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Saturday, 19 April 2014

Are domestic prosperity for lower and middle class citizens and successful exports becoming mutually exclusive factors in the Dutch economy?

A few weeks ago, on the First of April, I wrote about the alarming fact that 60% of the Dutch Collective Labour Agreements (CLA), had matured without being prolonged in time.

The apparent reason for this almost unheard of event was the fact that the Dutch federation of labour unions 'FNV' had demanded a general wage increase of 3%. 

Such an increase was intolerable for the large employers in The Netherlands:

Readers, who are not informed about the Dutch labour situation, would probably argue: “Well, 3% is indeed a lot of money. And hey, it is crisis. Why does the FNV labour union make such high wage demands?!”

There is, however, a very good reason for this.

The Netherlands is famous for its ‘polder model’ of regular consultations between the employer’s organizations, the labour unions and the Dutch government. Due to this polder model, The Netherlands has not only been a country with very fewlabour strikes during the last three decades, but it also had a moderate wage development during the last thirty years. Some well-respected economists – including yours truly – are saying these days: ‘Perhaps a little too moderate…’.

You can claim that the Dutch still earn very decent wages in general and that The Netherlands is one of the richest countries in Europe. And then you are totally right about that.

Nevertheless, during roughly two-third of the last thirty years, there has been a situation of wage restraint. As a consequence, there has been very moderate wage growth of not more than 2.5% - 3% per annum in general (and often the percentage was much less). In a number of years during this period, the wage development was even well below the inflation percentage. This meant ‘de facto’ a wage decrease, instead of an increase.

In other words: one can justifiably argue that the wage restraint has been maintained for an excessive period, which surpassed the initial and justified reasons for it.

[…]

The only country, which endured more decisive wage restraint than The Netherlands during this time period [the last decade – EL], was Germany.

It is no coincidence that Germany and The Netherlands are both the export champions of Europe and one should realize that these countries do it at the expense of the other Euro-zone countries; this is called "beggar thy neighbour".

This excessive period of wage restraint in The Netherlands caused that the average Dutch worker didn’t profit sufficiently from the (excess) profits and large productivity improvements, which many companies made during the larger part of the last twenty years.

This week, the Dutch Central Bureau of Statistics (CBS), presented two ‘alarming’ press releases, concerning the Dutch exports and consumer confidence.  

In the first press release that I want to discuss, the CBS stated that roughly one third of all jobs in The Netherlands is dependent on exports.


In  2012, exports of goods and services generated the equivalent of 2.2 million full-time jobs in the Netherlands. This accounts for one third of total employment in the country. Some 62% of these jobs are in the export sector itself, while 38% are in the sectors supplying the export sector.

Most export-related employment is generated by exporting companies themselves. These companies account for employment totalling over 1.3 million full-time equivalents. In addition, companies supplying goods and services to exporting companies also employ staff as a result of these exports. Supplying companies account for around 800,000 full-time equivalents of export-related employment.

The export sector generates half a million full-time jobs in the trade sector. Exports by wholesale companies are partly the reason for this. Trade is also an important supplying sector for exporters in other industry sectors.

The export sector accounted for nearly half a million full-time jobs in other business services. Many of these jobs are in services provided to other sectors of industry. Temp agencies, for example, place people in agricultural or manufacturing companies, which subsequently export their products. And nearly 300,000 full-time equivalents in the transport and storage, information and communication sector can be linked to exports.

There you have it! Almost one third of Dutch jobs is dependent on exports. 

That is really a massive number and – although I didn’t investigate this – probably higher than almost anywhere else in the world. Consequently, a very large share of the gross domestic product in The Netherlands is earned with exports. This might sound very positive, but there are a few snags.

A large share of the exports in The Netherlands is re-exports of goods fabricated elsewhere; this means in practice that The Netherlands only takes care of the transport and distribution from the ports Rotterdam, Amsterdam (and a few minor harbours) to the other European countries. This is business with very low margins, as every cent counts.

