Economic Bullies Are Fattening Up: Where are the Monitors?

When at middle school, some few years ago now, monitors would troll the break-rooms, corridors and playgrounds. If a bully or bully-like behavior was observed, a faithful monitor (sometimes of a more diminutive size) would wade in to neutralize the issue. In industry, economic bullies are getting larger and more powerful and the monitors are missing in action.

What we knew was happening in America is now clearly happening in the UK. In this week’s Economist there is an article titled, “More money, more problems” in the business section. The article reports on new research that suggests industry concentration is well established and getting more pronounced; large, dominant firms are getting larger and more dominant. As a result, a greater proportion of economic profits are being hovered up by the bullies and the rest of each industry is sucking on less and less.

If the market was operating efficiently and freely, the opportunity for start-ups to innovate and create the ‘next big thing’ would help foster creative destruction. But public policy has played a key part in (over?) regulating how business start and operate; and lobbying is running rampant such that, more clearly in America, firms with deeper chests can invest in lobbyists to ensure their masters’ interests are protected; putting more pressure in the smaller guys. The monitors have become the employees of the bullies.

There are implications a-many, some reported in the Economist article, touching innovation and its diffusion (or lack thereof), wage rates, productivity and employment. Larger firms tend to achieve higher degrees of economy of scale; this is a large playground where automation can help drive productivity thus helping the bullies get stronger. Other data from the OECD and other sources suggest that diffusion of knowledge and ideas, needed to help firms share in productivity-inducing work, is slowing down between innovators and followers; in other words between those who already have, and those that already don’t. This reinforces industry concentration or the barriers around the OECD’s ‘frontier firms’.

Employment opportunities and where we collectively go to work changes; and who is able to pay a higher wage becomes self evident. So all in all the controlled environment we live in is a far cry from the free market that was operating 20 or more years ago.

It seems the pundits feel that we need more competition. Can we legislate for more competition or can we undo the constraints that put us where we are today? I think that what is needed is:

• Less regulation overall and particularly on small and medium business, spanning financials, hiring practices, IP development, and so on
• Increase investment in primary R&D
• Increase vocational collaboration with education and industry
• If you want more regulation, point it at the lobbyists: reduce their spend and power
• Tinker with the tax code to help motivate investment in smaller firms and Tomory for it, tax larger firms more.

But these items are not even popular topics in politics today. It’s much more likely we will talk about fake news and Russians and Facebook, than economics, growth and hard work. Oh well.

Advertisements

Of Guns and Data

I compare two phenomena that are unrelated: the US and their guns and the Europeans and their data.

See Digital privacy rights require data ownership and Mark Zuckerberg apology: ‘I’m really sorry that this happened’.

The mass shootings in America are terribly sad.  The US is wracked with grief periodically and at the same time an inability to address the primary cause – guns are part of the way things are in this country; and access to them remains an big issue.  Guns are accepted, even respected, and are encoded into the country’s psyche via the Second Amendment.

At the same time many Europeans and others can’t understand the logic.  Many other counties have banned many kinds of firearms in their wider populations and such counties suffer far fewer mass shootings.  As such, those folks can’t get their heads around the argument for protection of the second amendment.  It is like two speakers in front of each other and neither understanding the other.  I have stood on both sides and seen the gap.

While in London, UK, this week I watched the frenzied coverage in the media about the Facebook data exploitation by Cambridge Analytica.  It seems, if one understands the story, that a vendor or app explored a loophole that came about due to a lapse in forward thinking by Facebook some time ago.  It seems the gaps have since closed, but the data trove had already been taken.

In Europe GDPR is big news: some recent surveys by Gartner showed that spending on governance related data and analytics initiatives have increased significantly in the last two years in the UK (as the example), far in excess of US spending habits.  The European media is incensed at the lazy attitude of American firms: how could they have allowed such a use of data without citizen consent?  The media is painting the US as Luddite-like for not realizing the obvious and for not reacting earlier to protect consumer data.  The US, at the current time, is reacting but more so in terms of the Facebook stock price rather than in media incredulity.

Even though there is no connection between guns and data, the intensity of the emotional response on both sides of the pond to each issue is palpable and an almost mirror image.  I have sat on both sides in each case and it is fascinating to observe.

One wonders if the US will ever adopt its own GDPR-like rules.  Harmonizing with the EU would be a logical and likely beneficial step, at some point.  Simplicity of equivalent rules would make business and IT costs bearable.  Should the US respond with different rules over time, costs will likley escalate as rules start to overlap and conflict.  But there are no signs the US – at a federal level – will seek anything like GDPR.  I just wonder if some enterprising, populist politician won’t pose a stalking horse.  I guess someone will, and of course it won’t survey engagement with reality.  But it might presage the first of many such attempts to test the popular perception.  Over the long haul, will the popular feeling converge with those of Europe?

As to the second amendment; I don’t think anything will change on that front for a long time.  It is a political argument – one steeped in a time long past when citizenry needed to arm itself from rampant enemies in the forests, and the possibility of a corrupt government.  Since democracy seems to be alive and very well, I am surprised that the Second Amendment has survived as long as it has.  But what do I know?

