Monday, November 13, 2017

Here is what Gary Shilling would do to fix the Fed

"First thing I would do at the Fed is to get them out of the forecasting business. They’re lousy at it. The Fed did not forecast up until the early 90s. They didn’t even tell you what their federal funds target is. Their interest rates.

Guys would get this data every Wednesday night and they would massage the data the wee hours of the morning trying to figure out what is the target that the Fed has? Because they didn’t announce it.

More recently they’ve gotten bitten by the transparency bug and I think that was a product of the financial crisis. A lot of things were not transparent and these guys running the Fed are mere mortals and they saw ok transparency is the in thing to do so we’re going to be transparent. We’re going to tell the world what our plans are.

Well, the problem is that all their targets are data driven. And they admit this, but they’re very, very poor forecasters of the data. I mean they have perennially forecast more inflation than we’ve had. Perennially forecast sooner and more interest rate increases than they’ve put in. Perennially over forecast inflation. Economic growth.

I would just say, “You don’t have to forecast.” The Fed’s charter is that they’re supposed to promote full employment and price stability and they define as they want to. But it doesn't say anything that they have to forecast.

Matter of fact we did a study, we looked back in 1993, the Fed was not telling you what they were doing then. And quite out of the blue, starting in February they raised interest rates they raised them from 3% to 6% in a matter of seven months. Huge shock to the economy.

We looked at that relative to what they’ve done since December of 2015 when they started raising rates now. And they’ve only gone up 100 basis points, 1%. But they’ve told everybody what they’re going to do. The volatility back then with much greater interest rate increases compared to the volatility now was much less.

Now there are other things at work there but I think you can say that forward guidance has not been a success and it has strained the credibility of the Fed so I’d get out of the forward guidance, I’d get out of the forecasting business, publicly forecasting, sure they got to do it internally but I’d keep their mouth shut publicly."

via http://www.businessinsider.com/gary-shilling-fed-chair-stop-forecasting-transparency-data-rate-2017-10

Monday, October 23, 2017

Why there may not be much more Fed interest rate hikes

Gary Shilling explains why he thinks the Fed is flying blind

Despite the large and growing deflationary pressures, Federal Reserve Chair Janet Yellen stuck to the central bank’s party line in her speech to the National Association for Business Economists in Cleveland on Sept. 26. She argued that the weaker inflation is transitory. Yes, she admitted, the Fed’s 2 percent target for personal consumption expenditures inflation, the central bank’s favorite measure, has been continually undershot, but “the restraint imposed in recent years by a variety of special factors, including movements in the relative prices of food, energy and imports, will wane in coming quarters.”

There are two problems with that statement. First, she’s been saying this for some time, but those “special factors” -- items such as falling mobile-phone service costs, lower airfares, weak oil prices in 2014 through 2016, and declines in education and health care costs -- just keep coming. After a while, continual “special factors” become a deflationary trend, which is fundamentally the result of a world in which supplies of productive capacity and labor exceed demand in most areas.

Second, Yellen, like most forecasters, thinks conditions move to a nice, steady long-run equilibrium. In this case, the Fed sees that nirvana as 2 percent annual inflation, 1.8 percent real gross domestic product growth, a 4.6 percent unemployment rate and a 2.9 percent federal funds rate. But steady states don’t exist for long, and long-run equilibria are simply crossing points through which the economy and financial markets move on their way to high and low extremes. Forecasts of long-run steady states are no more than hyper-quantifications of ignorance.

Real GDP grew at an average annual rate of 3.6 percent from 1949 through 2007, and many look back longingly at those years as ones of consistent stable growth, punctuated by a few brief recessions. In reality, among the 237 four-quarter stretches during those years, only 12 had four consecutive quarters of growth in the 3.4 percent to 3.8 percent range. By that measure, stable growth existed only 5 percent of the time.

Despite all the turmoil of the Great Recession, after the business peak in the fourth quarter of 2007, and erratic economic developments since then, the slow real GDP growth from 2008 to the present has been just as stable. Two of the 38 four-quarter periods during those years had growth in the 1.2 percent to 1.6 percent range, again 0.2 percentage points on either side of the 1.4 percent average. This is also 5 percent of the time.

Yellen did, in her extraordinary speech, go to considerable lengths to admit the Fed’s forecasts have been wide of targets. “My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objectives, or even the fundamental forces during inflation.” Wow! She even admitted that “a persistent undershoot of our stated 2 percent goal [for inflation] could undermine [the FOMC's] credibility.”

I’ve said many times that the headline unemployment rate is a poor measure of labor market conditions and Yellen admitted as much when she said it is questionable “whether the unemployment rate alone is an adequate gauge of economic slack for the purpose of explaining inflation,” noting that the employed share of the “prime-age worker” population -- those 25 to 54 -- remains noticeably below the 2007 level.

Yellen also addressed globalization, and how “increased competition from the integration of China and other emerging-market countries into the world economy may have materially restrained price margins and labor compensation in the United States and other advanced countries.” She also gives a nod to the effect on inflation of “the growing importance of online shopping.”

Although she didn’t throw in the towel on the Fed’s chronic forecast that higher wages and faster inflation are just around the corner, Yellen did note that “FOMC participants -- like private forecasters -- have reduced their estimates of the sustainable unemployment rate, especially over the past few years.” She also said the neutral real interest rate -- that is, the inflation-adjusted level of the federal funds rate consistent with keeping the economy on an even keel -- has “declined considerably in recent years, and by some estimates” is “currently close to zero.” She added, “Its value at any point in time cannot be estimated or projected with much certainty.” Translation: The Fed is flying blind.

Yellen may well be paving the way for further delays in Fed tightening, which has been the case for years. So don’t count on another 25 basis-point rate hike in December and three more next year, as the Fed has forecast. And don’t assume big reductions in the central bank’s $4.5 trillion portfolio will occur soon.

Via BloombergQuint

Monday, October 16, 2017

Gary Shilling will not invest in Bitcoin

Gary Shilling talks to BusinessInsider on why is not investing in Bitcoin.


It's a black box and I'm not a believer in black boxes. I recently met with a friend of mine, a West Coast venture capitalist. He was very early on this. He's made a lot of money on this and so on. I cornered him at a cocktail party and I said:
"Now listen, I want you to explain to me what this really is." 
"Well you know, ok it's a controlled deal and these miners. There's only so many of them."
And I said: "How about the guys behind this?" 
"Well you know nobody ... well we think we know who he is." 
Actually back in the ... Back in the South Sea Bubble, which is one of the great speculations. And there's a book by a guy named MacKay. It's a classic book. But he describes in there the South Sea Bubble, which was one of the great speculations. And this one guy comes out, puts an Ad on the paper, he said:
"Great discovery, wonderful investment, but I won't tell you the details." And a lot of suckers in London invested in this. And the last line was: The guy collected all the money, closed up, left for the continent that evening never to be heard of again." 
Similarities of South Sea Bubble and Bitcoin ?


I'm just very suspicious of things that are not transparent. If I can't understand it, I don't want to invest in it. 


Thursday, October 12, 2017

Lessons learnt in investing - US Housing bubble

Gary Shilling explains on BusinessInsider what he has learnt of the economy, on investing and what it takes to beat the market.

