Sunday, February 28, 2021

Niall Ferguson: 'His Dark Materials' Predicted Post-Pandemic Britain - Bloomberg

Niall Ferguson: 'His Dark Materials' Predicted Post-Pandemic Britain - Bloomberg

Britain Is Entering a Parallel Universe

Brexit, natural disaster, wokeness and a loss of enlightenment values – Philip Pullman’s novels are an intimation of the post-pandemic world.

 

By Niall Ferguson

February 21, 2021, 8:00 AM GMT

 

Niall Ferguson is the Milbank Family Senior Fellow at the Hoover Institution at Stanford University and a Bloomberg Opinion columnist. He was previously a professor of history at Harvard, New York University and Oxford. He is the founder and managing director of Greenmantle LLC, a New York-based advisory firm.

 

In Philip Pullman’s series of fantasy novels, “His Dark Materials,” we enter a universe containing an infinity of parallel worlds. In the most important of these worlds, which is similar to ours in many respects, evolution and history have had subtly different outcomes. Human beings have visible souls — small, semi-autonomous “daemons” that take the shapes of animals. And the Reformation has failed, leaving Europe still under the dominance of an obscurantist and oppressive “Magisterium.”

 

The home of the indomitably mendacious young heroine, Lyra Silvertongue, is an Oxford in which the nearest thing to physics is “experimental theology.” The Scientific Revolution has not been fully achieved and the Industrial Revolution looks equally incomplete. Lyra’s is a world that remains in many ways early modern. There are no planes, only balloons and airships. There is a primitive form of electricity but “anbaric” light is a luxury. The social order too lags behind our own. Servants rather than machines still perform most menial tasks. There are priories full of nuns. Politics remains an aristocratic preserve.

 

You are unlikely to have read “His Dark Materials” unless you have children, but perhaps you saw some of the recent HBO adaptation, notable for an unexpected and not wholly convincing appearance by Lin-Manuel Miranda as the Texan balloonist Lee Scoresby. If you’ve never even heard of Pullman, educate yourself. For he is not only as significant an author as that other great Oxonian C.S. Lewis (in many ways, the initial book in the series, “The Golden Compass,” is the atheist’s answer to “The Lion, the Witch and the Wardrobe”). Pullman also seems unwittingly to have written an intimation of the post-pandemic world.

 

There are a great many of us who still want to believe that at some point this year we shall all get back to normal — meaning life will resume more or less exactly as it was at the end of 2019. I am sure that by the summer it will feel in most developed countries that the worst of Covid-19 is over, thanks to a combination of mass vaccination and naturally acquired immunity. I am also confident that there will be a protracted global party to celebrate the reopening of bars and restaurants and the easing of at least some travel restrictions.

 

I fully expect a bout of rapid economic growth to ensue: Consumers have accumulated a vast sum of forced savings, a large proportion of which they are poised to spend — even before governments add fuel to the fire in the form of yet more fiscal stimulus.

 

Nevertheless, I am doubtful that our near-term future is going to revert entirely to the pre-pandemic normal. First, the SARS-CoV-2 virus is mutating in ways that few people foresaw a year ago, becoming more transmissible or more vaccine-resistant.

 

Second, the dominance of vaccine nationalism over global inoculation, combined with significant “anti-vaxxer” sentiment in countries that will soon have more vaccine shots than they require, will leave the virus with plenty of time and space to evolve further, especially in the Southern hemisphere. The elimination of Covid seems a distant prospect. A more likely scenario is that it will become an endemic, seasonal disease, requiring annual shots and causing recurrent waves of excess mortality.

 

Third, the hypermobility of the pre-pandemic era is highly unlikely to resume any time soon. Many countries that have managed to suppress the disease (e.g. Australia and New Zealand) will maintain travel restrictions. Few large businesses will return to their previous volume of corporate travel: Many meetings that would previously have necessitated long-haul flights will continue to happen over Zoom. A significant proportion of relatively high-skilled people will continue to work from home at least part of the time. And will you throw away all those masks? Will you resume hugs and handshakes of people outside your innermost circle? I know I won’t.

 

Fourth, Covid-19 has exposed how very poor our preparedness for disasters of all kinds has become, the central theme of my forthcoming book, “Doom: The Politics of Catastrophe.” There is a consensus that the next disaster we shall have to contend with will be related to climate change: That is Bill Gates’s story. Yet there are other disasters lurking out there to which we attach much lower probabilities. The eruption of Mount Etna last week is a reminder that the world has not seen a really large volcanic eruption since Mount Tambora in Indonesia in 1815. It has been two centuries since the annual amount of sulphate aerosol injected into the atmosphere by volcanic eruptions exceeded 50 million tons. We have forgotten how severe volcanic global cooling can be.

 

There’s a pervasive darkness to Philip Pullman’s worlds that I cannot help suspecting may characterize our world in the years ahead. Much of “The Golden Compass” is set in “the North,” including the frigid Norwegian archipelago of Svalbard. Texan readers are discovering that the weather of the north can now reach a lot further south than we are used to.

 

In “The Subtle Knife,” we encounter a beautiful Mediterranean country where specters hunt down adults and suck the vitality out of them — where only children are oblivious to and safe from the danger. It is remarkable how Pullman anticipated our ageist pandemic. In “The Golden Compass,” kids are cruelly separated from their daemons. In the Covid world, they are cruelly separated from their friends.

 

The Book of Dust” depicts Lyra’s Oxford devastated by a disastrous flood. Those who live there can easily imagine such an inundation, having seen the Thames so often burst its banks and submerge Port Meadow in recent years.

 

Nowhere does the future look less like the recent past and more like Pullman’s parallel universe than in his own country, England. True, 2021 has got off to a much better start for the U.K. than 2020 did. Thanks to world-class research at Oxford and elsewhere, bold procurement decisions led by Kate Bingham, head of the government’s task force, and the experience of the National Health Service in mass vaccination, the U.K. has surged ahead of the European Union in the vaccination race.

