Rich Folks Are Fleeing London and Lagos, Wealth Report Shows - Bloomberg
...Losing wealthy individuals is normally a sign of trouble in the political economy of a country. Rich people are often the first people to leave, because they can -- unlike the middle class or the poor.....
... there are some 15.2 million HNWIs in the world, defined as those with net assets of $1 million or more.
Wednesday, January 31, 2018
Tuesday, January 30, 2018
Patrick Cox's Tech Digest | Mauldin Economics
Patrick Cox's Tech Digest | Mauldin Economics
....In his keynote at last year’s WSCS, West unveiled his research into induced tissue regeneration (iTR) to the scientific community. ITR is the reactivation of embryonic genes that allows cells to restore themselves to perfect health based on their original DNA blueprint.
....In his keynote at last year’s WSCS, West unveiled his research into induced tissue regeneration (iTR) to the scientific community. ITR is the reactivation of embryonic genes that allows cells to restore themselves to perfect health based on their original DNA blueprint.
The ability to activate embryonic gene pathways in adults would make many medical practices obsolete. Damaged and diseased organs, limbs, and tissues could be completely regenerated—including hearts, joints, eyes, skin, and teeth. In short, ITR could extend health and lifespans far beyond current limits.
Essentially, iTR reactivates the embryonic superpowers locked away in our genomes. During the embryonic phase of development, our bodies can repair injuries completely. We can observe this ability in some lower-order animals that maintain embryonic healing capabilities. In these animals, even major injuries to organs and limbs are completely repaired.
Today's WorldView: How anti-feminism is shaping world politics - btbirkett@gmail.com - Gmail
Today's WorldView: How anti-feminism is shaping world politics - btbirkett@gmail.com - Gmail
The Washington Post 1/30/2018
The Washington Post 1/30/2018
Hostile takeover?
For decades, China was something of an El Dorado for foreign companies. Its low wages lured manufacturers and its vast consumer market and rapidly expanding middle class presented an unrivaled opportunity for growth — even if it was always a challenging place to operate.
But those challenges have only grown along with China's power and its decreasing need to welcome Western companies into its economy. Now, executives and business groups say, the Communist Party is demanding a direct voice in the decisions of Western companies operating in China.
According to them, American and European companies involved in joint ventures with state-owned Chinese firms — arrangements that are required in many cases for foreign companies — have been asked in recent months to give Communist Party cells an explicit role in decision-making. They see it as a worrying demand that suggests that foreign companies are no longer exempt from President Xi Jinping’s overarching vision of complete control over Chinese society.
That goes hand-in-hand with Xi's moves to crack down on China's Internet by boosting censorship and limiting the methods by which Chinese Internet users can evade the country's filtering systems. Smaller companies worry about having their Internet access effectively ransomed in order to win greater compliance with party demands.
To regain full access to the Internet, for example, one American company was asked to sign a “solemn commitment” that it would obey the Chinese Communist Party’s “seven bottom lines,” do nothing to undermine the socialist system, public order or social morality, and wouldn’t use the Internet to violate the interests of the state.
With China's confidence and economy both growing, experts say Beijing does not care as much about foreign firms as it used to, with a definite hubris setting in after the 2008 recession.
“Foreign companies used to be seen as special here, as friends of China,” said James McGregor, a China-based author and businessman. “But that kind of flipped during the Western financial crisis.”
But that could end up being a geopolitical mistake for Beijing, especially as tensions grow between Beijing and the Trump administration.
“In the past, foreign business has been an important ally for China," said J örg Wuttke, a former president of the European Chamber of Commerce, "but the country now appears to be alienating it at a time when it most needs friends abroad." — Simon Denyer
Monday, January 29, 2018
Chinese Tourists Are Reshaping World Economy - Bloomberg
Chinese Tourists Are Reshaping World Economy - Bloomberg
...If you worry that Chinese economic data are fake, here are some numbers that may comfort, or startle, you. According to the United Nations World Tourism Organization, Chinese outbound tourism expenditure grew to $261 billion in 2016 (21 percent of the world market), an increase of 12 percent from 2015 and 11 times of the amount spent a decade earlier.
...If you worry that Chinese economic data are fake, here are some numbers that may comfort, or startle, you. According to the United Nations World Tourism Organization, Chinese outbound tourism expenditure grew to $261 billion in 2016 (21 percent of the world market), an increase of 12 percent from 2015 and 11 times of the amount spent a decade earlier.
This Physics Breakthrough Could Help Save the World - Bloomberg
This Physics Breakthrough Could Help Save the World - Bloomberg
Turbulence wastes a lot of energy. New research shows how we might reduce it.
Turbulence wastes a lot of energy. New research shows how we might reduce it.
What's Next for Saudi's Elite After Leaving Ritz? - Bloomberg
What's Next for Saudi's Elite After Leaving Ritz? - Bloomberg
... In a secret 1996 cable published by WikiLeaks, a U.S. diplomat in Riyadh reported that a handful of the most senior princes enriched themselves by skimming from “off-budget” programs that received 12.5 percent of the country’s oil revenue. The diplomat said some royals used their power to confiscate land from commoners in order to resell it to the government at a profit.
... In a secret 1996 cable published by WikiLeaks, a U.S. diplomat in Riyadh reported that a handful of the most senior princes enriched themselves by skimming from “off-budget” programs that received 12.5 percent of the country’s oil revenue. The diplomat said some royals used their power to confiscate land from commoners in order to resell it to the government at a profit.
