Research

Menu

Back

Choose Language

August 30, 2018

News

Central banks scrutinise the impact of ‘superstar’ firms

While financial pundits were fixated upon the dovishness/hawkishness of major central banks, we perceived this year’s Jackson Hole symposium as something rather different: a “summer camp” of top economists playing catch up with a new reality.

The global central bank collective is grappling with a set of anomalies that question the relevancy of traditional economic models. Why, when unemployment is at very low levels, has wage growth failed to pick up?  Why are we seeing feeble productivity gains and weak physical investment despite high profitability? And why has it taken so long to coax stubbornly low inflation up towards target? At the annual Jackson Hole central bank summit last week, economic luminaries were deployed to delve into the these phenomena. ‘Superstar firms’ - the shrinking number of mega-firms are which have harnessed globalisation and technology in order to become the most dominant firms in their industry – are emerging as the culprit.

In his book, The Four, Scott Galloway describes the algorithms of Amazon, Google and Facebook as the most valuable man-made things ever created. Yet algorithms, and other types of intangible capital require very little initial investment and at the same time are highly scalable which has allowed select firms to grow exponentially. At the symposium, Nicolas Crouzet from Kellogg School of Management purported that ‘intangible capital’ has caused a rise in industry concentration by a few players. For example, one measure of corporate concentration, the Herfindahl-Hirschman index, is up 48% since 1996. In turn, noted the Kansas City Fed who hosted the event, this may be diluting dynamism, productivity growth and capital investment. Physical investment has been very low, relative to corporate valuations, since the late 2000s

Central bankers also face a puzzle when it comes to wages. In the past decade, despite rising profits, labour’s share of income generated has declined in the US and in other countries. Even now, with US unemployment below 4%, when employers should be competing to attract talent, wage growth has been tepid. At Jackson Hole, Princeton economist, Alan Krueger, presented a paper entitled ‘Reflections on Dwindling Worker Bargaining Power and Monetary Policy’. He floated the idea that perhaps weak wage growth is the result of a “monopsony” whereby the market place is dominated by a few major employers, giving workers less leeway when it comes to demanding higher pay. These large firms may even be able to inadvertently collude to limit pay levels. Of course, in many cases, algorithms and other forms of intangible capital represent a structural shift in that there is overall less demand for labourers.

Inflation’s elusiveness has also perplexed the world’s major central banks. Harvard economist Alberto Cavallo noted the “Amazon Effect” whereby rapidly adapting pricing algorithms used by the online retailer and its rivals are skewing inflation. He found that the shift has led to a greater influence of movements in the US dollar exchange rate and gas prices on retail prices. Inflation is a key gauge that central banks use when setting monetary policy and so it becomes essential that these new inflationary dynamics are somehow conceptualised.

Undoubtedly the rise of superstar firms has caused increased market concentration, perhaps altering the very workings of our economy. For central banks, it seems that the Jackson Hole event was only the first twist in understanding this complex new Rubik’s cube in which many micro elements converge with the traditional macro drivers of the economy. For now, a key take away may be that this time it really is different and the business cycle could extend much longer than it has in the past. This parallels with our base case which does not foresee imminent overheating in the US economy, compelling us to maintain an equity overweight in the US.

However, over the longer run, we expect that central banks and regulators may begin to consider implementing policies that more effectively redistribute the wealth of superstar firms and dilute their influence. This would potentially mean re-designing competition rules and policies on items such as mergers and acquisitions – especially in sectors such as Technology which is home to many of the new breed of ‘superstar firms’. If status quo ensues, and the gap between tech capital and human capital grows wider, it isn’t unrealistic to assume that ‘Occupy Silicon Valley’ could become the next ‘Occupy Wall Street’ as people grow frustrated by the power and share of the economy that only a handful of firms possess. As a prime example, after it become the first US listed company to reach $1 trillion in market cap, there were only 16 countries with a GDP equal to or greater than Apple’s valuation, according to World Bank data.

That said, in the near term, we remain positive on the Tech sector as it remains to be highly profitable.  It seems that the central banks will need some time (and perhaps a few more ‘summer camps’) to understand and model this ‘new normal’ before any regulation comes to fruition.

Disclaimer

All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data and/or economic information”), are provided for information purposes only, without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data. All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete. This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives, financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers, employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data, the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance. Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic documentation can be altered subsequent to original distribution.

As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments. It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.

Read more


More

October 21, 2024

Weekly Insights

Weekly Investment Insights

  During the autumn months, bears all over the world prepare for their winter hibernation. The market bears appear to already be asleep, with the...

October 15, 2024

BILBoard

BILBoard November 2024 – Beyond the U...

  The race for the US Presidential election on November 5 is heating up, but business activity is essentially frozen given the uncertain outcome and...

October 11, 2024

Weekly Insights

Weekly Investment Insights

  Hurricanes caused widespread damage last week. In the US, Florida residents rushed to evacuate ahead of Hurricane Milton, which followed closely on the heels...

October 4, 2024

Weekly Insights

Weekly Investment Insights

  Comments from central bankers toyed with both currencies and rate markets over the past week. The Fed Chair Powell said that the US central...

September 30, 2024

Weekly Insights

Weekly Investment Insights

Autumn is in full swing and with the change of season came a turnabout announcement that was noticed in all corners of the market. Beijing’s...

All articles