to as fat cats, but “I would prefer to call them sloths. Google tells me that ‘after consuming a large meal two-thirds of the sloth’s bodyweight will consist of the contents of its stomach’. Contrast then, these enormous feasts with the diet that the rest of us have been asked to go on for the last five years following previous excess, then it is plain as a pikestaff why Socialists are going to get a hearing between now and the next election.”

That was in 2012 and nothing has changed for the better. Indeed we now have Jeremy Corbyn drawing attention to the spectacular financial rewards that are being paid out to those at our near the top of our larger companies and other institutions. Thanks to this excess, the hard left in the UK and the hard right in the US (Donald Trump) are making all the running. Ultimately this state of affairs is much more damaging to Western economies than any slowdown in China. As an old business colleague of mine said: “Too many financiers and big business chiefs are trying to live like Yussopov princes.” Will anyone in Davos take note and take action?