Category Archives: Finance

Foreign Investment in the US Over $140 Billion

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It is not surprising that foreigners invest in the US.  The US is about as good as it gets in terms of reliability and performance.

Total expenditures in manufacturing were $139.1 billion in 2014, the largest among major industries. Within the manufacturing sector, expenditures were largest in pharmaceuticals and medicines at $75.9 billion. Outside of manufacturing, expenditures were notable in publishing industries and in real estate.

By country of ultimate beneficial owner (UBO), the largest source country was Ireland, with first-year expenditures of $42.5 billion. Expenditures from Canada, Germany, and Japan were also notable. The largest source countries for new investment were most often countries that already have a large foreign direct investment presence in the United States. Of the eight largest countries by foreign direct investment position in the United States—Canada, France, Germany, Ireland, Japan, Netherlands, Switzerland, and the United Kingdom—seven were also among the top eight source countries for new investment.

By U.S. state, the largest expenditures, $48.9 billion, were for U.S. businesses in California. The four largest U.S. states in terms of expenditures by foreign direct investors—California, New Jersey, New York, and Texas—together received over half of all new investment. These four states accounted for 35 percent of private industry GDP in the United States in 2014.

In this release, BEA is presenting statistics on Greenfield investments for the first time. Greenfield investment expenditures—expenditures to either establish a new U.S. business or to expand an existing foreign-owned U.S. business—totaled $16.6 billion in 2014. Total planned greenfield expenditures, which include both first-year expenditures and spending in other years, was $39.2 billion.

By U.S. industry, 2014 Greenfield expenditures were largest in real estate, at $4.7 billion. In manufacturing, expenditures for 2014 Greenfield investments were $2.8 billion and expenditures were particularly large in primary and fabricated metals and chemicals. By country of UBO, the largest source of first-year greenfield expenditures was Canada at $4.0 billion. Including expenditures from other years, the largest source countries for greenfield expenditures were China and Japan. By U.S. state, California and Texas attracted the largest expenditures for Greenfield investments, with first-year expenditures of $3.2 and $2.7 billion respectively, and planned total expenditures of $7.7 billion for each state.

 

India & Pakistan Accord Now Possible?

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Common economic interests may be the basis of the thaw between Pakistan and India.

Abbas Nasir writes:  Indian Prime Minister Narendra Modi visited Pakistan recently. Modi said he greatly appreciated Pakistan’s leader Sharif for personally receiving and seeing him off at the airport – on a non-state, unofficial visit.  Relations between the two countries have been dogged by the dispute over the Kashmir region, which dates back to the partition of India in 1947 after the British decided to leave.

Nearly 1.4 billion people inhabit the two traditional South Asian rival countries alone, and with their growing economies and energy needs, and the need for newer, more diverse markets and trading opportunities, the future of the troubled region once defined by conflict may well be defined by common economic interests.

Since then, several attempts to restart the stalled process have come to naught.

Even when images of the two leaders caught in a brief yet seemingly intense chat appeared in the media from the Paris Earth summit last month, few would have imagined the pace at which efforts towards normalisation would proceed.

Just three weeks ago, on December 7, the national security advisers to the two prime ministers met in Bangkok for a meeting that took the media by surprise. Their five-hour meeting took matters forward as three days later the Indian Foreign Minister Sushma Swaraj arrived in the Pakistani capital to attend a conference between Kabul and Islamabad on Afghanistan.

Analysts are asking what will happen if another terrorist attack on Indian soil is traced to militants across the border.

On the flip side, what is fuelling optimism is the huge peace dividend. Just this month the two countries joined Turkmenistan and Afghanistan in the ground-breaking ceremony of a natural gas pipepline called TAPI which will bring Turkmen natural gas via Afghanistan and Pakistan to India.

Then, the Iran leg of the Iran-Pakistan-India oil pipeline had already been built, and the rest is likely to be completed within a couple of years once United Nations sanctions on Tehran are lifted.

Pakistan has also concluded a $46bn China-Pakistan Economic Corridor aimed at connecting the underdeveloped western region of China to Gwadar Port on Pakistan’s Balochistan coast just south of the Hormuz Straits.

The pro-business Indian prime minister, addressing the opening of the parliament building in Kabul, called upon Pakistan to serve as a bridge between South Asia and Central Asia.

The future of the troubled region once defined by conflict may well be defined by common economic interests.

It appears that even Pakistan’s military, which has traditionally taken a tough, hard line on India, has begun to understand this.

Women at the Forefront of Invention

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Women are at the forefront of new creations across the globe.

Christina Lomasney, a physicist, is using nanopartices to make nanolaminates, a completely new material.

Lomasney is the founder of Modumetal, a firm using a new type of eletrolytic deposit.

By carefully manipulating the electric field, this process builds up veneers of different metals over a surface and controls how the layers interact with each other.

