The meaning of the week for the American President

The incidents at Charlottesville and the seeming flip-flop of the American President have been the issues that dominate the public airwaves in the US, notwithstanding another terrorist incident in the world, this time in Barcelona. Coverage of it has been surprisingly muted or may be, I did not look in the right places.

It should not have been too difficult to condemn white supremacists and neo-Nazis even if one had sympathies for the underlying feelings of disempowerment that middle-aged or elderly white males were experiencing. These are sensitive issues and one has to be good at nuanced communications separating one emotion from the other. Thus far, the President had not given much inclination of indication of his capabilities for nuanced expressions. A somewhat dated piece (last month!) by Peggy Noonan in the Wall Street Journal is a very good read.

At the same time, it is rational for politicians to do their electoral calculations in their heads and figure out how far they would be alienating their core constituencies. Many other political leaders, over the years, in democratic societies have equivocated in verbalising their own disapproval or angst over specific conduct. What is important is whether the country allows such forces to get away with it. There is very little to fear on that score. In the case of the U.S, that has not and does not stand in the way of the pursuit of the matter as law and order is in the hands of the State and they are going about it.

Rather separately, on the underlying issue of Confederacy statues, this Wall Street Journal article pointed to a NPR/PBS poll:

An NPR/PBS NewsHour/Marist Poll finds that even a survey sample that gives Mr. Trump his standard lousy approval rating overwhelmingly agrees with the President that statues of Confederate leaders should not be torn down. Even a plurality of African-Americans agrees that the statues should remain in place as symbols of our history. [Link]

I checked out the poll directly. This is the question that was posed to the survey respondents:

Do you think statues honouring leaders of the Confederacy should

Remain as a historical symbol?

Should be removed because they are offensive to some people?

Unsure

You can see the survey results yourself here or here. Once again, as Mark Lilla had written (extracted his from his book) here, the hyper-ventilation of the so-called elites and the media types is out of touch with the reality and the opinions of the people on the issue of Confederacy statues:

It is time to admit that American liberalism is in deep crisis: a crisis of imagination and ambition on our side, a crisis of attachment and trust on the side of the wider public. The question is, why? Why would those who claim to speak for and defend the great American demos be so indifferent to stirring its feelings and gaining its trust? Why, in the contest for the American imagination, have liberals simply abdicated?….. [Link]

Of course, the elites and the media types are not dumb. Why are they doing it? Two reasons, as I can see:

(1) They have to avenge the humiliation of not having been able to stop Trump from becoming their President in 2016.

(2) Two, they do not want to repeat the mistake of 2016 in 2020. They have to stop him right now. So, they are employing all tactics possible. Breaking up his core constituency, creating alienation between him and them, try and impeach him or get him to resign. Whatever. It is shock and awe. Just like banks are ‘too big to fail’, he is ‘too big to be allowed to be re-elected’.

On the economic front, check out this news snippet:

Reuters reviewed NFIB’s data and brought attention to the record number of small business owners that are planning to create jobs in July, which hit a seasonally adjusted net 19 percent that hasn’t been achieved since December 1999. [Link – this link will not be the same next month as it is updated every month]

NFIB stands for the National Federation of Independent Businesses.

Also, check out the Greg Ip article in Wall Street Journal here. The title of the article captures it all.

Six months into his presidency, Donald Trump’s detractors portray him as a do-nothing president with no big wins on issues such as health care, taxes and infrastructure.

That may be true if the benchmark is legislation, but that is an incomplete benchmark. To gauge a president’s impact you have to go beyond the laws he signs to the vast authority he wields through departments and agencies that apply the law. On that score, Mr. Trump is on track to do a lot. On finance, the internet, immigration and drugs, to name just a few issues, Trump appointees have begun nudging the economy and the country in a more conservative, pro-business direction. Whether that is good or bad is to a great extent in the eye of the beholder. What isn’t debatable is that the imperial presidency, after expanding under Barack Obama, remains just as formidable under Mr. Trump.

The American mainstream media has no time nor inclination to report this. They are drowning these news out. See the above two reasons as to why they are doing so.

To be clear, I am not in favour of all the de-regulation that is happening – on bankers’ compensation or dismantling Dodd-Frank without a proper debate (two wrongs do not make a right), etc. With respect to financial markets and the financial sector, I am more on the side of Elizabeth Warren than on the side of Donald Trump’s cabinet. But, if they manage to prescribe a simple but higher bank equity to bank assets ratio, they will have done far better than the Obama Administration did on fixing ‘Too Big to Fail’.