If you look at the economy, it grows over time. Not at a steady rate, but it grows over time. And markets, particularly the stock market, reflects that. In other words, if you have the economy growing at, let's say the nominal economy, nominal GDP growing at 4%. Long-term, corporate profits are going to grow about the same rate. 
Obviously, they can't continually expand faster than the economy or decline relative to the economy. So, that's where you start.
So, in terms of stocks, the only real difference between how the nominal economy is going, and how the stock market is going, is price-to-earnings ratios, and they move in long cycles. 10, 15 years, they move up, then they'll tend to move down. And that's pretty much it. 
Now, that's the overall economy and that's the overall investment.
Of course, everybody thinks they're going to beat this, there's that great gambling instinct in all of us. That's why people watch financial news programs. That's why they're watching us. Everybody's trying to get a leg up here. 
Well, of course everybody can't win at this game, I mean, on average, it's going to average out. There is that hope that springs eternal within the human breast, as somebody once said, that you're going to be ahead of the game. 
Now, what that means is, if you are trying to beat the game, you've got to be against the consensus. It doesn't mean that you simply are a contrarian in a sense of, "whatever the consensus is, I'm going to take the opposite side." No, no. 'Cause there's times the consensus can be right, and often is. 
But, what it means is that, when you come up with an idea, and it is counter to the consensus, and you think it's got a good chance of happening, and it's a trend that's working, well, then that's where you want to really jump on it with all force. 
That's what we did in the early 2000s. We saw as early as 2002, what looked like a developing housing bubble. And, so we said, "This isn't ready to crack yet, but it looks like it's getting there." You had people who were putting nothing down on houses, they assumed that the appreciation would be such they'd never even have to make one monthly payment, because they could refinance, you had the no-doc loans, all this nonsense. 
It really was clear. Now obviously that bubble would not have been developed and not broken 'til really the end of 2007, unless everybody, or most people, were convinced it was going to last forever. 
So, there's a case of where you had an extreme situation, it was against all reality in terms of how long it could last, and it was one of these rare opportunities where going against the trend with a major bubble having developed, where you could make some serious money.

Monday, September 11, 2017

Income Growth may have given rise to Populism


If you're wondering what gave rise to populism, look no further than the lack of real income growth. With purchasing power for most either flat or declining for more than a decade, voters rejected mainstream politicians in Western Europe and North America and turned to the fringes on the far right and far left.
Now, though, there is evidence that it is waning, or at least has peaked for the time being. Donald Trump’s popularity has plummeted in the early months of his presidency. In the U.K., after the initial post-Brexit euphoria, the cold, hard reality of separation from the European Union is setting in. Fringe parties in Western Europe have seen their popularity wane.

Why is populism fading? A number of reasons are apparent; some involve economics.

-Mainstream parties regroup and adapt. Most were oblivious to the rise of populism, but Trump’s surprise election and equally surprising Brexit got their attention. U.K. Prime Minister Theresa May and German Chancellor Angela Merkel have both responded to anti-EU, nationalist sentiments.

-Populism has failed to deliver instant results. It was unrealistic to believe Trump’s plans for speedy fiscal stimuli, tax reforms and replacement for Obamacare would be realized. Also, his personal attacks on both Democratic and Republican leaders mean there will be less cooperation in Congress to get his proposals enacted. Also, huge government spending, which all but the most ardent anti-deficit hawks desire, will take two to three years to be effective, even after the needed legislation is enacted. In the U.K., it’s evident that a clean, rapid Brexit is not possible. As with many major events, the devil is in the details.

-Populism’s approach has been flawed. It’s now obvious to most everyone that populists concentrate on what they’re against, not what they’re for. Sure, Trump emphasizes “America First,” but he concentrates on restricting immigration, reducing imports from Mexico, forcing China to abandon its mercantile policies, and compelling U.S. companies to hire Americans. His interest in positive changes such as improving education and training, opening America’s doors to skilled immigrants, and encouraging exports is much less apparent. In Europe, the emphasis is on containing the fallout from Brexit and keeping the extremists at bay. French President Emmanuel Macron’s plans for labor-market reform are viewed by workers as taking away their cherished 35-hour work week and essentially lifetime employment, not as creating conditions that will enlarge the economic pie so everyone gets a bigger slice.

-Economic conditions have improved, especially in the euro zone. Economic growth covers a multitude of sins. It is what reduced the federal government debt-to-GDP ratio from 106 percent in 1947 to 23 percent in 1975. For the first time in a decade, all 45 of the world’s major economies tracked by the Organization for Economic Cooperation and Development are growing, and in 33, the rate of advance is likely to be higher in 2017 than last year. The International Monetary Fund projects global economic growth at 3.5 percent this year, up from 3.2 percent in 2016, with a rise to 3.6 percent in 2018. Of more importance to the waning appeal of populism, the unemployment rate continues to fall in the euro zone as well as the U.S. and the U.K. It’s interesting to note that these developments abroad are occurring even with a weaker dollar, which aids U.S. exports but retards those of American trading partners, especially in the euro zone as the euro rises.

-Real wages are rising. Real, or inflation-adjusted, wages have been rising in G-7 countries. But that’s because of slower inflation, not an acceleration of nominal wages. That is not the way the Fed and other central banks want real wages to gain, since inflation is chronically undershooting the 2 percent target at which the Fed, the European Central Bank, the Bank of England, the Bank of Japan and other major credit authorities aim.

Despite recent events, though, populism is unlikely to disappear because the fundamental driving force -- the lack of real wage growth -- will likely persist. In my columns on July 31 and Aug. 1, I outlined reasons why sluggish wage growth is likely to continue -- including globalization, ample labor supply, cost-cutting by businesses that will affect labor, the bulk of new jobs being in low-paying sectors, the loss of high-paid union jobs, and poor productivity growth.
Populism may be down, but it isn’t out. If weak household purchasing power lingers, as it likely will for at least several years, populism will persist.

Thursday, September 7, 2017

The powers of Presidential Executive Orders

Remember when the teacher in high school civics class taught that the U.S. Congress makes laws and controls the purse while the president merely enforces them and spends the allocated money? That no longer reflects reality.

Federal spending has risen from 16 percent of gross domestic product in the early 1960's to 22 percent today. Regulatory bodies have mushroomed, including six new federal departments and numerous agencies. Every national crisis brings more federal involvement -- all of which has resulted in thousands of rules regardless of their costs or benefits. Recent presidents have taken it upon themselves to act unilaterally in regulating and deregulating countless aspects of the economy and business while issuing executive orders on items that on occasion have been stymied by Congress. 


Despite gridlock in Washington, Trump is moving ahead on his own on deregulation and foreign trade. The former is favorable for investors; the latter is problematic.

The Trump administration recently opened NAFTA renegotiations with Mexico and Canada. In line with Trump’s “Buy American” theme, it’s seeking greater flexibility in imposing or reinstating tariffs on Mexican and Canadian imports. Trump is also free to pursue his “America First” trade policies by taking a hard line against China and threatening to impose steep tariffs on Chinese exports.

Trump has also pressed for deregulation, but with little success. It’s not for lack of effort. Examples of deregulation under a Trump administration are legion and growing. Through the middle of the year, the federal government made 1,731 preliminary, proposed or final rules, down 40 percent from the 2011 peak under President Barack Obama and a 17-year low. And many actions taken under Trump are actually reversals of earlier rules made by the Obama administration. Of 66 completed actions at the Environmental Protection Agency, a third were rule withdrawals.

Trump’s Labor Department undid Obama’s expansion of eligibility for overtime pay while financial regulators dropped plans to tighten restrictions on banker pay. The Interior Department indicated it would rescind proposed rules on oil and gas fracking on federal land. The Federal Communications Commission is reversing the Obama-era decision to regulate internet service providers as utilities. The Food and Drug Administration has signaled faster approvals for new drugs.

