Category Archives: US

What Will Go Wrong in 2018?

James Mackintosh of the Wall Street Journal posts in today’s US print edition on “The 3 Things That Can Go Awry in 2018“. The article details three dynamics that, if played out as he suggests, could cause the global economy to trip in 2018. His summaries are good and compelling and, given our amazingly positive outlook today as 2017 comes to a close with all major nations growing at roughly the same time (an odd occurrence in its own right), they come at a good time to consider conservative actions against possible shifts next year.

The three are:

  1. Monetary Tightening. The story here looks at Fed and central bank interest rate hikes. We all know that interest rate raises have started, at least in the UK and US, even though the EU remains firmly stuck taking that drug. Japan is taking it slow, even as its economy shows much signs of improved life – Japan will have to continue pushing rates up in 2018, just as the EU will have to follow the US’s lead. The problem with this item is that there are us a lot of debt out there – corporate debt, public debt and yes, some consumer debt. It is not the same kind of debt that was part of the run-up to the crash that put us where we are today, but for some firms and some governments its big risky debt. As an example, and tangentially related, another article in the WSJ reports on a few firms that are high in debt that will be financial impacted by Trump’s tax reform – see Tax Plan Downside for Dell, Others in Debt. A lot firms have issues debt in the last few years in response to QE and near zero interest rates. As rates increase, debt load and repayments will increase. If inflation were to join the party, it could be a messy time for a number of firms and governments.
  2. China. This story has been used before since China has been the source of two recent periods where the US stock market (in fact the global stock market) fell by about 10%. As such, China’s management of its economy – shifting from a producer-based to consumer-based economy – is a major challenge. Debt remains a problem, and capital controls and currency exchange rates just add more menu items for Chinese leadership to wrestle with. Should China sneeze, so the saying goes, we would all fall could of a cold or something worse. Worse, there is no coordination between east and west – so we are somewhat at the behest of the Fed and People’s Bank of China – and we all hope they do the right thing. Of course, they will both do the right thing for their own constituents – or try to. Hence the lack of cooperation.
  3. A Correlation Correction. This for me is the more interesting and most likely issue to blow up in 2018, and it is the least talked about in the press since it is not as well understood. Mr. Mackintosh states, “one reason investors hold bonds is to cushion losses in a stock-market downturn.” This approach has worked for quite a while, as prices have diverged short-term all the while converging over the long-term. The risk is that should inflation appear in 2018 the relationship between stocks and bonds may revert to how it was in the 1980s and early 1990s, with rising bond yields being bad for share prices. The problem for me is that I think inflation will rise in 2018 to just levels that this will be the catalyst for change in the markers. If you read the tea leaves, there is ample evidence of a change underway. Many commodity prices are doing very well. Copper prices are, as an example, reportedly at recent high’s due to increased production. If you look at producer prices in the US, they are inching up now over 3%. Even though wage pressures remain subdued, the pressure is building. Though participating rates for males in the US aged 25-54 are at near all-time lows, yes the employment rates seems low and may go lower, but there remains some slack to take up the growth we will see. But that pressure is there. I think that by the second half of the year, certainly by Q3, US inflation forecasts will show that 3.5-4% are on the horizon. This won’t cause a panic, but it will lead the change and correction that will come. On top of this the author suggests that the Fed may just “give in” to the needs to cap the bloated asset prices we see all around us, to nip the bubble before it becomes unsustainable. Trump’s tax deal will push this peak out a year or two, but the dynamics are in play.

Reading between the lines you can see that all three of the authors ideas overlap and intersect. Inflation is mentioned directly in 2 of the 3; growth is everywhere; public policy too. As such he has hedged his bets and tried to call out the category of challenge. I will try to break the triggers into more simplistic sections.

