Central banks have been printing money aggressively since 2008. The US Fed is now slowing its money printing with a view to a static stance in the near future. What are the consequences for markets and the economy?

When money is printed it has to go somewhere. So far it has gone into asset markets to a far greater extent than it has to the real economy. The transmission mechanism from large scale asset purchases and suppressed interest rates has directed liquidity to stabilizing the mortgage market, and keeping interest rates low across the USD term structure. This has stabilized the housing market and restored household balance sheets to stronger equity positions, strengthened bank balance sheets through their mortgage loan portfolios, and driven yield seeking investors to supporting the corporate bond market which in turn finances share buybacks buoying the equity markets. The impact of QE on financial markets and capital values has been significant yet the impact on the real economy, on employment and wages and on cash flows has been less ebullient.

After 3 rounds and 5 years of QE we are only beginning to see some impact on employment, investment and output. Yet the Fed began, in 2013, to slow its Large Scale Asset Purchases and is expected to end it altogether by October 2014. It is unclear when the Fed will actually either raise rates or shrink its balance sheet; it is currently expected to continue to reinvest coupon and maturing bond principal. The implications of an expanding Fed balance sheet are now known but what about the effects of a static or shrinking balance sheet?

The transmission of QE has thus far directed liquidity to asset markets, notably the agency mortgage backed securities market and the US treasury market. Liquidity, however, has struggled to spur bank lending to financing growth as banks lend out of capital and not just liquidity, and the SMEs which rely on bank lending have faced tight credit underwriting standards. The treatment of riskier, smaller loans under bank regulatory capital rules also hampers such lending. Larger businesses, usually with listed equities, have access to the corporate bond market and have taken advantage of lower rates to raise debt capital. Companies with listed equities have aggressively raised debt to buy back shares thus increasing earnings per share growth without the challenge of having to actually grow their businesses organically. Smaller companies without listed equities do not have this luxury.

That business investment has been slow is concerning. Corporates have raised significant levels of debt in the bond markets, yet hold substantial cash on balance sheet, or engage in share buybacks and M&A. Surveys of business sentiment notwithstanding, the actions of business leaders is not encouraging.

Equity valuations in the developed markets are no longer cheap. Even in Europe, the market has been selective and quality is expensive. Asia is the only region showing any significant value. Yet for equities to push higher, assuming fundamentals are in place, liquidity needs to flow into the asset class. The US Fed is close to neutral, the BoJ, ECB and BoE are all expansionary and the PBoC is probably at an inflection point ready to run loose again. As long as the world’s central banks are in aggregate accommodative, markets will find some support. Under neutral liquidity, such as in the US, for equity and other risky assets to rise, liquidity must be diverted from the real economy. The equity market is therefore highly vulnerable to inflation since such would signal a substation to current consumption. Low inflation has been a sign that liquidity was being directed to investment. The other example is Europe, where inflation has been significantly below expectations and targets. Absent direct asset purchases, a pick up in inflation is in fact a bear signal.

The current structure of the economy is possibly a consequence of income and wealth inequality and that policy has favored the rich. Whereas expansionary monetary policy is normally inflationary, where the benefits of such policy accrue to the rich, the tendency to save or invest the new wealth is high and the marginal propensity to consume is low. Perhaps this is one price of inequality: that monetary policy is blunted and diverted towards more investment and less consumption. Policy makers may wish to consider how the distribution of wealth impacts policy efficacy. Policy that is blind to the distribution of wealth and income can create positive feedback loops which lead to unstable paths or accumulating imbalances.

6 years after the crisis, monetary and fiscal policies have not improved the economy significantly, especially when taken in the context of the financial resources and measures deployed. Global growth has slowed, unemployment remains high and where it has recovered has done so at the expense of the participation rate, income inequality has worsened at the individual and commercial level and geopolitical turbulence has risen, in part from America’s energy boom but in no small part due to growth withdrawal symptoms. What is concerning is that central banks and governments appear to have exhausted their crisis management resources and tools. Interest rates are acutely low, negative in the Eurozone, central bank balance sheets are grossly inflated, and sovereign balance sheets while improving, remain fragile. That inflation is low is a relief for high inflation would inflict serious losses for holders of duration heavy assets such as government bonds which fill the balance sheets of many commercial banks, but low inflation is also failing to erode the value of the stock of debt.

