Raphael Stevens

Universities have boomed in recent decades. Higher-education institutions across the world now employ on the order of 15m researchers, up from 4m in 1980. These workers produce five times the number of papers each year. Governments have ramped up spending on the sector. The justification for this rapid expansion has, in part, followed sound economic principles. Universities are supposed to produce intellectual and scientific breakthroughs that can be employed by businesses, the government and regular folk. Such ideas are placed in the public domain, available to all. In theory, therefore, universities should be an excellent source of productivity growth.In practice, however, the great expansion of higher education has coincided with a productivity slowdown. Whereas in the 1950s and 1960s workers’ output per hour across the rich world rose by 4% a year, in the decade before the covid-19 pandemic 1% a year was the norm. Even with the wave of innovation in artificial intelligence (ai), productivity growth remains weak—less than 1% a year, on a rough estimate—which is bad news for economic growth. A new paper by Ashish Arora, Sharon Belenzon, Larisa C. Cioaca, Lia Sheer and Hansen Zhang, five economists, suggests that universities’ blistering growth and the rich world’s stagnant productivity could be two sides of the same coin.To see why, turn to history. In the post-war period higher education played a modest role in innovation. Businesses had more responsibility for achieving scientific breakthroughs: in America during the 1950s they spent four times as much on research as universities. Companies like at&t, a telecoms firm, and General Electric, an energy firm, were as scholarly as they were profitable. In the 1960s the research and development (r&d) unit of DuPont, a chemicals company, published more articles in the Journal of the American Chemical Society than the Massachusetts Institute of Technology and Caltech combined. Ten or so people did research at Bell Labs, once part of at&t, which won them Nobel prizes.Giant corporate labs emerged in part because of tough anti-monopoly laws. These often made it difficult for a firm to acquire another firm’s inventions by buying them. So businesses had little choice but to develop ideas themselves. The golden age of the corporate lab then came to an end when competition policy loosened in the 1970s and 1980s. At the same time, growth in university research convinced many bosses that they no longer needed to spend money on their own. Today only a few firms, in big tech and pharma, offer anything comparable to the DuPonts of the past.The new paper by Mr Arora and his colleagues, as well as one from 2019 with a slightly different group of authors, makes a subtle but devastating suggestion: that when it came to delivering productivity gains, the old, big-business model of science worked better than the new, university-led one. The authors draw on an immense range of data, covering everything from counts of phds to analysis of citations. In order to identify a causal link between public science and corporate r&d, they employ a complex methodology that involves analysing changes to federal budgets. Broadly, they find that scientific breakthroughs from public institutions “elicit little or no response from established corporations” over a number of years. A boffin in a university lab might publish brilliant paper after brilliant paper, pushing the frontier of a discipline. Often, however, this has no impact on corporations’ own publications, their patents or the number of scientists that they employ, with life sciences being the exception. And this, in turn, points to a small impact on economy-wide productivity.Why do companies struggle to use ideas produced by universities? The loss of the corporate lab is one part of the answer. Such institutions were home to a lively mixture of thinkers and doers. In the 1940s Bell Labs had the interdisciplinary team of chemists, metallurgists and physicists necessary to solve the overlapping theoretical and practical problems associated with developing the transistor. That cross-cutting expertise is now largely gone. Another part of the answer concerns universities. Free from the demands of corporate overlords, research focuses more on satisfying geeks’ curiosity or boosting citation counts than it does on finding breakthroughs that will change the world or make money. In moderation, research for research’s sake is no bad thing; some breakthrough technologies, such as penicillin, were discovered almost by accident. But if everyone is arguing over how many angels dance on the head of a pin, the economy suffers.When higher-education institutions do produce work that is more relevant to the real world, the consequences are troubling. As universities produce more freshly minted phd graduates, companies seem to find it easier to invent new stuff, the authors find. Yet universities’ patents have an offsetting effect, provoking corporations to produce fewer patents themselves. It is possible that incumbent businesses, worried about competition from university spinoffs, cut back on r&d in that field. Although no one knows for sure how these opposing effects balance out, the authors point to a net decline in corporate patenting of about 1.5% a year. The vast fiscal resources devoted to public science, in other words, probably make businesses across the rich world less innovative.If you’re so smart, why aren’t you rich?Perhaps, with time, universities and the corporate sector will work together more profitably. Tighter competition policy could force businesses to behave a little more like they did in the post-war period, and beef up their internal research. And corporate researchers, rather than universities, are driving the current generative ai innovation boom: in a few cases, the corporate lab has already risen from the ashes. At some point, though, governments will need to ask themselves hard questions. In a world of weak economic growth, lavish public support for universities may come to seem an unjustifiable luxury. ■ More

Billionaire investor Ken Griffin’s flagship hedge fund rose last month as volatility made a return amid the debate about rate cuts.
The Citadel CEO recently spoke positively of the U.S. economy, seeing the Federal Reserve engineering a soft landing this year.