The fiduciary rule governing retirement-savings accounts is being delayed by 18 months from the Jan. 1, 2018 compliance date to July 1, 2019, so significant revisions may be made. The Treasury Department is proposing the rollback of many restrictions on financial institutions that the Obama administration believed were necessary to curb excessive risk-taking and a repeat of the 2008 financial crisis. Many are part of the 2010 Dodd-Frank financial regulation law.

The Consumer Financial Protection Bureau is still led by an Obama-appointed director, but is shifting toward lenders’ interest than its previous exclusive focus on consumer borrowers. As its rushes to complete a regulation on payday lenders before a Trump appointee takes over, it is scaling back restrictions on them. Of course, the new leadership may simply not enforce whatever restrictions on payday lenders that survive.

The Department of Housing and Urban Development just announced a tightening of rules for reverse mortgages. By requiring bigger upfront fees paid to the Federal Housing Administration that insures the loans and by reducing loans for new borrowers, the government believes the program will be on a sounder footing with less exposure for taxpayers.

In another reversal of Obama-era regulations, the Equal Employment Opportunity Commission will stop the scheduled collection of data from employers on how much they pay workers of different genders, races and ethnic groups. The 2016 proposal was part of Obama's efforts to address pay disparity among different groups of employees. It would have applied to private firms with 100 or more employees and federal contractors with 50 or more.

The Occupational Safety and Health Administration is reducing its reporting of workplace fatalities and is rolling back a regulation that went into effect Jan. 1, at the end of Obama’s presidency, that requires employers to electronically file injury logs to the government.

Many of the regulations instituted by Obama were via executive orders, and Trump is using executive orders to rescind them. Within days of taking office, Trump signed two orders supporting the construction of two controversial oil pipelines -- Keystone XL and Dakota Access -- that Obama had refused to back, due mostly to environmental concerns. 

The Trump administration is also considering reducing the size of some national monuments but not eliminating them. They encompass vast areas of federal land, especially in the western part of the country. Removing acreage would free up land for ranching, hunting and fishing, mining and other commercial use. This, too, can be done without congressional involvement.

Trump ended the Deferred Action for Childhood Arrivals program that has offered a reprieve from deportation to 800,000 people -- “Dreamers” -- brought to the U.S. illegally as children. It was instituted by Obama’s executive order five years ago.

Interestingly, executive orders were originated out of thin air by Franklin D. Roosevelt. Congress did not prohibit them so the custom became established and has grown tremendously, especially in recent years. They are, in effect, presidential legislation and another vivid example of the awesome power of the president of the United States.

via www.newsmax.com/Finance/StreetTalk/presidential-powers-markets-problem/2017/09/06/id/811988/

Thursday, August 31, 2017

Productivity and Economic Growth

"Productivity growth averaged 0.53 percent per year in the 2011-2016 period, far below the earlier norm of 2 percent to 2.5 percent. Reasons for the slowdown are many, but some economists suggest that such growth is being significantly understated. Mobile phones and other high-tech gadgets probably enhance efficiency of doing business far beyond their cost. Consider the value of time saved by shopping online, which is not captured in the statistics. The costs of new wonder drugs, high as they are, probably do not measure their value in saving lives.

The output in service industries is hard to measure, especially since quality can vary widely. One lawyer may bill twice as much time for reviewing a contract as another but make twice as many mistakes. The problem of measuring output in services only grows as services become an ever-greater share of spending.

Another explanation for slow U.S. productivity growth is that American multinationals have moved intangible assets such as patents and other intellectual property overseas in order to avoid paying taxes. Such actions slowed reported U.S. productivity gains by an estimated 0.25 percentage point per year between 2004 and 2008.

Although new technologies that enhance productivity are mushrooming, they often take decades before becoming big enough to move the overall productivity needle. The Industrial Revolution began in England and New England in the late 1700's, but only after the Civil War had it expanded to the point of hyping nationwide productivity. Ditto for railroads. As a result, between 1869 and 1898, real GDP per capita leaped at a 2.11 percent annual rate. It’s now rising around 1 percent annually.

Other forces may well push productivity, such as significant tax reform, education reform, deregulation, unifying state licensing requirements that now often impede labor mobility and reforming entitlements to encourage people to work. Also, there’s nothing like a stronger economy to create labor demand and the resulting high employment and wages."

Tuesday, August 29, 2017

Loss of Union Jobs could indicate lower worker pay in USA

"With globalization devastating U.S. manufacturing jobs and cost-cutting putting pressure on those that remained, union membership in the private sector has collapsed from a quarter of the total workforce in 1973 to 6.4 percent last year. 

This has had tremendous depressing effects on wages, since private union jobs on average offer 19 percent more in base pay than non-union positions, and over 50 percent more when health care, retirement and other benefits are included.

State and local government employees have enjoyed much higher pay and even more lush benefits than private-sector workers. Nevertheless, municipal employee compensation is under fire from many states and local governments with strained budgets and vastly underfunded pension plans. At the same time, municipal union membership is slipping.

Many employees are reluctant to demand higher pay because memories of the recession are still fresh. There also is an understanding among those who quit in the hope of getting a higher-paying job that they will probably end up with lower pay. On the other side, most employers, in the face of foreign and domestic competition, don’t believe they can pass on increased labor costs by boosting prices. The only alternative is increased productivity so higher costs can be paid without cutting into business profits. But miserable productivity growth has not provided the value added to justify higher wages."

via bloombergquint

Sunday, August 27, 2017

Movement from higher paid jobs to lower paid jobs

"In this economic recovery, the jobs that are being created are mainly in low-paid work. It’s been in sectors such as retail trade, where real wages have risen just 0.9 percent in total since the beginning of 2007. Similarly, the 3 million increase in hotel clerks, waiters and other leisure and hospitality jobs in this recovery has far outstripped the 900,000 gain in manufacturing. 

In June, manufacturing employees were paid $26.51 per hour, compared with the $15.43 per hour earned by leisure and hospitality workers. In addition, manufacturing employees worked 1.56 times as many hours, so their weekly pay of $1,081.61 was 2.69 times the $402.72 paid to the average leisure and hospitality employee. Even within industrial sectors, wages have been restrained as postwar babies at the top of their pay scales retire and are replaced by lower-paid new recruits."

via bloombergquint

Thursday, August 24, 2017

Peak Index Investing ?

"I think you are getting more and more of this feeling that you can buy anything, their all going up. This passive investment is over done, I think we probably swing back to Active Management and maybe it will take a big market decline to convince people......"

Monday, August 21, 2017

For every buyer there is a seller and for every seller there is a buyer.

"I think you got to be very cautious right now on stocks. Tech stocks have had a big run. You take out a few of the high fliers out of the NASDAQ and you don't have the performance. 

I have been a fan on long term treasury bonds since 1981 when the yield was 15.2 percent. Now its down to 3 percent, I think it could go to 2 percent on the 30 year bond and 1 percent on the 10 year treasury note. I think that's a good area. 

Commodities are probably going to continue to be weak, particularly oil.

Dollar has gotten beat up since the initial Trump rally. Long term I think the Dollar will probably be strong as a safe haven."



-Goldseek radio interview

Monday, August 7, 2017

US labor over supply

The Fed worries that the current 4.4 percent unemployment rate means that labor markets are too tight, but it also worried about a much higher rate back in December 2012. The central bank stated then that the federal funds rate, then in the zero-to-0.25-percent range, would be “appropriate at least as long as the unemployment rate remains above 6.5 percent, inflation one and two years ahead is projected to be no more than a half percentage point above the [policy] Committee’s 2 percent long run goal and long-term inflation expectations continue to be well anchored.”

