CEO Daily: Monday, 10th October

Fortune Magazine

Good morning.

Before last night's debate, I jotted down the top economic issues facing the next president, to see how many might be addressed. My list of ten:

1) Macroeconomics/budget deficits/zero interest rates/secular stagnation

2) Rising inequality/unequal opportunity

3) Failing education/training/continuous skills retraining

4) Broken corporate tax system

5) Broken immigration system

6) Crumbling infrastructure

7) Rising regulatory burden on business

8) Jumbled energy/environment policy

9) Slowing global trade/rising nationalism/protectionism

10) Changing nature of work/contingent work force

When the debate was over, education had gotten a passing mention or two, and taxes and healthcare each had their five minutes of fame. But if this were a drinking game, I'd still pass a sobriety test. You can read Tory Nemeyer’s account of the debate here.

Separately, the McKinsey Global Institute is out this morning with a new study on number 10), showing that 20 to 30 percent of the working age population in the U.S. and Europe engage in independent work - defined as work in which they have a high degree of autonomy, get paid by assignment, and have a short-term relationship with their employers.

The McKinsey number is significantly higher than previous studies. But interestingly, only 15% of those independent workers use digital platforms, like Uber, AirBnb or Taskrabbit. That suggests the size of that workforce could grow dramatically as these platforms expand in the years ahead.

The McKinsey research also shows that some 70% of independent workers do so by choice, not by necessity. They like the autonomy that comes with independent work.

The report is the most thorough picture I've see of the dramatic changes taking place in the workplace, and raises interesting policy questions for the next president, whoever that may be. You can find the study here.

More news below.

Alan Murray

Top News

[bs_bullet_primary] Where's There's Smoke, There's...a Galaxy Note 7

Samsung Electronics has suspended production of its flagship Galaxy Note 7 smartphone after reports of fires continued even in the devices that it used to replace an initial glitch-affected batch. The decision follows a well-publicized incident last week when an airliner in the U.S. was forced to evacuate after smoke from one of the replacement devices. The sweeping recall that Samsung had issued for the Note 7 had been welcomed as a robust act of damage limitation. But the new wave of problems, which suggests the recall itself was botched, arguably puts it in an even worse place than it was before. [bs_link link="" source="Fortune"]

[bs_bullet_primary] China Promises to Be Nicer to Foreigners (as Capital Floods Out)

The currency markets are moving again. The offshore rate for China's yuan, which moves more freely than the official rate and is often viewed as a better guide to the currency's direction slid to a six-year low against the dollar. This is despite evidence of a sharp increase in the selling of foreign reserves by the People's Bank of China in September to support the yuan. The desire to offset outflows of domestic capital appear to be one factor behind an announcement by the State Council on Saturday that China would open up more to foreign investment and competition. The other big factor appeared to be a fear of a protectionist backlash in developed economies against its trade policies. The statement was thin on detail. Such declarations are cheap currency and do nothing so suggest how companies like Netflix or Google, whose business involves the dissemination of world-views and cultural stances that China's Communist Party rejects, can really succeed there. [bs_link link="" source="Fortune"]

[bs_bullet_primary] Did the 'Earnings Recession' End in 3Q?

Wall Street swings into earnings season this week, in what will be the last snapshot of corporate America's health before the election. Stock markets have appeared to be supporting Hillary Clinton in this year's campaign, and U.S. futures posted another small gain overnight last night's debate in which neither candidate landed a knockout blow. The Mexican Peso, a more focused market bellwether for the election, also strengthened over the weekend after the revelations about Trump's comments about women into a hot microphone. The world economy slowed down during the third quarter, something that could affect the biggest U.S. companies' earnings. Analysts expect third-quarter earnings at S&P 500 companies will be down by an average of 0.7% from a year earlier, extending a yearlong decline. But revenue is expected to climb 2.5% year-on-year, due in part to the bottoming out of oil prices earlier in 2016. [bs_link link="" source="Fortune"]