 

The European Commission has handled the vaccine challenge so badly — simultaneously centralizing procurement and slowing it down, then lashing out at the U.K. with empty threats to close the border between Northern Ireland and the South — that even the most ardent proponents of Brexit can scarcely believe it. (“I understand Brexit better now,” a pro-EU source at the drug company AstraZeneca told the Spectator last month.) Close to a quarter of the U.K. population has now received at least once vaccine dose, compared with 12% in the U.S. and less than 4% in Germany.

 

However, this success story comes after an annus horribilis. Excluding tiny Gibraltar and San Marino, the U.K. has the third-worst Covid mortality rate of any country in the world, exceeded only by Slovenia and Belgium. The country saw two of the world’s worst waves of excess mortality, in April last year and again over the Christmas holidays.

 

The U.K.’s gross domestic product shrank by 9.9% last year, the worst performance of any major economy apart from Spain, according to the International Monetary Fund. The last annual contraction larger than that was in 1709, when economic activity was steeply reduced throughout Europe by the “Great Frost,” the coldest winter in five hundred years. This has been attributed by modern research to the exceptionally low sunspot activity known as the Maunder Minimum, as well as to volcanic eruptions in the two preceding years at Mount Fuji, in Japan, and Santorini and Vesuvius, in Europe.

 

The worst years in English economic history, according to the Bank of England, were 1629, when the economy contracted by 25%, and 1349, when it shrank by 23%. The 1340s were the decade of the Black Death. I still cannot work out what went wrong in 1629, a year best known to political historians as the beginning of Charles I’s 11-year “Personal Rule” without a parliament.

 

 

A contraction of nearly 10% turns the economic clock of a country back around six years. Also turning the clock back is the effect of Brexit, which formally came into effect at the beginning of this year, after four and half years of divorce negotiations. As I warned back after the June 2016 referendum, Brexit was always going to be one of those divorces that takes a lot longer and costs a lot more than the exiting spouse imagined at the outset. Sure enough, now that Britain has its decree nisi, the true costs of splitting up can no longer be glossed over. The U.K. has opted to phase in border checks on EU imports gradually until July 1, whereas U.K. exports to the EU have faced the full suite of new restrictions since Jan. 1. The Road Haulage Association has reported that U.K. exports to the EU have fallen by more than two thirds, though the government does not accept this claim.

 

Not only is trade in goods suddenly a lot more difficult than it was before — cue a hundred press stories about customs paperwork crushing small businesses whose owners voted for Brexit — there simply is no agreement on trade in services. Nor are the Europeans in any hurry to recognize London as having equivalent regulatory status with euro area financial centers.

 

As people anticipate the new world in which London is no longer both de facto and de jure the EU’s principal financial center, the City is losing out. A chunk of London’s swaps business has migrated. There is already talk of changing the rules that allow asset management funds based in the EU to be managed from the U.K. Most startling of all, Amsterdam overtook London as a stock trading center in December. That probably hasn’t been true since 1709, if not 1629.

 

It’s sometimes forgotten that the 17th century Dutch Republic led England in terms of financial development: the former had a “golden age” while the latter was wracked by a religious and political civil war. Only with the ouster of James II and the installation of William of Orange as king of England in 1688 — the so-called “Glorious Revolution” were Dutch economic institutions imported to London from Amsterdam.

 

The English already had their own East India Company, but before 1688 it was commercially inferior to its Dutch counterpart. In 1694 the Bank of England was founded to manage the government’s borrowings as well as the national currency, similar (though not identical) to the successful Amsterdam Wisselbank founded 85 years before. London was also able to import the Dutch system of a national debt, funded through a stock exchange, where long-term bonds could easily be bought and sold.

 

Brexit has also turned the clock back demographically. According to the Migration Observatory at Oxford, the U.K.’s foreign-born population shrank by just over 1 million in the first three quarters of 2020. About 481,000 of those departing were born in the EU, reversing an influx that began in 2004, when the U.K. was one of only three established EU countries (the others were Ireland and Sweden) to allow immediate free movement by the citizens of the 10 Eastern European states that had just joined the union.

 

Of all the political mistakes that led to Brexit, this is the one that attracts the least attention, because it was made by a Labour government, based on civil servants’ disastrous underestimates of the likely westward migration flows. Those who voted for Brexit to reverse these flows are seeing their wish come true, especially in London, from which there has been a veritable exodus of migrants.

 

I used to worry, half-jokingly, that the net result of Brexit would be turn the social and economic clock back to before 1973, the year Britain joined the European Economic Community. I am old enough to remember the shabbiness of the country in those days: the inefficiency of nationalized industries, the excessive power of trade unions, the pervasive mood of cynicism that was good for sitcom scripts but not much else. Economically, however, not even the combination of Brexit and Covid-19 could return living standards to the low levels of those days.

 

Yet culturally the country seems to be lurching even further backwards. It is not just those on the right who quietly craved a less cosmopolitan country. It is also those on the left who seek to repudiate almost all of British history since 1709. The “woke” elements on British campuses took this repudiation to new depths earlier this month with a conference on the “racial consequences” of Winston Churchill at the Cambridge college that bears his name.

 

Speaking at this event, Kehinde Andrews, author of “The Psychosis of Whiteness,” described Churchill as “the perfect embodiment of white supremacy” and the British Empire as having been “far worse than the Nazis and lasted far longer.” Madhusree Mukerjee argued that “militarism is the core of the British identity” and called for statues celebrating British militarism to be taken down. No Churchill defenders were among the panelists.

 

Education Secretary Gavin Williamson last week announced new measures to uphold free speech at British universities. That may provide protection to the conservative thinkers who have recently been subjected to various forms of “cancellation” at Cambridge and elsewhere, but it will do nothing to stem the tide of wokeism. The government may stand, as Williamson said, “unequivocally on the side of free speech and academic freedom, on the side of liberty, and of the values of the Enlightenment.” But the academic left repudiates the Enlightenment as a mere helpmeet of imperialism and likes nothing better than to claim that conservatives are “weaponizing” free speech. So dominant are such ideas on some U.K. campuses that the clock appears to have been turned all the way back to the mid-17th century, when it was routine to denounce one’s ideological enemies as heretics and to condemn their ideas as blasphemy.