Sunday, January 28, 2018
Sorry, Blue States: You Can't Fix the Tax Bill - Bloomberg
Sorry, Blue States: You Can't Fix the Tax Bill - Bloomberg
In the end, these places may even be forced to consider the truly audacious Option 4: cut their taxes and learn to live within a new, tighter budget.
In the end, these places may even be forced to consider the truly audacious Option 4: cut their taxes and learn to live within a new, tighter budget.
China’s Understanding of Global Order Shouldn’t Be Ours – Foreign Policy
China’s Understanding of Global Order Shouldn’t Be Ours – Foreign Policy
...Rather than move toward an increased reliance on markets, the Chinese government has doubled down on its use of mercantilist policy tools, subsidizing “national champions” and enabling the acquisition of technology and intellectual property by all means, fair or foul, while continuing to regulate and restrict foreign imports and investments.
...Rather than move toward an increased reliance on markets, the Chinese government has doubled down on its use of mercantilist policy tools, subsidizing “national champions” and enabling the acquisition of technology and intellectual property by all means, fair or foul, while continuing to regulate and restrict foreign imports and investments.
Social Progress Index - Maudlin
People have proposed such measures. In 2013 the Skoll World Forum launched the Social Progress Index, defined as “the capacity of a society to meet the basic human needs of its citizens, establish the building blocks that allow citizens and communities to enhance and sustain the quality of their lives, and create the conditions for all individuals to reach their full potential.”
Some of those indicators could be hard to pin down. I don’t see how you put a number on “religious tolerance,” or “tolerance for homosexuals,” for instance. But the creators of the index are on the right track in that they are attempting to measure well-being. I am not certain how widely accepted such a measure would be, but it’s a start.
https://mail.google.com/mail/u/0/#inbox/16139e58ba0c2a32
Gross Domestic Problems | Thoughts from the Frontline Investment Newsletter | Mauldin Economics
Gross Domestic Problems | Thoughts from the Frontline Investment Newsletter | Mauldin Economics
...Thanks to improved policy out of Washington, the Plow Horse has picked up its gait....
...The GDP formula is C + G + I + NX, where
...To an economist, a barrel of oil selling for $100 has the exact same effect on GDP as two barrels of oil selling at $50. Silly, but that’s the way the accounting works.
...GDP is a historical artifact from an industrial economy that doesn’t really exist anymore...Technically, manufacturing is still 35% of GDP, but fewer than 9% of US workers are actually involved in that manufacturing.
...how much more productive technology has made us...it’s 1975 and you want to know what GDP growth was in 1972...Remember the spiral-bound map books...
... the reduction in labor needed to operate a power plant as we move from nuclear or coal to natural gas or wind or solar...
...coal ...plants all shift to natural gas, which they will over time. That’s a loss of 130,800 workers...
...A key question: Is GDP completely outmoded, or does it just miss some things?
...Diane Coyle...She proposed in a recent paper with Benjamin Mitra-Kahn a series of incremental changes that should help: better measurement of intangible goods, an adjustment based on income distribution, and some other relatively simple changes.
...Distribution effects are a problem whenever we look at GDP per capita, ...indeed it is likely in some places, for per capita GDP to rise sharply while most of the population sees no change in its living standards or economic health. An adjustment to compensate for this inequity is an excellent idea.
...GDP Growth...If GDP is flat or falling, we see a recession and react accordingly. That is particularly the case with political leaders and central bankers, who then introduce policies to solve the perceived problem. These policies can be damaging if the problem is less serious than central bankers think it is. This may be happening in the US right now.
...What we want is a benchmark of economic progress....
...concepts like income inequality may differently skew the witches’ brew that is GDP. The only part of the economy that is really subject to serious increases in productivity is manufacturing; and, as noted above, manufacturing involves less than 9% of the workforce.
...In 2013 the Skoll World Forum launched the Social Progress Index,
...using GDP but add other data points to clarify it. They would use things like life expectancy, debt levels, educational achievement, and other social progress metrics.
...Thanks to improved policy out of Washington, the Plow Horse has picked up its gait....
...The GDP formula is C + G + I + NX, where
C = Consumer spending
G = Government spending
I = Private investment
NX = Net exports.
G = Government spending
I = Private investment
NX = Net exports.
...To an economist, a barrel of oil selling for $100 has the exact same effect on GDP as two barrels of oil selling at $50. Silly, but that’s the way the accounting works.
...GDP is a historical artifact from an industrial economy that doesn’t really exist anymore...Technically, manufacturing is still 35% of GDP, but fewer than 9% of US workers are actually involved in that manufacturing.
...how much more productive technology has made us...it’s 1975 and you want to know what GDP growth was in 1972...Remember the spiral-bound map books...
... the reduction in labor needed to operate a power plant as we move from nuclear or coal to natural gas or wind or solar...
...coal ...plants all shift to natural gas, which they will over time. That’s a loss of 130,800 workers...
...A key question: Is GDP completely outmoded, or does it just miss some things?
...Diane Coyle...She proposed in a recent paper with Benjamin Mitra-Kahn a series of incremental changes that should help: better measurement of intangible goods, an adjustment based on income distribution, and some other relatively simple changes.
...Distribution effects are a problem whenever we look at GDP per capita, ...indeed it is likely in some places, for per capita GDP to rise sharply while most of the population sees no change in its living standards or economic health. An adjustment to compensate for this inequity is an excellent idea.
...GDP Growth...If GDP is flat or falling, we see a recession and react accordingly. That is particularly the case with political leaders and central bankers, who then introduce policies to solve the perceived problem. These policies can be damaging if the problem is less serious than central bankers think it is. This may be happening in the US right now.
...What we want is a benchmark of economic progress....