How long can central banks and governments go on supporting asset markets in the hope that sentiment can drag along the real economy? How long can wealth and income inequality continue or worsen, aided and abetted by current economic policy? How long are central banks happy to carry on with their policy tools fully deployed while their efficacy has become blunted? What are the consequences of resetting policy tools such as asset purchases and suppressed interest rates? What if inflation picks up?

After a year of abnormally low volatility, high yield markets are correcting across the globe. Since 2008 the high yield market has experienced 3 bouts of turbulence

1. The European sovereign crisis in 2011.
2. The “Taper Tantrum” of 2013.
3. The last few weeks.

Why have high yield credit markets exhibited this volatility recently?

Purported reasons:

A number of events have coincided with the back up in spreads. I am not so sure they are good explanatory factors.

• The Ukraine troubles and sanctions against Russia are certainly increasing geopolitical risk.
• General turbulence in the MENA region has also increased but these have not been cited as factors.
• Argentina’s default has also been cited as a factor, however, Argentina has been isolated from international capital markets and contagion risk is low.
• Portugal’s banking troubles, specifically Banco Espirito Santo’s reorganization has been cited, but again there is little contagion risk and the Banco du Portugal has been quick to force a reorganization through the creation of a bad bank.

Other Possible Reasons:

• Market complacency. Implied volatilities are acutely low across
  • Treasuries
  • Equities
  • Credit
  • Commodities
  • FX
  • Swaptions

The level of implied vols do not reveal much about skews but generally the market was very complacent coming into the last couple of weeks.

• Realized or historical volatility has been abnormally low in the preceding 12 months. The volatility we have seen in the last couple of weeks is actually closer to normal volatility.
• While fundamentals remain healthy in the US and are improving in China and Europe, asset prices have run ahead of themselves in the US and Europe across equities, bonds and loans. A good asset bought at too high a price is a risky investment. A bad asset bought at a sufficiently low price is a less risky investment.
• Simple mean reversion in realized volatility.

Risks: Here are some of the more topical ones.

• Geopolitical risks will remain high but this is likely to be a long term problem going forward. It is not easily foreseeable so we have to either live with it and apply tighter risk management or increase our risk aversion. The slower pace of global growth, global recovery notwithstanding, is ushering in a new era of contentiousness between friend and foe alike. Expect less cordial negotiations in trade, commerce, and strategic matters in the foreseeable future. Risk = High.
• Economic growth. On the whole, global growth is stabilizing around a slower long term potential growth rate. There will be oscillations around this new rate but slower credit creation, more mature demographics, a relative de-globalization will slow the long term potential growth rate. While the secular trend is slower, the phase in the cycle is positive for the US, China and Europe. Emerging economies with small domestic demand bases or lower technology manufacturing will be at a disadvantage. Countries like Brazil for example will face not only a slower economy but a slower long term potential growth rate, inviting higher inflation at each level of growth. Reform in India and Japan are beginning to gain traction which will pay long term dividends. Indonesia’s prospects are good if the new President is able to consolidate, unite and execute. Risk = Low.
• Valuations are high in the developed markets across most asset classes from equities to bonds to loans to rea
  l estate. The concerted action of central banks has led to asset reflation almost across the board. The MV=PQ equation has not failed. The conspicuous absence of inflation has distracted the market from the obvious inflation of asset prices. The P in the equation is a vector whose components consist not only of goods and services but assets and forward markets. The liquidity operations of central banks has leaked into the asset markets while goods and services inflation has grown more moderately. As mentioned before, the risk of buying a good asset at an overly inflated price is high whereas the risk of buying a poor asset at a sufficiently low price, is comparatively low. The actions of central banks have led to a loss of price discovery in the free market. Risk = High.
• Liquidity I: Liquidity is a fickle friend. It is ample when not required but deficient precisely when it is required. The only markets with constantly high liquidity are the USD and US treasury markets where safe haven status can lead to higher liquidity in stress situations. In the context of credit markets, current liquidity remains good but untested. A test may soon be underway. Bond dealers’ ability to provide liquidity has been seriously diminished. Risk = High.
• Liquidity II: An underappreciated risk is the how investors gain access to an asset class. They do so in what can best be described as aggregation vehicles. The collective investment scheme is one example. So is the CDO or the CLO. These are significant investors across all credit assets from bonds to loans to asset securitizations. In all of these cases, the capital of a collection of investors is pooled into a single vehicle and placed under the management of a professional manager. The consequence of aggregation vehicles is that it concentrates decision making of large amounts of capital in the hands of small numbers of decision makers who often have the same behavioral traits, often the consequence of their contractual and compensation arrangements. That large swathes of the industry rent or purchase the same risk systems is another risk. Certain purveyors of risk system either dominate the market or are large asset managers themselves. By correlating the behavior of a smaller set of decision makers controlling large amount of capital, aggregation vehicles and common risk systems or standards add to liquidity by creating one way liquidity, ample on the way in and not so ample on the way out. Risk = High.