And a large share of the other Dutch exports are goods, services and agricultural produce with (again) a low margin. Especially this can be seen in the following breakdown chart of the February, 2014 exports, based on CBS data from the Statline database.

The February 2014 exports, per category in Millions of Euros
Chart created by: Ernst's Economy for You
Data courtesy of: statline.cbs.nl
Click to enlarge
Perhaps this is the biggest difference between The Netherlands and Germany:

A very large part of the German exports consists of high-tech, high-quality and high-margin goods, like trucks, cars, tools, technical equipment and household appliances, with the proverbial German quality. These are goods with generally a higher margin.

However, a very large part of Dutch exports consists of basic low-tech goods and semi-finished products, chemicals and agricultural produce, with generally very low margins.

The only way to remain successful with exports of the latter kinds is when the efficiency and cost-effectiveness is very high  (i.e. a high level of automation and robotization) and the costs of human labour – traditionally one of the biggest expenses during production, transport and distribution – remain low…; very low!

Of course, good craftsmen and well-trained and skilled knowledge workers still earn a very good salary in The Netherlands.

However, the hundreds of thousands  of workers in the exports and / or export-related industries, with a job requiring lesser skills and less craftsmanship, are less likely to earn a decent salary these days. For the exports (related) industries, low expenses are even more important than for the industries, producing for the domestic market. 

Consequently, these workers are involuntarily involved in the constant battle for the lowest margin among their employers.

In other words: they have to compete with production robots, robotized transport systems and computer systems, which can work 24x7. And for the jobs which can’t be done by robots yet, they have to compete with workers from the East-European low-wage countries, who work longer hours and against lesser wages.

The result is that especially the export (related) industries keep the wages of their workers as low as possible, in order to keep their margins as high as possible. They are not willing to hand out the generous wage increases that the Dutch people so desperately need, after years and years of wage restraint, as it would spoil the Dutch competitive (i.e. exports) position.

Thus, domestic prosperity for the lower and middle classes and successful exports become indeed mutually exclusive factors in the Dutch economy. I think that this point is proven by the great number of failed negotiations for the Collective Labour Agreements in The Netherlands.

The consequence are empoverished middle and (especially) lower classes in The Netherlands, due to longterm wage restraint, (government-spurred) inflation and near-zero interest rates. 

The effect of this is that the retail industry and SME companies – most of them domestically oriented companies traditionally – are seriously lagging, in comparison with the growth and profit figures of the large, quoted companies and the exports (related) industries.

Their customers are more and more WILLING to buy, but they are not ABLE to buy. The end result is indifferent: people don't buy!

That this statement isn’t just gibberish, is proven by the following quotes from the second CBS press release, about consumption and consumer confidence in The Netherlands:

Consumers were more optimistic about the economic climate. Their opinions about the economic climate in the next twelve months improved marginally, whereas their opinions on the economic climate over the past 12 months were far less negative than in March. The component indicator Economic climate climbed 3 points to reach 7. The last time consumers were so confident about the economic situation was nearly 7 years ago.

Consumers thought the time to buy expensive items, like washing machines and TV sets, was just as unfavourable as in the preceding month. Their opinions about their own financial situation were also just as negative as in March. On balance, the component indicator Willingness-to-buy remained stable at -13. Willingness-to-buy is still at a low level. 

And this willingness-to-buy will remain as low as it is, as long as the Dutch lower and middle class workers don’t feel the end of the crisis in their wallets.

For me, the enormous focus of The Netherlands on low-tech, low-margin exports is ignorant and imprudent, as it forces us to fight an eventually losing battle against the low wage countries, who can supply much more ‘bang for the buck’ with these low-tech goods.

Instead, companies should focus more on the domestic market and on high-tech, high-quality and  high-margin exports. 

These are the kind of exports that enable the possibility of paying better wages to our lower and middle class workers. After all, these people are the lifeblood of the whole Dutch retail and SME industry and consequently, of general prosperity in The Netherlands.