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 Rise and Fall of CNN

25 years ago I used to travel across Europe working with clients on small projects that kept me away from home for a day or three. My French is weak and German non-existent so I preferred to stay in English speaking and organized hotels. I discovered Marriott and other US centric hotels. After a long day and a client dinner, I would hide out in my hotel room and watch CNN. It was my first regular exposure to ‘America’ from an American point of view. I loved it.

After a couple of years I started to travel to the USA, mostly the Deep South. This was typically for a few days every other month, for about a year. Kent Mercer was playing for the Braves.  Of course I continued watching CNN. In those days I felt that the channel was well balanced; political views of the left and right were equally shared and equally scrutinized. I often compared CNN to my beloved BBC. About 20 years ago I moved to the US.

But about 8-10 years ago I spotted a slight shift in focus. CNN seemed to shift slightly and that shift seems now all but complete. That shift started with less and less coverage of right leaning views and more and more coverage of left leading views. At the same time, left leaning views were examined less and right leaning views were challenged more comprehensively.  The ‘fai, balanced’ view was disappearing.  That balance is now all gone and the channel’s reputation is all but gone.

Last evening is a good example. CNN was examining the current news related to Special Council Robert Mueller who has just impaneled a grand jury in relation to the Trump-Russian probe. To have a balanced review of this news CNN should have explored equally the challenges related to:

• Mueller’ political leanings and relationships with the Clinton’s and democrats 
• The fact that there are technical challenges outstanding on his ability to prosecute the case
• Despite the wide scope of his remit, he has dropped looking directly into Russian collision in the election (what he was supposed to be working on) and now he is digging around in years past financial transactions between Trump, his companies and Russia
• The location of the impaneled grand jury is fishy since it was called in a region that voted for Clinton by 94% so it is unlikely to be neutral

Yet CNN did not cover these issues at all. They repeated over and over the left leaning views they assume there was collision, there are shady financial deals, Mueller must be a good guy, and everything is fair and above board.

To prove my point there is more. Last evening Trump was holding a rally at which a democratic governor announced he was switching parties and would become a republican. This is stunning news. Yet during the live televised announcement, did CNN switch over to live coverage? Did they even report this on their news ticker on the screen? No they did neither. They ignored the news and failed to examine its implications. Some minutes later they did report the news, post live, as a snippet and moved right back to promoting their own agenda.

It’s a sad day to have to admit and call out that CNN has to come just a mouthpiece for the left. I really did love that channel. I still hope that Jonathan King, come the next election, remains neutral. If he goes, I will have had it with CNN.

The Home Owners/Renters Market is Upside Down

Two articles today suggest that two of the world’s largest economies are swapping roles and focus for home ownership and renting. Germany has been a nation of renters; home ownership has run at relatively low levels compared to the UK or US. The US has operated under the assumption that home ownership is central to the American Dream.

As we all now know, policies adopted by the US government in the 1980s led to a relaxation of requirements for those seeking a mortgage and low income, even zero-income families, obtained mortgages they could never afford. The result, when combined with human greed both by home buyers and the investment community, led to the financial crisis that is the cause of the situation we are in today: near zero interest rates and massive influx of quantitive easing that has filled the coffers of the investor class.

But what is happening now? It seems that the near zero interest rates in Germany are driving record levels of home ownership and low interest rates in the US is driving up demand for rental property with record low-levels of home ownership. The world is turning upside down!

In the US print edition of the Financial Times, the article, “German’s switch to home ownership fuels bubble fears“, reports that house prices are rising as demand for mortgages continues to rise. The good news is that many of these new mortgages are fixed rate plans- which protects home owners as interest rates increase.  Germany has been a relative laggard when it comes to home ownership. See Most Germans don’t buy their homes: Theey rent.  Here’s why.  

In the US print edition of the Wall Street Journal, in an article, “Millennials Fuel House Rental Boom“, we hear of the later boom afflicting the US market. It turns out that US home ownership is at record lows, yet house prices around the country are recovering and in some regions, back to pre-crisis levels. How can this be?   Turns out that firms flush with cash and low cost loans have been buying up property in the cheap and renting them. The article above goes even further and explains how firms are now increasing investing in entirely new property developments specifically for the rental market.  

This all might alarm you. The American Dream, perhaps western democracy, was assumed to be predicated on home ownership. But this is not the case. The German economy has done very well with relatively low home ownership rates. The US might have to learn from the Germans how to run such an economy; likewise the Germans need to take a leaf out of the US’ books to avoid bubble blow-out.  

But in all practical terms we should be alarmed. Germany is an export-based economy. Other counties want (or need) to buy Germany’s products. Exports from the US is vastly less of a proportion of it’s GDP than it is for Germany. So there is little room for the US to behave more like Germany. Additionally Germany cannot set its own interest rates; even now the stresses between the EU center and periphery are growing again. Greece, Spain and Italy continue to need low interest rates to help nurture their local economies to recovery. Germany, never near a recession, is showing signs of too rapid growth (and growing inflation) and may approach overheating before the periphery is even back to positive growth.  