Ken Griffin, CEO of Citadel, at CNBC’s Delivering Alpha on Sept. 28, 2022.
Scott Mlyn | CNBC

Billionaire investor Ken Griffin’s flagship hedge fund rose last month as volatility made a return amid the debate about rate cuts, according to a person familiar with the returns.
Citadel’s multistrategy flagship Wellington fund climbed 1.9% in January, following a 15.3% gain last year, according to the person, who spoke anonymously because the performance numbers are private. All five strategies used in the fund — commodities, equities, fixed income, credit and quantitative — were positive for the month, the person said.

The Miami-based firm’s tactical trading fund gained 2.6% for the month, while its equities fund, which uses a long/short strategy, returned 2.1%, said the person. Meanwhile, Citadel’s global fixed income fund returned 1.7%.
Citadel declined to comment.
The stock market had rallied to start the year, but the momentum lately eased as hopes for rate cuts pulled back. Federal Reserve Chair Jerome Powell said in late January that a March rate cut is unlikely, triggering the biggest daily loss since September for the S&P 500. The equity benchmark was up 1.6% for January.
The Citadel CEO recently spoke positively of the U.S. economy, seeing the Federal Reserve engineering a soft landing this year. He said the overall economy looks “pretty damn good” right now, with recent data indicating a solid labor market, healthy GDP growth and inflation moderating at a better pace than expected. 
The hedge fund giant started 2024 with $56 billion in assets under management.Don’t miss these stories from CNBC PRO: More

Minneapolis Federal Reserve President Neel Kashkari said in an essay on Monday that Fed policy is not as restrictive on growth as it appears on the surface.
The implications are important as the Fed contemplates when to start, how much it should cut and how quickly should it do so to get back to a neutral setting.

Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, during an interview in New York on Nov. 7, 2023.
Victor J. Blue | Bloomberg | Getty Images

Interest rates running at their highest levels in about 23 years are not hurting the economy and could buy policymakers more time before deciding whether to cut, Minneapolis Federal Reserve President Neel Kashkari said Monday.
In an essay released on the central bank’s website, Kashkari said economic developments have shown that Fed policy is not as restrictive on growth as it appears on the surface.

That means the longer-run “neutral” rate, or the level that is neither restrictive nor stimulative, is probably higher than before the Covid-19 pandemic.
In essence, what would appear to be tight monetary policy judging by history over the past 15 years or so no longer looks that way, meaning nominal rates could hold higher for longer without harming the economy.
“This constellation of data suggests to me that the current stance of monetary policy … may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic,” Kashkari wrote.
The implications are important as the Fed contemplates when to start, how much it should cut and how quickly should it do so to get back to a neutral setting. Markets have been betting on an aggressive move lower, but recent statements from central bank officials indicate little need to hurry.

“It is possible, at least during the post-pandemic recovery period, that the policy stance that represents neutral has increased,” wrote Kashkari, a nonvoting member of the rate-setting Federal Open Market Committee this year. “The implication of this is that, I believe, it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.”

