John Authers

I used to read Jason Zweig regularly. I have slipped now. Have not kept up with him lately. But, I do read John Authers. He is probably the most thoughtful market commentator writing currently. He was with Financial Times and he has moved to Bloomberg.

Without exception, his columns make you think. In more recent times, I will single out two pieces:

(1) ‘Don’t discount China’s role in the stock sell-off’. He is arguing that China’s economic weakness could be one underlying factor. Perhaps, he might have contradicted himself in the following piece where he writes about investors looking for ‘excuses’. He too might be looking for ‘excuses’ when he attributes a market move of a single day to a larger issue. There is a difference between catalysts and reasons. The reason for market crash: they are too expensive. They just cannot levitate at these levels. Expectations have gotten far ahead of reality. Period. No other reason needed. Everything else is a catalyst for this cause to create the effects.

In any case, I was more impressed with his analysis of Brexit.  He is absolutely right that ‘remainers’ cannot put the genie back into the bottle. He does not say it in so many words but things can never go back to being the same, even if a second referendum were held and it results in ‘Remain’ vote winning this time:

A second referendum seems more likely than it did. A lot has happened in the last two years, and much has been learnt. It seems reasonable to put the question again. But there is a real risk that this would result in a deeper nightmare scenario.

A second referendum might be as close as the first. A narrow victory for “Remain” would leave the country in the EU and almost half of the country with a lasting sense of injustice. A repeat of the first result would leave the country no further forward. Uncertainty would rise during the process. If the polls suggested that the country had now overwhelmingly turned in favor of staying in the EU, this calculation would be different, but there is no such evidence. [Link]

This reminds me of something that I tend to forget: sometimes, we cannot reverse certain decisions, even if we technically reverse them. Once the objective conditions have changed for good, it is impossible to restore them. So, some policy decisions cannot be reversed, even if we are open-minded about evidence and are prepared to swallow pride and reverse them. That puts the onus on getting it right the first time and also teaches us to be humble about unintended consequences and uncertainty in general.

While on the topic of Brexit, you should read Mervyn King’s op.-ed. too on the topic. He asks the UK Parliament not to endorse the deal (or, no-deal) that the British PM has arrived at. He says it is a ‘heads I lose; tails you win’ deal that UK has given the EU. It is a bit hard to sympathise with the plight of the Brits. I am reading ‘The Indian summer: the secret history of the end of an empire’. What one learns makes it hard to feel sympathetic for their travails now.

Apart from that, Mervyn King states publicly what we all know about the European Economic and Monetary Union:

the political nature of the EU has changed since monetary union. The EU failed to recognize that the euro would demand fiscal and political integration if it was to succeed, and that countries outside the euro area would require a different kind of EU membership. It was inevitable, therefore, that, sooner or later, Britain would decide to withdraw from a political project in which it had little interest apart from the shared desire for free trade. [Link]

(2) The second recent John Authers’ piece that I liked is the one titled, ‘Behind the Market Turmoil Lies Nothing But Excuses’. These conclusions are valid:

My best guess is that people were in need of an excuse to buy bonds Monday, catching others in a “short squeeze,” as many had been betting on higher bond yields. Plenty of others wanted to escape the stock market with gains while they could, and that carried on until prices had fallen enough to trigger the algorithms to buy stocks.

After years of central bank quantitative easing, there are lots of positions in markets that make little sense. Their holders have been awaiting for excuses to unload them. Keep tuned to see whether there really are convincing reasons to buy bonds or stocks. This week has been a litany of excuses. [Link]

Searching for fundamental reasons for market action is futile, especially for a market that has been rising for so long on the back of enormous leverage-based stock buyback aided by extraordinary global monetary accommodation. It simply had to end.

The hilarious paragraph of the year

Earlier this year, HMRC was embarrassed when it emerged that it had refused to assist a French investigation into suspected money-laundering and tax fraud by the UK telecoms giant Lycamobile, citing the fact that the company was the “biggest corporate donor to the Conservative Party”.

