Bill Gross: Happiness Runs

by: Janus Capital
Happiness is wanting what you have
And not wanting what you don't have. 
- Shakyamuni Buddha, 500 B.C.  

The three grand essentials of happiness are: something
To do, someone to love, and something to hope for.
 
- Alexander Chalmers 

Happiness runs in a circular motion...
Happiness runs, happiness runs.
 
- Donovan, 1968

Bill Gross January 2017 - Echoes from Africa I think a lot about happiness - what makes a person happy, whether or not happiness should even be a life's priority - things like that. A good high school friend stunned me at the early age of 17 by suggesting we should not necessarily try to be happy. Sacrifice, service, devotion to a cause were higher orders, he felt, although presumably, since those were choices, their pursuit could secondarily lead to happiness.
 
Through the years I've accumulated a short list of quotes that express a personal view of what makes people happy.
 
You, I'm sure, have your own candidates, but most of them probably resemble some of the ones listed above: Stay busy doing something you enjoy; be mindful of other people and the world in, around, and above you; don't let your reach exceed your grasp; find someone to share your happiness with. My favorite of all of these is the one above by Donovan - that somewhat kooky "love generation" folk singer of the late 1960s. "Happiness runs in a circular motion...happiness runs, happiness runs."
 
There may be more to this refrain, however, than appears at first glance, the entirety of which I've tried to encapsulate artistically in my open-ended smiley face that wasn't ever-popular when Donovan crooned the tune. For years I thought that the gist of Donovan's phrase was the obvious - the "pay it forward" allusion that suggests what goes around, comes around - and it undoubtedly is. But there are hidden nuances, at least to me.
The "running in a circular motion" also connotes a self-contained, inward-looking, self-satisfaction that equates happiness to being content with yourself as a person. And the last phrase - "happiness runs, happiness runs" may speak to the Buddhist philosophy of impermanence and the priority of the moment. Donovan might not rank up there with Kant and Spinoza, but his little song packs a powerful message. Rock on, flower child, wherever you are.
 
And while happiness may run in a circular motion, it seems history may too - or at least it may rhyme, as Mark Twain once said. Pictured below are two of my notes written not recently, but in 2003. They are as relevant today as they were then. "Financial repression" runs...in a circular motion, it seems. In 2003, though, central bankers had rarely contemplated the monetary policy instruments that could lower and then artificially cap interest rates. Although my notes correctly allude to "all means including 'ceilings' " to keep the cost of financing low, the expansion of central bank balance sheets from perhaps $2 trillion in 2003 to a now gargantuan $12 trillion at the end of 2016 is remarkable.
 
Not only did central banks buy $10 trillion of bonds, but they lowered policy rates to near 0% and in some cases, negative yields. All of this took place to save our "finance-based economy" and to raise asset prices upon which that model depends. As any investor would admit, these now ongoing policy panaceas have done just that - promoted higher asset prices and engendered a modicum of real growth.
 
In the process however, as I have frequently written, capitalism has been distorted: savings/investment has been discouraged by yields/returns too low to replicate historic productivity gains; zombie corporations have been kept alive in contrast to Schumpeter's "creative destruction"; debt has continued to rise relative to GDP; the financial system has not been cleansed and restored to a balance where risk and reward are on a level plane; disequilibrium has replaced equilibrium, although it is difficult to recognize this economic phantom as long as volatility is contained.
 
 
 
But in order to control volatility, and keep a floor under asset prices, central bankers may be trapped in a QE-forever cycle, (in order to keep the global system functioning). Withdrawal of stimulus, as has happened with the Fed in the past few years, seemingly must be replaced by an increased flow of asset purchases (bonds and stocks) from other central banks, as shown in Chart I.
 
A client asked me recently when the Fed or other central banks would ever be able to sell their assets back into the market. My answer was "NEVER". A $12 trillion global central bank balance sheet is PERMANENT - and growing at over $1 trillion a year, thanks to the ECB and the BOJ.
 

Central Bank Balance Sheet (US$)

Chart: Central Bank Balance Sheet (US$)
Source: Bank of England website "Following Bank of England money market reform on 18 May 2006 theBank of England 'Bank Return' was changed. This series forms part of the new Bank Return, with datastarting on 24 May 2006."
 
 
An investor must know that it is this money that now keeps the system functioning. Without it, even 0% policy rates are like methadone - cancelling the craving but not overcoming the addiction. The relevant point of all this for today's financial markets? A 2.45%, 10-year U.S. Treasury rests at 2.45% because the ECB and BOJ are buying $150 billion a month of their own bonds and much of that money then flows from 10 basis points JGB's and 45 basis point Bunds into 2.45% U.S. Treasuries.
Without that financial methadone, both bond and stock markets worldwide would sink and produce a tantrum of significant proportions. I would venture a guess that without QE from the ECB and BOJ that 10-year U.S. Treasuries would rather quickly rise to 3.5% and the U.S. economy would sink into recession.
 