Kashkari’s comments mirror those from Federal Reserve Chair Jerome Powell in recent days.
During his post-meeting news conference last Wednesday and in an interview broadcast Sunday evening with CBS’ “60 Minutes,” Powell asserted that a March cut is unlikely and agreed with the FOMC’s December projection for three quarter-percentage-point cuts this year.
More specifically to Kashkari’s argument, Powell noted that the negative effects he feared from the series of rate hikes the Fed implemented have not come to pass. The Fed hiked its benchmark overnight rate 11 times worth 5.25 percentage points in a tightening cycle that ran from March 2022 to July 2023.
“”It really hasn’t happened. The economy has continued to grow strongly. Job creation has been high,” he said on “60 Minutes.” “So really the kind of pain that I was worried about and so many others were, we haven’t had that.”
Despite widespread expectations for a recession, the U.S. economy as measured by gross domestic product grew at a 2.5% annualized pace in 2023. Payroll growth has held strong while inflation measures have eased.
Kashkari pointed to a variety of such data to show that the Fed hikes have not thwarted growth, leading to his conclusion that the neutral rate is likely higher than the 0.5% or so that Fed officials generally estimate.
There is no official “neutral rate,” and officials often stress that it can only be estimated but never observed. Some policymakers like to use the fed funds rate minus inflation as neutral. Kashkari prefers the 10-year TIPS yield, which is now around 1.82%. He notes that it has risen since over the past year, but only modestly.

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At the same time, business investment and big-ticket purchases have risen while housing numbers at least have moderated.
“These data lead me to question how much downward pressure monetary policy is currently placing on demand,” Kashkari said.
He did note that the data is not “unambiguously positive” and he will be watching items such as loan and credit card delinquencies for evidence of economic stress.

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Nonfarm payrolls grew by 353,000 in January, fresh data showed last week, vastly outstripping a Dow Jones estimate of 185,000, while average hourly earnings increased 0.6% on a monthly basis.
“Why is the stock market priced like it is with the economic strength and the Fed being pigeonholed into having to keep these rates high? That’s a very dangerous thing for stocks,” Smead cautioned.

A trader reacts as a screen displays the Fed rate announcement on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 31, 2024. 
Brendan McDermid | Reuters

The U.S. stock market is in a “very dangerous” spot as persistently strong jobs numbers and wage growth suggest the Federal Reserve’s interest rate hikes have not had the desired effect, according to Cole Smead, CEO of Smead Capital Management.
Nonfarm payrolls grew by 353,000 in January, fresh data showed last week, vastly outstripping a Dow Jones estimate of 185,000, while average hourly earnings increased 0.6% on a monthly basis, double the consensus forecasts. Unemployment held steady at a historically low 3.7%.

The figures came after Fed Chair Jerome Powell said the central bank would likely not cut rates in March, as some market participants had anticipated.
Smead, who has thus far correctly predicted the resilience of the U.S. consumer in the face of tighter monetary policy, told CNBC’s “Squawk Box Europe” on Monday that “the real risk this whole time has been how strong the economy has been” despite 500 basis points of interest rate hikes.
“We know the Fed has raised rates, we know that caused a banking run last spring and we know that’s damaged the bond market. I think the real question can be ‘do we know that the lowering of CPI has actually been caused by those short-term policy tools they’ve used?'” Smead said.
“Wage gains continue to be very strong. The Fed has not affected wage growth, which continues to outpunch inflation as we speak, and I look at the wage growth as a really good picture of inflationary pressures going forward.”
Inflation has slowed significantly from the June 2022 pandemic-era peak of 9.1%, but the U.S. consumer price index increased by 0.3% month-on-month in December to bring the annual rate to 3.4%, also above consensus estimates and above the Fed’s 2% target.

Smead argued that the fall in CPI should be chalked up to “good luck” due to the contributions of falling energy prices and other factors outside the central bank’s control, rather than the Fed’s aggressive cycle of monetary policy tightening.

Should strength in the jobs market, consumer sentiment and household balance sheets remain resilient, the Fed may have to keep interest rates higher for longer. This would eventually mean more and more listed companies having to refinance at much higher levels than previously and therefore the stock market may not benefit from strength in the economy.
Smead highlighted a period between 1964 and 1981 in which the economy was “generally strong” but the stock market did not proportionately benefit due to the persistence of inflationary pressures and tight monetary conditions, and suggested the markets could be entering a similar period.
The three major Wall Street averages on Friday closed out a 13th winning week out of the last 14 despite Powell’s warning on rate cuts, as bumper earnings from U.S. tech titans such as Meta powered further optimism.
“The better question might be why is the stock market priced like it is with the economic strength and the Fed being pigeonholed into having to keep these rates high? That’s a very dangerous thing for stocks,” Smead cautioned.
“And to follow on that, the economic benefit we’re seeing in the economy has very little tie to the stock market, it doesn’t benefit the stock market. What did the stock market do last year? It had valuations go up. Did it have a lot to do with the earnings growth tied to the economy? Not at all.”
Rate cut need becoming ‘less urgent’
However, some strategists have been keen to point out that the upside from recent data means the Fed’s efforts to engineer a “soft landing” for the economy are coming to fruition, and that a recession is seemingly no longer in the cards, which could limit the downside for the broader market.
Richard Flynn, managing director at Charles Schwab U.K., noted on Friday that up until recently, such a strong jobs report would have “set alarm bells ringing in the market,” but that doesn’t seem to be happening anymore.