HMRC initially denied the Lycamobile story, saying: “This is the United Kingdom for God’s sake, not some Third World banana republic where the organs of state are in hock to some sort of kleptocracy.” It later conceded that the story was accurate. [Link]

Monstrous non-sense

Martin Sandbu, I think, outdoes himself in his latest column. He says that central banks were not loose enough in the years following the crisis as, even after the latest Trump tax cut stimulus in the US, inflation rates are not picking up and therefore, spare capacity was much higher. If only central banks had been bolder, the negative output gap would have closed much earlier!

The certitude here is indeed breathtaking. It took my breath away for a minute. I just did not know where to begin.

The simple truth is that monetary policy has been completely orthogonal to the real economy developments after the crisis. The economies of America and Europe have recovered on their own because monetary policy has been so loose for so long that such a belated recovery cannot be attributed to policy effectiveness.

It is wrong to argue that central banks had not done enough. By April 2010, the S&P 500 had nearly doubled (up 81%) from its low in February 2009. The 10-year bond yield had crashed from 4.0% to 2.0%. Everytime it threatened to rise above 4.0%, the Federal Reserve did QE2 and QE3. It did not raise rates in 2014. In 2015 and in 2016, it raised rates by 25 basis points each – 0.5% in total in two years! Mr. Sandbu thinks that they were not bold enough?!

Monetary policy operates through financial market variables. Where was the wealth effect from these reactions in bond yields and in the stock market? Nothing.

Had the Federal Reserve been more reckless, it would have sent financial assets to even greater heights but to what effect on the real economy?

It would have only widened the inequality and the angst among the middle and lower classes. Hasn’t he seen the UK Housing Affordability Index released by the Office for National Statistics for 2017?

On average, full-time workers could expect to pay around 7.8 times their annual workplace-based earnings on purchasing a home in England and Wales in 2017, a significant increase of 2.4% since 2016.

Workplace-based housing affordability significantly worsened in England between 2016 and 2017, but there were no significant changes in Wales.

Housing affordability has worsened significantly in 69 local authorities in England and Wales over the last five years, with over three-quarters of these being in London, the South East and the East.

All but five London boroughs had significant worsening of affordability since 2012.

House prices and earnings increased in all English regions and Wales, but the two regions with the largest increase in house prices (the East (10%) and the South East (6.9%)), were the two regions with the significant differences over the year. This suggests that house prices are driving the significant worsening in affordability.

The affordability ratio has more than doubled for every property type in England from 1997 to 2017. [Link]

Right after the Brexit vote, the Bank of England had taken out a pre-emptive monetary policy accommodation insurance on top of the ultra-loose monetary policy that prevailed. Yet, Mr. Sandbu thinks that policy wast not loose enough!

Given continuously worsening affordability caused by asset price increases which are a consequence of monetary policy, does he reckon with the social and economic costs of his implicit recommendation that central bankers should have been more reckless than they already were? May be, Brexit would have been forced on David Cameron than him calling for a referendum on the matter.

May be, Trump would have won with an even bigger margin or Bernie Sanders would have won the Democratic Primaries notwithstanding all the attempts to stop him from winning it.

The Chicago Fed Financial Conditions Index is hovering near the easiest despite the Federal Reserve hiking interest rates gradually since 2015 (data as of July 27, 2018 was available at the time of writing this blog post). It only shows that the normalisation is proceeding at such a glacial pace that it is hardly registering on the financial conditions.

Graeme Wheeler, then Governor of the Reserve Bank of New Zealand said this in October 2015:

Monetary policy is, however, relatively powerless to influence the decisions that determine long-run economic performance and distributional outcomes. For example, over the long run, monetary policy can do little to generate higher spending by households and firms. Even in the shorter term, monetary policy’s influence may be low in an environment where debt levels are high and where there is considerable uncertainty about economic prospects.

