The Great Rebuilding
Trump should champion a 10-year, $1 trillion program, with much of the money raised by cities and states using Build America Bonds.
By Randall W. Forsyth
Physically, that is, with most bridges in decay, transit systems unable to cope with growing ridership, and roadways with potholes that blow out tires, snarl traffic, and cause productivity-killing delays. And it has become a cliché to describe U.S. airports as “third world,” as Vice President Joe Biden dubbed New York’s wretched LaGuardia Airport, even though facilities in most emerging countries put America’s outmoded and inconvenient airports to shame.
Barron’s offers another option to pay for these much-needed projects: a revival of Build America Bonds, a short-lived program that provided for taxable municipal bonds with a federal subsidy in place of the tax-exempt status of most municipal bonds. BABs were part of the Obama administrations’s 2009 American Recovery and Reinvestment Act, but the program expired at the end of 2010 and wasn’t renewed.
Build America Bonds wouldn’t add directly to Uncle Sam’s debt load and would be a more efficient way to finance much-needed infrastructure programs than traditional tax-exempt municipals. And unlike a big infrastructure-spending scheme, BABs could be added as part of tax-reform legislation, which has become a top priority for the incoming Trump administration. Then states, cities, and public authorities can draw up their own plans to shore up roads, bridges, and waterways without Washington.
Perhaps the public perception of big infrastructure projects was soured by the legacy of Robert Moses, the so-called master builder of the New York metropolitan area from the 1920s all the way through the 1960s.
Though holding no elected office, Moses was able to construct much of the roadways, bridges, and recreational areas in and around the Big Apple. But he gave short shrift to mass transit, and critics contend he destroyed whole neighborhoods, mostly minority, to fulfill his grand building schemes.
Other economists suggest infrastructure could be self-financing or that the economic payback would make borrowing worth it.
In a recent report, Goldman SachsGS in Your Value Your Change Short position economist Daan Struyven notes that estimates of the short-term multiplier effect from infrastructure spending are higher (1.4 times) than other government spending (1.2 times), tax cuts for upper-income earners (0.4 times) and for businesses (0.2 times).
As for where the spending should be targeted, Olivier Blanchard, former chief economist for the International Monetary Fund, writing for the deficit-averse Peterson Institute for International Economics, argues, “Maintenance of existing infrastructure, for example, which has been badly neglected, may be less glamorous and less politically attractive than brand-new projects, but it is where the government is likely to get the best bang for its buck.” Maintenance and useful public projects also may have higher “social returns” but lower financial returns than those funded by public-private partnerships, he adds.
That said, infrastructure investment will pay off more than any other fiscal measures, according to estimates cited by Goldman Sachs. The return should come in greater productivity for the economy as impediments from crumbling infrastructure are reduced. After all, it’s hard to see how self-driving Teslas could cope with the crater-size potholes common in urban thoroughfares.
Those are places for traditional public-sector financing, which is arguably better suited to states, cities, and public agencies. But their traditional mode of financing—tax-exempt municipal bonds—isn’t the ideal method for upward of $1 trillion worth of projects. Quite simply, tax-free bonds appeal only to investors who pay taxes, such as wealthy Americans with taxable accounts, but not those who don’t, such as those with retirement accounts or pension plans, or non-U.S. investors.
THAT’S WHERE BUILD AMERICA BONDS come in. Rather than the backdoor federal subsidy for regular munis (by way of the lower yields from the tax-exempt status for their interest), the federal government paid 35% of the interest on BABs, equal to the corporate-tax rate. Thus, the direct federal subsidy made up for the higher yield versus a tax-free muni. Indeed, a Treasury study found that BABs saved issuers an average of 0.84 percentage point on 30-year bonds compared with traditional tax-free munis.
Equally importantly, BABs wouldn’t add to the burgeoning federal debt as would Treasury borrowing. State and local authorities could choose the infrastructure projects to be funded by bonds, which would either be paid for by revenues such as tolls, or by taxes approved by their state and local representatives, instead of by Washington.
To make America great again, you have to fix its crumbling infrastructure. And make no mistake, that will be expensive. Uncle Sam will probably have to shoulder part of the burden along with private projects backed by tax credits, as has been discussed. But Build America Bonds can help rebuild the U.S. without adding to the excessive federal debt.