“And while lower interest rates would surely be welcomed, it is becoming increasingly clear that markets and the economy are coping well with the high rate environment, so investors are perhaps feeling that the need for monetary policy to ease is less urgent,” he said.
“[Friday’s] figures may be another factor delaying the Fed’s first rate cut closer to summer, but if the economy maintains its comfortable trajectory, that might not be a bad thing.”
This was echoed by Daniel Casali, chief investment strategist at Evelyn Partners, who said the bottom line was that investors are becoming “a little more comfortable that central banks can balance growth and inflation.”
“This benign macro backdrop is relatively constructive for stocks,” he added. More

Delivery Hero put out preliminary results Monday, earlier than they were expected to drop, after the company saw 26% erased from its share value last week.
The results, which are unaudited, show Delivery Hero grew its gross sales volume by 6.8% to 47.6 billion euros in 2023, in line with its own guidance.
Adjusted EBITDA totaled more than 250 million euros for the year, and the company said it expects its measure of profitability to climb even more in 2024.
It comes after Delivery Hero’s share price was battered last week by investors in response to news surrounding sales of key assets in its brand portfolio.

Delivery Hero CEO Niklas Östberg speaking at the Noah tech conference in Berlin on June 13, 2019.
Krisztian Bocsi | Bloomberg via Getty Images

Delivery Hero shares sank Monday morning, extending losses from last week, as investors reacted to preliminary financial results released by the company.
Shares were down 8% at one stage during the morning session before paring losses to trade 4% lower by 11 a.m. London time.

The financials, which were unaudited and released a week early, show the company grew sales in line with its guidance last year and is forecasting stronger profitability in 2024.
Delivery Hero’s decision to share its numbers early were a bid by the company to push back on investor flight last week over the food delivery giant’s asset sales strategy.
Here’s how the company did:
Revenue: 10.5 billion euros ($11.3 billion) in annual 2023 revenues, versus 10 billion euros expected by analysts, according to LSEG data
Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization): Delivery Hero says adjusted EBITDA “exceeded” 250 million euros ($269.4 million). Analysts had forecast adjusted EBITDA of 254.3 million euros, per LSEG

Delivery Hero said group GMV (gross merchandise value), which is the combined value of overall orders on its platforms, grew 6.7% year-over-year to 12.3 billion euros in the fourth quarter of 2023, and by 6.8% to 47.6 billion euros in full-year 2023.
Total segment revenue increased 15.7% to 3 billion in the fourth quarter. Full-year sales came in at 11.1 billion euros for the full year, up 15.7% year-on-year.
That matches company guidance for “around 15% YoY [year-over-year]” growth in 2023.
Adjusted EBITDA, which is Delivery Hero’s measure of profitability, totaled more than 250 million euros in full-year 2023, Delivery Hero said, and the company reported adjusted EBITDA margin of 0.6%.

Delivery Hero said the results were driven by healthy order growth in many of its geographies.
Most notably, Delivery Hero also gave some rosy guidance for 2024, with the delivery company forecasting group GMV growth of 7-9% for the year, higher than its performance in 2023.
Delivery Hero said it expects segment revenue growth of between 15% and 17% in full-year 2024, and an adjusted EBITDA of 725 million to 775 million euros.
That would mark a tripling of profits from last year.
Delivery Hero maintains it can reach that goal through rising order growth to increase its EBITDA margin incrementally. The company expects to hit a 1.6% EBITDA margin in 2024.
Delivery Hero said it would publish additional preliminary numbers for the fourth quarter in a trading update slated for Feb. 14, when it was originally due to report numbers.