[bs_bullet_primary] A Nobel Prize Every CEO Can Relate to

Two U.S.-based economists, Harvard's Oliver Hart and MIT's Bengt Holmstrom, have won this year's Nobel Prize for Economics for their work in researching Contract Theory. The award is notable for its micro-economic focus. Hart and Bengstrom are being rewarded for laying the intellectual groundwork for analysis of an issue that has direct lessons for every company. In recent years, the award has more usually go economists researching more macro phenomena, like Angus Deayton in 2015 for his work on poverty and welfare, or to those researching the structure and functioning of markets, such as Alvin Roth and Lloyd Shapley in 2012. Hart and Bengstr?m's work is topical not least for the persistent controversy over executive pay in the post-crisis world, illustrated most recently by the Wells Fargo scandal. [bs_link link="" source="Sveriges Riksbank"]

Around the Water Cooler

[bs_bullet_primary] Musk Tries to Disarm Revolting Shareholders

Elon Musk doubled down on his controversial corporate strategy at the weekend, tweeting that Tesla Motors won't need to raise either new equity or debt in the current quarter to complete its planned acquisition of SolarCity. Only two months ago, Musk had said that additional funds would be needed both to fund development of its first mass-market car, the Model 3, and support the SolarCity deal. Musk gave no indication that he expected to change the terms of the merger, which some shareholders are suing to stop on the grounds that it overvalues SolarCity to the detriment of Tesla investors. [bs_link link="" source="Fortune"]

[bs_bullet_primary] Deutsche CEO's U.S. Trip Brings No Relief

Shares in Deutsche Bank fell 3% in early trading in Germany after it became clear that CEO John Cryan's talks with U.S. officials while in Washington, D.C., last week had not yielded a quick solution to the bank's capital problems. The Department of Justice's $14 billion claim against Deutsche is threatening to force it, at least, into a highly dilutive issue of new shares. The Financial Times reported Monday that Deutsche had been given special treatment in this year's European stress tests, allowing the bank's capital position to look better than it would otherwise have done. None of the other banks tested received similar privileges, the FT said. Deutsche was allowed to book the proceeds of its sale of a 19% stake in a Chinese bank, despite the fact that the sale still hasn't been completed. [bs_link link="" source="FT, metered access"]

[bs_bullet_primary] Australia Finds a White Knight for Landmark Farming Deal

Australian mining billionaire Gina Rinehart descended from the clouds like a deus ex machina to resolve a bitter and long-running feud over Chinese investment in the country. Rinehart's company Hancock Prospecting will take the lead in a Chinese-backed consortium to buy the S. Kidman & Co cattle company, which controls Australia's biggest cattle property, spread over an area of farmland bigger than Kentucky. The Australian government had earlier vetoed Kidman's deal to sell to a Chinese-led group of investors citing national security issues. The deal touched a nerve with many Australians anxious about the spread of Chinese economic influence in their country. However, at barely $300 million, the deal is far smaller than the Chinese bid for State Grid Co. earlier this year, which collapsed for similar reasons. [bs_link link="" source="The Guardian"]

[bs_bullet_primary] Jack Ma Ties up With Steven Spielberg

Jack Ma doesn't like being outshone. Alibaba Pictures Group, the billionaire's movie unit, said Sunday it will co-produce and finance films for Chinese (and global) audiences with Steven Spielberg's Amblin Partners. The deal comes hot on the heels of a frenzy of M&A activity by Wang Jianlin's Wanda Group aimed at harnessing Hollywood's expertise and experience to the growth potential of the Chinese movie market. Alibaba Pictures was one of the pre-IPO acquisitions that led some on Wall Street to question Ma's strategic judgment, especially in the wake of allegations of improper accounting at the company before Alibaba took it over. Amblin is the company behind DreamWorks Pictures and the socially crusading Participant Media, as well as Amblin Entertainment, the studio behind titles such as "Bridge of Spies" and "The BFG". [bs_link link="" source="Reuters"]

Summaries by Geoffrey Smith


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