Of course, then there are issues of corporate executive compensation, Wall Street’s short-term tendencies, monetary policy obsession with asset markets, particularly stock markets. On these matters, perhaps, the Trump administration is on the wrong side of the debate, in my  view. In fact, the hope was that, at least on some of them, they would be on the right side (e.g., monetary policy). But, those hopes are receding.

Not that all de-regulation is for the good. I have also told my class that the world of finance and the world of non-financial sectors are different.

But, perhaps, the final word has to rest with an article in India’s ‘Swarajya’ magazine. There is no byline for the article.

Alternatively or even better, I would recommend Amy Zegart’s article in ‘The Atlantic’. The article is titled, ‘The Three Paradoxes Disrupting American Politics’ and the sub-title is ‘They didn’t start with Trump, and they won’t end with him.’. Quite.

Trump may personify America’s descent into coarse discourse and amplify its spread. But it didn’t start and will not stop in Trump Tower or the White House. The root causes lie deeper.

A reaction to Swadeshi vs. Videshi

In response to remarks made by Rajiv Kumar, the new Vice-Chairman designate of NITI-Aayog on the ‘Indian way of doing economics’  (I am paraphrasing and simplifying, perhaps oversimplifying), I had written a piece in MINT asking for open-mindedness rather than meeting with ideological rigidity and arrogance with a similar response. You can read it here.

A friend living outside of India reacted. I thought it was interesting. Somewhat unsurprisingly, he prefers to remain unnamed on this:

This foreign stuff is petty nonsense and RK has a Oxford D.Phil. The alleged Sangh dislike of the foreign stems from a mixture of envy and admiration. I used to get phone calls regularly to assist in the admission of children and relatives of successful Sangh functionaries at my University. They couldn’t understand why I insisted it could not be influenced in this way!

As for foreign influence, most of the profoundly nativist convictions of the Sangh (and most Indians) are presumptions infused by colonial bureaucrats like Max Mueller and others of much less distinction.

If you want to exclude foreign influence one should start with the Cambridge educated Aurobindo and also recall Vivekananda’s fame in India came via his Chicago address.

By all means, be sceptical but also remain open minded. Much of what originates abroad, especially on things like the efficient market hypothesis and the functioning of financial markets is suspect (Anwar Shaikh is damn good on this) but one should not abandon immanent logic itself. Ignorance cannot be obscured by huffing and puffing stupidly to advance personal and career aspirations masquerading as patriotism.

ECB Meeting Minutes

The Minutes of the European Central Bank (ECB) meeting held in the first week of August were released on August 17. Members had expressed concern over the strength of the Euro, overshooting further.[1] That was a surprise. One thought that Germany would tolerate a stronger Euro in return for less pressure on its high current account surplus. Further, even for other countries (the Southern European or peripheral countries), the real effective exchange rate is not overvalued. The Eurozone enjoys a current account surplus, even if modest. Not just Germany.

Instead, the ECB Governing Council was worried that the strength of the Euro would undermine its progress towards a 2% inflation rate, from below.

In fact, the Minutes reiterated the need for continued monetary policy accommodation more than once. It stressed that interest rates could remain at the present levels well past the end of the asset purchase programme:

The Governing Council decided to keep the interest rates on the Eurosystem’s main refinancing operations, the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and ‑0.40% respectively. The Governing Council expected the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. [Link]

Vague concerns were expressed about the low volatility in financial markets. Other than that, the ECB Governing Council had nothing to say about its monetary policy distorting global asset prices. Not just the Euro, but the ECB monetary policy is another bubble that needs to burst for the world to return to normalcy.

They should read what Howard Marks had written about the low volatility in his recent newsletter. [Page 5 – Link]

Thoughts on the latest GMO Asset class return forecast

I got GMO’s July 2017 update of Return Expectation over the next seven years. This form the basis of their asset allocation. You just need to set up a simple login to see their Asset Class Return forecasts.

The best way to read it is to compare it with their forecasts in recent months. I have compared it to May and March 2017.

U.S. large cap stocks, U.S. High Quality Stocks, International Large cap stocks, Emerging stocks and emerging debt have all become more overpriced in the last few months. Hence, GMO forecast of returns from these asset classes has become progressively lower over the months.

If we compare it to the situation in August 2016 – one year ago – Emerging market bonds and U.S. bonds have become somewhat less overvalued. That is, the return expectations from these two asset classes have improved in the last twelve months.

However, please note that the return expectations are still negative in the case of U.S. bonds. So, according to their model, it is still overvalued but somewhat less so than in August 2016.

