Try Abba Lerner's ideas! John Llewellyn and Russell Jones, two establishment economists, have come up with an unorthodox economic policy to get the world back on the growth track. On its own, “structural reform is ill-equipped to combat a chronic shortage of expenditure and dormant animal spirits.” Perhaps the solution is “less conventional macroeconomic policy, perhaps adoption of so-called ‘functional finance’”.

Functional Finance

They write about functional finance:

“This term was coined by Abba Lerner, a Russian-born British economist who in the 1930s worked alongside both Friedrich von Hayek and John Maynard Keynes, and then emigrated to the US, where he taught at universities.

“A maverick, albeit a brilliant one, Lerner’s macroeconomics ca[me] down to the idea that so strong [is] the economic, social and moral case for achieving high employment and relative price stability, policymakers should not be fussy about how they went about it. Policies should be judged on their ability to achieve these goals, and not whether they were considered ‘sound’ or comply with the dogmas of traditional economics. It was maintaining an adequate flow of expenditure that mattered.

“Lerner’s view would be that if direct financing of budget deficits by the central bank is the only option to boost aggregate demand and keep output in line with potential, then it should be employed.

“Modern-day policymakers may come to the same conclusion. Direct debt monetisation would break the policy logjam produced by a requirement for simultaneous deleveraging in both the private and public sectors. Because it makes no call on private sector savings, it should also prove more expansionary than QE or orthodox fiscal expansion on a unit-by-unit basis. Furthermore, by acting to rebuild shattered confidence, it could ’crowd in‘ additional private expenditure. Finally, as long as programs of direct debt monetisation were confined to closing large output gaps, the inflationary impact should be limited.

“Arguments against direct debt monetisation fall into two categories: the moral hazard it encourages, and its inflationary potential. The disruption of the connection between government decisions on the budget deficit and the willingness of the private sector to fund that deficit at reasonable interest rates destroys at a stroke one of the most important disciplines the market imposes on politicians. And with that discipline swept away, the door is open to irresponsible and ultimately inflationary policies. This, it would be argued, would at the very least encourage a significant increase in inflation expectations and risk premia.

Latin Juntas and Zimbabwe?

“Despite the logic of Lerner’s philosophy, taboos about outright ‘monetary financing’ cannot easily be cast off. In Latin American dictatorships and Robert Mugabe's Zimbabwe, debt monetisation is the route to hyperinflationary purgatory. But these taboos are ‘man-made‘ rather than ’God-given‘. Monetary financing need not always be bad and lead inevitably to a catastrophic loss of price stability. There can be circumstances where it is appropriate. Key considerations are: whether it has been subject to a rigorous cost-benefit analysis, how it is operat[ed], and whether it can be ‘turned off’ once it filled its objectives.

For the public and markets not to fear the worst, robust checks and balances need to be in place before direct debt monetisation: an explicit inflation, price level, or nominal GDP target framework, and all the transparency that goes with it.

“It would also make sense that any final decision [on debt monetisation be given to] an independent central bank’s policy-making committee, rather than a government. Direct monetary financing [sh]ould be [for] a specific amount over a specific period – say 3% of GDP over 3 years. It must be finite.

Rather than financing tax cuts [and thus] government popularity, it would be better funding a specified number of public infrastructure projects, [to] add to an economy’s productive potential and subsequently be partially sold back to the private sector. In the euro area, financing could be provided to the European Investment Bank rather than individual governments, thereby ring-fencing public sector balance sheets from associat[ion] with Weimar Germany,

“As a symbol of authorities’ good faith, it make[s] sense to combine the stimulus with structural reforms applied over [several] years.”

The economists work for Llewellyn Consulting in London, www.llewellyn-consulting.com. I know the principal of the firm since he was deputy chief economist at the very orthodox multilateral Organisation for Economic Cooperation & Development in Paris.

China ended most but not all of the ambiguity over the link between the Shanghai and Hong Kong stock exchanges by announcing that it will waive capital gains taxes on foreign investors licensed to invest in China by extending their tax exemption to linked trades on the Hong Kong exchange. How long this waiver will last is still not defined but it is enough to get business going. The link of exchanges starts up Nov. 17. A former China correspondent of this newsletter is involved.

More  follows from Singapore, China, and Hong Kong, and other places like Mexico, Britain, The Netherlands, S. Africa, Canada, Portugal, Spain, Brazil, and Finland.