 

Pullman’s England seemed a through-the-looking-glass place when I first read his novels to my older children. I now realize we are hurtling towards it.

 

Nothing would turn the clock back further than the breakup of Britain — an eventuality predicted many times over the years. The New Left writer Tom Nairn published a book of that title in 1977. I remember being briefly converted to the cause of Scottish independence by the arguments of that book, combined with renditions of the Corries’ faux national anthem, “Flower of Scotland,” at international rugby matches. (I was 13 and soon grew out if it.)

 

But Scottish independence, which I have opposed throughout my adult life, may now be inevitable. Elections to the Scottish Parliament at Holyrood are scheduled for May 2021. The Scottish National Party, which is campaigning for a second independence referendum, is on track to win a comfortable majority. Scotland’s first minister, Nicola Sturgeon, does not want to proceed to a “indyref 2” without the U.K. government’s consent. However, on Jan. 24, her party published a “Roadmap to a Referendum,” which stated that if the party wins a majority in May, it will hold an independence referendum regardless of the U.K. government’s consent — the same strategy that led to chaos in Catalonia in 2017.

 

My favorite cartoon of the year so far was by Graeme Keyes. It depicted an Englishman striding resolutely westward with a suitcase labeled “BREXIT,” while a kilt-wearing Scotsman sauntered in the opposite direction with a suitcase labeled “EXBRIT.”

 

Recent polling points to a wider disintegration of the country officially known as the United Kingdom of Great Britain and Northern Ireland. Not only do 49% of Scottish voters now favor independence over 44% who oppose it; 42% of voters in Northern Ireland also support a United Ireland. Moreover, the English themselves are becoming resigned to these outcomes. Some 49% of voters in England now think Scottish independence is likely; 45% would either be “pleased” or “not bothered” by it; and an amazing 57%  would be “pleased” or “not bothered” by Irish reunification.

 

No one knows how exactly the Scottish economy could cope with independence, especially if it were to apply to join the EU as many nationalists would like (remember, Scotland voted emphatically against Brexit). But practicalities are no more in focus than they were in 2016, when the English voted to leave the EU — despite the fact that this would be a much more momentous divorce, ending the union of parliaments of 1707 and potentially even the union of crowns of 1603.

 

You see what I mean about turning the clock back? And yet it may be time for me to accept this process of historical shape-shifting instead of trying to fight it. Reading the novels of Walter Scott, the first of which appeared the year before Tambora erupted, I am reminded time and again how contingent the Anglo-Scottish union was at its outset, and how hotly contested, sparking major rebellions in 1715 and 1745. Just as Pullman’s novels conjure up an imagined England, in which modernity does not quite come together as it has in our world, so Scott’s remind us of what the pre-modernity was like — a world not just lacking in modern technology, but afflicted by religious zealotry and intolerance.

 

The thought that we might be on our way back to that world would make my daemon — if I had one — shudder.

 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

 

To contact the author of this story:

Niall Ferguson at nferguson23@bloomberg.net

 

To contact the editor responsible for this story:

Tobin Harshaw at tharshaw@bloomberg.net


Bitcoin Rally Sends 3 Signals to Governments - Bloomberg

Bitcoin Rally Sends 3 Signals to Governments - Bloomberg

Bitcoin Rally Sends 3 Signals to Governments

The drivers behind the surge will impact the design and effectiveness of economic policies.

 

By Mohamed A. El-Erian

February 25, 2021, 3:00 PM EST

Officials write off the cryptocurrency phenomenon at their peril.

 

Bitcoin’s price has tripled in just three months, bringing the last 12-month appreciation to more than 400%. Analyzing this rally from the perspective of investors is a good way to understand what has driven this impressive rally and what it says about global finance and money. It also has important messages for governments and central banks, particularly in Europe and the United States, where several officials have warned about the Bitcoin phenomenon.

 

The widely covered announcements by Tesla and Square that they were buying Bitcoins highlight a broadening process of adoption. More companies are having to consider the possibility that Bitcoin is evolving into a more widely used form of payment and store of value, two key characteristics of money. With that comes a clear message to the public sector, especially in countries with currencies that are used worldwide such as the dollar and the euro: Take a lot more seriously both the technology underpinning cryptocurrencies and, on the more worrisome side, the potential of a growing migration away from traditional money and its implications for the effectiveness of monetary policy and the ability to profit from issuing currency (“seigniorage”).

 

The second driver of Bitcoin’s meteoric rise has come from those attracted to it not for positive reasons, such as Tesla and Square, but for negative ones instead. Several are in play here. Some fear inflation and currency debasement. Others have been pushed to Bitcoin in search of a financial risk mitigator when yields on government bonds are low, though a little less so recently, and when their traditional negative correlation with risk assets, such as stocks, has weakened significantly. With that comes higher threats to future financial stability as the risk-mitigating positioning now attracts a more volatile component.

 

Speculator flows have driven the third influence. Bitcoin is part of a set of assets seen by some as providing the possibility of quick outsized gains. This is part of a more general phenomenon of excessive risk-taking that is playing out in many segments of the financial markets — from record debt issuance and the notable compression of risk spreads on the lowest-rated high yield bonds to the proliferation of celebrity SPACs and the meme stock phenomenon. Here, once again, the message to governments and central banks about the risk of future financial volatility and instability is far from reassuring.

 

At Bitcoin’s birth and during its early childhood, too many were quick to dismiss the phenomenon as short-lived and irrelevant, if not prone to fraud. They have been proved wrong so far. Today, too many officials are inclined to look at in the cryptocurrency in a rather narrow way. They shouldn’t. What is happening to the price of Bitcoin is indicative of broader developments that are relevant to the design and effectiveness of policies.