A tough week for Delivery Hero

It comes after Delivery Hero shares lost more than 26% of their value last week, slipping to their lowest price since 2022, as investors reacted to a mix of news surrounding portfolio asset sales.
On Tuesday, Delivery Hero said it would sell all of its 4.5% stake in British food delivery firm Deliveroo for £76.8 million ($97 million), a value far lower than the price it paid for the shares in 2021.
Then, on Friday, Delivery Hero shares sank sharply after a report said the company had ended discussions to sell certain assets within its Southeast Asian food delivery business Foodpanda to Singapore’s Grab.
Delivery Hero denied the report, putting out a statement saying that any rumors that negotiations for the potential sale of the Foodpanda assets had collapsed were “false,” and that talks are ongoing.
Delivery Hero has been notably active when it comes to mergers and acquisitions over the past year or so — both on the acquisitions side of things and divestments.
The company snapped up Spanish rival Glovo for an undisclosed sum in 2022. That same year, Delivery Hero also sold its stake in German grocery firm Gorillas to competitor Getir, which acquired the company outright for an undisclosed price.
The company’s belief is that M&A should be used as a tool to unlock strategic value from certain assets rather than acquire them for a sizable return to then sell them off.
With Deliveroo, Delivery Hero sold its shares as their value fell significantly from the price Delivery Hero paid in mid-2021, at the peak of the pandemic-driven boom in online food delivery.
Delivery Hero is one of the largest food delivery services globally with more 2.2 billion users.
It competes with the likes of American giant DoorDash, Britain’s Deliveroo, Anglo-Dutch firm Just Eat Takeaway.com, Singaporean company Grab, and Indonesia-based Gojek. More

Federal Reserve Chair Jerome Powell vowed in a “60 Minutes” interview aired Sunday that the central bank will proceed carefully with interest rate cuts this year.
“We just want some more confidence before we take that very important step of beginning to cut interest rates,” he said.
Powell warned that the monetary policy tightening would cause “some pain.” However, “it really hasn’t happened,” he added.

Federal Reserve Chair Jerome Powell holds a press conference following the release of the Fed’s interest rate policy decision at the Federal Reserve in Washington, U.S., January 31, 2024. 
Evelyn Hockstein | Reuters

Federal Reserve Chair Jerome Powell vowed in an interview aired Sunday that the central bank will proceed carefully with interest rate cuts this year and likely will move at a considerably slower pace than the market expects.
In a wide-ranging interview with “60 Minutes” after last week’s Federal Open Market Committee meeting, Powell expressed confidence in the economy, promised he wouldn’t be swayed by this year’s presidential election, and said the pain he feared from rate hikes never really materialized.

“With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully,” he told the news magazine’s Scott Pelley, according to a transcript CBS released.
“We want to see more evidence that inflation is moving sustainably down to 2%,” Powell added. “Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.”
As he did during a Wednesday news conference, he said it’s unlikely the FOMC will make that first move in March, which futures markets had been anticipating.
The meeting concluded with the committee holding its benchmark borrowing rate in a range between 5.25%-5.5%. In its post-meeting statement, the committee said it would not be cutting “until it has gained greater confidence that inflation is moving” to the 2% target.
Markets have been making aggressive bets on how many cuts the Fed would make this year. Current pricing is pointing to five quarter-percentage points reductions, though Powell backed the FOMC’s December “dot plot” grid of individual members’ estimates that pointed to just three moves.

“We’ll update [the outlook] at the March meeting. I will say, though, nothing has happened in the meantime that would lead me to think that people would dramatically change their forecasts,” he said, noting that “the time is coming” for cuts but perhaps not yet.
Powell was broadly optimistic about the economy, noting that inflation, while still above the Fed’s target, has moderated while the jobs market is strong. Nonfarm payrolls accelerated by 353,000 in January, the Labor Department reported Friday. The biggest risk, he said, is likely from geopolitical events.
During the Fed’s annual retreat in Jackson Hole, Wyoming, in August 2022, in the early days of the rate-hike cycle, Powell warned that the policy tightening would cause “some pain.” However, that hasn’t been the case, he said in the “60 Minutes” interview.
“It really hasn’t happened. The economy has continued to grow strongly. Job creation has been high,” he said. “So really the kind of pain that I was worried about and so many others were, we haven’t had that. And that’s a really good thing. And, you know, we want that to continue.”
In another matter, Powell reiterated that neither he nor his colleagues would be swayed by political pressure during this presidential election year.
“We do not consider politics in our decisions. We never do. And we never will,” he said. More