But the Fed had to abandon that unemployment target as this very poor measure of labor market conditions fell, not so much due to increased employment but mainly because fewer people were looking for work. Youths stayed in school in hopes that more education would improve their job prospects, and many middle-aged people, discouraged over poor job prospects, discontinued their search for employment.

The many dropouts may well be drawn back to work as opportunities expand. Indeed, the labor force of those age 20 to 29 has been growing since 2012. At the same time, people over 65 who are employed or actively looking has been rising since the early 1990s. Many seniors are in good health and prefer active work to vegetating in front of the TV. Others, among them many postwar babies born in the 1946-1964 years, have been notoriously poor savers throughout their lives and need to keep working due to a lack of retirement assets.

As a result, the total labor participation rate appears to have bottomed. From September 2015 to this June, it rose from 62.4 percent to 62.8 percent. The growth in the working-age population will provide ample people to fill available jobs, even if economic growth accelerates from the recent average of 2.1 percent to my forecast of 3 percent to 3.5 percent -- assuming they have the needed skills.

Also, keep in mind that, like capacity utilization data measures of labor market slack on a global basis aren’t available. It certainly appears, however, to be ample, and the skills of workers in Asia are rising rapidly, not only in the production of goods but in services as well.

via bloomberg

Friday, August 4, 2017

Plenty of world labor supply putting pressures on worker wages

Some policy makers fret that the output gap - the percentage of un-utilized output in the U.S. economy - is shrinking fast. This is debatable since the economy’s output potential isn’t a fixed number but depends on speed of growth, which influences the economy’s flexibility. Business can adapt much better to slow growth, as proven in this recovery.

Also, capacity is sensitive to wages and prices. Higher pay attracts new workers who otherwise are comfortable drawing welfare, unemployment and disability benefits. By the same token, high selling prices can make otherwise obsolete machinery profitable to utilize in times of increased demand for their output and rising prices. In any event, the current overall operating rate remains muted and definitely below the levels that in the past have initiated capital spending surges.

More important, in today’s world, supplies of labor and productivity capacity need to be considered on a global basis. By all accounts, such supplies are ample and will remain so, barring all-out protectionist wars and tariff walls in advanced countries that could drastically chop imports.


via bloomberg

Wednesday, August 2, 2017

Manufacturing industry in Developed countries under pressure

Manufacturing employment in the West has seen a dramatic drop as production in the last three decades shifted from developed countries in Europe and North America to developing economies in Asia, where costs are much lower. 

There’s also downward pressure on jobs and compensation in the service sector due to legal, accounting, medical billing and other services being outsourced abroad. That trend will only intensify as economies expand and services become a bigger share of spending at the expense of goods. There’s only room for so many cars in the driveway, but opportunities to spend on recreation and travel, health care and other services are almost limitless.

Note that with globalization, many U.S. goods prices continue to deflate. But domestic and international downward pressure is also being felt on services as diverse as education, health care, retailing and financial service fees and commissions.

Tuesday, August 1, 2017

Real wages in developed countries have been under pressure

Wages have been either stagnant or declining in the U.S. and other developed economies for more than a decade once inflation is taken into account. Yet, the Federal Reserve and other major central banks remain convinced labor markets are tight, and that a surge in employee costs and inflation are just around the corner. Hence, their recent shift toward credit restraint.

But inexplicably, policy makers are failing to take into account the many significant economic changes in recent decades that are holding down wage growth. 

Monday, July 24, 2017

Monetary Policies has helped the Rich

Monetary policy is a very blunt instrument. Central Banks can raise and lower interest rates. They can buy or sell securities. They cannot have a direct impact on the economy. In other words, it is very different from Fiscal policy; if there is a desire to help the unemployed, they can increase unemployment benefits, put money directly into people's hands. They can't do that with Monetary Policies.

So what has happened is the Fed and other Central Banks have been very stimulative, they knocked their reference rates down to essentially Zero in response to the great recession but that didn't have much effect because credit worthy borrowers had plenty of money and the banks didn't want to lend to the rest. 

Then they went into Quantitative Easing, where they were buying all these securities, pumping money into the economy. What happens is these securities were owned by Financial Institutions or High Net Worth Individuals. And what did the Financial Institutions do with that money, they took that money and reinvested them in equities. And I think that's what basically drove up equities starting in March 2009. It was entirely the Fed. It wasn't the economy, the economy has been limping along.

Okay those equity portfolios go up, upscale individuals are not going to increase spending that much. 

Tuesday, July 11, 2017

Why lower oil prices could negatively affect the bull market in stocks


What will happen if oil prices continue to fall
"Financial worries will no doubt magnify, and the result could be the shock we’ve been looking for that would end the long bull market in stocks that started in March 2009 and precipitate a recession."

Oil prices could fall to $10 - $20
[Oil prices collapsing] "would be a financial shock reminiscent of the dot-com collapse in the late 1990's that precipitated the 2001 recession. It would also resemble the subprime mortgage debacle in the mid-2000s that touched off the 2007-2009 Great Recession, the deepest since the 1930's."



via thinkadvisor

Monday, June 26, 2017

College Degree VS Real Job Training


College graduates make Two-Thirds more than high school graduates. That's the statistics. Most people assume that if you go to college you will have a higher income.I think that smart people go to college but going to college doesn't make them smart. And you know you cant prove causality with statistics. The fact that college graduates make 2/3rd more, well those people would have made more money anyways. Bill Gates never finished. Henry Ford never went to college.

A system that we see in the South East of our country. The Germans have a very strong apprenticeship program. And many of them move manufacturing plants to the South East. And they brought with them this apprenticeship program and they combine on the job training with two year college degrees. They are training people for real jobs. These people come out very well. And a lot of US companies are emulating this program. 

Monday, June 19, 2017

How our Savings Rate affects economic growth and retailers


From the early 80's the savings rate in this country was around 12 percent. That meant people were spending 88 percent of their after tax income. The savings rate got down to 2 percent meaning people were spending 98 percent of their after tax income. 

The savings rate is now back around 5 percent and I think it could go to double digit numbers. So it does mean in terms of the economic growth you are getting reversal. Its an on-going feature, an longer term issue. 

Thursday, June 15, 2017

Finance is a healthy and necessary parasite according to Michael Lewis

Whats the role of Finance ? Michael Lewis pointed out that Finance is a parasite on commerce, but its a helpful parasite, its a necessary parasite. In other words, you need Finance to move money from the savers to investors. to grease the wheels of Finance. And that really was the spread lending by banks. That's traditional banking. 

But the guys running the banks were not were not satisfied with it and they got involved with all kinds of off balance sheet vehicles, derivative origination's and proprietary trading. A lot of these things that were very troubling and led to the Dodd Frank law regulations and all the banks had to be bailed out. The Banks have gotten bigger and more powerful and the concentration of financial power in this country and I dont think its a terribly healthy situation.


Tuesday, May 30, 2017

Treasury and Fed Funds Rate

The Federal Reserve seems determined to raise the overnight federal funds rate it controls. Many believe that two or three more 25 basis-point increases this year are all but certain, unless the economy suddenly weakens appreciably or a major financial or political crisis unfolds here or abroad.

The prospect of steady rate increases is a worry to many market participants with the taper tantrum of May and June 2013 still a vivid memory. Then-Fed Chairman Ben Bernanke only hinted at a slowing of Fed security purchases, then running at $85 billion per month, but yields on Treasury notes and bonds rose sharply higher nonetheless. In fact, the Fed didn’t taper until December of that year and finally discontinued adding to its huge portfolio in October 2014.