...concepts like income inequality may differently skew the witches’ brew that is GDP. The only part of the economy that is really subject to serious increases in productivity is manufacturing; and, as noted above, manufacturing involves less than 9% of the workforce.
...In 2013 the Skoll World Forum launched the Social Progress Index,
...using GDP but add other data points to clarify it. They would use things like life expectancy, debt levels, educational achievement, and other social progress metrics.
Coal Plants - Maudlin
Our antiquated methods matter to employment, too. I saw in a recent Wall Street Journalreport the reduction in labor needed to operate a power plant as we move from nuclear or coal to natural gas or wind or solar. One company that is shutting down its coal plant and laying off 430 workers will be opening a solar plant in West Texas that will be one of the largest solar facilities in the country, operated by two workers, who may actually be part-time. Put that in your future-of-work pipe and smoke it.
Coal power accounted for 39% of US electricity production in 2014, 33% in 2015, and 30.4% in 2016. There are 1308 coal-powered plants in the US. Assume 125 workers per plant. That’s 163,500 workers. Now cut that number by at least 80% if the plants all shift to natural gas, which they will over time. That’s a loss of 130,800 workers. And that’s assuming that they all go to natural gas and don’t go to wind or solar. This is going to happen in the next 10 to 15 years. My math could be off here or there, but not by an order of magnitude.
http://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/180127_TFTF.pdf
Attacking North Korea Is Unthinkable. Or Is It? - Bloomberg
Attacking North Korea Is Unthinkable. Or Is It? - Bloomberg
Yet the advantage that those guns have -- being in caves and protected by blast doors -- it also has a big disadvantages. They're not mobile; other than a few feet to get in and out of a cave, they're not going anywhere. And they are at known positions. We know the coordinates of every gun. Nowadays, we can drop GPS-guided ordinance on coordinates with a miss-distance of just 10 meters. A 10-meter miss with a 2,000-pound conventional bomb means that gun is out of action, because the blast doors would cave in. The people inside will likely be out of commission for a while. This is a different kind of a threat to those guys.
I still think that in the opening moments of any aerial campaign against the North there will be some damage in Seoul, probably considerable. But I no longer think that you have to go in and take those guns out with ground forces.
Saturday, January 27, 2018
Release the Dutch Evidence of the DNC Hack - Bloomberg
Release the Dutch Evidence of the DNC Hack - Bloomberg
...The Dutch hackers, reportedly, didn't just watch everything Cozy Bear -- a fluid group in which about 10 people were active at any given time -- was doing on its computers. They also took over the security camera that recorded all the comings and goings at the group's space. Dutch intelligence matched the faces of visitors against a database of known Russian agents and linked the group to the SVR. Crowdstrike, the cybersecurity firm retained by the DNC, hinted in its analysis of the breach that Cozy Bear could have been run by either SVR or the FSB, Russia's domestic intelligence service, so the Dutch report clarifies the attribution.
...the questions raised by the Dutch scoop are as significant as the gaps it helps to close. If the Dutch witnessed the DNC intrusion in 2015 and reported it to U.S. colleagues, it's difficult to understand why the Russian hackers were left to forage in the DNC network for months without being ejected. After all, Cozy Bear's attacks on the State Department and the White House were actively fought as soon as they became apparent.
...It also appears that the Dutch hackers didn't detect a second Russian intrusion into the DNC, by APT 28, or Fancy Bear, a group Crowdstrike links to GRU military intelligence: They didn't have access to this group's network.
...Specific evidence linking Russian intelligence to the DNC hack would dramatically change the current picture of limited attempts at interference via Facebook and the state-owned network Russia Today, especially if it could also be shown that material obtained in that Russian hack surfaced on Wikileaks. It serves no purpose to keep that kind of information from the public.
...The Dutch hackers, reportedly, didn't just watch everything Cozy Bear -- a fluid group in which about 10 people were active at any given time -- was doing on its computers. They also took over the security camera that recorded all the comings and goings at the group's space. Dutch intelligence matched the faces of visitors against a database of known Russian agents and linked the group to the SVR. Crowdstrike, the cybersecurity firm retained by the DNC, hinted in its analysis of the breach that Cozy Bear could have been run by either SVR or the FSB, Russia's domestic intelligence service, so the Dutch report clarifies the attribution.
...the questions raised by the Dutch scoop are as significant as the gaps it helps to close. If the Dutch witnessed the DNC intrusion in 2015 and reported it to U.S. colleagues, it's difficult to understand why the Russian hackers were left to forage in the DNC network for months without being ejected. After all, Cozy Bear's attacks on the State Department and the White House were actively fought as soon as they became apparent.
...It also appears that the Dutch hackers didn't detect a second Russian intrusion into the DNC, by APT 28, or Fancy Bear, a group Crowdstrike links to GRU military intelligence: They didn't have access to this group's network.
...Specific evidence linking Russian intelligence to the DNC hack would dramatically change the current picture of limited attempts at interference via Facebook and the state-owned network Russia Today, especially if it could also be shown that material obtained in that Russian hack surfaced on Wikileaks. It serves no purpose to keep that kind of information from the public.
The Ultimate Dealmakers' Retreat Isn't Davos This Year - Bloomberg
The Ultimate Dealmakers' Retreat Isn't Davos This Year - Bloomberg
Macron's flagship announcement of 3 billion euros of investments over five years is encouraging -- but it’s still only one-tenth what Apple Inc. is pledging at home.