Trump’s tax plans favour the rich and will hamper economic growth
The proposals would threaten to increase federal debt and interest rates
by: Lawrence Summers
Unfortunately, what we know of the intentions of the president-elect and congressional leadership suggest that they risk pushing through the most misguided set of tax changes in US history.
A core principle agreed to by all in 1986 was that reform would not reduce the tax burden on high-income taxpayers. Reagan achieved this objective while reducing top marginal rates because he raised capital gains rates, scaled back investment incentives, increased corporate tax collection, curtailed shelters and left estate and gift taxes alone. Unfortunately, neither the Trump plan, nor the one put forward by Paul Ryan, speaker of the House of Representatives, provides for nearly enough base-broadening to finance all the high-end tax cutting they include.
Steven Mnuchin, Treasury secretary-designate, asserts there will be no absolute tax cut for the upper class because deductions would be scaled back. The rub is that totally eliminating all deductions for those with incomes over $1m would not even raise enough revenue to cover reducing their marginal tax rates from 39 to 33 per cent, let alone offset their benefit from huge rate reductions on business and corporate income, and the elimination of estate and gift taxes.
Estimates of the Trump plan suggest that it will raise the average after-tax income of the 0.9 per cent of the population with incomes over $1m by 14 per cent, or more than $215,000. This contrasts with proposed tax cuts for those in the middle of the income distribution of $1,000, or about 2 per cent.
The repeal of estate and gift taxes is especially problematic because it would provide a window for the very rich to use gift and trust structures to ensure that their wealth passes without tax not just to their children but to their grandchildren and great grandchildren, regardless of subsequent legislation.
The Reagan tax reform simplified the code by eliminating the need for rules distinguishing ordinary and capital gains income, because these were taxed at the same rate, and by doing away with industry-specific shelter provisions. In contrast, the Trump proposal creates sheltering opportunities by reducing to 15 per cent the tax rate on any income that can be characterised as coming from an incorporated entity. Rather than reducing targeted subsidies, it would establish a highly dubious 82 per cent credit — the highest in the world — for financial equity investments in infrastructure.
Today’s budget situation is much more worrisome. The baseline involves much higher levels of debt and deficits. Then the economy was suffering from a deep recession; now it approaches full employment. If extreme tax cuts are legislated in the next months, uncertainty about the federal budget and about further tax adjustments is likely to rise. Finally, I can find no basis in either economic history or logic for Mr Mnuchin’s claim that the proposed reforms would increase the economy’s growth rate from its current 2 per cent rate to the historical 3 to 4 per cent norm. Adult population growth has slowed by nearly a percentage point, the gains generated by more women entering the workforce have been exhausted, and it is far from clear why tax reform will hugely spur productivity growth.
Indeed, because the Trump proposal would redistribute after-tax income towards those most likely to save it, push up long-term interest rates because of debt pressures, increase uncertainty and the advantages of overseas production, it is as likely to retard growth as to accelerate it.
In the 1980s, Don Regan, Treasury secretary, said the first Reagan reform proposal was written on a word processor to signal the administration’s openness to negotiation and radical alteration. We should all hope the Trump administration follows Reagan’s approach on both tax policy principles and a commitment to bipartisan negotiation.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary
China's Unfinished Trade Revolution
Measured by its impact on the Chinese economy, which has grown almost tenfold since 2001, accession to the WTO was no less momentous than the epochal changes ushered in by the start of "Reform and Opening" in 1978 or the fiscal and political recentralization that followed the 1989 Tiananmen crisis.
In the scale and speed of changes it wrought on Chinese society and politics, WTO accession was hardly less revolutionary than the Great Leap Forward of 1958-1961 or the Great Proletarian Cultural Revolution of 1966-1976. And in terms of their import for the structure of the global economy, few events in recent memory equal China's entry into the organization. By virtually any indicator, Dec. 11, 2001, was an inflection point not only for China's economy but also for much of the world's. But the anniversary also highlights how Chinese integration into the global economy remains incomplete.
On Sunday, a key provision contained in Article 15 of China's WTO accession protocols will expire.
At issue is what countries must do to make the case that China is subsidizing exports as a way to undercut competition abroad. The provision stipulates that unless producers in China can "clearly show that market conditions prevail" in a given sector, WTO members importing Chinese goods from that sector can use a different methodology for assessing whether to impose anti-dumping measures. Rather than compare Chinese domestic and export prices for a good (the standard procedure for market economies), the provision allows WTO members to compare Chinese prices with rates for the same good in countries with similar levels of development. In practice, this provision makes it much easier to launch anti-dumping investigations in the WTO and to impose protective tariffs on Chinese imports than if China were recognized as a market economy.