Bottom line: zero interest rates and quantitive easing (and resulting central bank balance sheet ballooning) is changing our economic foundations. This will impact our societies in ways it is hard to predict. Hang on guys, it’s gonna be a bumpy ride!

My Top 5 Biggest New Year Risks to the Global Economy

In order or scale, priority and impact, here are my picks for the five most critical trigger-points that may impact, negatively, a return to ‘old normal’. Currently we stand at the edifice of a new normal, the great stagflation, but the anti-establishment and populist changes taking place seem to suggest a knew-jerk reaction by nations fed up with socialist dressed-up-as-market politics that have led the West for 20 years.

1. China’s economy stagnates or crashes. Debt levels are above EM levels and are now among the largest, approaching the incredulous Japanese levels. This dynamic is not sustainable for a nation whose currency is not a reserve currency. However the economy is the world second largest even without the development and emergence of whole swathes of other sectors such as healthcare and leisure, which may offset contracting first world growth over the next year or two. So the risk is there and there is no clear leaning one way or the other, yet. But debt is growing faster than these new sectors; exchange reserves at $3bn are limited (though huge), and currency value management is not market-bases. So greater risk is with the downside. China’s growth flags, currency sinks, counterbalancing US growth and confidence, creating a massive imbalance in the global economy. Europe watches on as global GDP sinks under its own debt weight. KPI’s to avoid/watch out for: China GDP falls to or below 4.5%; China’s debt load surpasses 300% of GDP.
2. Trump quits after 18 months due to intractable political limitations that prevent policy changes he seeks related to healthcare, regulatory complexity, tax reform and trade. Trump’s political rhetoric is being replaced with solid business-based policy. However not all such policies have ever been tested at a national level and scale. Some efforts will fall foul to physical, social and political limitations. This may prove frustrating for Trump. As growth will return short term, such medium term frustration will lead Trump to claim, “My policies worked, see? But now the system has reached its limit and there is nothing I can do until the country agrees with me to shut down the whole government system! Since they are not ready, yet, I am ‘outa here’ until they are!” Markets crash, interest rates balloon, inflation rages all within a year. World economy sinks into the abyss. KPI’s to avoid/watch out for: US GDP 1H 2017 reaches 4.5% but Congressional conflict leads to policy deadlock ; vacancy in position at Whitehouse. 
3. Emerging Marker currency crisis as massed capital investment is siphoned away towards a resurgent US economy and dominant dollar, as well as a stable and even growing China economy. This situation is already underway. The risk is that what is currently a reasonably ordered trend becomes a financial route. This is possible since the financial markets are starved of yield due to the collective policies of central banks to keep interest rates very low for too long and for the build up in their massive balance sheets. If the trend becomes a torrent, EM’s will have to yank up interest rates far beyond what their local economics can support and economic disaster will follow. This will ferment more political instability and drive increased destabilizing ebonies to ruin. Though the US may be growing well, compared to its peers, it’s the imbalance they tips the ship over. KPI’s to avoid/watch out for: dollar index, the weighted value against basket of currencies, surpasses 115. It is currently at 103.33, which is a 14 year high; EM interest rate differential balloons.
4. Hard Brexit forced through by intransigent Europeans who think the EU experiment is more about political union than economic liberalism. A new trade deal, legal framework and social contract can be negotiated within a two year window. But only if politicians and civil servants want it too. Continental politicians however, under the strain from populist pressures, will equate intransigence over Brexit negotiations with an improved politicos standing with their electorates. Fool for them as this will actually create the opposite response for such behavior will simply worsen the economic climate. The lack of any sign of return to old normal will lead to political paralysis and the clock will time-out. Hard Brexit will be forced upon a supplicant Britian. Europe and UK economies will tank; currency wars will wage; global trade will collapse further. This will not sunk the global economy short term but will act as a dead weight slowing its resurgence down. KPI’s to avoid/watch out for: no agreement at end of two year period lost triggering of Article 50. 
5. Latin or Indian debt or economic crisis. Much like with other EM’s, growing sectors of significant size around the world may blow up- India being the best example. India’s growth is different to China. It is more integrated socially and politically with the west, but it’s corruption levels are far greater than what one can see or observe in China. It is possible that local economic difficulties, hard to observe today, may trigger a collapse in confidence that leads to a destabilizing debt or currency crisis. Brazil’s economy is certainly in the dock currently; Argentina is struggling. India’s economy looks like paradise right now but the growth across the country is extremely uneven- you only have to look at public sector infrastructure investment. So should two such countries suffer local difficulties, the combination may result in significant risk to the global financial system. KPI’s to avoid/watch out for: two simultaneous financial/debt crisis afflicting EM or India.

These are my top 5 risks the global economy faces in 2017. I hope I am wide of the mark, in a positive way. I left Japan off the top 5 list yet their economy remains anathema to growth. The Japanese market invented the whole new normal cycle with a anaemic growth, massive debt, low inflation, and demographic contraction. And Japan has an amazing debt load that refuses to spook investors. Things may yet have a Japanese tinge before the year end. Does Japan, along with the US, lead the global economy back to the old normal!
What potential risks do you see?