Wednesday, 16 April 2014

Where dangerous nationalism emerges, common sense leaves through the side door.

They flutter behind you your possible pasts,
Some bright-eyed and crazy, some frightened and lost.
A warning to anyone still in command
Of their possible future, to take care.

Nationalism in a mild form is not necessarily a bad thing.

Nationalism can be a strong force, which bonds the citizens of a country together. It reminds them of their common symbols and values and it lets them share feelings of joy and solidarity. In this form, nationalism is a positive force that makes people feel proud and happy about their country. 

This is the kind of nationalism that can be enjoyed during large sports events, like the international football championships, the Grand Slam tennis championships or the Olympic Games. It gives joy to people and it rather triggers fraternization between different groups of people than verbal or physical aggression (although there have been exceptions sometimes, unfortunately).

In a divided country with two or more very different population groups, like for instance Belgium or Canada, a mild nationalism is in the end the power that bonds the country together. It reduces the differences between people and emphasizes the common ground on which they live.

However, it becomes a whole different story when nationalism turns into an overdone glorification of the own people, history, shared symbols and values. 

Shared feelings that a certain group of people or a whole country and its people are predestined and superior, come almost always at the expense of degrading and excluding (groups of) people in other countries or within one’s own country. That is when nationalism can become a destructive force, which can cause violence against other people and eventually could lead to civil wars and wars between nations.

For many people with a clear view on history, it is no secret that we live in very (I would say dangerously) nationalist times.

Three years ago, at the very beginning of this blog, I noticed an uprising of Dutch nationalism in commercials. Although seemingly innocent, this development was in a sense more disturbing to me than the mindless shouting of the right-wing populist parties all over Europe, as it showed me that nationalism became much more mainstream than it had been before. And from generally accepted nationalism to dangerous nationalism is sometimes only a few steps:

Of course nationalism and xenophobia in politics were already a well-known phenomena, with the FPÖ in Austria (Freedom Party Austria led by Jörg Haider),  “Vlaams belang” (Flemish interest, the nationalistic party in Belgium, led by Filip de Winter) and the PVV (Party for Freedom in The Netherlands, led by Geert Wilders). But these parties could be dismissed as side-issues.

But when commercials and marketing in general start to bang the nationalistic drum, there is really something going on. Marketing men investigate the results when they try something. And it seems they liked what they tried.

I hope we can avoid the pivotal point where a “healthy”, normal nationalism turns into a “you are second-rate people, because you are not Dutch” kind of nationalism. We do have some bad experiences with it.

Three years later, I think we can conclude that nationalism in The Netherlands and other European countries has proved to be more than just a passing trend.

A constant factor during the last three years has been the increasingly annoyed and aggressive tone of voice of Dutch and other European people against: 

  • The European Union itself and its officials;
  • The peripheral members of the European Union (aka the PIIGS-countries Portugal, Spain and especially Greece);
  • The latest (candidate) members of the European Union: Slovenia, Bulgaria, Romania and the other countries in former Yugoslavia;
  • Groups of people in the European countries itself, which were not considered to be native or belonging to the ‘moral majority’;
    • The “lower class” foreign workers from especially the East-European countries;
    • The Antilleans and Moroccans, who were the favorite ‘perpetrators’ and ranting targets of the Dutch populists and an increasing group of dissatisfied and disappointed, often elderly people;
    • The Roma in Romania and Bulgaria, the Mid-African people and Algerians in France, the South-Italians in Italy and other ethnic groups in countries all over Europe.

Suffice it to say that The Netherlands is currently light-years removed from the very tolerant and open country, which it was in the nineties of last century. 

Political discussions upon certain ethnic groups took a gloomy turn during the last decade and, on occasions, groups of people within the Dutch society have been disqualified and rejected in a way, that would not have been considered acceptable in the nineties. 