Mitigation:

• Decision making is very difficult in the face of market volatility, even if it is upside volatility. Downside volatility circumvents most human logic circuits. The decision to buy must be accompanied by sell discipline and a list of sell triggers. Too many investors buy without a selling plan. With defined triggers and milestones, a market move can be analysed with disinterest and the optimal decision taken.
• Diversify. The only investor who doesn’t need to diversify is the one who is always right. I have yet to meet this person. Diversify by region, by asset class, by issuer quality, by priority of claim. And watch those correlations. Institutional investors search relentlessly for low correlation strategies which they value as part of their diversified portfolios.
• Understand what you are buying. A thorough understanding of an investment one is making allows one to make informed decisions when prices move. Up or down. When do you average up, or down? When should you take profit or cut loss? Generally, for directional long only (or short only strategies), add risk when you move into profit and cut risk when you lose. For arbitrage strategies, almost always you should add risk when you move into a loss. That’s the rule of thumb. When the investment thesis is invalidated, sell, even if you are making money. When an investment thesis continues to hold but a position goes into loss, that’s the most difficult situation. Are you wrong? Is the market wrong? Lord Keyne’s said, some 80 years ago, the market can stay irrational longer than you can stay solvent…
• There are several ways to de-risk a portfolio.

o Increase the cash allocation by selling some risky assets.

o Switch from lower quality issuers to higher quality issuers.

o Switch from junior and subordinated assets to senior and secured assets.

o Switch from expensive assets to cheaper assets.

Practical matters:

• For investors who have a high allocation to high yield we counsel caution. We did not say sell. In particular we did not recommend a sell on European HY. We focused our caution on US HY where we felt that spreads were too tight and did not refl
  ect value despite healthy corporate fundamentals.
• In the US, we recommend diversifying from HY to IG thus moving up the credit quality scale.
• In Europe, we recommend remaining in HY but to be more specific, buying subordinated capital of financials, that is, bank capital securities.
• In Asia, equities are undervalued. So, while equities are the junior security, we recommend diversifying credit exposure into equity exposure.

Bottom line:

European high yield remains attractive. While some sovereign risk remains, and will remain as long as the European persist with the EUR, the ECB’s promise to do ‘whatever it takes’ is a back stop for the European credit markets. That inflation is low also underpins duration in European credit. The region is improving in terms of credit quality. While the US is in re-leveraging mode Europe remains in recapitalization and deleveraging mode which is constructive for credit. Pricing is certainly not as cheap as it was a year ago and bonds trading well above par are vulnerable to mark to market price volatility. Credit quality, however, is improving and underwriting standards are being maintained. European bank capital has been a big theme. While the asset class has done well, the volume of issuance, driven by increased regulation, has maintained spreads at attractive levels. Security selection is key as the theme is fairly mature. Fortunately, the variety of complex structures,  amd differential triggers and capital treatment, provides ample alpha opportunities.

In the US, high yield pricing is more stretched, not only against the sovereign curve but against investment grade credits. While investment grade is also trading tight, spreads are still reasonable against both high yield and treasuries. That said, high yield spreads remain some 50% wide of 2007 tights. IG spreads, however, are double their 2007 tights. Corporate balance sheets remain cashed up, however, balance sheets are being relevered once more and underwriting standards are faltering. The majority of leveraged loans issued this year are covenant lite. We remain optimistic about US RMBS, in particular in the Option Arm and Alt-A’s while eschewing the riskier sub-prime loans.

Asian high yield spreads are quite attractive, some 200+ basis points cheap to their developed market counterparts. The pendulum seems to be swinging towards Asia as China recovers and India and Japan pursue reform. A more accommodative PBOC can easily precipitate a risk on environment in the region. LatAm, on the other hand seems to be swooning with Brazil, once the darling of the BRIC facing stagflation and Argentina default. While EM may look attractive in parts, equities remain cheap to credit and are the preferred trade expression.

