EconVue Spotlight - History is Back

I normally feel after reading, reviewing, and discussing the events of the previous week that I’m able to discern a direction or constructive theme.  Today however, every corner of the world seems mired in some degree of turmoil, and markets are reacting. There is so much noise that it is difficult to decide what is causing this new volatility. Is it China, the Fed, the Mueller investigation, Yellow Jackets, or technology run amuck?

All asset classes--from the newest, such as cryptocurrencies, to the oldest, including real property, are being affected in sometimes non-intuitive ways. Last January, at Michael Lewis’s annual forecast luncheon here in Chicago, I correctly forecast increased turmoil in the Middle East.  On that basis, I incorrectly predicted year-end 2018 oil higher at $72. 

In fact, prices have gone the other way.  Just like everything else, oil is a global game now and US producers matter.  For the first time in history, this month the US became a net exporter of oil. EconVue expert Karim Pakravan analyzes the geopolitical causes of the energy market rout in his excellent report below.

Economists everywhere are reevaluating. Instead of the “it’s the economy stupid” era that President Clinton kicked off with his defeat of George H.W. Bush, this time politics is roiling economics. I was struck by this quote from Council on Foreign Relations president Richard Haass:

In an instant Europe has gone from being the most stable region in the world to anything but.  Paris is burning, the Merkel era is ending, Italy is playing a dangerous game of chicken with the EU, Russia is carving up Ukraine, and the UK is consumed by Brexit. History is resuming.

History is indeed back, and synchronized global growth is switching gears to beneath-trend growth, as British economist Timothy Congdon writes in his report below.  He also sees Europe as the center of concern, in spite of the high-level pyrotechnics of the US-China relationship.

At the Council on Foreign Relations last week, I attended a meeting that featured former central bankers Raghuram Rajan, Jacob Frenkel, Tharman Shanmugaratnam and Jean-Claude Trichet, who have just issued a report  to the G20 about persistent weaknesses and needed reforms to the global financial system.  They are concerned about inadequate coordination between financial players post-2008, and the possibility that only another crisis could bring needed change.

One factor this eminent group however failed to highlight is the role of technology.  The Inequality Paradox by Douglas McWilliams of Cebr is a new book about the root causes of the current malaise. He says that inequality is not just caused by the rich per Piketty, but by technology and globalization,  even as global poverty levels have fallen. Technology has created concentrated wealth in new places and globalization has created lopsided benefits with unexpected political consequences.

At Mike Lewis’s next luncheon, I am going to be much less certain about my predictions. Back to China, I can say with certainty that the world’s two most powerful leaders, Donald Trump and Xi Jinping, will face challenges not just from their political rivals, but from jittery economies. And that central bankers are just as flummoxed as we are. 

RESEARCH BY ECONVUE EXPERTS

The Oil Market Rout
Karim Pakravan 

The rout in oil markets continued in November, the markets worst month in 10 years. While a softening of demand (in particular from China) has been a factor, the main issues have been geo-political. 

Beneath-Trend Growth for World Economy in Early 2019
Tim Congdon 

Forecasts for 2019 are now coalescing. The typical view is that the first half of the year will be more difficult for the world economy than 2017 and 2018, with beneath-trend growth likely. As has been anticipated in these notes for some time, the Eurozone is the focus of concern. 

Data Round Up: November Jobs, Wage Gains Will Cement Fed's December Rate Hike Decision
Michael Lewis 

A mixed bag: payroll job gains slightly below trend, unemployment stable, but wages continue to trend up. This is more than enough to cement the Fed’s decision to hike rates again at their meeting in two weeks.

Taiwan’s Struggle for Partners and Survival
R. Evan Ellis 

Dr. Ellis' report on his recent trip to Taiwan where he had the chance to interact with academics, officials, and students regarding Taiwan’s relationships in Latin America and the Caribbean and its associated struggle for diplomatic and existential survival.

Whither the Dollar-The Chinese Challenge
Karim Pakravan 

Is the dollar’s position as the preeminent global vehicle currency under attack? Does the rise of China as a global power threaten the dollar’s position? Would a normalization of the dollar’s global position be beneficial to the global economy, including the United State?  These are some of the questions that have become more relevant, especially since a number of analysts and academic economists have argued that the indiscriminate application of sanctions, tariffs and other punitive actions by the Trump administration have roiled the global financial system and opened the door for a search for alternatives for the dollar. 