It is the so-called moral majority of average, increasingly dissatisfied citizens, which considers this to be an acceptable development right now. And in my humble opinion, The Netherlands does not stand alone in this negative development. Similar developments have also been going on in other European countries.

The biggest danger of nationalism does not lie in the people at the forefront of the news: the politicians, the opinion leaders and the media, who spread and/or advocate the (dangerously) nationalist message. These people and institutions are relatively powerless, as long as few people listen to their messages and endorse their (hidden) objectives. No, the biggest danger looms when this moral majority of citizens in a country starts to silently or openly agree with the messages and propaganda from the nationalists and populists.

When this large group of people starts to think that the nationalists’ outings are indeed the single truth and do not resist against these populist messengers anymore, things can go seriously wrong. Then the nationalists become an important political factor within a country or large group of people.
Their self-glorifying and often discriminative messages start to poison the whole society top-down and bottom-up and also the relations with other countries. 

In my humble opinion, this is what is happening now  on various places in the world. The protractedly poor economy in Europe and its consequences – general impoverishment among large groups of people from the lowest societal classes, mass unemployment and diminishing chances for a prosperous future for many youngsters, at the beginning of their career – are a strong catalyst for such nationalist feelings and feelings of resentment against other groups and countries. 

The longer that a serious economic downturn lasts, the more and more momentum will be gained by politicians and movements, which spread these nationalist thoughts. After all, there is always somebody who must be blamed for the economic misery and for everything that is wrong in a country: 

  • The political elites who formerly ruled the country; 
  • Certain ethnic groups; 
  • And – everybody’s favorite – the "nameless, shamelessly sponging, paper producing, anonymous apparatchiks" in Europe.

What also happens is that unscrupulous politicians put the focus on other countries:

  • “They are corrupted, lazy crooks and criminals, who have stolen our tax-money and sit in the sun all day” (Remember Greece?! - EL);
  • “Not a single cent will be paid to the Greeks anymore” (Greece);

  • “We tell Europe to go to hell, with their &#$@$^&% demands and conditions” (Various populists withi the EU);
     
  • “They don’t pay the bills for our gas and they even steal gas from us” (Ukraine vs Russia);
  • “We demand that everybody in the Ukraine speaks solely Ukrainian. Russian is an outlawed language from now on” (Ukraine vs Russia);
  • “If a was in one room with Vladimir Putin and I would have a gun, I would put a bullet in his %$&^$ head” (Ukraine vs Russia);
  • “Crimea was given to the Ukraine for the wrong reasons, but it really belongs to Russia. And now we want it back to wipe out this historical error” (Ukraine vs Russia);

  • “We need to protect the native Russians in Ukraine, just like the ones in Georgia, Letland, Lithuania and Estonia” (could have been said by Vladimir Putin?)

In times like these, with a strongly elevated, dangerous nationalism, the smallest spark can cause havoc on a massive scale.

The worst example of this seems to be Eastern Europe, in which Ukraine is on its way to prepare for an all-out civil war and perhaps even a bloody war with “big brother” Russia.
This war-in-the-making is seemingly started for the silliest of objective reasons, sparked by the tidal waves of dangerous nationalism that are flooding the Ukraine and especially Russia.

It would be virtually impossible for Vladimir Putin to execute his current, blatant ‘great Russia policy’, when the moral majority of the Russians would not think that their country deserves an important role in world politics and should become a real superpower again. 

Russia seems to be an proper case, in which the population suffers from aggrieved feelings of superiority, while overestimating its own powers, in combination with economic backwardedness and despair. Roughly the same emotions seem to rule (in a different way) in Ukraine.

The more the US and the EU react against the Russian desire to be taken seriously on the "world stage", the stronger the feelings of superiority and resentment of the common Russians become. A very dangerous mix.

At the same time, the NATO, the United States and the European Union are acting like ‘rebels without a cause’ in this situation. 