As such, I give the following percentage probability for each driving a correction by the end of 2018:

  1. Monetary Tightening, most likely US led, due to over heating: 15%
  2. China growth, debt to currency issues: 28%
  3. EU or euro-zone debt or banking crisis: 15%
  4. Inflation-driven policy changes: 22%
  5. Japan public debt or growth challenges: 10%
  6. Emerging Market currency or debt issues: 5% (this one won’t trigger in isolation but might follow from one of the others, namely 1, causing a currency drain)
  7. Significant War triggering financial panic: 5%

Trouble for The Eurozone with Trump’s Tax Deal

There was an excellent Opinion piece in today’s Wall Street Journal that calls out the less thought through implications of Trump’s domestic tax deal on international business. The piece, US Tax Reform Has Europe Worried, by Joseph C Sternberg, explores the writings of a German research group that details some thinking suggests some organizations will think twice about new investments in Europe – specifically Germany – with the new US corporate tax rates being leveled. The research piece is from ZEW and is here: Germany loses out in US Tax Reform. This is another dimension not modeled by US economists when they try to determine the impact of the tax reform on US growth.

The more important point however in Mr. Sternberg’s piece comes toward the end of his excellent article. The author suggests that US tax reform highlights a different opinion for taxation from an ideological perspective. This point needs to be talked about more since we have lost our Mojo for ideology in favor of a left-right populist dichotomy. The US reform is being used to alter tax incentives to drive growth, investment and job creation. Most of Europe, with is more socialist (and Democratic-leaning) policies, uses tax incentives mostly as a redistributive process for sharing an assumed pie. There is much less effort in driving growth or influencing investment to grow jobs. This is the dialog we had in the 1980s and it leads to the dialog about big government versus small government.

It is about time ideology got a fair crack again!

One small picture says it all

Standing about 2-3 inches tell and 1-2 inches across, a small chart in page A6 of this last weekend’s Wall Street Journal, sums up our economic predicament. The article, Japan Firms End Yearslong Price Freezes, reports that a growing number of businesses are reporting that labor shortages and increasing demand are leading to price increases. The chart shows a pleasing, gradual but clear rise in prices in Japan over the last year, now approaching 1%. This is important.

Though 1% inflation sounds measly for Japan it could be a short-term boon. The nation has been bedeviled for over 20 years with meager growth, stagnant wages, and tepid productivity growth. In fact some economist suggest that Japan’s fall from economic grace that preceded the West’s financial crisis of 2007, demonstrated early what would happen in a deflationary economy with massive quantitative easing. QE did not drive Japan’s economy to growth; it does not seem to have done so in the west, though it may have saved it from crashing and now we see how it’s persistence has led to financial and investment dislocation.

The news all around us is quite positive:

  • Most recent quarterly GDP in US was restated up to 3.3%, almost unimaginable a year ago.
  • EU economic growth rates are forecasted to grow above their recent meager levels in recent OECD reports
  • ‘Currency war’ reports appear in the press infrequently, even though global trade remains torn by the idea that the US wants a stronger negotiating position (for what is, essentially, a very small part of the US economy).

But inflation remains stubbornly low almost everywhere. If Japan soon demonstrates ongoing growth in inflation, and global commodity prices push up, the result will be a wave of input price increase around the world. Some months later the US and more clearly the EU will see producer price increase and so consumers may see pass-through increases. This will encourage central banks to continue their march toward normality.

The downside with a return to inflation: Debt servicing becomes more onerous as interest rates increase in response to inflation increases. As such, governments and businesses that stocked up on cheap debt during QE and the near-zero interest rate period will have to squirrel away more cash to pay their interest charges. This will reduce what’s available for investment, thus slowing down growth.

The cycle feeds on itself so it can sometimes stabilize or other events can kick it into maddening swings. We will just have to see what happens. It may depend on how fast inflation growth returns. But for now, that little picture on page A6 looks very nice in a chilly autumn morning.

The Inconvenient Truth About CharlottesvilleĀ 

The cout detat continues apace as the establishment, the democrats and an increasing number of republicans continue to resist Trump.  Charlottesville and its aftermath was just what the doctor ordered, in the eyes of the left.  Their arch-enemy was in trouble no matter which way he leaned.  But I have to tell you, after reading the Opinion piece by Holman W Jenkins Jr., in Saturday’s Wall Street Journal, the whole things stinks.  See The Extremist Show is Just Starting.  It seems that the Democrats control the city where the application for the Charlottville demonstration,  against the removal of a civil war statue, was made.  Why didn’t they turn it down?  Did they deliberately set the whole thing up?  

