Economic growth is not an entitlement

That is the title of my column in MINT today. I call the downward revision to global growth forecasts by the International Monetary Fund good news. Spontaneous economic growth ended after about twenty five years since the end of WW II. After that, it has been mostly sporadic. But, financial leverage has propelled economic growth. That is why there have been so many attendant problems  – climate change, environmental and ecological damage, workplace stress, mental health issues for individuals and for families, income and wealth inequality, etc.

Hence, a period of sub-par economic growth for the world economy would be a bitter but necessary medicine for the world economy. Yes, it won’t be easy. But, when the body has become dysfunctional and unhealthy, how can any medicine cure it without side effects and painful and long side effects, at that?

Elsewhere in the column, I wrote that India needs an adult-like conversation on its economy but that it lacks a quorum. It is true of global economy too.

Read my column here.

IMF Asia Regional Outlook

Some highlights:

Pakistan is missing from the summary of the Regional Outlook. Bangladesh has grown faster than India in the last two years (2016 and 2017). In 2018, India and Bangladesh are projected to grow at the same rate. In 2019, India is expected to overtake Bangladesh in its growth rate. Other than Bangladesh, Nepal, Mongolia and Thailand have seen their growth rates revised higher. Everyone else has their growth rate revised lower.

The only thing that IMF could say is that countries should open up their Services sector. I think that they are running out of ideas.

You can find the summary here.

Invisible band vs. Invisible hand

Jonathan Haidt’ column from 2015 on the organisational structure in Sears is useful. But, it is not clear if the blame on the bankruptcy of Sears can be laid solely on that. At some level, there is some merit in having a clean organisational structure with each business in Sears operating as an independent company.  But, he points out that this ruled out cooperation between businesses and that Sears businesses even privileged Samsung brand rather than Sears’ own brand of consumer durables in shelf spaces. Perhaps, the KRAs of the CEOs of each of the businesses could have also included a component for cooperation and synergies between the businesses. An interesting case-study for students of organisational structure and behaviour, etc.

It cannot be said that much of this wisdom is hindsight, because Sears is in trouble now. The article was written three years ago. It can be even called prescient, actually.

He concludes that invisible bands matter as much as inevitable hands. Nice. Read the post here.

Validating Jonathan Haidt is Nick Hanauer whose speech delivered on September 30th at MIT, where Nick Hanauer won the 2018 Harvard and MIT Humanist of the Year award calls for killing ‘Homo Economicus’ to bring about the destruction of ‘neo-liberalism’ that celebrates selfishness or self-centredness.

His profile says that he is a Seattle-based serial entrepreneur, venture capitalist, author, and activist with a knack for identifying and building transformative business models.

These are powerful sentences:

The neoliberal claim that the sole purpose of the corporation is to enrich shareholders is the most egregious grift in contemporary life. Corporations are granted limited liability in exchange for improving the common good. Thus, the true purpose of the corporation is to build great products for customers, provide good jobs for employees, provide a fair return to shareholders and to make their communities stronger—in coequal measure. [Link]

I am all for the pendulum swinging in the direction of greater consideration to other stakeholders, esp. in the developed societies. But, I am far more ambivalent on their benefits for developing societies where these might be interpreted (or, misinterpreted) deliberately as calling for greater government intervention, regulation and the return of State-directed socialism. Let us see.

Two classic understatements

China’s policies have focused on addressing the economy’s significant and longstanding financial vulnerabilities. But the shift in priority toward stabilizing growth may mean slower progress on deleveraging and heightened medium-term risks for China and the entire region. – Emphasis mine [Link]

This one from Barry Ritholtz:

You can have a committee of 10 geniuses that proves collectively to be a moron [Link]

The quote is attributed to Cliff Asness by Barry Ritholtz.

What did America do between 2014 and 2016?

My column in MINT on Tuesday 9th October:

Bloomberg Business Week broke the story of the “Big hack” — how a tiny chip (the size of a pencil tip or a grain of rice) was embedded in servers bought by America’s big technology companies on 4 October. A week earlier, The New York Times wrote that the Chinese government had issued instructions to stop the reporting of negative news in print media and online forums, etc. The directive sent to journalists named six economic topics to be “managed”. Two of them carry interesting implications. One is “local government debt risks” and the other is “the risks of stagflation, or rising prices coupled with slowing economic growth”. It is reasonable to assume that these two remain live issues or risks in China. However, China is not alone in wanting to suppress reality.

I have long been puzzled by the turnaround in the global economy and asset markets in 2016 when it appeared that the bottom was about to fall off for the global economy and asset markets. Everyone assumed that China’s credit taps were opened and that the world was saved. The truth is slightly trickier than that. There are reasonable grounds to suspect that the US had fudged data from 2014 to 2016 to prevent official data from showing an economic recession and that the stock market too was manipulated. The supporting arguments follow.