The NATO, as well as the US and the EU, know that they should not enter into a direct confrontation with Russia and they know extremely well that they can't afford an all-out war within Europe. Nevertheless, it feels… oh so good to give "that arrogant Russian S.O.B. Vladimir Putin" a good spankin’! 

“We will show him who’s boss here and who rules the waves!”; this is the attitude than can be seen at every European and American politician and can be read from almost every line in the newspapers about this subject. There is little room for contemplation and for a de-escalating policy, when it comes to this topic.

How this explosive mix of frustrated nationalism turns out, we will ‘enjoy’ in the coming weeks and months. And as far as I’m concerned, things might turn nasty very quickly, as - like I stated in the last paragraph - nobody really works on de-escalating the situation: neither Russia and the Ukraine, nor Europe, the United States or the NATO as a whole.

And even when this conflict blows over very quickly, the current level of dangerous nationalism everywhere might very soon spark a new conflict within Europe and other places in the world.

In the current situation in Eastern Europe, one thing already became blatantly clear: where dangerous nationalism emerges, common sense leaves through the side door. You bet it does…!!

Monday, 14 April 2014

Larry Fink of BlackRock writes letter to leading European stock funds: “Stop with your stock buyback programs and your excess dividends. Please invest your profits and cash in your company again, so you can meet long-term goals that will keep shareholders happy in the long run”. I totally agree with this visionary wealth manager.



I’m not a particular fan of companies, which pay out excess dividends to their shareholders or enter into vast stock buyback programs. That can’t be much of a surprise for regular readers of this blog. 

While such buyback events and excess dividend payments always seem moments of great happiness for the shareholders, I think that it is in reality an ‘early warning signal’ about the company that performs such actions.

Of course, there is little wrong with a one-off party for the shareholders. These were after all the people, who had the faith to invest in your company and who enabled it to grow to something great. As a company, it is good to show your gratitude to your shareholders every now and then.

However, too often it happens that large dividend payments and stock buyback programs point at a blatant lack of smarter, better yielding investments and long-term goals within a company. And consequently, to a lack of long-term vision within the executive management of such a company.

I don’t like politicians – like for instance Dutch PM Mark Rutte – who seem to lack a coherent long-term vision on the future. Such politicians often don’t have any groundbreaking ideas to build upon and they ‘only take care of the shop’. After such politicians have gone, a country notices often that it missed important developments which took place in the rest of the world and that it had been starting to lag to other countries.

It is the same with large companies and their CEO’s. Not structurally investing in the future causes such companies to stand still and lose future battles to their competitors. While the CEO’s of companies in this situation are often the ‘golden boys’ of the shareholders, their successors often taste the sour grapes of their failed policy.

In spite of these ponderings, many CEO’s of stock-quoted companies still seem to think: “Heck, we are sitting on a stockpile of cash and we don’t know what to do with it. If we don’t bring it back to the shareholders quickly, some activist jerk comes along and takes over the whole joint at a bargain price”. Or words like that. 

And it also happens that CEO’s are literally forced by one of those activist shareholders to pay out higher dividends or buy stock back. Or else…

In an older blog I wrote the following snippets about KPN, a telecom company that was a typical representative of companies handing out excess dividends, in the time of CEO Ad Scheepbouwer:

Former CEO Ad Scheepbouwer thought that, in order to keep the shareholders happy, a steady flow of high dividends was exactly what the doctor ordered. And happy the shareholders were… Especially the ones with a long-term vision that ended on dividend payment day. Unfortunately, this high-dividend strategy turned out to be a losing bet for KPN eventually. And now the grapes are sour for the shareholders.

The necessary investments for the future, in order to keep its fixed and mobile network up-to-date and state-of-the-art, were neglected by KPN in exchange for short-term ‘shareholder value’. In other words: the company has been used as a cash cow.

Currently the telecom behemoth is hit by a perfect storm, caused by:
  • An outdated infrastructure that is in desperate need of updating and/or replacement, if the company doesn’t want to lose its current position on the business-2-business fixed telephone+internet market and the b2c (consumer) market for 'internet+television+fixed voice-over-IP telephone' in The Netherlands;
[…]

KPN Telecom has been THE example for me, that a fixation on short term shareholder value can almost kill a company in the long run.