- https://www.bloomberg.com/gadfly/articles/2018-01-24/the-ultimate-dealmakers-retreat-isn-t-davos-this-year
Macron's flagship announcement of 3 billion euros of investments over five years is encouraging -- but it’s still only one-tenth what Apple Inc. is pledging at home.
- https://www.bloomberg.com/gadfly/articles/2018-01-24/the-ultimate-dealmakers-retreat-isn-t-davos-this-year
Tuesday, January 23, 2018
Gender Balanced VC Firm - Term Sheet: Jan. 23, 2018 - btbirkett@gmail.com - Gmail
Term Sheet: Jan. 23, 2018 - btbirkett@gmail.com - Gmail
In a new feature, my colleague Michal Lev-Ram delves into the inner-workings of Aspect Ventures, a rare gender-balanced VC firm. "Our company is nearly 50/50 in an industry in which just 7% of investors are female," says Aspect Ventures co-founder Theresia Gouw. "And our portfolio is a reflection of our pipeline."
In a new feature, my colleague Michal Lev-Ram delves into the inner-workings of Aspect Ventures, a rare gender-balanced VC firm. "Our company is nearly 50/50 in an industry in which just 7% of investors are female," says Aspect Ventures co-founder Theresia Gouw. "And our portfolio is a reflection of our pipeline."
Monday, January 22, 2018
Sunday, January 21, 2018
Saturday, January 20, 2018
The Five People Shaping My Worldview - Mauldin Economics
The Five People Shaping My Worldview - Mauldin Economics
John Mauldin
Chairman
ESSAY 5 Featuring Niall Ferguson
What Does the End of The Liberal International Order Mean for Markets?
By John Mauldin
“Globalization [has] overshot and produced a quite legitimate backlash. While people like me were enjoying Davos and Aspen and saying how marvelous the Liberal International Order was, a rather large number of ordinary Americans were not feeling quite so chipper.”—Niall Ferguson
“Niall Ferguson is not the kind of historian who suffers from understatement. He writes big, muscular books with high-concept ideas that target current concerns through the prism of the past. They are pull-yourself-together warnings to the present by way of arresting historical precedent.”—The Guardian
If there is a sentence (or two) that encapsulates my thoughts on globalization, it is the William Gibson quote I’ve used many times at the opening of my letters: “The future is already here. It’s just not evenly distributed yet.”
The benefits of globalization have been unevenly distributed, and those who have been on the short end of the curve are pushing back. Given the dire situation millions of Americans are in today, I don’t wonder why they are doing so; I wonder what took them so long.
According to a 2017 study by the Federal Reserve, 44% of Americans wouldn’t be able to cover an unexpected $400 expense without borrowing or selling something. Yes, nearly half the country can’t come up with $400 cash in an emergency. That’s stunning. The slightest mishap—a toothache, a minor car problem—will send them into debt or force them to sell something.
This situation is the result of decades of stagnant wage growth. Since 1979, real (inflation-adjusted) hourly wages for the bottom quintile of earners fell by 1%. Worse, the inflation adjustment is based on the CPI, which as I’ve said many times, understates the real cost of living for most people. But wages haven’t stagnated for everybody. As the below chart shows, real hourly wages for the top quintile of earners have increased by over 27% in the same period.
Source: Brookings Institute
Income gains for the top 10% of the population rose roughly in line with that of the bottom 90% from 1930 to 1970. What happened in the 1970s to cause this divergence? The chief suspect is China’s opening to world trade and the onset of globalization.
Over the past four decades, globalization has enabled the transfer of millions of jobs from the US to various emerging-market countries. It changed the relative value of capital and labor all over the world. The top earners started getting a larger share of their income from investments than from their labor. They own the “means of production,” and the producers did increasingly well from the ’70s forward.
Nobody paid much attention to the unevenly distributed benefits of globalization, until around 40 million Americans lost their jobs in the 2007–2009 recession. Now, the backlash has begun, and it’s not going to stop until the situation improves for those who have been left behind.
Globalization has lost its political support, and that raises an important question about the future of the global economy. If globalization has fallen out of favor with large swaths of the voting public, what does the future look like for the American-led order which has promoted economic liberalization and liberal values around the world since the end of WWII?
This system, defined as the Liberal International Order, is the framework of rules, alliances, and institutions that is credited with the relative peace and prosperity the world has enjoyed since 1945. So, if the order has lost support, will the world plunge into beggar-thy-neighbor protectionism? Worse, without the threat of military intervention by the US and its allies, will regional powers start to challenge one another?
One man answering these pressing questions is my good friend, Niall Ferguson. I’m sure most of you have heard of Niall, but for those who haven’t, it is my great pleasure to introduce him to you.
Niall Ferguson is a senior fellow at Stanford University, and a senior fellow of the Center for European Studies at Harvard, where he served for twelve years as a professor of history. Niall is one of the finest economic historians on the planet; but he isn’t only an academic. What many people don’t know is that he works with a small group of elite hedge fund managers and executives as the managing director of macroeconomic and geopolitical advisory firm, Greenmantle.
Niall has made a habit of tackling topics that have significant importance in his career. But in my opinion, this is the most critical question Niall is attempting to answer: “Is the Liberal International Order over?”
Before we dive in, I want to make clear that the goal of this letter is not to say whether liberal internationalism is good or bad, or defend the backlash against it. My objective is to highlight the current state of the order and give insight into Niall’s argument behind why he believes it is over. As investors, it is imperative we understand this trend because it has major implications for financial markets we need to think about. With that being said, let’s dive straight in.