Anchored to ANTON, Schlum

• Anton Oilfield Services, which we kept our half share in (as it fell too fast to sell) reported on its outlook for the next 3 years. ATONY trades as 3337 in Hong Kong, but operates mostly in China. It is 20% owned by Schlumberger Ltd. ATONY provides three services: production services like above-ground maintenance of equipment on drilling rigs; workover service for underground boreholes and reservoirs; and lately also reservoir monitoring for production wells. It is innovating in how it contracts for its services as well as expanding them.

Production services will bring ATONY more stability in revenues it is not linked to oil and gas companies' capital spending and is less cyclical. Moreover, production services require less of ATONY's assets, and are longer-term. Apart from monitoring, production services include operations management, equipment repair and maintenance, and surface engineering. When production service contracts expire, clients tend to renew rather than shopping around.

The move to production services began in 2012. The goal is to triple the number of Anton production engineers from 150 now to 450 in three years to serve Middle Eastern and African markets. The order backlog in production services now is over RMB 270 mn for next 2 years and is expected to reach the higher end of ATONY's 30% to 50% growth target. The 2015 backlog is more than half the 2-yr total.

Workover services are ATONY's newest line, launched only this year, mostly now offered in northwest China, including: regular and special workovers, sidetrack drilling, well testing and completion, and regular maintenance. This business has what ATONY calls “excellent opportunities for domestic market opening” and gives it “a head-start” as markets recover.

Anton expects it “will achieve leap-frog growth in this product line” which will bring “continued stable income streams in this new market.” ATONY owns 4 worker rigs and manages another 16. How the optimistic forecasts arose:

Late in Oct. it was qualified to run 3 workover rigs for oil exploration in southern Xinjiang province and the rigs will enter service shortly, bringing to 4 the number of rigs operating, all brought on this year. In eastern Xinjiang another late Oct. award for workovers came from another unnamed Chinese national oil driller company which will provide its own 16 sets of capital equipment to be managed by an independent service between the client and an ATONY crew to increase effectiveness.

This is a new cooperation model which ATONY expects can be replicated both within China and in the Middle East and South America. The unnamed client earlier this year signed a contract with ATONY for RMB 114 mn, and the revenue projected to be received in 2015 alone is capped at the contract value. Subsequent earnings can rise. The workovers order backlog is RMB 150 mn all for 2015.

Reservoir services are still being developed. They will improve recovery by using dynamic monitoring and evaluation of reservoirs; creating optimal reservoir production plans; offering specialised engineering and consulting. This product line is expected to produce first revenues in 2015 after initial development is completed.

Lower reservoir spending except on personnel (it expects to add 600 reservoir field engineers over the next 3 years) will stabilize ATONY's capital expenditure. It will try to apply cooperation already in place for workovers to other dealing with state sector oil companies, to meet “their rigid demand of production phase maintenance and production services.”

“As a pioneer of the oil and gas sector reform” ATONY “is poised to forge similar strategic partnrships with other domestic oilfields, helping the production module to gain scale and generate stable and stronger cooperation to provice more project opportunities for sustainable development.” ATONY says its mission is to “help oil companies solve their challenges in increating production, improving drilling efficiency, and optimizing waste management” as China develops its gas fields. ATONY also operates in the Middle East, mostly Iraq; central Asia, Africa, and Latin America.

Another reason for sticking with ATONY is expectation that it will attract Shanghai investors.

• Schlumberger is not currently involved in merger talks between its rivals, Halliburton and Baker Hughes, but it may get to buy assets they may be required to divest. This may nip the forecast by an anonymous Seeking Alpha writer that SLB can raise its dividend by 100 basis points over the next 15 months. (“Stock Gamer” writes of “a 1% dividend” rise but he doesn't mean only 1% of the current 1.6% payout level to 1.61%, but a rise to 1.7%.) SLB is Dutch.

• A complex multifaceted jv will link Naspers, the global S. African media group, with Asian firms as they join together to collect on-line advertising, notably classifieds. The venture, subject to EU competition approvals, will link NPSNY to Singapore Press Holdings, and 2 Norwegian firms, Schibsted Media and telco Telenor ASA. Contributor Harry Geisel, who wrote up NPSNY, also suggested buying Schibsted but your author vetoed the idea as she has too much media risk. Schibsted rose 37% in Oslo today, overshadowing the mere 12% rise for Naspers. It is now a 10-bagger for us.