Monetary policy can influence risk-taking in asset markets, but this does not necessarily translate into risk taking in long term real assets – requiring the investment and entrepreneurial decisions that underpin productivity growth and hence long-run improvements in living standards. [Link]

A gentleman (Ben Carlson) had posted a comment under Martin Sandbu’s column implicitly supporting him by providing a link to his blog post.

My comments on that are as follows:

(1) The Fed’s remit is, officially, not the stock market index

(2) Earnings improvements were a functioning of low interest rates as top lines did not improve much for quite some time after 2009. Federal Reserve policy was powerless to influence aggregate demand and real economy. See Graeme Wheeler’s comments.

(3) Most ordinary people save through bank deposits. They were robbed of their incomes even as asset prices went up.

(4) Household debt has fallen but corporate and other debt have risen significantly. Overall leverage of the U.S. economy has only increased despite the crisis having been caused by leverage

(5) The improvement in household networth says nothing about its distribution. For that, check out the work (‘A lost generation’) by the Federal Reserve Bank of St. Louis on whose networth has improved. Mr. Ben Carlson’s stock market performance would not make a difference to them.

(6) If one taunts the Fed sceptics that their criticism was a reflection of ‘sour grapes’, it is equally possible that one’s approval of Fed policy is a reflection of their personal riches. Social and public welfare consequences be damned.

Resilience of human irrationality, a I wrote in my MINT column two weeks ago, is remarkably strong.

High external tariffs were effective once

I was preparing for a lecture I have been asked to give on Technology and Development to visiting scholars of Indian Economic Service at the Singapore Civil Services College tomorrow. I had made a mental note of referring to Professor Robert Allen’s work on the history of economic development. I had written on it in MINT in February 2015. Let me recall those words here:

According to him, North America and western continental Europe caught up with the British industrial revolution by adopting the following:

• Internal free market (elimination of internal tariffs)—national single market

• Stable domestic banking system

• High external tariff

• Universal education

• Infrastructure.

They did not catch up practising free trade and open capital markets. What a surprise! [Link]

High external tariff was needed to catch up with Britain which industrialised earlier. Now, President Trump is again resorting to high external tariffs. America has a stable banking system and an internal free market. Its infrastructure is in need of improvement, for sure. In other words, trade barriers were effective. They may well be effective again. Academics are finding it difficult to accept that possibility.

I saw an article by Professor Dani Rodrik in FT.  He was making two points of which I thought one was valid – that the WTO was more intrusive than that of GATT. His second point was that such intrusion did not allow for heterogenous economic models like that of China’s. I thought that the second point was problematic.

Countries are now holding China into account for its failure to honour the very commitments it made when it joined the WTO.  It signed up to it. It benefitted from it. Its breakneck export growth and foreign exchange reserves accumulation were due to its accession to WTO. Higher Foreign Direct Investment into China was also due to WTO accession.

Second, I was not sure if China’s economic model was that heterogenous. It followed Japan’s model  – export growth, undervalued currency and protected domestic markets. Post-2008, China copied the neo-Western model of economic growth – reliance on debt. I doubt if there was much that was or is heterogenous about China’s growth model.

But, on the intrusiveness of WTO (vs. GATT), Professors Joel Trachtman and Simon Lester have responded sharply to Dani Rodrik. You can see their posts here and here.

For what it is worth, Professor Rodrik should also read this Merics brief on what certain things mean in China.

Also, I am not sure many in America see the US-China trade dispute the way Professor Stiglitz sees it. I have cited in these pages from the Harvard-Harris poll of the last few months that those polled did not want a trade war but they also wanted China dealt with, firmly.  Stiglitz writes:

No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war

He may be too harsh on the first part of his statement but he appears most certainly wrong with the second part of his statement. He should go through carefully pages 123-130 of the June 2018 Harvard-Harris poll.

If China was winning the trade war, a rare and risky outburst from a Chinese professor against President Xi Jinping would not have happened.