The expiration of the provision will leave open the question of how WTO members should now assess under what conditions to impose anti-dumping measures against China. For Beijing, the answer is clear: Because the provision is the only mention in the accession protocols of a procedure for judging Chinese trade practices differently than those of market economies, its expiration should make China, by default, a market economy. Therefore, Beijing argues, WTO members must treat China the same as they would other market economies: by comparing Chinese domestic and export prices. For key industrial goods such as steel, which China produces far more than it consumes and thus exports in large volumes and at low prices, this would make it much more difficult for countries to impose anti-dumping measures on China, at least by WTO regulations. After all, though Chinese steel exporters may undercut their U.S. and European competitors, the prices are not systematically or artificially lower than what they charge at home.
But while the accession protocols nowhere clarify that on Sunday China will not automatically be granted market economy status, neither do they state that other WTO members will be required to regard it as such. And therein lies the rub. Not all WTO members agree with Beijing. The United States and Japan, driven both by domestic protectionism and a rising sense of strategic competition with China, have indicated that they do not yet regard China as a market economy and thus will not use market economy-based measures to judge China's dumping practices. It is unclear whether other major WTO players such as Canada, India and Mexico will follow suit.
Against this backdrop, the question of whether the European Union will grant China market economy status has drawn considerable attention. Initially, an EU decision on China's status was expected by midyear. And with the strong backing of the United Kingdom and the modest support of Germany, the prospects of an affirmative vote looked promising. Brexit upended both expectations. The United Kingdom, which has heavily courted Chinese investment in recent years, was perhaps the strongest EU proponent for granting China market economy status. But with London's negotiating power now substantially diluted, the calls of countries strongly opposed to rendering China a market economy — and thus to loosening controls on imports of Chinese industrial goods — will undoubtedly grow louder.
Italy, home to a long-struggling steel sector, leads the opposition, followed by Spain and much of Southern Europe. Germany, with advanced steel and industrial sectors that are less vulnerable to cheap Chinese imports, is unlikely to actively block an affirmative decision. But whether it has the will or interest to actively champion China's market economy claim at a time of rising protectionism at home, across Europe and globally is another matter. Whatever Europe's decision regarding the extent of China's market orientation, the expiration of the provision will likely require some reformulation of EU laws regarding Chinese dumping practices.
China has threatened to take its case to the WTO for arbitration. In the meantime, Beijing will do what it can to secure an at least partial relaxation of existing tariffs on European imports of China steel and other industrial goods. This endeavor is becoming more urgent given U.S. President-elect Donald Trump's pledge to ramp up U.S. duties on imports of Chinese goods, particularly steel.
Though Beijing will continue its long-running efforts to consolidate its steel and other heavy and construction-related industries in 2017, its overriding imperative to maintain stable economic growth — all the more pointed in light of President Xi Jinping's push to consolidate his power ahead of the 2017 Party Congress — means those efforts will likely bear only limited fruit next year.
Measured in terms of gross domestic product, trade, energy consumption and any number of other economic indicators, WTO accession revolutionized the Chinese economy. But the very fact that Beijing and its WTO counterparts are still haggling over the meaning of Article 15 points to the incompleteness of that revolution. In all likelihood, the provision's vagueness on the matter of China's status reflects the fact that in 2001, neither China's leaders nor those of other WTO members imagined that come Sunday China would not be, clearly and for all to see, a market-driven economy.
One need look no further than its state-dominated financial system to see how China has fallen short.
Former Chinese Premier Zhu Rongji, who drove China's arduous WTO accession process, envisioned membership as a means to force his country out of its cycles of inwardness and irreversibly into the world. In some ways, his vision was quickly realized. In others, it remains a dream deferred.
Precious Metals Market Commentary – December 2016
By Sam Broom
It’s been just shy of a month since our last “post-election” market update and given the recent developments across markets, it seems a pertinent time for an update regarding our thoughts on the precious metals market.
