The Short-Termism of Protectionism (Gwen Moritz Editor's Note)

by Gwen Moritz  on Monday, Feb. 13, 2017 12:00 am  

Larry Fink

At the beginning of 2016, when a “Trump bump” was unimaginable, the CEO of BlackRock Inc. begged CEOs of Fortune 500 companies to resist “the powerful forces of short-termism afflicting corporate behavior” — buybacks, overly generous dividends and “quarterly earnings hysteria.”

BlackRock has more than $5 trillion to invest, so when Larry Fink talks, corporations at least hear him out.

In a recent letter to the same executives, Fink noted, critically, that they had “continued to engage in buybacks at a furious pace.” But, he said, “many companies” had responded to last year’s letter by disclosing detailed plans that shareholders could use to evaluate progress.

But it turns out that those long-range plans that corporations were finally starting to make were based on assumptions of low inflation and continued globalization, Fink wrote, but then came Brexit, upheaval in the Middle East, higher interest rates and President Trump.

“At the root of many of these changes is a growing backlash against the impact globalization and technological change are having on many workers and communities,” he wrote. “I remain a firm believer that the overall benefits of globalization have been significant, and that global companies play a leading role in driving growth and prosperity for all. However, there is little doubt that globalization’s benefits have been shared unequally, disproportionately benefitting more highly skilled workers, especially those in urban areas.”

Seth A. Klarman, who runs the $30 billion Baupost Group hedge fund, has also written a letter, this one to his investors. As reported by The New York Times, Klarman frets about “perilously high valuations” in the short term and dire long-term consequences of protectionism.

“Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers,” Klarman wrote.

“President Trump may be able to temporarily hold off the sweep of automation and globalization by cajoling companies to keep jobs at home, but bolstering inefficient and uncompetitive enterprises is likely to only temporarily stave off market forces. While they might be popular, the reason the U.S. long ago abandoned protectionist trade policies is because they not only don’t work, they actually leave society worse off.”

Of course, hard truths don’t fit on ball caps. Fink, in his letter to CEOs, pointed out another hard truth for those disaffected Americans: “Workers whose roles are being lost to technological change are typically facing retirement with inadequate savings, in part because the burden for retirement savings increasingly has shifted from employers to employees.”

This feels circular, doesn’t it? Trump was elected on a protectionist promise that is short-termism writ large, depending as it does on inefficiencies.

“If things go wrong,” Klarman projects, “we could find ourselves at the beginning of a lengthy decline in dollar hegemony, a rapid rise in interest rates and inflation, and global angst.”

And if the dollar loses value and corporate profits stall, the retirement crisis will not be limited to the working class.



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