The fate of the Liberal International Order rests on Pax Americana
In a recent interview, Niall pointed out the potentially fatal flaw in the Liberal International Order:
“If the world has been more peaceful since WWII, the main reason is not because of the Liberal International Order, it’s because the United States had decided to play a leadership role. The big story after 1945 was the Pax Americana. The big story since 9/11 has been its crumbling.”
While the Liberal International Order and its institutions are credited with the relative peace the world has enjoyed since 1945, Niall says, “That's a very implausible argument.” He believes the world has been more peaceful because of the will and capacity of the US to be the principal guarantor of the system. This is often referred to as Pax Americana, in which the US employed its overwhelming military power to shape and direct global events.
This reliance on US strength hasn’t been a problem for the past seven decades, but times are changing. Since the financial crisis, the US has been less willing to bear the costs needed to be the guarantor of the international order. Niall highlights the inaction over Russia’s annexation of Crimea in 2014, and the “little more than cosmetic” strikes against Syria as signs that the US is starting to take a more ambivalent approach to global conflicts.
Without US willingness to use military power to establish balance across the world, it’s likely the liberal order will buckle under the unrestrained competition of regional powers. As the below chart shows, there has already been a sharp rise in the number of armed conflicts around the world.
Source: RAND Corporation
As Niall pointed out: “Things are becoming quite disorderly for the liberal order.” Before we go on, I want to make a critical point. Whether you support military intervention, or not, isn’t the issue here. The issue is that without the US playing the role of guarantor, we are likely to see a rise in conflicts. That is going to affect financial markets and your portfolio.
The second “pillar” of the Liberal International Order, economic liberalization, is also under strain.
Peak globalization is in the rearview mirror
Niall points to falling global trade and capital flows as another symptom of the Liberal International Order being over:
“Peak globalization is already behind us. Trade is no longer growing at the rate it did prior to the financial crisis, and international capital flows have fallen too.”
Since peaking in 2007 and 2008, respectively, trade and foreign direct investment as a percentage of world GDP have fallen sharply. McKinsey Global Institute found that global flows of goods, finances, and services have declined by 15% since peaking in 2007.
Source: World Bank
I believe “peak globalization” is in the rearview mirror. I say that not only because cross-border flows have declined precipitously, but because we are headed into a period of protectionism. US withdrawal from the Trans-Pacific Partnership is the most high-profile instance so far, but there are several more.
The governments of Australia and Canada have taken measures to curb foreign ownership of real estate. New Zealand has taken this a step further by outright banning foreign ownership of real estate. In Europe, there have been several “behind the border” restrictions enacted by countries, which are designed to bolster domestic industries. Thus, it seems to me even the most liberal of countries are realizing globalization has overshot.
The rise of protectionism has serious implications for investors. We have become used to companies being able to break into new markets and the idea of “multinational corporations.” This may not be the case going forward. Investors will have to pay a lot more attention to where the companies they choose to invest in operate, and where their sales come from. In short, protectionism is on the rise and investors must prepare accordingly.
Longtime readers will know that I’m second to no one in defending free trade—but I also see the reality, which is that it has had a dark side. And that dark side is another symptom Niall has pointed to as proof that the International Liberal Order is over.
Globalization has killed the goose that lays the golden eggs
Although the Liberal International Order has benefited some, Niall points out that it has been very bad for millions of ordinary Americans:
“While it's great to say that 300 million Chinese people have been pulled out of poverty, the reality is that there has been, at the same time, a significant erosion of living standards for middle-class and working-class Americans.”
I mentioned at the beginning of this letter that the benefits of globalization have been unevenly distributed. As the below chart shows, the big losers have been the American middle and working classes.
Source: Harvard Business Review
Globalization has been bad for these sections of society because it changed the relative value of capital and labor. When capital and goods could flow freely between the US and emerging market countries, the value of labor in the US fell dramatically. Today, we are at a point where labor share of income has fallen to an all-time low of 57%. That means a growing fraction of the gains have been going to capital, and those who have it.
This has resulted in the loss of millions of US jobs. Since 1979, manufacturing employment has dropped by approximately seven million jobs. Studies show that technology accounts for around half of these losses. But Niall makes a very succinct point about these findings:
“The distinction [between globalization and technology] is arbitrary. What distinguishes the technological revolution is precisely that things like iPhones could be designed in California but made in China. The paradox of the Liberal International Order is that it made a lot of technology affordable, while at the same time destroying manufacturing jobs.”
The hardship experienced by millions of Americans has happened at a time when the wealthy have done increasingly well. Today, we have a situation where the top 0.1% of the population has roughly the same share of the US national wealth as the bottom 90%. Cue: the re-emergence of populism.
Source: Ray Dalio, Bridgewater Associates
It’s not a coincidence that populism emerged as a political force in both the 1920s–1930s, and again today. In each case, people at the bottom could tell the economy wasn’t working in their favor. The best tool they had to do something about it was the vote, so they elected FDR then, and Trump now. Two very different presidents, but both responsive to the most intensely angered voters of their eras.
You only have to observe how the word “globalist” has become a slur to see that people have turned against liberal internationalism and those who support it. Globalization has been terrible for millions of middle- and working-class Americans, and they are very unlikely to vote for politicians who support it. By lowering the living standards for millions of Americans, the Liberal International Order has become the architect of their own downfall.
Niall has also highlighted events taking place on the other side of the Atlantic as another sign that the Liberal International Order is indeed finished.