As of now, it does not appear that China is either winning the battle or the war. China has imposed unremunerated reserve requirements on forward transactions on Yuan and the People’s Bank of China demands ID proof for transfer of US dollars over USD1000.00 Professor Stiglitz has allowed his biases to cloud his judgment.

He should spend some time reading the detailed two-part article that the South China Morning Post on how China might have mishandled the US on the trade dispute. One can find them here and here.

Both he and Professor Rodrik would also find it useful to read the Merics China Monitor dated 18th July 2018 on China’s cosmological communism.

Read this comment too in the FT on strains showing in China.

Not too many people – even those who are ideologically ill-disposed towards Trump find it easy to side with China. For example, FT thinks that IMF would be wrong to bail out Pakistan which tantamounts to bailing out Chinese banks that lent to Pakistan to get China to build some infrastructure as part of its ‘One Belt One Road’ initiative.

On the Edg(e)baston

Three days and one session – that is all it took to get a result in Edgbaston – the venue of the first of the five Test match series between England and India. It was gripping but as India entered the fourth day needing 84 runs with five wickets in hand, one had to admit the odds favoured England. Seldom these days have teams performed well overseas. Probably, that distinction belonged to the West Indies team of the Seventies and Eighties and the Australian team of that period too. After that, it is not just India who are supposedly tigers at home and lambs everywhere else. It applies to all teams.

I had watched South Africa in England last summer. I watched a day’s play each at the Oval and at Old Trafford. Hashim Amla, Faf du Plessis – they all disappointed. South African bowlers did not make English batsmen play as many balls as they should have. I was disappointed by their under-par performance.

India had a good outing in England in 2002 and in 2007, not to mention 1986. In 1990 and in 1996, India lost a test each. They were three-test series. In 2002, India drew the series. It was a four-test series in 2002. In 2007, India won the three-test series. India was humilated in the Test Series in 2011 and in 2014. A 0-4 whitewash in 2011 and India lost the final three tests badly in 2014, after having drawn the first and won the second.

Indian batsmen, based on my recollection, have not done that well, with the exception of Vengsarkar in the Eighties and Dravid from 1996 up to 2011. Sachin has a good average against England but he had two good series – 1996 and 2002. The rest – 1990, 2007 and 2011 were mediocre, especially the 2011 series. In that series, he managed two fifties in ten innings.

Ganguly had only twelve tests against England and he has a better average. Laxman had not done well against them, except perhaps in 2002. I am citing all these from memory. In other words, Indian top order batsmen have not fired consistently against England. That, to the best of my recollection, happened only in 2002.

So, the failure of Rahane, Rahul, Murali Vijay and Shikhar Dhawan in both the innings are par for the course although one is disappointed at Rahane’s shot selection. I thought he was made of better stuff. Rahul had a brutish delivery in the second innings but, in the first, the dismissal was of his own making.

It is the pressure, of course, that is built up by the good deliveries that make batsmen play loose shots at poor deliveries and get out to them.

That is the achievement of Virat Kohli in this test match – he did not let the good deliveries creat the platform for the poor deliveries to swallow him!

That said, I would hold his dismissal – against the run of play – on day 2 – as an important turning point in the match. Towards the end of the innings, he was on fire, toying with Ben Stokes and other bowlers. I thought he would earn India a 20-run lead or something closer to that. But, his tame dismissal against Rashid was a bit of a surprise. It came unexpectedly.

The second important turning point of the match was the quick half century+ by Curran. At 87 for 7, India will have fancied their chances of getting England out under 150, at most. The extra thirty runs made the difference in the end.

To succeed in England or to avoid embarrassing series defeats, a team needs at least two top order batsmen to score well and consistently and bat longer. If India does not manage that, a repeat of 2011 and 2014 might be in store. One hopes not.

In English conditions, this England team has a good attack – Anderson, Broad, Stokes and Curran. One has to admire Jimmy Anderson’s resilience, fitness and longevity in Test cricket.