So what's wrong with financial methadone? What's wrong with a continuing program of QEs or even a rejuvenated U.S. QE if needed? Well conceptually at first blush, not much. The interest earned on the $12 trillion is already being flushed from central banks back to government fiscal authorities. One hand is paying the other. But the transfer in essence means that monetary and fiscal policies have joined hands and that the government, not the private sector, is financing its own spending.
 
At an expanding margin, this allows the private sector to finance its own spending and fails to discriminate between risk and reward. $600 billion in the U.S. for instance goes into the repurchase of company stock, whereas before, investment in the real economy might have been a more lucrative choice. In addition, individual savers, pension funds, and insurance companies are now robbed of the ability to earn rates of return necessary to maintain long-term solvency.
 
Financial Armageddon is postponed as consumption is brought forward and savings suppressed and deferred.
 
For now, investors must go with, indeed embrace this financial methadone QE fix. Quantitative easing will continue even though the dose may be reduced in future years. But while a methadone habit is far better than a heroin fix, it has created and will continue to create an unhealthy capitalistic equilibrium that one day must be reckoned with. Yields will likely gradually rise (watch 2.60% on the 10-year Treasury), yet they will stay artificially low due to the kindness of foreign central bank quantitative easing policies. But that is not a good thing.
 
Happiness runs...Happiness runs, and so one day, will asset markets, artificially supported by quantitative easing.


Germany Buys Time From China

The news that China has become Germany's largest trading partner merits a closer look.

By Jacob L. Shapiro


Germany’s economy has avoided the problems besetting most export-dependent countries in the last two years. In 2015, Germany accomplished this by compensating for decreased demand from China by substantially increasing its exports to the United States and the United Kingdom. In 2016, the situation was reversed. Exports to China increased while exports to the U.S. and the U.K. declined significantly. The most important geopolitical question in Europe this year is whether Germany can stave off a decline in its exports for a third consecutive year. Geopolitical Futures has forecast that German exports will fall in 2017, and the most recent trade data released by the Federal Statistical Office (Destatis) both supports and challenges the thought process behind that forecast. 
   

To understand the significance of the change in German trade patterns, it is necessary to go back a few years. 2015 was the first time in 54 years that a country other than France was the top destination for German exports. German exports to the U.S. increased by 18.7 percent in 2015, or approximately 18 billion euros ($19.4 billion). For the year, German exports to the U.S. represented 9.5 percent of total German exports. Meanwhile, German exports to the U.K., the third largest destination for German goods, enjoyed a similarly meteoric rise. German exports to the U.K. increased by 12.8 percent in 2015, approximately 10.1 billion euros. For the year, 7.5 percent of total German exports went to the U.K.
Germany VW exportsA Volkswagen Passat and Golf 7 car are stored in a tower at the Volkswagen Autostadt complex near the Volkswagen factory in March 2015 in Wolfsburg, Germany. In 2015, Germany increased its total exports to the United States and the United Kingdom to compensate for decreased demand in China. Alexander Koerner/Getty Images
 
The growth in German exports to the U.S. and the U.K. represented just under 40 percent of the total growth in value of German exports in 2015. This was important because Germany saw major declines in exports to two important trading partners in 2015: China and Russia. The decline in exports to China was somewhat modest, with a drop of 4.2 percent, or about 3.2 billion euros. The decline in exports to Russia was more stark, declining 25.5 percent from the previous year, or roughly 7.4 billion euros. The increase in exports to the U.S. and the U.K. absorbed the blow of the unexpected (to German companies) decline in demand from China and Russia.

The problem for Germany was not necessarily the absolute figures themselves. Even without the growth in exports to the U.K. and the U.S., German exports increased enough to cover the loss. This was due primarily to demand from other European countries. The deeper problem was that China and Russia were both important markets that German companies had bet would increase demand for German products. Exports to China had been steadily increasing since 2001, with a slight hiccup in 2012. Before the 2014 revolution in Ukraine and the 2015 drop in oil prices, Russia was considered one of the top potential growth markets for German products. Exports to the U.K. and the U.S. stabilized the situation, but a serious question remained: Could Germany depend on exporting to the U.S. and the U.K. at similar levels for a sustained period?