For those after the short version, the take home points are as follows:
Contrary to the pre-election consensus, Trump's victory has been negative for gold, at least in the short term. Since his election on November the 8th, price has declined from a peak of $1,336 to where it’s currently trading at $1,170 – a drop of $166 or 12.5%.
Since the election, gold has been trading in a strong down trend, slicing through key support levels at $1,250 and $1,200 with barely a pause. This is not typical of price action during a “bull market correction”, whereby we should be seeing buying support coming in around key support levels:
In my previous update I noted that we needed to be very cautious of a downside break of $1,200.
Given that this breakdown occurred, I believe investors should take a cautious approach regarding the near term direction in the gold price, as momentum is firmly to the downside at present.
However, there are many conflicting signals, the main one being the performance of the gold and silver mining stocks. Price action in the miners appears to have, momentarily at least, decoupled from the behavior of the underlying metals with which they produce. Take note the current strong, linear down trend outlined in gold chart above (downward red arrows) and compare that to the price action over the same time period in the GDX (upward green arrows) in the chart below:
The miners are currently trading at the same level as they were when gold was $50 higher at the $1,220 level - this is what technicians (chartists) refer to as “bullish divergence” and this can be (but is not always) a leading indicator regarding the price action to come in the near future.
In order to confirm this signal, we need to see a reversal of the downtrend in the gold price, with a break above $1,200 (hopefully with “gusto”) combined with a breakout upwards out of this sideways consolidation pattern we’re experiencing in the miners. This would be seen as a breakout above 22 in the GDX, with an eye to breaking the mid-term downtrend (i.e. the 22 to 23 level). Until we see this kind of confirmation, from a technical standpoint one should remain aware of the possibility that miners may “capitulate” downwards and “catch up” with gold.
Precious Metals - Drivers
In my opinion, there are two key drivers of the gold price right now, both of which have “broken out” post-election; 1) real yields and 2) the strength of the U.S. dollar.
Real yields are best measured using 5 year TIPS, or Treasury Inflation Protected Securities.
Presently, the TIPS yield has the strongest (inverse) correlation to gold of any asset class that I’m aware of. This makes sense given golds primary “competition” as a safe haven store of value is US treasuries, the relative attractiveness of which varies depending on the degree to which inflation destroys it’s yield (it’s main perceived advantage over gold).
The chart below shows this strong inverse correlation between the two assets since the 2008 global financial crisis, with changes in trend almost directly correlating with the changing fortunes in the gold space:
The breakout in the real yields contributed to the smack down in gold through the key support level of $1,250 and it’s continued rise has been a big bearish headwind for the gold price. However, in the very near term (the past 2 weeks), TIPS yields have started to roll over, with no sign of support kicking in, yet (see chart below). If TIPS yields continue to correct, this should provide a positive backdrop for gold to move higher. The opposite is also true and if we see a strong support into a bounce, then this would likely add to further downward pressure in the gold space.
The Dollar - I believe the other major influencer of gold prices is the strength (or otherwise) of the U.S. dollar, best measured by the DXY index. As with real yields, the DXY recently broke out of its 18 month consolidation pattern when it moved above strong resistance at 100.5:
Increasing the resolution and looking at shorter (daily) timeframes, we can see that, unlike with real yields, the DXY has bounced strongly following a little pause and looks like it will test the recent high – a breakout to new highs looks likely (generally bearish for gold):
The reasons for the breakout are many, and deserve a discussion all on its own, but needless to say there are plenty of macro reasons to suggest the dollar may trend higher for some time.
Hedging Options for a Gold Portfolio
With uncertainty in the precious metals markets, it may be a good time to consider hedging a gold portfolio against further downside that may eventuate. Whilst we can’t discuss specifics here, with the dollar looking strong, some see the best bet being the currency market, i.e. shorting the major constituents of the Dollar index.
To sum things up, there are a host of conflicting forces acting on the gold market right now, making forward looking predictions extremely difficult. On the one hand, momentum in the gold price itself is firmly to the downside and we’ve yet to see any buying support during this selloff that followed Trump’s election. However, gold remains extremely oversold and mining stocks (often forward looking) have diverged in a bullish manner, giving hints that we may be nearing a bottom in this correction. In order for that signal to be confirmed, we need to see a convincing break for gold above $1,200, and a move above 22 to 23 in the GDX.
As far as the factors driving gold are concerned, we are again seeing conflicting patterns.