The Future of Latin America and the Caribbean in the Context of the Rise of China
R.. Evan Ellis

This report examines, in detail, how the growth of China, with its power and role in the global economy, is likely to transform Latin America and the Caribbean through economic, political, and other forms of engagement with the region. 

Cautiously optimistic on the upcoming G20 Xi-Trump meeting
Xi Sun 

Has the “new Cold War” between the People’s Republic of China and the United States of America began? Pessimists argue that the tough speech on China made by US Vice-President Mike Pence at the Hudson Institute on October 4, 2018 was the dangerous sign.

STORIES IN OUR SPOTLIGHT

Global

Internet giants pose existential threat to banks: BIS chief
Marc Jones 12/4/2018 Reuters

Internet and ‘big data’ giants like Amazon and China’s Alibaba pose an existential threat to traditional banks, said the head of the Bank for International Settlements, Agustín Carstens.

Taking the Pulse of Dr. Copper for 2019
Erik Norland 11/29/2018 CME Group

Copper prices are often said to reflect the health of the global economy because of the metal’s use in every major facet of industry, hence the moniker “Dr. Copper.”  Here’s a look at copper’s demand-and-supply conditions as we enter the last year of the decade.

Can the euro rival the dollar ?
Adam Tooze, Christian Odendahl 12/4/2018 Centre for European Reform

The international role of the US dollar is deeply entrenched. To change that, Europe – and Germany in particular – would need to rethink some core economic policies. 

The UNCTAD Handbook of Statistics 2018 
United Nations 12/2018

The bible of global trade statistics.

The failed governance in Venezuela has spawned a mass exodus of 3 M people to neighboring countries
Laurie Garrett 12/5/2018 Twitter

This is frightening. Risk of disease associated with people fleeing from Venezuela who have not been vaccinated could have global consequences. Who will act?

MiFID II has shrunk fixed income research market, research indicates
Susanna Rust 11/26/2018 IPE

Unintended consequences of E.U. legislation: MiFID II has shrunk fixed income research market, research indicates

Fed

Does the Yield Curve Really Forecast Recession?
David Andolfatto and Andrew Spewak 11/30/2018 Federal Reserve Bank of St. Louis

With so many treasuries owned by foreigners do yields purely reflect the US economy?

The Case for Pausing the Interest-Rate Climb
Jason Furman 11/27/2018 Wall Street Journal

Support for a Fed pause is non-partisan.

Grim Stock Signals Piling Up as Wall Street Mulls Recession Odds
Elena Popina and Vildana Hajric 11/25/2018 Bloomberg

Which means the Fed can’t predict recessions either.

Ominous omen? A look at how Fed tightening episodes usually end
11/25/2018 Financial Times

Everyone is blaming trade for the market slump, but it is the end of the Fed's CARRY TRADE via low interest rates that is actually to blame.
Christopher Whalen 12/5/2018 Twitter

I completely agree. But is it also worries about the new Congress and Friday’s unemployment figures and Brexit and oil prices and the strong$ and EM debt and robotrading and a world of other uncertainties?

U.S.

Housing Can’t Be Both Affordable and a Good Investment
Daniel Hertz 11/19/2018 City Lab

At the height of a cycle it is neither. At the bottom of a cycle it is both.

Ten Best and Worst Metro Areas to Be a First Time Homebuyer
12/2018 AEI

A new study ranks the affordability of 50 metropolitan regions in the US for first-time homebuyers by using the ratio of home prices to incomes, with Pittsburgh being the most affordable and San Jose the least.

The economy is booming, but Americans still aren't moving
Stef W. Kight 12/2/2018 Axios

Millennials, scarred by witnessing the housing crisis, just aren’t buying homes or moving far from their parents.

The Recent Rise in Health Care Inflation
Diane Alexander 12/2018 Federal Reserve Bank of Chicago

This title is misleading. It is actually about the relative lack of price increases on a historical basis.

Daniel Schneider and Kristen Harknett: Consequences of Routine Work Schedule Instability for Worker Health and Wellbeing
Brad DeLong 12/2/2018 Bradford DeLong Blog

Precarity in work schedules matters more to health and happiness than slightly higher wages. The divide between salaried and unsalaried workers is usually unseen by economists and others who themselves are the beneficiaries of paid stable employment.