A word about convertible bonds. Issuance has been well bid and valuations are rich and getting richer even as issuers tend to be riskier. Demand has been driven by credit and yield investors (as opposed to arbs) who see converts as a yield enhancement alternative. The market appears to be demand driven with little consideration for monetizing the embedded vega or indeed value and could be vulnerable if fund flows reverse.

Without considering fundamentals, lets look at some pictures…

The global economy is in relatively rude health. The US continues to grow and employment is becoming broader based. The UK is one of the faster growing economies in the developed world. China is recovering nicely as the PBOC eases. The ECB is underwritten the Eurozone economy and is cleaning up the banks. LatAm and some other emerging markets are flirting with stagflation but China, India, Indonesia, are healthy. The MENA is in turmoil and but this is in part a consequence of their waning energy importance. On balance, the world economy looks alright. But there is a right price for everything. Sadly we just don’t know what it is until after the fact. So here are a few pictures for you to make up your own minds.

Are equities expensive? The yield gap between US equities and UST 10 year yields is still reasonable if you use 12 month trailing earnings. However, the Shiller PE is at 26X against a long term average of 17X. Which one is appropriate is a matter of inclination.

What is the relative valuation between US equities and US corporate bonds? Here is the spread between US equity yields and the yield on Baa rated corporate debt. Looks like a toss up.

What does the relative valuation between US HY and IG look like? Looks like HY is trading tight to IG and could widen.

What is the spread between Baa and UST 10 years? IG does not appear as tight as one might have expected.

How steep is the US term structure? The  2 – 10 spread looks pretty healthy. In fact, there appears to be room to flatten.

The 2 – 30 spread certainly looks like it has room to flatten.

What are inflation expectations? Here are the 5 year breakevens (spread between TIPS and USTs). Inflation does not appear to be a concern. However…

The Fed balance sheet is a bit big. And inflation can rise if the velocity of money picks up and multiplies through the balance sheet.

What can we infer from all this?

• Equities are not expensive if you use 12 month trailing earnings but are expensive based on the Shiller PE which adjusts for profitability.

• Investment grade credit is not as stretched compared with treasuries.

• High yield is over valued relative to investment grade.

• The yield curve is still quite steep. This bodes well for the economy and for equities. There is room to flatten which is actually good for carry trades and duration.

• All can be well if inflation doesn’t suddenly pick up.

Things that make you go hmmm…

Post 2008, the S&P and the Fed balance sheet seem to be going in the same direction. And now what is the Fed up to?

Equity, bond, FX, swaption and commodity volatility have one thing in common. They have contracted steadily from 2008/9 levels to 2006 levels, almost in lockstep. To some, this is a sign of complacency, to others, calm.

The US economy remains the focal point of the global economy as it is one of the few areas of sustained growth, and its interest rate policy and treasury markets will influence credit conditions globally. In Q1, this growth faltered, ostensibly due to bad weather. Currently, the economy suffers from weak consumption, capex, and exports while at simultaneously facing a manufacturing renaissance and an improving labour market. I expect growth to pick up from Q2 well into the future, driven by a revitalized consumer and a recovery in investment as US capital stock has an average age of 23 years and is overdue for a wave of replacement. As stronger data emerges, it is likely to drive rates higher across the curve. Fed policy is likely to suppress the short end for a much longer time to come. Demand and supply considerations are likely to flatten the curve, so any short term steepening is catalyst driven, likely to be short lived, and should be seen as a buying opportunity, especially at longer maturities. US equities are currently expensive, having run ahead of themselves and risen through multiple expansion in the previous two years. Corporate profitability is also at cycle highs and further gains will require a further transfer of share of output from labour to businesses, a phenomenon the Fed has identified as unhealthy for the labour market and welfare. The relentless dominance of intellectual property in the so-called knowledge-economy may perpetuate this phenomenon. Individuals have limited capacity to accumulate intellectual property compared with institutions. Unfortunately, unchecked the decreasing share of profits due to labour will also lead to further disparity of wealth and income distribution. While corporate prospects are healthy, albeit patchy, corporate bonds remain reasonably priced especially in the investment grade sector. A surfeit of capital seeking high yield has reduced spreads relative to treasuries and high grade to the extent that they are relatively expensive. The outlook for the US remains optimistic, however, conviction around this call is quite low.