But reading on we find that the democratic city members who voted to remove the Robert E Lee status have all left office.  Two didn’t seek re-election; one did and lost; and one had to leave his teaching job under a cloud due to a “history of bigoted, anti white tweets”.  It seems, according to the article, that the removal of the statue was not a popular item.  It was only popular with a small number activists groups.  The author of the opinion piece lists some of these activist groups and their background is less than savory and full of trouble making social media or principles.  The whole event seems to be a prefect set up by a number of clever inviduals who might have staged the whole thing.  It’s just too prefect and unlikely to have happened without careful planning – on both sides.  And this is the point that the mass media don’t want to talk about.  It takes two to make a fight and both sides turned up looking for that fight.  Yes, Trump took the middle road as Obama did and as explained in “Trump follows Obama’s example of moral equivalence“.

So after reading this opinion piece was I left with sour taste.  It seems that the establishment is gearing up for hard work against President Trump.  Those on the extreme right need to watch their actions.  They may end up falling for the bait and thus damaging the very think they perceive helps their cause (even though Trump does not).  The coffee was strong but with such a sour taste I had no option but to go to the tread mill for an hour to get my frustration out.  

It was wonderful to watch the preceding Friday to listen to Scott McNealy talking sense on CNBC’s Squawk Box.  He took Andrew Ross Sorkin to town over the mass media mess.  He explained to Mr Sorkin that everyone in their right mind stands against Nazis and extremeists – Trump included – and to use the argument of the change in tone, or the sequence of speeches the president made, as an proof he was defending Nazis is stupid.  Mr Sorkin was taken aback and not able to get his point over since he was pushing the establishment’s arguments.  See the video here. Mr McNealy affirms that Trump did not say or imply that any Nazis or white supremacists are “fine people”.  Trump was referring to the likehoood that on both sides, there were some there who were going to protest peacefully and some others were going to peacefully protest the protesters.  But Trump’s words were construed since it played into the establishment’s plans.  The cout detat is gathering space.

My Second of Three: The Lies of Communism and Capitalsm

Three articles came across my desk yesterday – and I noted them with a blog on the first concerning Trump/Obama.  Today my “second of three” looks at a comment by Martin Sanbu of the Financial Times, titled “From Lenin to Lehman – the big lies“.  Let me restate the lies Mr. Sandbu explains.

Communism promoted two lies:

  1. A society organized by communism would lead to widespread equality trough collective purpose.
  2. Central planning would lead to a more efficient economic system

These two lies came crashing down as we all know.  We are all human, and despite our best efforts, when you put some of our number in charge of others, they tend to pay themselves for the pleasure.  Absolute power corrupts absolutely.  The second lie took a while longer to fail but some economists nailed it.  We are all enterprising and creative individuals that seek to improve – that is a natural tendency.  Communism flew in the face of this and ignored a basic human need.  It also created a massive information problem.  The economy is so big that no amount of method or information can be gathered and analyses centrally.  There are more efficient systems to help organize resource allocation.

So far, so good.  Now let’s look at the authors’ lies of capitalism.

  1. The market values of financial and other assets accurately reflect the economic value they represent
  2. The future will always offer more opportunities for a better life than the past

Mr Sandbu has tried to make an argument in order to write a column.  His arguments are manufactured and simple, probably because he assumes you would not understand the realty.  Let’s look at them.
The first lie is explained with the argument that prices measuring wealth that people thought they had did not in fact exist.  This a massive misunderstanding of the price mechanism and what happened in the financial crisis. First, weath is always and everywhere a relative measure.  As such we need something to compare one to another – price fits the bill nicely.  Howeve, justbecause  the price of assets go up does not mean you are more wealthy.  Yes, press articles told us that as house prices went up we could therefore monetize the increase in value.  But that extra cash is not wealth – since we incurred a debt (increase in debt).

The second problem is that prices were not set efficiently.  There were several failures in the system that meant risk was not correctly priced into the asset price.  This is not a failure of price per se.  It was in part a failure of living and cheating individuals (that didnt go to jail) and incompetence by others.   If we had more transparency (and accountability) in the pricing systems that worked together, more folks would have seen the risks sooner and the bubble might have been nipped in the bud.  