Interestingly, the taper tantrum may have prepared markets for that eventuality since no cataclysmic actions ensued in the market for Treasuries. Also, stocks, which were propelled by Fed largess since their March 2009 bottom, merely leveled and didn’t sell off, even as the central bank stopped adding more fuel to the equity bonfire. The Fed did, however, pledge to maintain the size of its asset horde by using the proceeds of maturing securities to buy more bonds.

The question now is: How much effect do changes in the fed funds rate have on longer-term Treasury yields? This question assumes that the Fed is the prime mover and Treasury markets follow. But you can argue that causality runs the other way. If investors fear an overheating economy and resulting inflation, they probably would sell Treasuries, pushing bond yields higher. That could worry the central bank, which then delays raising short-term rates. Furthermore, the Fed, along with other major central banks, reduced overnight rates to essentially zero in reaction to the financial crisis and held them there until recent years. So, the Fed was essentially on the sidelines in influencing long-term rates.

As I’ve often said, causality can’t be proven with statistics. After beating a drum, a solar eclipse goes away; that’s 100 percent correlation, but not causality. Still, it’s probable that the causality runs from changes in the fed funds rate to Treasury yields. My firm’s research shows that the highest correlation between the fed funds rate and 10-year Treasury note yields is with the central bank rate leading the note yield by 10 months.

The fed funds rate and yields on 10-year and 30-year Treasuries all increased with inflation from the end of World War II to the early 1980s and then fell with disinflation. So, correlating the raw data would imply stronger relationships than existed. To measure the true effects of fed funds rate changes on long-term Treasury yields, we statistically removed the up and down trends and correlated the deviations that were left.

The statistical fits appear meaningful, though they are much lower than if the trends had not been removed. But again, good statistical fits over time may have no causal relationships. Global steel and meat consumption correlate highly over time, but only because both grow with economic development.

A 100 basis-point increase in the fed fund rate, using our analysis, results in a 46 basis-point increase in 10-year Treasury yields, on average. In other words, about half the change in the fed fund rate spills over to Treasury yields. So the influence is far less than one-to-one. As you’d expect, the spillover from fed funds changes to 30-year Treasury yields is even smaller. A 100 basis-point rise in the fed funds rate results in only a 35 basis-point rise in yields.

The statistical results reflect the entire post-World War II era, but the influence of changes in the fed funds rate on Treasury yields may be even less today. Thirty-year yields are lower, not higher, than when the Fed first raised its reference rate by 25 basis points in December 2015 and then made further quarter-point increases in December 2016 and in March of this year.

One reason for this weaker response may be the Fed’s use of forward guidance to advertise its intentions regarding the future path of rates. The spillover effect on Treasuries may already be in place. Another may be the lack of effectiveness of the fed funds rate in recent years. It’s the rate that banks with excess reserves at the Fed lend to those with deficient reserves. But with the huge amount of excess reserves -- about $2.7 trillion at present -- that have been created by the Fed’s bailout of Wall Street and then quantitative easing, most banks have ample reserves and few need to borrow from other banks in order to meet their reserve requirements.

So the fed funds rate is simply a reference rate with little practical meaning. Market participants believe it measures Fed policy, but the emperor may have no clothes. That’s why the central bank has considered alternatives such as paying enough on bank reserves, currently 1 percent, to make them attractive for banks to hold. That also, in effect, would sterilize those excess reserves because lending to the Fed would, risk-adjusted, be more rewarding than lending them to private borrowers. 

Also, sterilizing excess reserves would remove the likelihood that when the economy resumes rapid growth, which I expect in two or three years, those reserves would be lent and re-lent to eager borrowers. The result could be an explosion of the money supply and velocity, which might propel excess economic demand and inflation. I already look for robust economic growth of 3 percent to 3.5 percent, to be driven by massive fiscal stimuli.

Alternatively, the central bank is thinking about letting its $4.5 trillion portfolio run down by not reinvesting maturing securities. To do so would require great skill and uncommon good luck to avoid squeezing or frightening lenders and borrowers to the point that a recession follows. Indeed, key Fed officials have suggested that the Fed may not return to its $1 trillion pre-crisis portfolio but perhaps keep it at $2 trillion. So it still would have massive excess reserves to deal with.

via bloombergquint

Thursday, May 18, 2017

Six new investing themes

With Trump’s agenda mostly stalled, many investors are swinging to my earlier conviction that much of the post-election euphoria was overblown, at least in terms of instant actions, and are reorienting their sights to the long-term. 

I recommend six long-term economic and investment themes.

1. Huge fiscal stimulus, primarily infrastructure- and military-related, in reaction to mad-as-hell voters who have suffered flat or mostly declining purchasing power for more than a decade. These declines were importantly caused by globalization, probably the most significant international economic development in the last three decades.Despite Marine Le Pen’s loss in this month’s presidential election in France, the populism and anti-globalization sentiments that elected Trump and led to the Brexit vote last June persist.

Major fiscal stimulus could take two to three years to become effective after working its way from congressional approval to actual spending and job creation. Nevertheless, it will constitute a major investment theme and will push U.S. economic growth to the 3 percent to 3.5 percent range, almost double the 2.1 percent average since this business recovery started in mid-2009, the weakest in the post-World War II era.

2. Globalization that shifted manufacturing from the West to Asia is largely completed. Manufacturing’s share of U.S. gross domestic product fell from about 17 percent in 1997 to around 12 percent by 2009, but then flattened. Still, inner workings of the process continue as low-end manufacturing is now moving from China to even-cheaper locales, such as Vietnam and Pakistan.
Many who formerly felt safe in well-paying jobs and looked forward to comfortable retirements while enjoying low-cost imports from China had no idea that they were vastly overpaid by Asian standards -- and that those low-cost imports were coming at their expense. So now they are angry and enthralled by politicians who blame their plight on immigrants and imports, and promise to restore their incomes through protectionist measures.
Those former manufacturing employees in the West who have been re-employed have generally moved to lower-paying areas. Also, hiring since the economic recovery commenced in mid-2009 has been focused on low-paying sectors such as leisure and hospitality. Furthermore, those in manufacturing not only are paid 1.72 times as much per hour as those in leisure and hospitality, but they work 1.56 times as many hours. So their weekly pay is 2.69 times greater.
Still, with the movement of manufacturing and other production from West to East largely completed, the traditional pattern of employment shifts due to technology changes will likely resume. The gap created by globalization remains, but there will probably not be big new waves of displaced workers.

3. Another long-term development with immense economic and investment implications is the worldwide aging of most populations. Fertility rates in most major countries except India are below the 2.1 level needed to maintain, much less grow, the population. The United Nations projects that Japan, China, Germany and Russia will see their populations decline by 2050 while the U.S., Canada and the U.K. will increase due to immigration offsetting low fertility rates. Those populations are projected to grow through 2050.

Japan’s population is already falling as it has the longest life expectancy of any G-7 country and the lowest fertility rate.  In addition, despite the need for new workers as the population falls and ages, women in Japan are still discouraged from entering the labor force. In China, the earlier one child-per-couple policy has slashed the number of prime new labor force entrants by about 400 million.
Pessimists maintain that aging and retiring postwar babies in the U.S., as well as Trump’s anti-immigration policies, will severely limit labor-force growth. At the other end of the spectrum are those who believe robots will replace people to the point that there will be too few earners to buy the nation’s output. I disagree with both views, and forecast real U.S. GDP annual growth of 3.0 percent to 3.5 percent thanks to 2.5 percent yearly rises in new tech-driven productivity and 1.0 percent increases in employment, the historic norms. Plus the labor participation rate, now at 62.9 percent vs. the 67.3 percent peak 17 years ago, should increase if the retirement age is raised. And the participation rate for those over 65 is rising as seniors are healthier and many have inadequate assets to retire.

