Juggling Dynamite

Canada’s economy unexpectedly shrank 0.3% in the second quarter for an annualized contraction of 1.1% versus the consensus forecast of a 2.5% gain.  Declines in home resale activities and exports were the largest negatives.  Homeownership transfer fees shrank 17.7%.  Constraints in the auto sector led to a 4% decrease in exports.

Business inventories, government expenditure, capital investment in machinery and equipment, new home construction and renovation were all higher on the quarter.

As we anticipated, the loonie is lower and Canada Treasury prices are higher on the news.  Slowing activity in Canada’s ridiculously priced housing sector is much overdue; it is also disinflationary.  If the downturn in activity translates to falling prices–and it should–the effects will be full-out deflationary.  This will be a big negative for households and an economy precariously concentrated on highly levered home prices.

These obvious admissions are ridiculously overdue, but public comments by the new Securities Exchange Commission (SEC) Chair Gary Gensler offer a glimmer of regulatory hope.

Gensler admitted this week that payment for order flow — the back-end payment brokerages receive for directing clients’ trades to market makers — has “an inherent conflict of interest”  and that banning the controversial practice is “on the table.”

Shares of the ironically named customer-abusing-trading platform Robinhood tumbled on the news. Still, the implications are far-reaching:  most major brokerages now collect billions selling their customer orders to predatory trading firms.

The Securities and Exchange Commission also said Friday it is stepping up its inquiry into so-called gamification and behavioral prompts used by online brokerages and investment advisors to prod people to trade more stocks and other securities, adding:

“investors can be misled by rosy projections of profit by technologies that, in reality, understate the risk of a particular investment or the odds of eye-popping returns”.

Do ya think??

A new report from the Institute for Policy Studies finds that half of the 100 S&P 500 firms with the lowest median worker wage revised their pay rules in 2020, such that the median worker pay declined 2%, while CEO pay rose 29%.  Sixteen of those companies lost money in 2020 while having the highest average CEO pay, at US$17.5 million.  See Pandemic Pay Plunder: Low-Wage Workers Lost Hours, Jobs, and Lives. Their Employers Bent the Rules – to Pump up CEO Paychecks.

In the early 1990s, the largest shareholders pushed corporations to tie executive pay packages to stock performance.  This was promoted as aligning operators with investors.  It has since run to counter-productive extremes where company leadership is incentivized to boost near-term share prices through gimmicks (like share buybacks) at the expense of longer-term strength, stability, innovation and productivity of the franchise, its workers and the broader economy.  The chart below, since 1965, shows the unsustainable pay disparity now inherent.

As a step towards redressing this problem, in 2017, US Securities law began requiring companies to disclose the ratio of CEO compensation to the median compensation of their employees.  But gaming is rife, as explained in A Promising Start to the Challenge of Excessive CEO Pay:

The rule is a good start, but all that “flexibility” carries its own risks. Namely, the potential exists to game the system by, for example, outsourcing your lowest paid work, thus lowering your ratio without touching CEO pay. It also creates a different playing field for industries where salaries are relatively high, such as the technology industry, versus industries that rely on front line staff, such as retailers and grocery stores.

Meanwhile, as shown below since 2000 (courtesy of Lance Armstrong), share buybacks that boost share-linked pay packages are back near a record this year even as many businesses and workers face a highly uncertain future, now heavily indebted.

Re-banning share buybacks as the illegal market manipulation it was considered up until 1982 is a critical first step in redressing financially and socially destructive incentives.  Yes, we can.