“In effect, we grow material,” says Ms. Lomasney.  Lomasney expects to do this cheaply on an industrial scale for metals like steel, inc and aluminum.  Itts first products are pumps, valves and fasteners.  One of the most important applications of this technology is batteries.  Batteries for electric cars are still expensive and the search for a cheaper solution may lead to s. Lomasney.

Nanolaminates

 

Whistleblowers Worldwide

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Forty-two percent of corporate fraud is detected by tips.  Insiders know better than anyone what is going on at Volkswagen, for instance.  Since the 2007-8 financial crisis, whistleblowing is on the increase.  How it is treated by the governments of countries varies enormously worldwide.

Some countries like Canada have weak laws protecting whistleblowers. Turkey has strong ones.  Yet whistleblowers have more protection in Canada.  The laws do not always indicate the degree to which it’s safe to suggest corruption.

After a whistleblower in Britain revealed corruption at HBOS, he suffered severe emotional consequences.  As a result, British regulatory authorities have insisted that companies they oversee have provisions for employees to safely report transgressions directly to the regulators and that companies have a post for a “whistleblower’s champion.”

Germany and Switzerland are particularly tough on whistleblowers.  Germany is now covered by the best practice guidelines from the Council of Europe, a group of 47 countries in Western and Eastern Europe.

The US, with strong protections, has a very uneven record.  The strength of the banking lobby in the US makes whistleblowing risky if you want to keep your job.

Whistleblowers

 

How Should the Yuan Be Valued?

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What does putting the yuan in the basket mean?   Very little except a recognition of the importance of China’s economy on the world scene.

Most things are not priced in SDRs, the Special Drawing Rights basket of currencies used by the International Monetary Fund as its units of account.

Yet because its been put in the basket, there is an expectation that China will let the market decies the yuan’s exchange rate.  If China maintains a rate that is in fact pegged to the dollar, it will boost the dollar’s weight in the basket, which is not the point of the inclusion.

The Federal Reserve has begun to raise interest rates, which will put pressure on the yuan in any case.  It’s unlikely that China will give the market free rein, but China has to be aware of its new responsibilities as part of the SDR.

Pressure on the Yuan

Banks’ Performance in Emerging Countries

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More than a third of the world’s largest banks have their headquarters in emerging markets.

Emerging market banks have little trouble funding themselves.  Many emerging countries, especially i Asia, have high savings rates.  This leaves lenders with more deposits than loans.

Unlike their Western counterparts, emerging-country banks o not have risky investment banking arms.  Yet profits can be wiped out by bad loans, which are increasingly being extended by “extend and pretend”, which gives companies which have little prospect of re-paying a loan years of forebearance.

Chinese banks report non-performing loans at 1.6% of assets, but share prices in these banks suggest that the market thinks dud loans represent closer to 8% of assets   How quickly these banks admit their failings will determine their future health.

Non-Performing Loans.

 

Has Oil Run Its Course?

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Anatole Karetsky writes:  Now that oil prices have settled into a long-term range of $30-50, energy users everywhere are enjoying an annual income boost worth more than $2 trillion. The net result will almost certainly accelerate global growth, because the beneficiaries of this enormous income redistribution are mostly lower- and middle-income households that spend all they earn.

Of course, there will be some big losers – mainly governments in oil-producing countries, which will run down reserves and borrow in financial markets for as long as possible, rather than cut public spending. That, after all, is politicians’ preferred approach, especially when they are fighting wars, defying geopolitical pressures, or confronting popular revolts.

The managements of leading energy companies must face economic reality and abandon their wasteful obsession with finding new oil.

But the monopoly has fallen on hard times. Assuming that a combination of shale development, environmental pressure, and advances in clean energy keep the OPEC cartel paralyzed, oil will now trade like any other commodity in a normal competitive market, as it did from 1986 to 2005.

In a normal competitive market, prices will be set by the cost of producing an extra barrel from the cheapest oilfields with spare capacity. This means that all the reserves in Saudi Arabia, Iran, Iraq, Russia, and Central Asia would have to be fully developed and exhausted before anyone even bothered exploring under the Arctic ice cap or deep in the Gulf of Mexico or hundreds of miles off the Brazilian coast.

Of course, the real world is never as simple as an economics textbook. Geopolitical tensions, transport costs, and infrastructure bottlenecks mean that oil-consuming countries are willing to pay a premium for energy security, including the accumulation of strategic supplies on their own territory.

For Western oil companies,the rational strategy will be to stop oil exploration and seek profits by providing equipment, geological knowhow, and new technologies such as hydraulic fracturing (“fracking”) to oil-producing countries. But their ultimate goal should be to sell their existing oil reserves as quickly as possible and distribute the resulting tsunami of cash to their shareholders until all of their low-cost oilfields run dry.