4. The long-promised Asian Century of global leadership is unlikely to come to pass due to the completion of globalization, the slow shift from export-led to domestic-spending-driven economies, government and cultural restraints, aging and falling populations, and military threats. 

The fascination with Asia started with Japan’s dazzling economic recovery after World War II, which culminated with purchases of U.S. trophy properties such as the Pebble Beach golf course and Rockefeller Center in the 1980's. Rising property and equity prices convinced many in the West that Japan would soon take over the world, but those bubbles burst in late 1989, sending the Nikkei index down 63 percent in less than three years and real estate prices down by 59 percent. Japanese economic growth has averaged just 1.1 percent since then.

With Japan’s decline, Western fascination shifted to the rapidly growing developing economies of the Asian Tigers, but the regional financial crisis that commenced in Thailand in 1997 started a domino-like collapse of neighboring financial markets and economies. With the 2007-2009 recession and financial crisis, export-led Asia suffered along with the economies of the U.S. and Europe. Yet Westerners didn’t abandon Asia, but shifted their admiration to China. 

Chinese real economic annual growth rates nosedived from double digits to a recessionary 6.3 percent during the worldwide downturn, but then revived thanks to the huge 2009 stimulus program. Easy credit fueled a property boom and inflation, both of which were unwanted by Chinese authorities. Also, the growth in exports rebounded back to the 20 percent to 30 percent annual rates seen before the recession. As with the Asian Tigers earlier, many thought Chinese growth was self-sustaining and unrelated to ongoing sluggish economic performance in North America and Europe, especially after China’s gross domestic product topped Japan’s in 2009. 

But like virtually all developing economies, China’s has been driven by exports that directly or indirectly are sold to North America and Europe. And those imports by the West are fundamentally curtailed by sluggish overall economic growth -- the result of deleveraging, the working off of excess debt built up in the exuberant 1980s and 1990s. Annual Chinese export growth dropped from 20 percent to 30 percent in the 2000s to negative territory in February.

Further, globalization is largely completed, curbing that source of emerging-economy advance. And China’s huge total economic size had covered up its still-underdeveloped status. Even with the explosive growth in the past several decades, Chinese GDP per capita in 2016 was $8,030, or just 14 percent of the U.S.’s. Meanwhile, consumer spending in China amounts to just 37 percent of GDP compared to 68.1 percent in the U.S.

China won’t shrivel up and die, but it will be a much less important actor on the global stage as it shifts from commodity-munching exports, housing and infrastructure to consumer spending and services. The same was true of Japan starting in the early 1990s.

There may well be an “Asian Century,” but don’t hold your breath. It took about a millennium for the West to develop meaningful democracy, the rule of law, large middle classes that support domestic economies, and all the other institutions that are largely lacking in developing Asian lands at present.

5. Disinflation that started in 1980 continues with chronic deflation likely, especially as services follow goods in price retreats. The Federal Reserve and every other major central bank have a 2 percent inflation target. They don’t love inflation, which devastated economies and financial markets in the 1970s, when it rose to double-digit levels. But they fear deflation, which curbs consumer spending and capital investment along with economic growth as deflationary expectations set in. When price declines are widespread and chronic, buyers anticipate further declines so they wait for even lower prices. The resulting excess capacity and unwanted inventories force producers to cut prices further. Suspicions are confirmed, so buyers wait for still-lower prices in a self-perpetuating spiral. So deflation is self-feeding, as seen clearly for two decades in Japan.

Also, with deflation, the real cost of debts rises, making them harder to service and inducing financial problems and bankruptcies.

I remain convinced that widespread inflation results from overall demand exceeding supply, and deflation is caused by the reverse. Historically, governments create inflation in wartime with robust spending on top of fully-employed economies. That was the case in the late 1960s and 1970s, when Vietnam War outlays combined with War on Poverty spending. And that led to double-digit inflation rates by 1980. In peacetime, however, supply normally exceeds demand and deflation prevails. In the 96 years of war since 1749, wholesale prices rose 8.2 percent per year on average, but fell by 0.45 percent annually in the 170 years of peace. Assuming that the Trump administration, China, Russia and Middle East terrorists don’t drag the U.S. into a significant armed conflict, deflation is more likely in the years ahead, at least by historical precedent.

6. “The bond rally of a lifetime” that I first identified in 1981, when 30-year Treasuries yielded 15.2 percent, continues. With their safe-haven appeal, lower interest rates abroad and prospective deflation, we look for 2.0 percent yields on the long bond and 1.0 percent on the 10-year Treasury note.

I’ve been pretty lonely as a Treasury bond bull for 36 years. Stockholders and others may hate them, but their quality is unquestioned, and Treasuries and the forces that move yields are well-defined: Federal Reserve policy and inflation or deflation.

In addition, I’ve always liked Treasury coupon and zero-coupon bonds because of their three sterling qualities. First, they have gigantic liquidity with hundreds of billions of dollars’ worth trading each day. So all but the few largest investors can buy or sell without disturbing the market.

Second, in most cases, they can’t be called before maturity. This is an annoying feature of corporate and municipal bonds. When interest rates are declining and you’d like longer maturities to get more appreciation per given fall in yields, issuers can call the bonds at fixed prices, limiting your appreciation. Even if they aren’t called, callable bonds don’t often rise over the call price because of that threat. But when rates rise and you prefer shorter maturities, you’re stuck with the bonds until maturity because issuers have no interest in calling them. It’s a game of heads the issuer wins, tails the investor loses.

Third, Treasuries are generally considered the best-quality issues in the world. This was clear in 2008 when 30-year bonds returned 42 percent, but global corporate bonds fell 8 percent, emerging market bonds lost 10 percent, junk bonds dropped 27 percent, and even investment-grade municipal bonds fell 4 percent in price.

Treasuries sold off with the “Trump Trade” after his election, but revived recently. This reflects deflation prospects since inflation rates and Treasury yields move together -- up in the post-World War II years up until 1980 and then down ever since. Treasuries have also rallied lately due to their safe-haven status and thanks to having a higher yield than other developed country sovereigns, making them more attractive to foreign investors.

via bloomberg

Tuesday, May 16, 2017

Focus on the bigger trade

Successful investors rely on basic analyses of hard facts and trends and try to avoid short-term emotional responses. They evaluate fundamental forces, decide on the investment themes they imply, and then invest.  Of course, their positions are constantly examined in light of new data, and investments are eliminated if the basic atmosphere no longer supports them. Still, successful investments are usually long-term because they flow from forces that are significant and likely to be in place for some time -- years or even decades.

The challenge is to recognize the difference between a sea change of lasting consequences and ephemeral random noise. Most security-market analysts and investors thrive on short-term swings that they interpret as being of huge significance. The media gains attention -- and advertising dollars -- by interpreting every minor wiggle as an earth-shattering event.  So it takes conviction and willingness to stand up to the crowd to stay focused on long-run economic and financial trends and the implied investment implications.

A good recent example of investor overreaction to short-term developments is the “Trump Trade,” the initial response of investors to Donald Trump’s election and Republican control of both houses of Congress that I discussed in a previous column. Stocks, commodities and the dollar leaped as investors seemed to assume that overnight, huge tax cuts, deregulation and fiscal stimulus would propel rapid economic growth and a surge in corporate profits, as well as renewed inflation. Treasuries fell in price as anticipated major tax cuts and fiscal stimulus implied huge new financing from bond issues.