Between the summer of 2014 and spring 2016, stock prices in many markets declined sharply. Stock indices developed by Morgan Stanley Capital International for the European Monetary Union, Asia-ex-Japan, Japan, Switzerland and emerging markets had declined anywhere between 20% and 40% in that period. Emerging market bond spread doubled. However, the S&P 500 stock index traded sideways. Was it because earnings by S&P 500 companies were stellar? No. For about seven to eight quarters from December 2014 to September 2016, year-on-year (yoy) growth of earnings per share’ (EPS) of S&P 500 companies was negative. Quite how the S&P 500 stock index remained stable in the face of a global sell-off in risk assets and contraction in earnings remains a mystery to be solved.

What happened to the real economy in the US? In the same period, industrial production and manufacturing recorded more months of negative change than positive change—both on a month-on-month and on a yoy basis. Capacity utilization declined. Consumer confidence—University of Michigan consumer confidence indices—declined. Import prices—from China and Mexico—recorded declines on an annual basis. Consumer price inflation came down from 2% to around 0%. All these indicators suggested a recession in America. Real gross domestic product (GDP) growth slowed, but there was no recession.

The price of crude oil declined sharply in this period. It must have helped Asian stock indices and corporate earnings since Asia is largely an oil importer. But, as mentioned above, Asian stock indices fell sharply. The balance sheet troubles of oil producers and companies in related industries eclipsed the positive effects of lower oil prices. None of this showed up in American stocks. In fact, excluding oil stocks, the S&P 500 would have been up. Of course, excluding profits of oil companies, S&P 50 EPS might have experienced growth. That might explain the resilience of the index. However, this does not sound right because the rest of the economy was reflecting the strains that the oil industry was facing. But, not the stock market. Why did the US have to do this?

By 2015, had official statistics reflected the slowdown in the economy fully, it would have been a big indictment of the policies pursued since the crisis of 2008. Short-term interest rates at 0% and three rounds of quantitative easing and repurchase of maturing treasury assets could not produce a recovery that lasted longer than six years. It would have been a huge embarrassment to the Fed and would have emboldened the likes of Ron Paul to demand drastic changes to the charter of the Fed and the trimming of its sails. The other motivation is political.

An economic recession and a stock market decline would have sealed the verdict on the Barack Obama presidency and would have effectively nullified the chances of the election of a Democrat as president in the 2016 elections. Perhaps, a Republican victory coming on top of an official economic recession and stock market collapse would have made Democrats unelectable for a long time to come. In the end, they did not succeed because public sentiment could not be manipulated. They were hurting because of the sham recovery. Hence, apart from the traditional Democrat bastions along the coasts, the rest of the country voted Donald Trump to the office of the president.

What are the implications of this? By not allowing the American stock market to correct meaningfully in that period, policymakers have not allowed the pressure valves to function. Pressure has built up as the stock market then began to climb from 2016 onwards. So, the “bottled up” pressure is now immense. Stock market stability followed by a steep ascent since end-2016 means that excess risk had been taken by companies, funds and investors. We cannot pinpoint before the fact where they are. We will all be wiser after the fact as we were, after 2008 only to forget the lessons in short order. Recently, the chief economist of the European Central Bank expressed fears about the degree of leverage in the financial system because of shadow banking. It had taken just 10 years to come back a full circle. A truly bizarre world.

V. Anantha Nageswaran is the dean of the IFMR Business School. These are his personal views. Read Anantha’s Mint columns at http://www.livemint.com/baretalk.

 

First Published: Mon, Oct 08 2018. 09 09 PM IST

Breaking the hiatus: RBI, Michael Pence

I had joined the IFMR Business School as its Dean, as of October 4.  It is located at Sri City in Andhra Pradesh. I arrived at Sri City campus on October 1 and the last week has been a blur. But, blogging is a refuge. I think I had mentioned it once before.

You can watch the interview I gave to ET NOW Television on RBI monetary policy decision on Friday. I was part of a panel. I did not fault their rate decision on Friday. It was a fine call. They took their chances. The stock market appeared not to like it. But, it has fallen the day before too. In any case, it was so rich in valuation that it deserved to fall. Establishing causation for such short-term action when the market was anyway overvalued is problematic. Did the market expect RBI to cut rates or raise rates?

But, I felt that they should have offered more substantive comments on the IL&FS, if not on Friday, but on another occasion.

Before the interview, I managed to go through the monetary policy report and the press statement in the long car ride from Chennai city to Navalur in Kancheepuram District (OMR).

Michael Pence’s speech on China requires careful reading. I had not done so yet. It is an  important and calculated escalation.

We can do without headlines of this nature. The Federal Reserve Chairman does not exist to serve the stock market investors.