Gems from China

It is really hard to believe why an aspiring superpower would do this or is this an effective tactic that other countries can and should learn from? I doubt if is something worth emulating. I am referring to the video that China had allegedly put out, parodying Indians with reference to the Doklam standoff.

But, if you peruse the links below, this might not come as a surprise.

They have also been ordered to remove inscriptions of Islam’s holiest verse, “There is no god but God, and Muhammad is the messenger of God,” from mosque walls and replace them with large red banners that read “Love the [Communist] Party, Love the Country” in yellow writing. [Link]

The title of this article wonders if granting WTO accession to China was a mistake:

When China entered the WTO in 2001, it promised to sign the Government Procurement Agreement, which requires government purchases to be made on a nondiscriminatory and transparent basis, “as soon as possible.” Sixteen years later, this has not happened. [Link]

Apparently, WTO rules prohibit mandatory requirement of technology transfers. The article concludes on this ominous note:

If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.

Nor will the media and American elites would let President Trump do that.

James Kynge writes about the trust issue with China:

The concern for western business is not that its Chinese counterparts may have more money than sense, but that they have little idea who or what to trust. ….The key challenge for western companies is that Chinese bids emanate from a domestic context that is difficult to understand and impossible to predict. The invisible hand of the Communist party can permit market forces to flourish for a while, only to abruptly curb such freedoms when they no longer serve a higher purpose.

“The risks associated with Chinese investments overseas are usually of three types,” said Yu Jie, head of the China Foresight Project at the London School of Economics. “There are economic risks, political risks and ones associated with the omnipresence of the Chinese Communist party.” All three of these are “inevitably intertwined” given the nature of China’s political system, she adds. They “do not always follow economic rationality”.

The FT has a story based on the latest report by Charlene Chu at Autonomous Research:

In her latest report, Ms Chu estimates that bad debt in China’s financial system will reach as much as Rmb51tn ($7.6tn) by the end of this year, more than five times the value of bank loans officially classified as either non-performing or one notch above. That estimate implies a bad-debt ratio of 34 per cent, well above the official 5.3 per cent ratio for those two categories at the end of June….

…. Her estimate of Rmb51tn in bad debt is based on average credit losses across other 11 other economies that previously experienced rapid debt increases comparable to China, including Japan in 1985-97 and the US in 2000-07.

“What I’ve gotten a greater appreciation for is how everything is so orchestrated by the authorities,” she said. “The upside is that it creates stability. The downside is that it can create a problem of proportions that people would think is never possible. We’re moving into that territory.”

While we are at the subject of bad debts, some stuff from Caixin magazine:

A CBRC-led audit at the beginning of this year found that actual bad loans were higher than what the banks had on the record, a vice director of a provincial branch of the banking regulator told Caixin.

In a report last year, the central bank estimated that lenders might have understated the amount of nonperforming loans by at least 50%, which suggests that bad loans at commercial banks could be as high as 4 trillion yuan.

This could present a problem as the amount of funds set aside for bad loans, totaling 2.9 trillion yuan at the end of the second quarter, is only enough to cover reported levels of bad debt.

In addition to being underestimated, bad loans may be on the rise too.

“The banking industry’s risk control situation is still complex and difficult, and pressure for nonperforming loans to bounce back is very high,” according to an official transcript of the CBRC’s mid-2017 Work Forum held on July 29. [Link]

 

 

Clearing up the confusion or not

The title of Matthew C. Klein’s post in FT Alphaville succeeded in enticing me to read it: ‘Clearing up some misconceptions about how the stock market works.’  He had tried to decipher how the U.S. stock market works, based on U.S. Flow of Funds data published quarterly by the Federal Reserve Board.

He has tried to show that businesses do not spend all their money buying back stocks and that households do not buy at the top and sell at the bottom. Unfortunately, he did not succeed. What follows below is the comment I left beneath the post. In order to make sense of it, you need to see his post and the charts he had stuck there.

Not sure if the scaling of the net stock issuance with market value changes the perception that the first chart gives. Except for the 1990s, net stock issuance – in the 1980s and in the new millennium – have been negative. More buybacks, on balance. Then, for a few years after 2008, it becomes less negative – so incremental positive. They had sold equities. Again, from 2014, they have been net buyers. So, the two charts, ‘Not much of a trend anymore’ and ‘Return to Normalcy’ have not changed the picture provided by the un-scaled first chart.

Similarly, households had not been exactly selling into market strength. They were probably very highly exposed at the peak in 1999-2000. They were not sucked too much into the 2002-07 rally. But, now again, they have been buying and are at peak exposure in this cycle.

So, thanks for the charts. But, the conclusions do not seem correct to me.