The second lie is totally made up.  The author argues that we are now poorer than we were before the crisis and that our future prospects are negative such that the young are now dissalusioned.  This is fallacy.  This is not a failure of capitalism.  We do not live in a free market.  We live in a massively over regulated and over taxed econonmy.  Never before has the US government taken so much tax and spent so much (e.g. Debt) on social transfers.  The number of rules we have to follow has never been higher.  The number of rule-making bodies writing those rules, and rule-making bodies managing the rule-making bodies, has never been higher.  Over 51% of Americans receive a social transfer of some kind from the governance (see A Nation of Takers).  

If the central bank had raised interest rates sooner private industry would have returned to normal investment practices.  If the central bank had collapsed its balance sheets sooner, private funds would not have been crowded out and instead redirected to stock buy-backs and uncompetitive M&A, which has now created yet another stock-market bubble.  We need a good dose of natural, healthy, honest hard work that is rewarded and encouraged. We need to stop talking about how we are all owed a debt by the government and they should give is all that we need.  We need to take responsibility for our own success.  

The author concludes that we now need a mix – of communism and capitalism to get out of the mess we are in.  He is mistaken.  We exist today in a mixed model.  Socialist has been creeping up on us for years – and this is the analogy to communism.  No, we are not let by Leninist’s or Trotskyist’s but we are led by socialist policies that align with the lies of communism above.  We need more honest work, and honest pay, in a freer economy.  We do need regulation – but we need less so we can see where the real wood for the trees lays.

Everything Comes in Threes: Trump/Obama, Capitalism/Socialism, and Britain/Germany

There were three articles in today’s US print editions of the Wall Street Journal and Financial Times. One highlights what the mainstream media does not want to admit about Trump; one looks at the so called lies at the heart of capitalism and communism, and the last looks at Brexit and Germany’s view of its neighbor. This blog looks at the hot topic of Trump and Obama vis a vis racism.

In “Trump Follows Obama’s Example of Moral Equivalence“, Jason Riley highlights how President Trump has repeated the same method employed by President Obama when criticism torrid and unforgivable acts by extremists. The opinion piece highlights how Obama took side swipes at racist policemen in the same dialog concerning those who killed such cops. Two examples are given – Dallas last year where 5 cops were killed and then again i. Baltimore. In both examples the killing and killers were correctly vilified, but the implied unfair and even racist references to the police and judicial system implied that the killings were justified. This is the exact same “identity policies” (Jason Riley’s words) that Trump employed this week when criticizing both sides of the Charlottesville situation.  

Clearly there were extreme right-wingers and new-Nazi’s that turned up for a fight. But someone had to stand up and return that fight. That was just as clearly the extreme left. It takes two to tango. You can’t fight yourself. And better, Trump did call out racism and Nazism, but he is standing up against the left who want to push their agenda. For example, the NAACP want to ban more souther statues related to the Confederacy. This is seen as an attack on the white’s. As such it feeds into the KKK’s plans. If the NAACP focused on the future, the KKK would have little to do.

When Obama was president he was attacked by the smaller right-leaning press for his remarks. Now Trump is also being criticized but the scale tells us that the press is, in general, more left leaning.  I dont think anyone that matters endorses the white supremacists.  Trump certainly does not.  And I assume that democrats do not endorse the extreme left that seeks to promote black supremacists.  I give Trump and Obama the benefit of the doubt.  But anyone on either side of the devide that claims to be open minded, than attacks the other side by removing statuses or saluting Hitler, is not worth talking too.

The Problem with American Politics is that we Don’t Understand Each other

Left or right? Democrat or Republican? White supreme year or Black Lives Matter? These are all labels that incite a certain response, and that response tends to be negative. If that response is only marginally negative, in about three more seconds it becomes impossible to explore the meaning of the labels, to debate any issue openly and fairly, and so find any possible grounds for agreement. I saw this so clearly on Sunday morning, reading my Wall Street Journal.

In the Review section on the front page was an article by Mark Lilla, based on his upcoming book, “The Once and Future Liberal: After Identify Politics“. It is an interesting article that explores what has happened with the left-leaning side of American politics and the so called liberal wing lost its way by focusing too much on specific social goals by flouting them in front of every other policy and voter. But this is not the main point I wanted to call out.