In Europe, the picture is decidedly disinflationary with the exception of the UK and possibly Germany. Rates are likely to remain subdued for some time. In the Eurozone, the economy remains generally weak with pockets of fragile growth. France remains a significant risk as business conditions and sentiment remain weak. Peripheral Europe is picking up, particularly in Spain. Italy remains a problem area. What plagues Europe, generally, is that banks have not reorganized their balance sheets or raised sufficient capital and are therefore not lending, especially to SMEs which are the key to European growth and employment. The ECB has taken steps, notably with two TLTROs in the calendar, to boost bank lending to businesses. These measures are unlikely to work on their own, and more needs to be done, in particular, to improve bank balance sheets to enable lending. Policy is therefore expected to be accommodative for some time to come. New measures are unlikely in the second half as the measures announced in June are implemented and the ECB will want to see how effective they are. One area of particular interest is the vague statement by the ECB regarding its preparations for outright purchase of asset backed securities. Not only is this QE but it could signal the emergence of a liquid market for new securities, possibly with ECB credit support. This is of course speculation but would represent a step change in ECB policy and technology. Region wide, inflation is hardly a problem and fears of deflation are pervasive, with the exception perhaps of Germany. July witnessed the appointment of a new EU Commission President which presages the usual political horse-trading by member countries for key EU appointments to represent their special and particular interests, such as fiscal flexibility in the case of peripheral Eurozone. This occurs amid cynicism and disinterest amongst the people of Europe for the EU.

The UK is a slightly different picture. Growth is robust, albeit unbalanced, with big business taking the major share of the recovery. Concerns over an overheating housing market cast a pall over rates but this is unlikely to translate into immediate and significant policy action. While rates might be hiked, it won’t be by a lot and will probably be later than the market expects. Apart from luxury prime housing in the capital, fueled by foreign money backed by acutely low levels of leverage, the UK housing market is only in its early stages of recovery, and the government will not sacrifice the recovery on account of an anomalous segment of the housing market. Higher rates will choke of the recovery in SMEs which already trail big business which mostly access the bond markets for funding. Inflation has begun to rise, although it remains below the 2% level at which policy action becomes a real prospect.

Japan’s recovery feels more and more real by the day. Abe’s Third Arrow appears to be material. The concern in Japan is to do with its funding model and its export sector. Globally, exports are facing a wave of mercantilism. Japan’s debt service and refinancing prospects are precarious. Japan is cash flow insolvent. Its trade balance has gone sharply negative for most of 2013 and reserves may come under pressure. The cost of shorting the 10 year JGB is low with the yield at some 60 basis points. Liquidity in the JGB market has also become fickle of late, remarkable for a large sovereign debt market. The question for Japan is if it can grow sufficiently quickly to maintain confidence. Between reality and confidence, always bet on confidence. So far, Japan has the confidence of the market and so the risk on trade continues.

China is an interesting market. It has one of the cheapest equity markets in the world and economic growth, while slowing, remains high by any standards. The risks of excessive credit are well documented and while they should not be ignored, the ability of the central government to bail out the credit system should also be taken into account. Don’t avoid the market for this reason alone, just make sure the fire escape is unlocked. Recent data points to a cyclical recovery, to a certain extent driven by macro prudential accommodation. With a closed capital account, monetary policy plays a big part in prices of assets, goods and services, particular in asset
markets where international access is limited. It is likely that as the US Fed begins to slow the inflation of its balance sheet, the PBOC will eventually be under pressure to be more accommodative and this will likely trigger a risk on phase for Chinese domestic risk assets. This may not be too far away. While US rates are unlikely to rise, at least not significantly, for a couple of years, large scale asset purchases are being scaled back. We have seen some signs of monetary easing in China, which might trigger a sustained risk-on phase. Certainly, the sustained underperformance of China assets has led to them being under-owned and risks are to the upside.

A comment about LatAm and Brazil in particular. The World Cup is over, and the hangover has begun. Brazil’s economy has slowed significantly with no respite in sight. Industrial production has been soft and business sentiment is gloomy. As the economy has slowed, inflation has picked up again to over 6.50%. Brazil sovereign spreads have begun to widen after 6 months of tightening. If Brazil is indicative of the region, the picture is not optimistic. Argentina’s sovereign credit issues have added volatility to regional CDS spreads. LatAm is illustrative of export dependent emerging economies as de facto protectionism takes hold. Growth has to be internally generated through more domestic consumption. Without the crutch of exports to lean on, allocative efficiency cannot afford to be confounded by inflexible or policy distortion of relative prices.