Engrossing game of cricket, no doubt – not very pleasant to watch, if you are a batsman or inclined towards batsmen but gritty game. One that separates the greats from the also-rans. In that sense, Kohli succeeding in this test overcoming his own mental blocks and ego was a far more satisfying outcome for him and his fans than his centuries on other occasions.

Battling the mental demons and coming on top is always very satisfying. It elevates us and maks us better and stronger human beings.

Who is a Liberal?

TIME magazine has the following cover in its July 2nd Edition.

TIME Cover_02072018

Sanctimonious hypocrisy.

The purpose of the cover is not better public policy. The purpose of the cover is not even to regain power in elections. That can happen only when one wins converts to one’s cause. This won’t or cannot win converts.

These are not liberals. They are D.A.D.D.I: Dangerous, Arrogant, Deluded, Double-standard Idiots.

Who is a liberal? See here. That is a covery story I wrote for the Dec. 2015 issue of ‘Swarajya’.

Also, it is a good time to recall John Gray’s article in July 2016 (a classic) in the aftermath of the Brexit vote. If you thought that the Brexit was narrow and lacked legitimacy, pl. check your facts again here. Take out Northern Ireland, Scotland and the Greater London Area. It was as clear as it could get.

As Tim Price reminds us in his latest note,

In recent debates, Quisling MPs and unelected peers have resorted to the purest sophistry, citing sources such as Edmund Burke’s speech to the electors of Bristol in their appeals to override the legitimate plebiscite held in the UK on 23 June 2016, in which 17.4 million people voted to leave the EU – more voters than have ever voted for anything, ever, in our country’s history. [Link]

By the way, Tim Price’ ‘Darkest hour’ is a very good read.

Back to John Gray:

As it is being used today, “populism” is a term of abuse applied by establishment thinkers to people whose lives they have not troubled to understand. A revolt of the masses is under way, but it is one in which those who have shaped policies over the past twenty years are more remote from reality than the ordinary men and women at whom they like to sneer. …

… The contradictions of the world-view shared by progressive thinkers and established elites are becoming acutely evident. There is constant talk about being in a time of unprecedented change. Globalisation is connecting the world as never before; our lives are being continuously transformed by disruptive technologies; old ways of life and hierarchies in society are fast dissolving . . . these are the ruling clichés of the age. What is striking is that they are deployed to prop up a failing ancien régime. …

… There is much that is ugly and threatening about Donald Trump – not least his divisive attacks on Muslims. But it is the parties that have been in power for the past thirty years that have created Trump’s main constituency. His appeal is to casualties of the American economy that mainstream politicians have chosen to ignore…

If Brexit has come as a great blow to many who think of themselves as progressive, it is because politics is undergoing a regime shift – several of them, in fact, at the same time – that they have not perceived….

…Like the financial elites shown to be so pitifully short-sighted in the early hours of Friday morning, politicians and pundits who bang on about adapting to change have been confounded by changes that they believed could not happen. [Link]

The travails and the triumph of Blackpool

This morning, as I was waiting for my turn in the Purohits’ house in Singapore to perform the rituals for one’s departed elders on the New Moon day, I caught up with Sarah O’ Connor’s piece in FT on the coastal town of Blackpool in UK Northwest.

It is a great article in many respects. Some commentators in FT have identified the reasons. It is honest journalistic work; told with sensitivity and with no ideological baggage – one way or the other. There is no air of superiority; there are no lazy ‘I know it all’ prescriptions. The journalist lets the protagonists speak. It is their voices that come through. Ms. Sarah O’ Connor – take a bow!

Further, as several have written, these are the kinds of stories that keep the faith in FT hanging by a thread. They are the antidotes to having ‘free lunches’ and reading other worthies who forget what they themselves wrote earlier or have become so blatantly one-sided that they should add disclaimers about their ideological leanings and personal prejudices.

At least, the FT Editor cannot claim now not to know what clicks with its readers and what they expect of it.

There are many statements made in the article – either by the journalist or by the people of Blackpool – that are worthy of reflection. They make for ideal seminar topics as some of them are rich and are eternal public policy questions. I capture them below with some comments/thoughts preceding them, with the full realisation that opinions an interpretations of the quotes can and will be different.