Tuesday, May 2, 2017

Canadians should be worried about NAFTA



Gary Shilling interview above with BNN on Trump's action on Canada and its effects on the Canadian Dollar. 

Click here if the above video does not play.

Wednesday, April 19, 2017

Small luxuries to do well when wage growth stays stagnant

Consumers tend to buy the best of what they can afford, even if it’s within lower-priced categories. I developed a “small luxuries” investment theme, and my firm’s index of companies involved in premium beer and liquor, perfumes, luxury clothing, jewelry, home products and handbags outperformed the S&P 500 from the March 2009 market bottom, rising 616% vs. 251% for the total market.

Stocks that fit the bill include, Williams Sonoma, Tiffany & Co., Boston Beer Co., Coach and Ralph Lauren. Companies that can adapt to the demand for small luxuries will continue to be winners in the current environment where wage growth remains stagnant.


via forbes

Tuesday, April 11, 2017

Gary Shilling latest views on US housing and its effects on the economy


By many measures, the U.S. housing market seems in very good shape. The National Association of Realtors in Washington said last week that contracts to buy existing homes jumped 5.5 percent in February, the biggest increase since July 2010. Fannie Mae’s National Housing Survey showed that Americans expect home prices to rise a robust 3.2 percent over the next year as its sentiment index reached a record high.

So, are boom times ahead for housing? Not quite. To understand why, it helps to revisit recent history. The housing bubble of the early 2000s was driven by subprime mortgages and other loose-lending practices. The subsequent collapse left many potential new homeowners with inadequate credit scores, not enough money for a down payment and insufficient job security to buy a house. They also saw, for the first time since the 1930s, that not only house prices fall nationwide, but nosedive by a third. Homeownership plunged and those who did form households moved into rental apartments instead of single-family houses. 
That drove rental vacancy rates down and starts of multi-family housing -- about two-thirds of which are rentals -- up to 396,000 units, more than the earlier norm of 300,000 starts at annual rates. But single-family housing starts -- even with the rebound to an 872,000 annual rate from the bottom of about 400,000 -- are still far below the pre-housing bubble average of more than 1 million.

Despite the recovery in house prices, rents have risen at a much faster pace. As a share of median income, rents have jumped while mortgage costs have fallen. The latest data from the National Association of Realtors show its Housing Affordability Index was up 52 percent in the fourth quarter of 2016 from the early 2007 low.

Even with conditions shifting away from rental apartments in favor of single-family housing, the homeownership rate is unlikely to rise from the current 63.7 percent to anything like its fourth quarter 2004 peak of 69.2 percent because of the reasons listed earlier. Many believe that because of the rise in Americans in the first-time homebuying age range of 25 to 44, there is a huge batch of households just waiting to buy single-family houses or at least rent more apartments.

Demographics are important in the long run, but that can be the very long run. There is little correlation between the number of U.S. households and the population aged 25 to 44. The speculative boom in housing in the early 2000's and the subsequent collapse were far more important to the broad universe of households than the number of people in the prime ages for buying or renting.

The one-third plunge in home values shocked house flippers by proving that prices can and do fall significantly. Many believed that prices not only always rise, but climb faster than overall inflation. But real house prices were essentially flat for more than a century. They leaped almost 100 percent during the bubble before falling, and are not yet back to the long-run average. I look for a reversion to the mean that could last just as long.

The current homeownership rate is essentially at its long-term average before the bubble. So it’s not at a depressed level just waiting to leap. In fact, the rate, which averaged 66.7 percent during the boom and bust, may be subdued for years if the previous long-run average of 64.3 percent is still valid. And it might well be, now that the bloom is off the ownership rose.

Just as house prices and homeownership leaped in the bubble and then collapsed, so did the effect on GDP of housing’s rise and fall. The cumulative contribution to real GDP from the second quarter of 2000 to the fourth quarter of 2005, including residential construction spending and consumer spending on home maintenance, etc., was $183 billion. But the subsequent drop to the bottom in the first quarter of 2012 subtracted $393 billion. So the round trip boom-to-bust result was a negative $210 billion.

That net loss was 1.5 percent of average GDP during the cycle, but the total impact was much worse because of the distorting effects of the huge rise and then even bigger drop in housing. On the way up, many who were not financially equipped to own houses got sucked in by mortgages that required no documentation of income and assets -- “no doc loans” -- or they took out “liar loans” by submitting numbers that had no verification. Many believed the pitch from mortgage lenders that they’d never have to make a monthly payment on a zero-down loan because the appreciation of their houses would permit refinancing, even with cash-out before the first installment was due.

Not only did most of those folks suffer as their mortgages were foreclosed, but many who didn’t had negative equity in their houses as values dropped below what was owed on the mortgages. So they could not refinance as mortgage rates fell. Then there are all the unsuspecting investors who bought pieces of securities backed by subprime mortgages that were rated AA or A by ratings firms but in reality were worthy of D, or default, ratings. And default many of them did.

Housing has recovered from the depths, and a shift from rental apartment buildings to single-family construction is under way. But don’t look for anything like the boom of the early 2000's, and the stimulating effects it had on the overall economy.

via bloombergview

Monday, April 3, 2017

Why the Asian century may not arrive in our life time

People in the West, certainly Americans, have long had a fascination with the East, with many predicting an inevitable “Asian century” marked by economic and market dominance. I have long disagreed with the consensus on China and other Asian Tigers, and others are beginning to agree. Many problems stand in the way of the “Asian century.”


Japan dazzled Westerners with the speed of its recovery from the ashes of World War II. Japanese purchases of U.S. trophy properties such as the Pebble Beach golf resort in California and Rockefeller Center in Manhattan in the 1980's, on top of the leaping property and equity prices in Japan, convinced many in the West that Japan would soon take over the world.

Japan’s economic decline in the early 1990's did not curb fascination with Asia. It simply shifted to the rapidly-growing developing economies, the Asian Tigers. The original four, Hong Kong, Singapore, South Korea and Taiwan, were later augmented by the likes of Malaysia, Thailand, the Philippines and, of course, China -- and more recently, Pakistan, Vietnam, Indonesia and Bangladesh.

The late-1990s Asian financial crisis only temporarily disrupted Western fascination with the East and the prospects for an “Asian century.”

The 2007-2009 Great Recession and financial crisis ended rapid economic growth in Western countries and, therefore, the robust demand for exports that were the mainstay of developing economies. Still, Western zeal for Asia persisted and many, for no logical reasons, believed emerging countries could independently continue to grow rapidly and, indeed, support economic activity in the sluggish U.S. and Europe.

Chinese real economic annual growth rates nosedived from double digits to a recessionary 6.3 percent during the worldwide downturn, but then revived due to the massive 2009 stimulus program. Easy credit fueled a property boom and inflation, and excessive infrastructure spending replaced exports as the growth engine. As with the Asian Tigers earlier, many thought Chinese growth was self-sustaining and unrelated to ongoing sluggish economic performance in North America and Europe, especially after Chinese GDP topped Japan’s in 2009.

There are five main reasons why it won’t get any easier for Asia:

1. Globalization is largely completed. There isn’t much manufacturing in North America and Europe left to be moved to lower-cost developing economies. At the same time, the West is basically saturated with Asian exports, and those countries are competing fiercely among themselves for limited total export demand. Also, exports are shifting among those countries as low-end production moves from China to places such as Pakistan and Bangladesh, much as they shifted out of Japan in earlier decades. As economies grow, a greater share of spending is on services and less on goods. This reality is a long-term drag on almost all the other Asian lands, except India, due to their goods-export orientation. This will temper long-term growth for Asian goods exports even after rapid economic growth resumes in the U.S. and possibly other Western economies.