Both real yields and the dollar both broke out to the upside following Trump’s election, a negative “double whammy” for the gold price. However, since breaking out, TIPS yields (arguably the most important influence) have looked weak in the very short term (bullish for gold). If these continue to move down, this should provide strong bullish tailwinds for the gold price. On the flip side, the DXY has looked much stronger, correcting only slightly before rebounding over the past few days.
Whilst we think real yields are likely to impact gold the most over the mid to long term, a rising dollar would likely provide negative headwinds for the gold price. If real yields and the dollar continue to move in opposite directions, we are likely to see a fascinating case of “tug of war” on the gold price.
With the Fed rate decision to hike today, Wednesday (14th of December) – we are likely to see some big swings in price immediately following this decision, and the price direction in the immediate aftermath. Price action following the decision may confirm the short to mid-term direction.
A New Wave of Popular Fury Could Hit Europe in 2017
By ALISSA J. RUBIN
European Populism in the Age of Donald Trump
Credit Ben Stansall/Agence France-Presse — Getty Images
Credit Jean-Philippe Chognot/Agence France-Presse — Getty Images
Photo: Getty Images
The Promise and Peril of the Trump Trade
Long-term interest rates have risen sharply on his pledge to bolster the economy—but can he deliver?
By Justin Lahart
Markets are predicting that President-elect Donald Trump will be able to juice the economy soon after he gets in office. That is putting extra pressure on him to succeed quickly before higher rates quash any economic liftoff.
Since the election, investors have embraced a view that the spending and tax-cut package Mr. Trump is promising will both boost growth and fan inflation. That has been good for stocks, but very bad for bonds, which have sold off sharply. The yield on the 10-year Treasury note is approaching 2.5%.
Data Tuesday about rising labor costs coupled with last week’s 4.6% unemployment rate mean inflation, and yields, could rise further.
Rising interest rates change the longstanding dynamic in the economy and markets. The higher yields go, the more costly it becomes for companies and households to borrow. The higher yields go, the stronger the dollar is likely to become, widening the trade deficit and weighing on the economy. And the higher yields go, the more attractive bonds become relative to stocks.
If growth is accelerating, higher rates won’t matter to investors and businesses eager to cash in on the stronger economy. But if the Trump trade, which has already driven up 10-year Treasury yields by nearly a full percentage point, proves a mistake, or even just premature, higher rates and everything that comes with them could actually slow growth.
A simulation that forecasting firm Macroeconomic Advisers ran for The Wall Street Journal shows what happens if Treasury yields rise further, not because of an improving economy but because investors believe, based on an incorrect growth forecast or for whatever reason, that the Federal Reserve will raise rates more aggressively. The firm’s econometric model, which incorporates hundreds of variables, is widely used on Wall Street and elsewhere to test economic scenarios.
The starting point assumes that growth doesn’t pick up and current trends persist, with economic growth averaging about 2%, around where it is now, the unemployment rate keeps drifting lower, inflation firms and the Fed gradually raises rates.
If 10-year Treasury yields rise by another half-a-percentage point, then the simulation predicts that annual economic growth by the first quarter of 2018 would fall to just 0.9%. That would push up unemployment, keep inflation lower than the Fed’s target and force the central bank to reverse course and lower rates.
If yields rise a full percentage point, the outlook is so bad under this simulation that the Fed cuts rates down to zero.
But if the Trump trade turns out to be right and the economy picks up, then the simulations show that yields could rise much further without hurting growth.
Borrowing costs would go up, but so would the ability of companies and households to pay their debts, as sales and incomes rise. Companies that spent years selling long-term debt at low rates would benefit. The dollar might rise further, as overseas investors moved to take advantage of Treasurys’ higher returns. That would worsen the trade deficit, weighing on growth, as well as crimping the profits U.S. multinationals generate overseas. But that could be more than offset by a stronger domestic economy.
Mr. Trump has made a lot of big promises. If he fails to deliver quickly on the economy, his biggest promise might be a bust.
The Kremlin and the US Election
Joseph S. Nye
CAMBRIDGE – In early November, US President Barack Obama reportedly contacted Russian President Vladimir Putin personally to warn against cyber attacks aimed at the American presidential election. The previous month, the Director of National Intelligence, James Clapper, and Jeh Johnson, the Secretary of Homeland Security, publicly accused Russia’s most senior officials of using cyber attacks to “interfere with the US election process.”
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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