 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.


Saturday, February 27, 2021

The post-Covid hospital of the future will look quite different - btbirkett@gmail.com - Gmail

The post-Covid hospital of the future will look quite different - btbirkett@gmail.com - Gmail

What a post-pandemic hospital may look like

When the first wave of Covid-19 patients crashed into New York City hospitals in March, it quickly became clear that this public-health crisis was also a design problem: Without clear signage and sealed rooms and doors to contain infection risk, doctors and nurses could be unwittingly spreading contagion throughout the hospital.

To fix its isolation regime, Mount Sinai Hospital in upper Manhattan turned to Ariadne Labs, a center for health-systems innovation affiliated with Boston’s Brigham and Women’s Hospital and Harvard’s Chan School of Public Health. Working with the nonprofit MASS Design Group, the Ariadne team quickly helped redesign the hospital’s Covid ward with clearly marked doors, bright warning graphics and places to don and doff personal protective equipment. 

That emergency facelift marked the beginning of what has turned out to be a transformational year in health-care infrastructure. Just as the pandemic exposed the fissures in society, so too has it accelerated dramatic reforms in how hospitals look, feel and function.

“Things that advocates have pursued for decades are now happening,” Neel Shah, an obstetrician who heads the Delivery Decisions Initiative at Ariadne Labs, tells Bloomberg CityLab contributor James Russell.

One model for the hospital of the post-Covid era is Rush University Medical Center in Chicago, which has been touted as a pandemic-resistant facility. The building, which opened in 2012, was designed for mass-casualty events, with special ventilation features and a lobby equipped with electrical and medical gas outlets that allow it to accommodate surge beds. That kind of flexibility could be critical for managing future outbreaks.

Rush University Medical Center in Chicago, designed by Perkins & Will, was built to anticipate pandemics and other mass-casualty events. 

Photographer: Raymond Boyd/Michael Ochs Archives

Going forward, hospitals and clinics built in the wake of coronavirus could bear more subtle marks of the pandemic, as designers increasingly emphasize making them more welcoming spaces.

“Every major health-care facility is moving progressively to include green space and daylight,” says Raj Daswani, who leads health-care projects at the design firm Arup in Northern California. “Research shows these contribute to the healing process.”

Such wellness-oriented design isn’t just for patients. Doctors, nurses and other health-care staff have endured brutally stressful working conditions during the Covid crisis. The architects of tomorrow’s hospitals will be acutely aware of their needs for places of respite, too.– David Dudley

The Great Jobs Reset - Mauldin Economics

The Great Jobs Reset - Mauldin Economics

The Great Jobs Reset

By John Mauldin | Feb 27, 2021

John Mauldin

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We are almost through February and (knocking on wood) the US COVID-19 situation is improving daily. The B117 and other variants haven’t yet made a big impact. Possibly they will, but as time passes more people are getting at least partial protection through vaccines. The “race” I’ve described seems to be going the way we hoped.

In the US, hospitalizations for those age 85 and older dropped 81% from January to February, according to Bloomberg. This chart below summarizes data from 10 states.


Source: Bloomberg

Another case surge, variant-driven or otherwise, shouldn’t be as deadly since so many vulnerable and older people have been vaccinated. The vaccines appear extremely effective at minimizing severity even when they don’t stop infection. And the fact that every age group—including those who haven’t yet been offered vaccines—is seeing lower hospitalizations is very encouraging.

If this continues, and we all hope it does, it means we can start looking ahead to the other side of all this. By no means have we reached the other side. It is not yet time to relax. Nevertheless, it looks like we can, as President Biden has said, “approach normalcy” by year-end.

But that raises a question: What normalcy will it be? I don’t expect to simply go back to the way things were. The economy as it was structured in December 2019 is gone forever. The world is different now. The economy will be different, too.

We’ll see this in myriad ways but in this letter I’ll focus on just one: jobs. That is the key way in which most people participate in the economy. How they do it matters. And, as you’ll see, many will do it in new and different forms.

Interest Rates, Federal Reserve, and Unemployment

The Federal Reserve is primarily focused on unemployment and not inflation, according to numerous officials and Jerome Powell. They are willing to let the economy “run hot.” That means tolerating higher inflation for some period while they try to reach what they consider “full employment.”

However, as is so often the case in government, the left hand is not working with the right hand. The bond market has not been happy the past few weeks. Last week’s Treasury auctions were ugly. The “yield to cover” was the worst in history.

Below is the seven-year yield (courtesy of Peter Boockvar)…


Source: Peter Boockvar

Yes, yields are up significantly since the summer lows but are roughly where they were a year ago. The recession and pandemic pushed yields down and the market is beginning to suggest recovery. Yet the Fed says yields should stay low.

This “battle” is important. From 1966 to 1997 inflation was the primary driver of the markets. In general, the bond market and the stock market moved in opposite directions. Starting in 1997–8 up until (maybe) this week, they mostly moved in tandem. If we see what The Bank Credit Analyst calls a regime change, where once again bond yields and stocks diverge, that means that as rates go up, the stock market will fall.

There is a marked difference between how the stock market performs in periods of disinflation versus inflation. This chart from Charles Gave at Gavekal shows how basically all stock market returns for the last 140 years came in disinflationary periods. Quoting Charles:

All—and we mean all—of the excess returns from owning US equities in the last 142 years came in disinflationary periods, while no excess returns were achieved during the inflationary times.


Source: Gavekal

I have written about this in the past. The “regime change” is exactly what the Federal Reserve does not want to happen. A few days doesn’t make a trend. But if this goes on for weeks? Will we see the “bond vigilantes” rise from the dead?

The single biggest danger to the stock market is that the Federal Reserve in particular and central banks in general, “lose the narrative.” When the market stops believing the Fed can control interest rates and influence markets, we enter a scary new world, and likely a bear market for stocks.