The European Union has a crisis of confidence
Niall says the EU’s mishandling of the financial and migrant crises have resulted in a total loss of confidence in the institution:
“The European Union is a perfect illustration of why the Liberal International Order is over. The EU wholly mismanaged the financial crisis, massively amplifying the effects on member states. But it will turn out to have committed suicide because its leaders got the immigration issue wrong. The Europeans forgot that borders are really the first defining characteristic of a state. As they became borderless, they made themselves open to a catastrophe, which was the uncontrolled influx of more than a million people. The most basic roles that we expect a state to perform, from economic management to the defense of borders, were flunked completely by the EU over the past 10 years.”
The EU’s incompetence in both situations has ignited a wave of populism across the continent:
- Austria elected a 31-year-old, anti-immigration candidate as Chancellor.
- Italy’s populist Five-Star movement are leading in the polls for the general election, which takes place March 4.
- The Visegrad group, which consists of the governments of Poland, Hungary, Czech Republic, and Slovakia, have strongly opposed the resettlement of refugees and are battling with the EU over the issue.
- Angela Merkel did win the German elections, but four months later, she hasn’t been able to form a government because of the strong showing by the populist Alternative for Germany party.
The empirical evidence supports Niall’s thesis, and so does the academic research. A 2017 study from the Brookings Institution found that there is a high correlation between jobs losses which occurred as a result of the financial crisis, and increased support for anti-establishment political parties in Europe.
This populist backlash shouldn’t come as a surprise to us. During a recent discussion, Niall pointed out that: “If one looks at all the elections back to 1870, financial crises lead to backlashes against globalization that erode to the political center.” Here’s a chart which shows this trend:
Source: Funke, Schularick, Trebesch (2015)
This is why I love talking with Niall. He makes sense of current trends by providing a historical perspective. Getting Niall’s insight not only allows you to understand what is currently happening, but how things are likely to unfold in the future.
While the EU’s handling of the financial crisis hasn’t been good for business, I believe their mismanagement of the migrant crisis will prove to be their real downfall. According to Frontex, the EU border surveillance agency, over the course of 2015 and 2016, more than 2.3 million illegal crossings into Europe were detected. This influx of migrants hasn’t gone unnoticed.
A recent survey by Paris-based think-tank, Fondapol, found that nearly two-thirds of EU citizens surveyed believe immigration has a negative impact on their countries. As the below chart shows, a similar percentage of respondents said they are “very worried/worried” about Islam.
Source: Fondapol, Financial Times
Despite the concerns of people all across Europe about immigration, EU officials continue to push refugee resettlement on member states. The EU’s actions in the face of these concerns proves that there is a complete disconnect between those in Brussels and ordinary Europeans.
I can’t see how this doesn’t cause a further increase in support for populism around Europe, and ultimately lead to the demise of the EU—which would certainly prove that the Liberal International Order is over. To be clear, I don’t think the collapse of the EU is imminent, but it is certainty on a downward trajectory.
We saw this movie before, will it have the same ending?
As I mentioned, Niall has a special ability to dissect historical trends and extrapolate out what they can tell us about the future. He did this recently with the Liberal International Order:
“The big lesson of history is that we have run the experiment of hyper-globalization before. In the late 19th century, many of the forces we are seeing [today] were at work: International migration reached levels we have begun to see again, the percentage of the US population that was foreign born reached 14%, and free trade and international capital flows reached new heights. At the time, the 1% were tremendously happy. Unfortunately, they underestimated the backlash that happens when globalization runs too far. The populist backlash [in the late 19th century] was just the beginning of a succession of crises that culminated in 1914 with WWI. War can be global too, and we will know the Liberal International Order has failed when it does what the last one did, and that is to produce a major conflict.”
I’m not sure if the Liberal International Order will end in war, but the current state of affairs can’t last much longer. Globalization has jumped the shark, and as a result, we are seeing a powerful backlash from those who have been hurt by it. There is no way to predict how this situation will unfold. But I know that I want to be the first to hear about any developments, because they have serious implications for financial markets and the societies we live in.
I have so many questions I want to ask Niall about this trend and many others. That’s why I’ve invited him back to give a keynote speech at my Strategic Investment Conference in San Diego this March.
Niall last spoke at my conference two years ago. He was bullish on the global economy at a time when almost everybody—including me—was bearish. I really don’t know what Niall is thinking about right now, or what new insights he has in store for SIC attendees. I am truly excited to welcome him back and I hope you can be there with me to experience it, first-hand. If you would like to learn more about attending the SIC 2018, and about the other speakers who will be there, you can do so here.
“I told my sister about the conference and why I was going. She said, "Of course! Not going would be like standing around and missing 1968 in San Francisco."—C. Cayes (past SIC attendee)
That concludes the fifth and final installment in this series. I hope you have enjoyed reading my insights into these “big ideas” as much as I have enjoyed writing them. Although it’s over, I do have something special to send you in the coming days. It’s a personal video message that I just finished recording. Think of it as a stepping stone to taking these “big ideas” to the next level. I’ll tell you more about it in my series recap email, tomorrow.
Before you go...
What are your thoughts about Niall’s insights into the Liberal International Order and its potential demise?
I’d love to hear your questions or comments about Niall’s insights, or anything else on this five-part series. Please post them in the comment section, below.
Your pondering what the future has in store for financial markets analyst,
John Mauldin
Chairman
Copyright © 2018 Mauldin Economics
The Five People Shaping My Worldview - Mauldin Economics - Lacy Hunt
http://www.mauldineconomics.com/landing/the-five-people-shaping-my-worldview#article4
ESSAY 4 Featuring Lacy Hunt
The Fed Has Put Itself Out of Business, Where to Now?
...The Fed’s failure to address over-indebtedness has caused irreversible damage to the economy. When debt levels rise past a certain threshold, additional debt-financed stimulus becomes ineffective. Worse yet, when an economy becomes extremely indebted, monetary policy stops working altogether.