In the opening sections of the article Mr. Lilla so nicely expresses the very reason why our politicians, even our own colleagues, are unable to discuss politics without it becoming an emotional or charged issue. The author introduces a way to look at democrats and republicans as follows:

Ronald Reagan almost single-handedly destroyed the New Deal vision of America that used to guide us. Franklin Roosevelt had pictured a place where citizens were joined in collective enterprise to build a strong nation and protect each other. The watchwords of that effort were solidarity, opportunity and public duty. Reagan pictured a more individualistic America where everyone would flourish once freed from the shackles of the state, and so the watchwords became self-reliance and small government.

This explanation of what happened at this pivotal time in US history clearly unmasks the misunderstanding that is actually reinforced and even peddled by those that want to emphasis a difference – real or imagined – between our political parties. Let’s look at this perspective for a moment. First Roosevelt. The New Deal was basically a Keynesian expansion of public sector spending. It was designed to drive economic recovery in America after the terrible challenges of the Great Depression, itself brought on and exacerbated by Congress’ unwillingness to forgive World War I debts. The New Deal of public works indeed worked substantially, and it brought with it social services to help the less-well off. However, the watchwords chosen are misleading. Opportunity is a word the right tends to see ownership of: the left tend to focus on equal outcomes, the right tend focus on equal opportunity.

Now looking at Reagan and you again would be confused. Reagan did not dismantle the New Deal. The reality is that social services and the entire continued transfer f public funds to the population continued (and continues today – see A Nation of Takers). But Reagan did ask of us all a question: Are you not first and foremost responsible to yourself? This is a key point since it presupposes that you are not, in the first instance, owed a thing. You are supposed to try your hardest to help yourself. That is why self-reliance is a good watchword, it it is portrayed as something alien to the New Deal or democratic values.

I think there is a lot more common here than meets the eyes but media, press and writers like Mr. Lilla want to paint a murkier picture since it stokes spending on their wares and it drives eye balls and voter emotions who have nothing better to do with their time (#WhileRomanBurns). Here is where the common ground exists:

  •  We are first and foremost individuals. We should be proud of our ability to stand alone, fend for ourselves, and play a key role in society, our family, and wherever and whatever we call home
  • Second we have a responsibility to our fellow man. This means we should respect her needs, her wants, much as she should respect ours. Everyone is equal under the eyes of God or the sun, which influences you most.
  • Third we have a civic duty to help others who, through bad luck and ill fortune, have need of assistance until and if they are able to again stand up and live as equal among us. We should work together to better our opportunities and the world around us. We should create civic services to serve the wider community; to educate, to serve, to heal, to protect.

These are all common ground issues. What they do not say or imply are any of the following:

  •  Minority preferences should not be flouted and used to subvert the way the majority behaves. Respect and support for minority needs will be supported, in their place
  • We are all owed an equal outcome. There are no such things as differences between sexes, creeds, religions, and secular groups. Though we all start from different places we are owed a common experience.
  • It is our right to be given a job, good health, entertainment, and all that would otherwise come to us by hard work, clean living, and honesty.

I would agree with Mr. Lilla’s premise that the Liberals lost their way. Sometime in the 1960s’ this “identify politics” become a legitimate goal in its own right. Each and every minority cause was celebrated, then promoted, then sold, as a national concern that should alter everything for everyone. Instead of mutual respect, and yes uneven experiences, liberals and left-leaning “progressives” adopted a national platform for change which resulted in a splintered view of the world, yet with the cloak of uniformity.

Likewise the right has failed too but for different reasons. The individualism that was at first a message of responsibility resulted in example after example of selfish acts, groups and even organizations. Responsibility gave way to greed. It turns out that this was not a fault of capitalism or right-wing politics. This was a failure that came about because we are all human. It is human to want, to greed, to collect. You only have to understand our history to know this. Worse, no amount of legislation can change this.  

So left and right made mistakes but rather than any third force see those mistakes and call them out, they have become hidden in the shroud of politics and now represent some underlying, simmering reason for arguing for why the other side is wrong. If we could start all over again, with no preconceptions of what is right or wrong, what is left or right, we might get past today’s current blind spot. The only trouble with that idea is that we would destined to are the same mistakes all our forefathers have made over and over again.

So for now we need to message the common ground – call it a New Bargain. Over time members from the left and right can join; but they cannot join with a message of, “I join because the other side is wrong”. They just have to forget their identity politics and remember who they are: individuals first, responsible for their own success, working together to help all have the same opportunity.