This is something the Fed can’t allow. A few more weeks of rising interest rates in the face of $120 billion per month of Federal Reserve purchases will force Fed officials (at least in the opinion of your humble analyst) to take action. The last thing they want is actual Yield Curve Control (YCC). That is akin to getting on the back of an angry tiger. While they may be able to ride it for a time, the dismount would make the taper tantrum look like a Sunday school picnic.

More likely, they will do YCC through the back door. They have several options. Right now they’re buying $40 billion per month of “agencies,” basically mortgage bonds. They can reduce the amount of agencies and increase their Treasury debt purchases, thus influencing the bond market. They can increase the amount of actual QE, which given the deficits that the government is running, may actually be necessary to control interest rates. And, I would rate it better than 50–50 odds they move out the yield curve to the 10-year bond. All of this will influence yields without actually invoking YCC.

The effect on unemployment? If rising rates spark a stock bear market (as happened in 2000), a recession could follow. That is by definition deflationary and would increase unemployment. Not what the Fed wants.

I did a webinar yesterday with Lacy Hunt, and we both basically took the deflation side of the future. But in summary, we acknowledged we could see inflation in the short term (i.e., starting soon and lasting until perhaps the end of the year).

Part of that “rise” in places is going to be easy year-over-year comparisons. Inflation dropped significantly with the onset of the pandemic, so year-over-year comparisons for March, April, and May will likely show annualized CPI inflation over 2% for the first time in almost 10 years. I think it will be transitory as the overall trend of the decade is going to be disinflationary/deflationary.

If you look back over two years, the inflation will not be apparent. But the markets focus on annual changes, which is why rates are rising. And that matters for the 17 million people who are currently on some type of unemployment assistance.

Tough Job Market

As we know, the pandemic and its many ramifications drove US unemployment to Great-Depression levels in a hurry. We have seen some improvement but it is still quite high—likely higher than the official data indicates.

Unfortunately, all our jobs data sources have limitations. Many look at weekly jobless benefit claims, which have the advantage of being high-frequency, but they also depend on state-level data collection, which varies (let’s just say that Texas and some southern states had an excuse last week, which showed up as lower initial claims).

Meanwhile, the “headline” unemployment rate only measures people who say they are looking for work. In this situation, many are not, for various reasons. Another confounding factor is the “birth/death rate” (of businesses, not people) the Labor Department uses to adjust its survey data. Millions have turned to freelancing not because of entrepreneurial dreams but for lack of better options. Other businesses closed, sometimes permanently and sometimes not. Sorting out all this in an economy as large as the US has always been difficult. It is impossible now. The methodology is simply broken as it is based on past trends which have no bearing on our current reality.

On top of all that are the usual problems with survey data. The unemployment rate comes from a Census Bureau collection program called the Current Population Survey. Its process is necessarily rigorous in order to be consistent over time. But these are not normal times. Researchers working with the Dallas Fed recently constructed an alternative Real-Time Population Survey (RPS) specifically to measure labor market trends. In the RPS methodology, January’s headline unemployment rate would have been 11.4% instead of the official 6.9%. It also peaked considerably higher and a month later in 2020 (17.2% in May vs. 14.3% in April).


Source: Dallas Fed

Of course, we should be wary about picking the data that “feels” right. But really, this seems a lot closer to reality when you look at unemployment claims and other similar surveys. It’s a tough, tough job market that doesn’t seem to be improving.

Nonetheless, it should improve once we get COVID-19 off our backs. But it won’t improve for everyone.

Skill Mismatch

When we talk about returning to normalcy, many imply a simple return to pre-pandemic conditions. This seems unlikely to me. Many of the specific 10 million+ jobs that have been lost are not going to come back. But as an optimist, I believe other jobs will replace them and those 10 million people will find different employment. The problem is in the transition from here to there.

First, people will gain confidence at different rates. It will be a gradual process, not a sudden “reopening” like Black Friday used to be.

Second, many people will return with new attitudes. I would not assume mass events—concerts, sports, conventions—will regain their previous popularity in the short or medium term.

Third, probably most important, the pandemic brought innovations that affect how we work, and therefore the type and number of jobs the economy will support.

I’ll use myself as an example. I was one of the planet’s most frequent flyers, at least as measured by American Airlines. My business (at least I thought) required it and I actually enjoy it. I’m eager to fly again—but I won’t do it anywhere near as often. In the last year I learned how to hold online video meetings, accomplishing in a few hours things that would have once required two full days just for travel time, costing thousands of dollars in airfare, hotels, and restaurant meals.

Sometimes that’s what it takes, but as I learned, not as much as I thought. And I’m not the only one who learned this. The economy will need fewer flight attendants, hotel housekeepers, chefs, and so on. These occupations also account for a large part of the currently unemployed. Many, and perhaps most, will not be resuming that same kind of work.

By the way, business travel is different from pleasure tourist travel. At some point, people are once again going to want to take vacations and weekend getaways. I think conventions will come back as they are efficient ways to see a lot of people in a short time. But not this year.

At the same time, demand is growing in some occupations. According to a recent WSJ report, jobs site Indeed.com is seeing above-average growth in postings for driving, warehousing, construction, and manufacturing jobs. These stem from two trends that predated the pandemic and were accelerated by it: a housing boom and e-commerce.

Our housing needs are changing, both in type and location, which creates new construction work. Concurrently, we are shopping online and having products delivered. This generates new warehouse and transportation jobs, even as it eliminates in-store salespeople.

The challenge is a mismatch between the kind of jobs that are available and the skills of those who need work. That’s not new; it has always been the case as economies grow and change. Now it happens faster. Someone who was a barista in 2019 might be a good framing carpenter, but will need retraining. This takes time and the transition period is often difficult.

These are relatively short-term problems, though. The Decade of Disruption is just getting started, and we haven’t fully grasped how the pandemic changed it.

Permanent Changes

I started with good news about virus fears receding this year. If that happens—and it’s not guaranteed—it doesn’t necessarily mean our economic challenges will recede at the same pace.