Mercantilism is likely to proliferate as the world seeks a new model of growth. The past three decades were marked by accelerating globalization, offshoring, specialization and trade. The credit crisis of 2008 exposed the fragility of over-reliance on trading partners, and countries are seeking to find a better balance between domestic and export drivers. This new balance favors countries with a domestic demand base and disadvantages countries reliant on exports. The nature of domestic consumption is important. That domestic consumer base needs to demand goods and services produced domestically.

Inflation is an important indicator. The current global wave of money printing has not driven inflation, but it has driven asset prices. As long as central banks continue to print, asset prices will be supported. It is when central banks adopt a neutral or worse, a tightening position, that the trade off between goods and assets manifests. Europe will likely see further asset price inflation as the ECB continues to be accommodative and inflation remains subdued. The US is at an inflection where the Fed will slow its LSAP to only recycle run offs. There, assets will compete with goods and inflation will be a concern. In China, inflation is in a manageable range, but this hides considerable effort involving macro prudential policies.

Policymakers, central banks and regulators are always addressing the crises of the prior generation. The focus on inflation fighting led government to lose sight of more dangerous imbalances brewing in credit markets in the years leading up to 2008. Governments today are preoccupied with regulating the banking system and credit markets. It is safe to say the next crisis will not be precipitated by the banks. One risk is the re-emergence of inflation. Central banks have been in easing mode and will become conditioned to it. They may be late to turn off the taps when the barrel is full. This is a less probable risk given that inflation was a recent problem, the one prior to the credit crisis. Another risk is political risk. This can arise from a number of sources. The fracking boom has made the US more energy independent which has led it to retract from the Middle East leaving it more time and resources to concentrate more on engaging China. This has destabilized the MENA region. This theme is unlikely to reverse soon and things are likely to deteriorate further as the US becomes less engaged in the region. The reversal of globalization is also likely to make the globe a more contentious place as countries become less interdependent. Another serious issue that an entire generation has tried to defer to the next will eventually rear its ugly head and that is of retirement funding. In most developed markets, available data shows impending funding shortfalls for entire generations as they come to retire. Households are generally unprepared and have not considered their financial plans for when they cease to be in gainful employment. For many, their savings will be insufficient, and this does not even take into account risk of illness which may either curtail the period of employment, or increase the cost of care in retirement. No doubt the financial services industry will be first to offer solutions, at a price.

It is difficult for an individual to hold, accumulate or acquire intellectual property directly. Storage capacity is one issue. At best an individual can hold or acquire the last mile of the intellectual property chain. The most practical way for an individual to own intellectual property is through ownership of a company or business. (Higher education and vocational training are examples of acquiring non exclusive access to existing technology and need separate treatment.)

The storage of intellectual property is one of the possible reasons that labour’s share of income has been declining almost monotonically. Perhaps the picture might look more balanced if we include under labour’s share, a portion of corporate’s share representing labour’s ‘IP holding company.’

One of the implications of this interpretation is that the distribution of intellectual property is somewhat dependent on individuals’ investments into companies or businesses. It follows that income distribution is also dependent on the extent of equity investments.

Incremental innovation and IP accumulation can therefore imply a steadily declining share of profits for labour. How far can labour’s share decline, and what could happen? In the extreme, what happens when labour’s share tends to zero? Are wages expected to tend to zero? What then is a fair distribution of intellectual property and how would it be allocated? A concrete example would be: if robots did all the work in the world, how much would humans get paid, and who would own the robots? If we assumed an arbitrary endowment of ownership at a snapshot in time, how would this evolve? It is reasonable to assume that ownership of such assets would compound much faster and lead to a greater inequality of wealth. Owners of equity are owners of intellectual property and will obtain a disproportionate and growing share of output and income. In the hypothetical limit, income is entirely derived from ownership of assets and labour obtains zero income and employment. Clearly, before this could happen, social and welfare issues would arise.

The disruption to the current trend of rising productivity, rising corporate profitability, the decline of labour’s share of income and production, appears only to be interruptible by non-economic, extra-commercial factors.