There are two reasons why this has not happened – yet. Oil company managements still believe, with quasi-religious fervor, in perpetually rising demand and prices. So they prefer to waste money seeking new reserves instead of maximizing shareholders’ cash payouts. And they contemptuously dismiss the only other plausible strategy: an investment shift from oil exploration to new energy technologies that will eventually replace fossil fuels.

Redirecting just half the $50 billion that oil companies are likely to spend this year on exploring for new reserves would more than double the $10 billion for clean-energy research announced this month by 20 governments at the Paris climate-change conference. The financial returns from such investment would almost certainly be far higher than from oil exploration. Yet, as one BP director replied when I asked why his company continued to risk deep-water drilling, instead of investing in alternative energy: “We are a drilling business, and that is our expertise. Why should we spend our time and money competing in new technology with General Electric or Toshiba?”

As technology continues to improve and environmental restrictions tighten, it seems inevitable that much of the world’s proven oil reserves will be left where they are, like most of the world’s coal.

OPEC seems finally to have absorbed this message and realized that the Oil Age is ending. Western oil companies need to wake up to the same reality, stop exploring, and either innovate or liquidate.

End of Oil?

 

Entrepreneur Alert: Saudi Arabia Looks to the Future

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Gassan al Kibsiver writes:  Over the past few weeks, the government of Saudi Arabia has been engaged in an unprecedented strategic policy review that could have ramifications for every aspect of the country’s social and economic life.

There are two reasons why change has become urgent. The first is the dramatic drop in global oil prices, from above $100 per barrel in the middle of 2014 to below $40 today.

The second reason is demographic. In the next 15 years, some six million young Saudis will reach working age, putting enormous pressure on the labor market and potentially doubling its size.

The new Saudi leadership’s recognizes the challenge and the possibilities that addressing the future can create.

Saudi Arabia has the potential to double its GDP and create six million additional jobs by 2030, enough to absorb the influx of young men – and, increasingly, young women – entering the labor market. To accomplish this however, the kingdom will have to dramatically reduce its unhealthy dependence on oil.

Saudi Arabia has many sectors with strong potential for expansion. The country has substantial untapped deposits of metals and non-metallic minerals, including phosphate, gold, zinc, bauxite, and high-quality silica. Its retail sector is already growing quickly, but it lags behind in areas like e-merchandizing and supply-chain efficiencies.

The country’s tourism sector could be developed and upgraded, not only for the millions of Muslim pilgrims who visit the holy sites of Mecca and Medina every year, but also for leisure tourists. Saudi Arabia has a long coastline on the Red Sea. Exploiting these opportunities will require trillions of dollars in investment, radical improvements in productivity, and the government’s firm, sustained commitment. Attaining this level of investment will require radical policy reforms. Transforming the economy will require large improvements in productivity.  Jump-starting productivity growth will require reworking the kingdom’s restrictions on business and labor practices. For now, the Saudi economy relies heavily on low-wage and low-productivity foreign workers on limited contracts; indeed, such workers hold more than half the jobs in the country.

The most important priorities include boosting the efficiency of government spending and developing new sources of revenue to replace oil exports.

Weaning Saudi Arabia’s economy off oil will not be easy, and the kingdom has an uneven track record in this regard. But there are encouraging early signs about the government’s focus, energy, and determination.

Why Manipulate Rice Production?

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Crop subsidies may aid farmers, but they can often hurt consumers.

Asia consumes 90 percent of the world’s rice.  Political tensions in the area often drive governments to become self-sufficient producers.  This can drive the local price of rice up and cut off the supply of imported rice.

When governments manipulate the rice market through subsidies, taiffs and other support for domestic producers, prices are raised for consumers and the poorest people suffer.

Rice is used for all kinds of food by people of all ages in Asia.  Babies and the elderly eat ric gruel.  Rice porridge is eaten by the wealthy.  Sake made from rice is sipped in karaoke bars.

Rice is also cultural and religious symbol.  This makes the food politically charged.  Yet raising the price of rice is not good for countries whose poor and moderately poor people depend on it.

Does rice have to be grown locally in Asia to be readily available?

What May Happen if Oil Prices Stay Low?

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Will oil prices become subject to supply and demand?  OPEC’s unwillingness to manipulate the price of oil by pumping less gas hints that the future may reside in the market.

Saudi Arabia appears to be displacing Russian crude going into refineries in Poland and Sweden   Producers who depend on a higher price per barrel of oil have cut back by $150 billion this year.  Eventually diminished investment will diminish output.

Falling oil prices are increasing consumption, which may not be good for carbon levels.  In the developing world, however, the amount of oil consumed in relation to economic output is declining.  China is becoming less energy-intensive.  Rapid depletion in shale oil fields may make investments in shale less attractive, in addition to the environmental objections and the low cost of fuel oil.   Who knows?  Only the Saudis!