Back when all this started, George Friedman said the recession would turn into depression if it went on too long. The difference, in his view, is that ]e.

Has that happened yet? Maybe not, but we aren’t yet through this. Even in the relatively optimistic scenario I now foresee, many small businesses are still months away from customers gaining enough confidence to return in significant numbers, even if the various health restrictions are lifted.

And beyond that, we just don’t know what kind of permanent lifestyle changes will come out of this. I mentioned travel, and that’s an obvious one. But I suspect other, less obvious changes are brewing. They will affect the employment picture.

The Bureau of Labor Statistics—the same agency that reports the unemployment rate—periodically does a 10-year jobs forecast. Of course it requires many assumptions. Their last one was based on pre-pandemic data but they recently updated it, considering “moderate” and “strong” pandemic impact scenarios.

Here’s a chart that cuts to the chase. The gray bars are the percentage employment change BLS expected from 2019–2029 in some selected job categories. The others are a new projection based on moderate pandemic impact (blue) and strong impact (red).


Source: BLS

Note that in these four “service” occupations, BLS already expected either little growth or outright losses even before the pandemic, often due to automation. And in all cases, it thinks the pandemic will make it even worse. Ditto for restaurant and bar jobs.

But BLS foresees the opposite in many technology and healthcare occupations. They think the pandemic will actually create long-term jobs in those categories.


Source: BLS

These kind of tech jobs, already expected to show solid growth, should grow even more in the post-pandemic era, thinks BLS.

Unfortunately, these growing occupations generally require more education than the shrinking ones. And in terms of raw numbers, there just aren’t as many of them. That leaves a big problem: What will happen to workers in these disappearing occupations?

How many of us work at the same kind of jobs we studied for in school? How often have we changed careers? Twisted career paths are nothing new. If the path doesn’t lead where you want, maybe it’s time to blaze a new one. Millions will be doing so in the coming decade.

The Incentives of Unemployment

I served for several years on the board of a public company (Ashford, Inc.) which managed hotel REITs with 125 hotels, including the Ritz-Carlton in the Virgin Islands. Shane and I were married there and my fellow board members gave us a week as a wedding gift. A few years later (after hurricane Maria) I wanted to take Shane back. I learned the hotel was still closed. It having been some time, I asked why. I was told the company was making more on business interruption insurance that it would by actually operating the hotel. Magically, hotels all over the Caribbean generally opened up about the time the insurance ran out.

In December, Congress and President Trump agreed on an $800 billion pandemic relief bill. We are now contemplating another $1.9 trillion in “relief.” Much of that money will be spent after this year and as late as 2029, but a good bit of it will hit in the second quarter. Some of it may actually incentivize unemployment.

As noted above, there are jobs available, but if you can get paid unemployment that is more or less equivalent (plus cash, plus child tax credits, and other benefits) your incentive to seek one of those jobs is lower.

I would not for one second begrudge any jobless person the safety net of unemployment insurance. It is necessary. But it was meant as transition assistance while trying to find a new job, not a substitute.

In summary, the economy is recovering. Government transfer payments boosted personal income 10% in January, with spending up 2.4%. GDP is likely to be very strong for the first two quarters at least. The already-passed and soon-to-be-passed relief spending could be inflationary in a growing economy. (As an aside, surveys show that 37% of the $600 stimulus checks will end up in the stock market.)

Yet, millions of people are unemployed and many of them will have to make career changes. Transitions are never easy or swift. The Federal Reserve is committed to low rates and easy monetary policy at least until 2023, even with a growing economy. The markets want higher rates, but the Fed doesn’t. This is the type of fight where both sides will lose, even if one appears to win. Jerome Powell’s term as chair ends in February 2022. You can expect a more dovish chair (likely Lael Brainard) will replace him.

Unemployment is going to be “stickier” than we would like to see, especially in a recovering economy for the reasons stated above. All of this is going to produce more market volatility.

There are lots of places to employ your investment capital. I am bullish about some and bearish about others. I don’t have to risk my capital in the midst of an economic bar fight. I can choose to go to another, more tranquil establishment.

You need to seek out absolute returns over passive relative returns. Fixed income ETFs and mutual funds offer very low yields and capital loss in times of rising interest rates. When we don’t know what’s going to happen, maybe find an alternative? There are many.

Puerto Rico

It has been basically muy tranquilo here in Dorado Beach. The “winter” here brings temperatures into the low 70s and sometimes even in the 60s in the evening. The humidity is not that much. That being said, there are lots of friends and opportunities for more friends and local investment.

I find I am doing more and more Zoom calls. It turns out that people really do want to see one another, and a telephone call simply doesn’t scratch that itch. I am enjoying the lifestyle here far more than I thought I would. I couldn’t blow Shane out of here with dynamite.

Thursday, February 25, 2021

The Legal Fallout Trump Still Faces From the Capitol Riots - Bloomberg

The Legal Fallout Trump Still Faces From the Capitol Riots - Bloomberg

The Legal Fallout Trump Still Faces From the Capitol Riots

The former president avoided conviction by the Senate for inciting insurrection, but he may not have escaped legal accountability

 

By David Yaffe-Bellany

February 25, 2021, 2:00 AM EST

Defense lawyers for rioters facing charges have already begun framing the unrest as the result of Trump’s violent rhetoric.

 

While Congress has moved on from impeachment to probing the security failings leading up to the Jan. 6 riot at the U.S. Capitol, the legal threats to former President Donald Trump may be only just beginning.

 

Senate Republican Leader Mitch McConnell laid out the alternatives to impeachment in a Feb. 13 floor speech after Trump was acquitted in his Senate trial. “We have a criminal justice system in this country,” McConnell said. “We have civil litigation. And former presidents are not immune from being held accountable by either one.”