This is a wonderful doctoral dissertation topic

Well there’s 5,000 new jobs in London every week, and people seem to find it perfectly easy to move 600 miles from rural Romania to take one of these jobs, so why can’t you move 200 miles from Blackpool?’ — it’s true but it sort of ignores the social context.

This lays out how difficult it is to address root causes and why GPs cannot be held responsible for addressing root causes. But, symptomatic treatment is supposed to help buy time for addressing the root causes.  An analogy is QE and zero or negative interest rates. But, they have become the only treatment and for ever!

 Well, yeah, that’s what medicine does, it treats symptoms. Setting a bone doesn’t get to the root cause of a broken leg — if you wanted to get to the root cause, your job would be to remove the slightly wonky paving stones that drunk people fall over on the way out of pubs on Friday night.” Rajpura argues that the ultimate answer is to tackle the mental health equivalent of the wonky paving stones. He believes that, in places such as Blackpool, we sometimes end up medicating economic and social problems.

This is the holistic understanding that policymakers should have. Indeed, even ordinary citizens should remember. The answer to health issues may lie in non-health aspects and medication may only be a part answer:

 [That’s because] 80 per cent of health is determined outside the health service; it’s things like whether you’ve got a job, whether you’ve got a decent home, whether you’ve got social connections and friends.

This is about synergy, information sharing, shedding egos and breaking down silos and it is about walking around and seeing what is there in one’s environment. Sometimes, answers are right under our noses but we become so engrossed in our own little world that we fail to notice the answers around us. Holistic thinking, approach – all those lessons are implicit in the statement below.

Last but not the least, it is about how various government welfare (or even private) initiatives must work together, learn to appreciate the inter-linkages and co-dependencies between each other.

 Rajpura wants to make all these social groups, charities, health services and council services aware of each other, so that GPs have more options when a patient such as Phillips sits down in their examination room.

WoW! Ronald Reagan and Margaret Thatcher (and even Ayn Rynd?) would feel vindicated. This is one of the many evidence of a non-doctrinaire and non-ideological reporting that Ms. Sarah O’ Connor has done in this piece. There is something to be said for taking charge and not depending on the welfare state to do its work for you. The question is about lending a helping hand without making the beneficiaries getting addicted to it. Addiction to welfare and doles is as harmful (to oneself and to the society and to the nation’s coffers) as addiction to drugs are. At least with the latter, the damage is somewhat confined to fewer set of people. The statement below goes to the heart of the challenge: how to help in need; for how long; how much; when to withdraw and how not to stifle humans’ innate survival and fighting instincts.

In any case, Dean Baker, Larry Summers and Paul Krugman should read this article.

“Places like Blackpool have suffered deep budget cuts since 2010, putting public services under pressure. But, says Tracy Hopkins, chief executive of Blackpool Citizens Advice, “It’s led us to be more creative about the solutions. There’s really positive things that have come out of — dare I say it — austerity.

What a brilliant articulation of a public policy goal?! Perhaps, it should be the only goal? Get out of the way; provide or enable the infrastructure to be provided and provide an insurance role – whether it is health or harvest or price realisation or access to credit – step in and provide insurance, when the so-called market mechanism is indifferent or insensitive or simply cannot provide it.

 The state’s “fundamental purpose” is to provide people with insurance against macroeconomic risks they can’t avoid, she says. “And it hasn’t been working since the early 1980s. 

As is evident from this long post, it is clear that Sarah O’ Connor has achieved the purpose of writing – making readers think or rise to the challenge of thinking! Congratulations and may we read more such stuff from her.

Finally, if we are ready to criticise the newspaper (FT) for all the other stuff it has been peddling for the last several years (including its continued backing for ultra-loose monetary policies that is part of the problems faced by places like Blackpool), we should not hesitate to praise it for publishing pieces like this too.

FT too can and should take a bow! Congratulations.