Has bail reform been a success? Check the crime numbers, then decide 
Star-Ledger Editorial Board 12/4/2018 nj.com

Counterintuitive way to lower crime rates: drop cash requirements for bail.

Insuring Against Drop in Chinese Students
Ellie Bothwell 11/29/2018 Inside Higher Education

Pretty amazing use of insurance, and a measure of the dependence of US universities-even public institutions-on Chinese student enrollment.

China

Huawei CFO arrested, expect trade talks to continue as US-China tech strains intensify
Bill Bishop 12/6/2018 Sinocism (unlocked subscriber content, click on "let me read it first")

Today Larry Kudlow said that President Trump was unaware of the Huawei arrest at the time of his meeting with Xi Jinping in Argentina.

Trade agreements and communist party committees with Christopher Balding
China Tech Investor 12/6/2018 Podcast

Hosts Elliott Zaagman and James Hull debate the G20, how Trump likes his steak, party committees, and look at the cash burn at four watchlist companies. They are also discuss the Trump-Xi G20 meeting and party committees in Chinese companies.

One Belt, One Road, One Big Mistake
Tanner Greer 12/6/2018 Foreign Policy

Trump Says China Will Curtail Fentanyl. The U.S. Has Heard That Before.
Sui-Lee Wee 12/3/2018 New York Times

China vows to stem the supply of the powerful opioid fentanyl flowing into the United States. It pledges to target exports of fentanyl-related substances bound for the United States that are prohibited there, while sharing information with American law-enforcement authorities.

ING is forecasting 9-10 trillion in stimulus in 2019-2020. I'll just say: I've seen Chinese banks use bigger numbers
@BaldingsWord 11/29/2018 Twitter

That’s 9-10 trillion CNY not USD but still a big number. China stimulus program will mostly be infrastructure projects. I agree- this is a major climate story. Growth without regards to longer term costs.

China's young tech giants behind explosion in country's R&D
Jada Nagumo 11/26/2018 Nikkei Asian Review

Chinese R&D rising quickly, Japan led by carmakers. Amazon tops the list with $20B in annual R&D. ⁦

FinTech

Brave New World That Hath Such Risks in It: Giant Tech Firms and Systemic Danger
Karen Petrou 11/28/2018 Federal Financial Analytics 

FedFin's managing partner Karen Petrou advised clients about emerging risk in the “big tech” sector and what global central bankers think must be done about it.   This will be a big focus of our 2019 analytics given how quickly the market is changing and the risks that come with it.

Unpacking Bitcoin’s Social Contract: A Skeptic’s Guide to Bitcoin
Hasu 12/3/2018 Medium

Part of the reason cryptocurrencies are so difficult to grasp is that they are equal parts reward/money, technology and social contract. The social contract is what is most often omitted from discussions. Useful piece.

Workshop on digital currency economics and policy
Asian Bureau of Finance and Economic Research 12/2018

Browsing thru these presentations my take is that economists & central bankers underweight technology. Flight was impossible-before technology made it possible. Centralization was the only choice before decentralized tech-which they don’t understand.

The Trade Of The Decade: Betting On Bitcoin
Katina Stefanova 11/28/2018 Forbes

In a highly leveraged world, is Bitcoin’s key advantage that it can’t be leveraged? Arguments for including cryptocurrencies in investor portfolios. 

Illinois

Even pension loopholes are protected? Then amend the Illinois Constitution
Chicago Tribume 12/5/2018

Only in Illinois could someone retire from a $56,000 job with a $158,000 pension and have the high Court deem it a constitutional right. Amend the Constitution.@StatehouseChick

Repeal Day: Illinois' sobbering alcohol taxes, regulations, a reminder of prohibition
Vincent Caruso 12/5/2018 Illinois Policy

With the ratification of the 21st Amendment, 1933 marked the end of Prohibition in the United States. The Land of Lincoln, however, has continued to serve a cocktail of prohibitive regulations on alcoholic beverages.

The Day They Came for the Governor
Daniel Cain and Patrick Murphy 12/6/2018 Chicago Magazine

Ten years ago this month, Rod Blagojevich was arrested in one of the state’s most famous corruption cases. Now, for the first time, the two lead FBI investigators tell the inside story.