 

Those legal threats to Trump are quickly taking shape. In his Monday confirmation hearing as President Joe Biden’s nominee for attorney general, Merrick Garland  didn’t specifically address the prospect of prosecuting Trump but said his Justice Department would “work our way up to those who are involved and further involved” in the Capitol riot. Defense lawyers for rioters facing charges have already begun framing the unrest as the result of Trump’s violent rhetoric.

 

Last week, a Democratic congressman filed the first in what is likely to be a series of lawsuits against Trump. In the coming months, those suits could produce a steady drumbeat of revelations about Trump’s role in the riot, as lawyers scrutinize his private communications and social-media pronouncements.

 

Here are the ways the former president could be held accountable for the siege of the Capitol.

 

Federal Prosecution

Shortly after the riot, the acting U.S. attorney in Washington, Michael Sherwin, pointedly refused to rule out an investigation into Trump or the other officials who spoke at the Jan. 6 rally. Sherwin’s top deputy later appeared to backtrack, saying he did not expect to charge the speakers. Sherwin’s office declined to comment.

 

The decision will ultimately rest with Garland and whomever the Biden administration picks to replace Sherwin as Washington’s chief federal prosecutor. A substantial obstacle to any prosecution is the U.S. Supreme Court’s 1969 ruling in a case involving a Ku Klux Klan leader’s speech — the justices said the First Amendment protects inflammatory rhetoric unless it’s intended to produce “imminent lawless action and is likely to incite or produce such action.

 

Randall Eliason, a former federal prosecutor in Washington, said Trump knew what he was doing. “If I’m a prosecutor, I feel pretty good about this case,” said Eliason. “He knows who he’s talking to. He’s talking to supporters who come from around the country and use rhetoric like civil war, insurrection, violence.

 

But Andrew Koppelman, a constitutional law expert at Northwestern University, said such a prosecution would set a bad precedent. “You can’t allow the government to lock up protest leaders whenever the protests produce violence,” he said. “The Trump speech was full of lies, but that’s not a crime. He told them to ‘fight like hell,’ but that’s familiar political language that does not ordinarily produce violence.”

 

Local Charges

The attorney general in Washington, Karl Racine, has said he’s investigating the speakers at the rally and considering charges against the president.

 

Given the capital’s unique political status, the local attorney general has only limited authority. The U.S. attorney acts as the city’s main prosecutor for felonies, with the attorney general responsible for prosecuting more minor crimes. Racine has said Trump may have violated a local statute against inciting disorderly conduct, a misdemeanor charge carrying a maximum prison sentence of six months.

 

Racine, who was recently named the president of the National Association of Attorneys General, has spoken publicly about his desire to use that platform to combat hate groups like some of those that participated in the Capitol riot. But his office is still weighing whether such a minor charge is the best way to hold the former president accountable, according to a person familiar with the probe, and some of Racine's early statements were aimed in part at pressuring federal prosecutors to act. A local prosecution would also face the same legal burden of proving that the former president’s speech was intended to cause harm.

 

A spokeswoman for Racine said the attorney general’s office is “investigating whether former president Trump or any other individual violated District law and illegally incited violence on January 6.” She declined to comment further on the investigation.

 

Private Suits

Private lawsuits may have a better chance of holding Trump accountable than criminal prosecutions, said John Banzhaf, a law professor at George Washington University. The standard of proof would be lower and Trump’s First Amendment argument would be weaker in a civil case as well.

 

“If somebody was injured as a result of the riot, they would have a cause of action,” Banzhaf said. “That would be true even if the injury was kind of indirect — if someone was running away from the rioters and tripped and fell and sprained an ankle or broke an arm.”

 

Last week, U.S. Representative Bennie Thompson, a Mississippi Democrat, filed the first major suit over the riot, claiming that Trump and his lawyer Rudy Giuliani conspired to incite the riot in violation of an 1871 law enacted to combat Ku Klux Klan intimidation of voters and officials.

 

Many potential claimants, notably police officers, could face restrictions on their ability to sue over injuries suffered on the job. All lawsuits against Trump also face the hurdle that presidents are immune from litigation over their official actions. Trump would likely claim his Jan. 6 rally speech fell within his presidential duties.

 

Joseph Sellers, a lawyer for Thompson, said in an interview that he is preparing for that defense. “It was clear that his intention was to interfere with the ability of Congress to complete the ratification of the presidential election,” he said. “That could not conceivably be part of the official duties of a president.

 

Sellers said he also hoped the case would uncover new details. “We want to inquire further about what was occurring with the president during the afternoon of Jan. 6,” he said. “Whether he intended or didn’t intend to whip up the crowd to engage in this kind of violence, he had ample opportunity to take steps to curb the violence.”

 

The Rioters

Some major legal risks to Trump are emerging from an unexpected quarter — his most fervent supporters. Of the more than 200 people now charged with storming the Capitol, many have moved quickly to cast blame on the president and his rhetoric.

 

A member of the far-right Proud Boys claimed in a court filing that he was “misled by the president’s deception.” A leader of the Oath Keepers told associates she was acting on Trump’s orders.

 

“My client among thousands of others operated under the good faith belief that they were going to the Capitol at the invitation of the president,” said Albert Watkins, the lawyer for ‘QAnon Shaman’ Jacob Chansley, who stood at the Senate dais in a horned hat and fur robe. “There’s no secret about it.”

 

Rioters seem prepared to argue they weren’t at fault because they were following orders by the president — a so-called public-authority defense. Such assertions could eventually buttress a criminal prosecution or civil suits against Trump, while further undercutting his public claims that he did nothing wrong. House impeachment managers quoted copiously from rioters who said they were acting at the his behest during his Senate trial. If Trump’s main defense to claims that he incited the riot is that he couldn’t have foreseen what his supporters would do, there may no better rebuttal than their own words.

 

“That would be very powerful evidence,” said Banzhaf.

 


Wednesday, February 24, 2021

Powell Was Just Gloomy Enough to Make Stocks Happy - Authers

Powell Was Just Gloomy Enough to Make Stocks Happy - btbirkett@gmail.com - Gmail

What exact monetary regime are we living in? And how is this all going to end? For that, let us look at the lessons of history.