Aggro for Abengoa?

• Abengoa continues to fall and is now below half our recent acquisition cost. Green energy is being hurt by ever-lower oil prices but this may be overdone. It initially fell to $7.70 and change but then recovered to $0.37 after ABGB has raised its 2015 dividend guidance to $1.60/sh and launched an initial divi at 25.92 cents for Q3 (equal to 8%!). It also said Q3 saw earnings before interest, taxes, depreciation, and amortization up 103% from last year's Q3 to $226 mn . ABGB is down mainly because the rating agencies may cut its credit and it fell over 36% today alone in Spain. Earlier this week it cut its full year sales figures to euros 7.4-7.5 bn and reported 9-mo figures (as it hadn't really been operational a year ago.) All this seems to be scaring the market. We await Frida Ghitis to sort this out for us. I put in a low bid to average down. Friday's are good for low bids on Europe stocks.

• Mexichem lost a case before the US International Trade Commission despite hopes earlier that it would succeed in getting a dumping designation on Chinese fluoride refrigerant gas imports, which would subject them to countervailing duty, Eduardo Garcia writes. MXCHF was surprised at the ruling because the US Dept of Commerce earlier said that China was selling its refrigerants at more than 11% below the cost of production and should be subject to 280.7% in duty. Mexichem, a global leader in fluoride and chlorine chemicals and plastic pipe, is considering an appeal of the US ITC ruling, according to Reuters. Although its gas refrigerants account for only ~3% of sales, the ruling hit MXCHF's stock price. (Eduardo Garcia edits www.sentidocomun.co.mx with which we trade articles.)

• Royal Bank of Scotland has opted to totally exit the US mortgage market rather than scaling it down, in part because new US rules would require it to create a holding company if it had more than $50 bn in American assets. It would if it kept the home lender. We own RBS and NatWest preferreds which gain the longer its eventual privatization is delayed. RBS is 81% owned by the UK government since its bailout.

• Agrium is issuing $500 mn in 30-yr US-listed bonds yielding 5.25% to refinance existng debt. The bonds, for US investors only, are priced at 99.491% of par. The lead managers are Merrill Lynch, RBC Capital Markets, and Scotia Capital. We own AGU common listed both here and in Canada.

• Nokia Oy suffered a 2.5% loss in Friday's London trading after its 2015 guidance came out. It is now down 5.5% in the US. NOK raised its long-term margin target to 8-11% from 5-10% but did not give many details beyond saying next year's sales overall and for Here and for IT licenses would grow, with no figures. It expects capex to come in at euros 200 mn and have net financial expenses of euros 160 mn, plus operating expenses of euros 120 mn. Telco spending on mobile networks is expected by CEO Rajeev Suri to be “flattish” but expects that NOK will gain market share. One reason for the vagueness is that it is in arbitration over IT with Samsung for violating NOK's patents.

• Credit Suisse cut its rating for Oi of Brazil OIBR which is burning through its cash. This afflicted our Portugal Telecom especially as a weekend looms. I couldn't resist buying more, in my IRA. I am a PT junky.

• More China. Chaintek insiders opted to take their dividends in “scrip” meaning stock, rather than cash, which frees up the cash for other shareholders. We will get 1 UK penny per share Nov 17 if the stock is at 58.3 pence or higher. (CTEK:AIM).

Fund notes

• We also take an indirect hit through our shares in closed-end Mexico Equity & Income, MXE, whose Maru Pichardo introduced us to Mexichem.

• A new ETF called Emerging Markets Internet, EMQQ, is buying not just Alibaba Group, but also Yandex. Run by Exchange Traded Concepts, it follows an index from Big Tree Capital LLC which uses not the place of listing but the site of operations to designate a company as being from emerging markets. BABA is US listed; YNDX is Dutch-listed but operates in Russia, Ukraine, and Turkey.

• Aberdeen Asia-Pacific Income Fund (FAX) resumed trading after a NYSE Mkt outage yesterday.

• Uranerz, URZ, which I also own, which also was suspended yesterday, rose 5.6% today, partly because of troubles with nuclear cooperation with Russia. I really would prefer to not make money on nuclear splits.