I often get asked if I am still a deficit hawk. The answer is, “Yes, more than ever,” because current debt levels are rendering monetary and fiscal policy ineffective. And that, my friends, is a game-changer.
...As Lacy says, “By allowing the country to become extremely over-indebted, the Fed has put themselves out of business.”
....Future tax cuts and other fiscal measures may generate spurts of growth, but given the debt burden, it will fizzle out shortly thereafter.
...The composition of our debt is becoming increasingly inferior. We have the wrong type of debt. We’re taking on debt that is not going to generate an income stream, and that feeds financial speculation. That may benefit some, but not the society at large.
...Economists have been perplexed by the absence of growth and inflation over the past decade. The unproductive nature of the debt being borrowed goes a long way to explaining why.
... In 1997, $1 of new [money] increased GDP by $2.20. [Now] it is $1.43. This reflects the fact that we have too much of the wrong type of debt... if money is being used for unproductive purposes and doesn’t generate an income stream, velocity will fall.
...Velocity can also tell us about the long-term direction of bond yields. As velocity is a main determinate of nominal GDP, and yields track nominal GDP, Lacy believes that the secular low for interest rates are not in hand: “In my view, we will not see the secular low in interest rates until the velocity of money reaches its secular trough, and that is not something that’s going to happen soon.”
..While the debt burden is putting downward pressure on velocity, which is dampening growth, it is also incapacitating monetary policy.
...Again, the reason why inflation and growth have remained anemic despite record-low interest rates and multiple rounds of QE is the over-indebtedness of the US economy....you have to look to the money multiplier. The money multiplier is the amount of money that banks generate with each dollar of reserves. Due to the over-indebtedness of the economy—or more precisely, the lack of “savings”—the multiplier has plunged from 12.1 in 1985, to 3.6 today.
... the five rate hikes since December 2015 have produced a noticeable slowing in the growth of the money supply and several important areas of bank lending.
Given the strong impact the five 25-basis-point hikes have had on the money supply and bank lending, I am highly doubtful that the Fed can continue on their current tightening path.
... how will the coming wave of retirees, which will significantly increase mandatory spending, affect the measures I discussed in this letter?
Thursday, January 18, 2018
The Seven Deadly Sins | Booms & Manias - Mauldin Economics
The Seven Deadly Sins | Mauldin Economics
The Seven Deadly Sins
By David McWilliams
... I live in a truncated terrace of houses built just after the Napoleonic Wars when Dublin and the rest of urban Britain was in the grip of a building boom. The boom was fuelled by paper profits generated by exotic investment in the first emerging markets mania.
Following British victories over France, the colonies were seen as a place to make fortunes – which in some cases they were. Once the war was won, yields on British government bonds (Consols) collapsed and interest rates fell dramatically. Between 1820 and 1824, powered by the confidence that followed the military victory abroad and rock bottom interest rates at home, local speculators played the arbitrage between the paltry yields on British Consols and the stellar yields of colonial debt. Colonial projects promised vast fortunes. Punters piled in. Banks lent using existing colonial debt as collateral, encouraged by the exciting mathematics of notional arbitrage.
This is a common feature of many booms. The bank’s balance sheet plays tricks on itself, whereby expensive collateral is mistaken for good collateral. Money gushed into the system, linking for the first time, credit with the business cycle. Up to the 1800s, wars and agriculture drove the vagaries of the business cycle. Once credit emerged, it came to dominate the business cycle.
The modern cycle, whereby credit begets credit, first emerged in the 1820s.
In 1825, the Bank of England, fearing that asset price inflation was getting out of control, raised rates and the highly leveraged, post Napoleonic boom came crashing down, driving banks to the wall.
Building on the terrace where I live was stopped as the developer went bust.
Things that last
As I write, looking out the window over Dun Laoghaire harbour towards Wales, Dublin’s only efficient metropolitan railway trundles reliably along just across the road, hugging the coastline. This line was one of the world’s first suburban railways, completed in 1834 to whisk the wealthy Victorians out from the fetid city centre to the refreshing air of the seaside. Following the emerging markets crisis of 1825, the next big financial boom in these parts revolved around railways.
The first railway boom, or ‘railway fever’ as it was called at the time, broke out just after the 1825 crash with the opening of the Stockport / Darlington line. In no time – and again driven by easier monetary conditions after the crash – ‘railway fever’ engulfed both islands, with Liverpool, Manchester and Dublin vying to match London’s enthusiasm for new railway companies.
Not unlike the dotcom boom a few years back and today’s tech boom, the technological revolution wrought by the railways was real. It brought massive social change.
The 1840s and 1850s witnessed a speculative mania like no other in terms of participation and excitement. Railways captured the imagination of all with the promise of cheap transport for the masses, opening up the countryside and connecting people like never before. It’s hard to overstate the impact of cheap transport on a society where up to then, a significant proportion of the population had barely travelled more than a few miles beyond their own villages. The place was giddy with railway exhilaration. As more lines were laid, more railway shares were issued and more and more people were sucked into the financial vortex.
John Mills, head of the Manchester Statistical Society, looked back at the railway boom in the 1860s and noted that “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”
Railways were the future but they still had to make money. Mass transport means cheap transport and the cheaper the tickets the more compromised the revenue stream of the newer lines, which were being built in more and more remote places. In time, the disparity between the soaring speculative share prices buoyed up by ever increasing leverage and the underlying modest profitability of many of the lines themselves, coaxed some to take profits.
The very psychological act of defiance that is selling early, undermines the shaky edifice of the boom.