 

Inflation Over Time

Financial history is a burgeoning discipline, thankfully. Deutsche Bank AG’s annual long-term asset return study, overseen by Jim Reid, provides some clues as to how changes in the price level behaved over time. As the following remarkable chart shows, inflation as we currently conceive it scarcely existed until the turn of the last century. At that point, it became a global phenomenon:

Obviously, data for earlier centuries can be sketchy. But looking at the median by decade, we see that significant inflation was a rare phenomenon until the 20th century, when it suddenly became the norm:

What exactly changed about a hundred years ago? Here is Reid’s annotated time series since 1210. The establishment of the Fed and the First World War came immediately before the great explosion:

What other things changed at that point?

 

Demographics

If we are looking for a reason why inflation became much more of a problem in the 20th century, demographic trends looks a plausible candidate. The global population surged in a way never before seen:

Is it possible to discern any longer-term link with inflation? While there must be caveats over such long-term data derived from basic sources, there does seem to be a connection:

What does this portend for the future? As we discussed in the last installment of the book club, the impact of demographics is controversial. Population growth is set to decline in the developed world. But longevity will have an increasing impact. As people live longer, their consumption no longer declines in the last years of life and instead rises sharply, particularly in the U.S.:

Then there is the working-age population. Across the developed world (including China), this is starting to drop both in absolute and relative terms, after decades of increases that were probably a major factor in bringing inflation under control. The entry of China into the global workforce was on this basis possibly the greatest deflationary shock in history. 

Now that the number of workers is declining, their bargaining power is rising. Slower increases in the overall population should produce less economic growth and less inflationary pressure. This, though, may be counterbalanced by rising expenditures in old age and pressure for higher wages. 

Demographic trends take time to have an impact. But this analysis does suggest that a protracted period in which central banks try to encourage price gains could unwittingly feed into a secular shift to higher inflation before much longer. 

 

Pricing Power

A critical point is whether companies are able to pass on higher costs to consumers. Those that can have what Warren Buffett calls a “wide economic moat” and what others might call a “crushing and probably unfair competitive advantage and a propensity to use it ruthlessly.” Such companies can prosper in conditions of inflation and also, ironically, ensure that it takes hold. 

Pricing power was a critical preoccupation of executives and analysts in the latest season of corporate earnings announcements, according to Goldman Sachs Group Inc.’s quarterly “Beige Book" of management commentary culled from S&P 500 earnings calls. Company after company, from a range of sectors, complained about rising costs, while many insisted they had the pricing power to avoid a hit to margins.

By Goldman’s estimates, the market is less worried than it was. Companies with strong pricing power rallied for several years ahead of the pandemic, and have underperformed badly since then. It might be unwise to expect this to continue if inflation picks up:

This isn’t just a matter of picking stock-market winners and losers. As the following chart from Absolute Strategy Research shows, margins move in line with core inflation. When companies have pricing power, margins thicken and inflation rises. Margins have tightened during the pandemic as companies are forced to maintain fixed costs while revenues drop. Will they surge back?

One of the most trenchant criticisms of contemporary capitalism is that it has become too concentrated, as a result largely of mergers and acquisitions. If concentrated industries are now able to pass on higher prices, inflationary issues grow much more significant — along with the possibility of a political response.

 

Regime Change

A final question: What kind of a monetary regime are we entering? The elephant in the room for inflation in the 20th century is the abandonment of currencies based on precious metals. Inflation can rise far more easily with a fiat currency, which is reliant on confidence in governments and banks and where the money supply can rise sharply at any time. This can be mightily attractive for governments looking for ways to get rid of debt. Just inflate it away. This is Reid’s central statement after his welter of historical research:

While we still remain in a fiat currency world, the temptation for a great inflationary reset at some point will be ever present. [I]nflation in a fiat currency world is a political choice and very easy to create if there is the appetite and the appropriate policy response. Given the historical precedents, our feeling is that this will eventually be the route many countries will choose to take to reduce their debt burdens.

Changing monetary regimes have repeatedly created new investment regimes since the gold standard ended in the 1970s. This was my attempt to summarize them in a piece for Markets magazine earlier this month:

Broadly, the 1970s saw governments spend heavily once they were rid of the gold standard; that led to inflation and higher oil prices, with equities doing horribly. Then in the early 1980s Paul Volcker persuaded everyone that the Fed would limit inflation. The “Volcker Standard” replaced the old trust in gold until everything got out of hand in the bull market of the late 1990s. There followed the “Greenspan Put,” when the Fed appeared to cut rates whenever asset prices fell. That era climaxed with the global financial crisis and was replaced by the “QE Standard,” where an implicit promise by central banks to keep yields low helped an unsteady recovery. This has been underpinned by an abiding confidence that inflation has been vanquished, and Powell’s words on Tuesday can be seen as an attempt to perpetuate that standard. That would imply continuing rising equity prices relative to gold. 

But what if inflation does begin to take off? That would change the investment regime and eventually force a change of Fed policy. For the stock market, Absolute Strategy suggests we might return to something like the so-called Fed Model of the 1990s, when analysts expected earnings yields on stocks and yields on bonds to follow each other:

Does that mean a period similar to the 1970s, when inflation ran amok? Absolute Strategy suggests the 1950s as another analogy. This was also marked by financial repression, as the Fed and other central banks kept a limit on bond yields to ensure people lent money to the government at cheap rates. Absolute Strategy suggests that the 1950s-style experience of loose fiscal policy combined with accommodative monetary policy could spur nominal economic growth and deliver a dynamic rotation into value:

The puzzle will persist. Powell and other central bankers are evidently attempting to prolong the QE Standard. Investors with an eye to the future should ask what will happen if inflation returns. To prepare for such an environment, it would be best to avoid bonds, and to continue piling into the value stocks whose recovery was interrupted by Powell on Tuesday.