2. The shift from being export-led economies to ones driven by domestic spending, especially by consumers, has been slow. Chinese leaders want this transition, but it is moving at glacial speed. At 37 percent, Chinese consumer spending as a share of GDP is well below major developed countries such as the U.S. at 68.1 percent, Japan at 58.6 percent, and even Russia at 51.9 percent.

3. There are government and cultural restraints. Almost all developing Asian economies are tightly controlled by governments. Top-down regimes stoutly resist reform and often persist until they’re overthrown by revolutions. The current Mao dynasty in China, as I’ve dubbed it, seems seriously worried about popular unrest due to the lack of promised economic growth and is reducing what little political liberty was previously allowed. President Xi is now the Big Brother with lots of little brothers insuring proper thoughts and actions, even at the local level.

In Malaysia, Prime Minister Najib Razak is enmeshed in a multibillion-dollar investment scandal. In the Philippines, crime and drug trafficking are so rampant that President Rodrigo Duterte was elected on a platform of eliminating drug dealers, even by murderous vigilante squads. South Korea’s former president Park Geun-hye was thrown out over corruption.

4. Population problems endure. Despite the need for new workers in Japan as its population falls and ages, women are still discouraged from entering the labor force, and Japan continues to be unwelcoming toward newcomers. There’s no such thing as an immigration visa despite the fact that 83 percent of Japanese hiring managers have difficulty filling jobs, versus a global average of 38 percent in the last five years.

China also has a looming labor shortage and severe limits to economic growth due to its earlier one-child policy, which resulted in about 400 million Chinese not being born. Low fertility rates are also destined to reduce the populations of Hong Kong, Taiwan, Singapore and South Korea. At the other end of the population spectrum are Asian countries like Indonesia and India, whose population is expected to exceed China’s by 2022.

5. Military threats are growing in Asia, and could severely disrupt stability and retard economic growth if they flare up. China is exercising its military muscles by challenging U.S. military influence in the region by, among other actions, building military islands on reefs in the South China Sea. Japan is abandoning its post-World War pacifism and shifting from defensive to offensive capabilities. The Russians are also making military threats. The region contains five nuclear-armed countries: China, India and its rival Pakistan, Russia, and -- most troubling -- North Korea, which is testing long-range missiles. China isn’t happy about that, but it wants North Korea as a buffer between it and South Korea as well as a deterrent to its old foe, Japan. 

There may well be an “Asian century” in the future, but don’t hold your breath. It took about a millennium for the West to develop meaningful democracy, the rule of law, large middle classes that support domestic economies and all the institutions that are largely lacking in developing Asian lands.

via BloombergView

Wednesday, March 15, 2017

Trump could start a massive fiscal stimulus program

Most forecasters believe the Trump administration’s forecasts of 3 percent to 3.5 percent annual real gross domestic product growth in the next decade are far too rosy. The nonpartisan Congressional Budget Office foresees 1.9 percent per year between 2021 and 2027, and the Federal Reserve expects 1.8 percent annually in the long run.

These differences aren’t trivial. Growth at 3.5 percent per year rather than 1.8 percent would make the economy 18 percent bigger over a decade. It also would involve reducing federal budget deficits by cutting spending on programs such as food stamps and unemployment insurance while boosting taxable personal and corporate incomes.

Pessimists point to the ironclad law of economic growth: Annual increases in employment plus productivity growth equal yearly gains in economic output. Aging and retiring postwar babies, as well as President Donald Trump’s anti-immigration policies, will severely limit labor force growth, they maintain. And output per hour worked, which gained about 2.5 percent a year in earlier decades, has risen just 0.5 percent annually in the 2010-2016 years.

Some blame weak capital spending while others foresee no big productivity-soaked new technologies coming along to propel productivity because everything worth inventing is extant. Malthus is alive and well. At the opposite end of the spectrum are those who believe robots will replace people to the point that there will be too few earners to buy the nation’s output.

I disagree. First of all, consider the bias of most forecasters toward slow growth forever. Since this business expansion started in mid-2009, real GDP growth has averaged a mere 2.1 percent despite the Federal Reserve’s cuts in short-term interest rates to zero and huge quantitative easing. So the tendency of most is to assume that this pattern will last indefinitely and they select evidence to substantiate that view. It’s the easiest forecast to sell as forecasters’ audiences readily agree because it matches their ongoing experience.

Still, the ironclad law of economic growth is actually quite pliable. Real GDP annual growth of 3.5 percent would occur with 2.5 percent yearly growth in productivity and 1 percent rises in employment, the historic numbers. True, with low fertility rates, the Census Bureau sees the U.S. population rising just 0.2 percent a year by 2026, even with net immigration of 1.3 million annually over the next decade.

Nevertheless, the labor participation rate -- the percentage of the population over 16 that is employed or actively looking for work -- had plummeted to 62.9 percent in January from the 67.3 percent peak 17 years earlier. So 4.4 percent of the potential workforce, or 11.3 million people, have departed. About 60 percent were retiring postwar babies, but many are returning or staying in jobs past normal retirement ages because their health is better than their predecessors’ and because they need the income. Postwar babies have been notoriously poor savers throughout their lives. The participation rates of those over 65 are actually rising, not falling, as is normally true for seniors.

Also increasingly looking for work are youths who stayed in school during the dark Great Recession years and are now better educated and attracted by expanding job openings. In addition, skills to meet available jobs are being provided by apprenticeship programs that combine two-year college degrees with on-the-job training. German manufacturers brought this system with them to their factories in the U.S. Southwest, and it is increasingly being emulated by U.S. firms.

Trump’s threats of mass deportation of undocumented immigrants have been scaled back. They now target those with criminal records and other suspects. And with cooler heads in Congress, U.S. immigration policy may end up mirroring Canada’s with a point system aimed at admitting those with the skills this country needs.

Trump’s planned deregulation and lower corporate tax rates may spur capital spending, but the correlation between the growth in capital expenditures and productivity gains is low, sometimes negative. More machines alone don’t spur efficiency. More important, productivity-enhancing new technologies grow explosively, but since they start from essentially zero, it takes decades before they move the productivity needle significantly. Aside from those yet to be developed, today’s well-known technologies such as robotics, additive manufacturing, biotech and self-driving vehicles are no doubt still in their infancy.

The argument that protectionism inhibits economic growth is also suspect. Sure, eras of rapid global economic growth are also periods of strong foreign trade advances, but do trade gains stimulate economic activity or the reverse? You can’t prove causality with statistics. If you beat a drum every time there is a total eclipse of the sun, it will go away. No causality, but 100 percent correlation.

Also questionable is the robots-will-eliminate-workers theory. A recent McKinsey study found only 5 percent of 800 occupations and 2,000 job tasks are likely to be entirely automated. Instead, half of current jobs will be changed significantly, forcing employees to adjust. At the same time, automation may hike global productivity by 0.8 percent to 1.4 percent per year during the next half century.

The catalyst for the return to rapid economic growth will, no doubt, be a huge fiscal stimulus program. Voters who are mad as hell after a decade or more of no growth in real incomes elected Trump and the Republican Congress, and politicians will respond. It will take two or three years to come to fruition, but look for huge infrastructure outlays and large increases in military spending. 

Stocks don’t normally discount that far ahead, but maybe that’s what leaping equities are anticipating, despite all the uncertainty in Washington, the nation and, indeed, the world.