In the end, the railway boom came to a shuddering halt weighed down by its own internal contradictions between price and value. As always, value elbows its way into the speculative group trip and wrecks the buzz.
That’s not to say the railway mania was an irrelevant wasteful period in our history. Not at all. In fact, after I finish writing this I’m going to hop on a new train on the old Victorian line into the city. But the point is that boom and bust cycles tend to follow similar paths. The most expensive four words of all are: “This time it’s different”.
Credit cycles, as Thomas Aquinas understood, are part of human nature. Boom / bust episodes do strange things to us. It is easy to be caught up in the effervescence, misdiagnosing flakey speculation in the asset of the moment for a solid long-term investment.
The Kindleberger / Minsky framework
When thinking about asset bubbles, I frequently turn to the work of two economists whose work on credit bubbles, booms and busts seems, to me, extremely accurate. Charles Kindleberger and Hyman Minsky, rejecting classical economics that took the irrational human out of the equation, both recognised the importance of the human propensity to panic, indulge in herd behavior and believe our own propaganda. They outlined the stages of a credit boom, where investors go from optimism and euphoria to depression and panic – a journey that leads to the destruction of wealth.
Like Aquinas, they understood human nature.
Because we are a flock or a herd, we are essentially pro-cyclical. That is why we tend to act in ways that reinforce whatever economic trend prevails at a given time. In other words, most people are what is known in financial markets as ‘momentum investors’, who follow the crowd, buoyed up by the excitement of it all, rather than value investors who are constantly asking themselves whether prices are reflecting real value or something else. The predominance of momentum investors has the effect of amplifying the high and low points of cycles.
It is this sort of behaviour that leads to bubbles and can also push the economy out of kilter for long periods of time. It is simply not true that the self-interested economy naturally rights itself and finds equilibrium. In fact, the opposite is the case. The self interest of banks, market players and leveraged speculators can lead the economy to long inflationary periods or can find itself stuck in long periods of unemployment and deficient demand.
Kindleberger’s seminal work – Manias, Panics and Crashes – is well worth a read over Christmas. In it he rejects two widely-held views in classical economics: that financial markets are efficient and that people are rational. He quotes Isaac Newton, who lost a small fortune on the great 18th century speculative punt, the South Sea Bubble, “I can calculate the motions of heavenly bodies but not the madness of crowds”.
Kindleberger observed that panic can be sparked by a relatively trivial event. Once there is leverage in the system, small events have the tendency to become amplified, particularly if there is no hegemon that will backstop the system when a panic occurs. Such a hegemon in a financial crisis is a large active central bank with sufficient ammunition to mollify the panic. If a panic occurs when rates are high and unorthodox monetary policy has not been used, the central bank’s powder is dry so to speak. But today, after nearly a decade of QE, this is not the case.
Looking at the Great Depression and sharing some of Kindleberger’s analysis, Minsky observed how the financial system can go from rude health to fragility extremely quickly. He also identified the five sequential stages of a credit crisis: (1) displacement; (2) boom; (3) euphoria; (4) profit-taking and (5) panic.
At the beginning something real happens to displace or disrupt the old order and replace it with something new. This can be a monetary event like the ZIRP or QE where monetary conditions are changed dramatically. This has a real impact on valuations. The displacement or disruption can also be an innovation, which changes the market, such as the emergence of railways, the Internet, Amazon or Uber.
Prices of assets start to rise rapidly and people who usually remain aloof from these events become involved. The boom period leads to gearing as the banks fall over themselves to get involved. The next stage is euphoria, when the herd gets excited. This is when balance sheets play tricks on both lenders and borrowers. But of course success breeds a healthy disregard for the chances of failure. The thundering herd is galloping.
During the euphoria stage, leverage amplifies prices. At these lofty levels, some savvy players take this as a signal to cash in their chips. A prescient few take profits. This begins the process of unraveling when the herd realises that prices are falling and, in an effort to get out, everyone rushes for the door in panic. The edifice collapses, fortunes are lost and we start again.
The essence of a credit cycle is a debt build up combined with old fashioned human nature fueling humanity’s pathological optimism as we end up believing our own propaganda.
Minsky made another crucial observation which helps us to understand panics; it is important to look at the types of borrowers who obtain financing during a boom.
There are the ‘hedge borrowers’ who can finance their borrowings, both the capital and the interest, out of their own income.
Then there are the ‘speculative borrowers’ who can finance the interest on their borrowing but need to roll over the principal.
Finally, there are the ‘Ponzi borrowers’ who can’t afford the interest or principal; only the rising value of the asset makes their investments viable. In this type of deal, money doesn’t change hands. The Ponzi borrowers buy ‘on paper’ and sell ‘on paper’ and if the market goes up quick enough they make a tidy killing. If the market falls, they are goosed and so too are those who lent to the Ponzi borrowers!
When the bubble pops, the first guy to fall is the Ponzi borrower – but it doesn’t stop there. The generalised fall in asset prices affects the speculative borrower too, because the bank will only allow him to rollover the principal if the asset has value; if the asset value falls, the bank slams on the brakes.
As the withdrawal of credit causes the economy to seize up, everyone’s income falls. This affects even the hedge borrower’s position because although he could finance both interest and capital out of income, as everyone’s income is falling, his is too, making it difficult for even the hedge borrower to meet his payments.
As markets go ever higher and the gap between valuation and prices becomes more and more stretched, it would seem injudicious to ignore the repeated warnings from history and overlook our human capacity for individual and collective self-delusion.
At Christmas time, even the faithful could do with a little self-doubt.
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