Today, I learned to my pleasant surprise that not all large shareholders appreciate quick, short-term gains above more substantial, long-term yields, which secure real shareholder value for the long run.

Het Financieel Dagblad wrote that a number of leading European stock funds – with among them a number of AEX (i.e. the Amsterdam Exchange leading quotation) quoted funds – had received a letter from Larry Fink of BlackRock: the largest wealth management corporation in the world. The FD also had a link to Larry Fink's letter.

Here are the pertinent snips from both the FD article and Larry Fink’s letter.


In a letter, the world’s largest wealth management corporation BlackRock called European companies to keep a keener eye on the long-term future of their company.

BlackRock prefers that quoted European companies invest profits and available cash money in themselves, instead of forwarding the money to their shareholders. ‘We think that companies should be focused upon durable yields in the long run’, according to Larry Fink, CEO and co-founder of BlackRock, in a letter which was sent to various European stock funds last week.

Earlier this year, BlackRock sent a similar letter in the United States, where it caused quite a commotion. With a managed capital of $4,300 billion, BlackRock challenged the likes of David Einhorn, Daniel Loeb and Carl Icahn. 

Where these activist shareholders spur companies to reward their shareholders with extra dividend and stock buyback programs, BlackRock tries to make an end to the exclusive focus on quick, short-term gains.

‘Many people regret the short-term demands of the capital markets’, according to Fink. ‘We share these feelings’.

During the last few years, many quoted Dutch funds maintained a policy that was particularly favourable to the shareholders. Since the financial crisis started in 2008, companies downsized their capital investments and brought back their debt to healthier proportions. The extra Euro’s that were earned, were returned to the shareholders.

Of their joint profits of €26.4 billion, the 25 biggest Dutch stock funds returned no less than €20.4 billion to their shareholders. Of this amount, €13.2 billion was returned in dividend payments and €7.2 was spent on stock buyback programs. The dividend that will be paid out in 2014, will be roughly 3% higher.

Here are the snippets from the letter from BlackRock chairman Larry Fink

As a fiduciary investor, one of BlackRock’s primary objectives is to secure better financial futures for our clients and the people they serve. This responsibility requires that we be  good stewards of their capital, addressing short-term challenges but always with a focus on the longer term.

To meet our clients’ needs, we believe the companies we invest in should similarly be focused on achieving sustainable returns over the longer term. Good corporate governance is critical to that goal.

Many commentators lament the short-term demands of the capital markets. We share those concerns, and believe it is part of our collective role as actors in the global capital markets to challenge that trend. Corporate leaders can play their part by persuasively communicating their company’s long-term strategy for growth. They must set the stage to attract the patient capital they seek: explaining to investors what drives real value, how and when far-sighted investments will deliver returns, and, perhaps most importantly, what metrics shareholders should use to assess their management team’s success over time.

It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks. We certainly believe that returning cash to shareholders should be part of a balanced capital strategy; however, when done for the wrong reasons and at the expense of capital investment, it can jeopardize a company’s ability to generate sustainable long-term returns.

I am indeed very happy that Larry Fink of BlackRock ran the gauntlet – both here in Europe as in the United States – and advocated a corporate strategy for ‘his’ companies, which could be seen as a slight return to the Rheinland model of investing; a model in which the focus is shifted from short-term gains to true, long-term profitability and in which the personnel of the company is an important stakeholder.

I don’t think that it will make Fink particularly popular among the ‘corporate raiders’ who will see him as their natural enemy, but it will make him much more popular among the other loyal, long-term investors and the personnel of the companies which BlackRock owns.

With his message, Fink forces CEO’s to look at their own companies and think about how the available cash and profits can be invested in a way that really makes a difference. 

That is not a bad development, isn’t it?!