The most recent available data from Destatis covers January to November 2016, but even so, it provides a clear answer to that question: The 2015 level of U.S. and U.K. imports of German goods was unsustainable. German exports to the U.K. declined by 3.1 percent in the first 11 months of 2016; German exports to the U.S. declined by double that figure, or 6.2 percent. Germany saw exports in the first 11 months of 2015 increase by an impressive 6.5 percent. In January to November 2016, growth in German exports was just 0.8 percent. There is one significant bright spot for Germany in the data. German exports to China rebounded in 2016, increasing by 3.6 billion euros, or 5.5 percent year-on-year.

This development recently has been trumpeted as a “changing of the guard” in both the German and Chinese press. Deutsche Presse-Agentur reported that the chief economist for the Association of German Chambers of Commerce and Industry said on Jan. 27 that China had become Germany’s top trading partner. The story was subsequently picked up by the People’s Daily, and both stories made a point of emphasizing that the U.S. had fallen to Germany’s third largest trading partner. Both stories buried the fact that even with a 6.2 percent decline, the U.S. remains the largest destination for German exports. German exports to the U.S. in 2016 were worth 66.9 billion euros more than German exports to China. Considering that 46.8 percent of Germany’s GDP comes from exports, the importance of the U.S. to Germany’s export machine should not be underestimated.

The rise in Chinese demand for German exports is slightly surprising considering that Chinese imports have been decreasing steadily since 2011 and that Chinese imports of German goods declined in 2015. This decline was in part due to the decline in global commodities prices. The volume of Chinese imports increased even as prices fell from 2011-2014. This, however, began to change in 2015. A study published last May by the International Monetary Fund (IMF) noted that the volume of Chinese imports decreased by 0.7 percent in 2015, and that both commodity and non-commodity items contributed to this decline. The latter category is the important one from the German perspective: The bulk of German exports to China are not raw materials like iron ore but finished products like cars and various machinery. Non-commodity imports declined by 8 percent in 2015, 35 percent of which was attributed to a fall in imports of the types of products Germany exports.

The IMF’s conclusion also fits with the decline in German exports to China in 2015. The most recent data available from China’s General Administration of Customs showed that Chinese import growth in 2016 fell by 5.5 percent in terms of value. It was not just Chinese imports that fell, however. Chinese exports also decreased by 7.7 percent year-on-year. This is important because a significant portion of Chinese imports are not meant for Chinese consumption. They are parts that are used in goods that China assembles and then exports. Whether it is demand for the raw materials or parts involved in production, or just the financial health of the state-owned enterprises involved in exports, a decline in Chinese exports puts further pressure on Chinese imports. This in turn is bad news for a country like Germany hoping to increase exports to China.

The other thing to keep in mind is that China relied once again on stimulus to meet its GDP growth targets for the year in 2016. The stock market collapse at the beginning of 2016 and the subsequent crisis in confidence necessitated significant stimulus from Beijing, but those monetary polices continued throughout the entire year, long after the stock market stabilized. China did take steps last year toward cutting oversupply in some of the most pressured sectors in the country, particularly coal and steel. Even so, China continued to pump money into the system, prioritizing growth over efficiency.
Much of this economic growth was dependent on construction or investment in the real estate market, which has resulted in fears of a potential bubble in the housing market that China is now actively seeking to rein in. Meanwhile, corporate debt in China has increased to 169 percent of China’s GDP, according to the Bank of International Settlements, and the specter of non-performing loans is casting a long shadow once more on China’s books.

The high levels of debt in China’s system because of unending stimulus already make the Chinese economy unstable. On top of this, the U.S. is getting tough on China and holds many of the cards in the economic relationship. China will likely have to make concessions to the U.S. that will be less than beneficial for China’s economy. Herein lies somewhat of a silver lining for Germany. Every year China is concerned about maintaining political stability, but in 2017, the need for political stability is going to be particularly acute. Chinese President Xi Jinping will aim to solidify his control over the government for at least the next five years at this fall’s Communist Party of China Congress, and to do that he needs to avoid domestic unrest. That means more stimulus and more maintenance of growth numbers no matter the cost. That in turn should continue to prop up Chinese imports, which is what Germany needs from China.

The problems, however, are greater than the silver lining. China’s solutions are ultimately stopgaps, and steady Chinese demand for German goods is unreliable at best. There are limits to how much Germany can increase its exports to the U.S. and the U.K. 2015 demonstrated that this was possible in the short term, but it is also a stopgap. German trade data also emphasize just how dependent Germany is on the rest of Europe. If not for the 2 percent rise in exports to European countries in January to November 2016, German exports would have declined last year. Considering Europe’s sluggish growth and regional inequalities, the fact that 23 of 31 European countries (as defined by German statistics) increased imports of German goods is impressive. Germany needs those European imports, and it needs the EU. This is a reality that must be kept in mind as the drama over the U.K.’s withdrawal from the EU soaks up more headlines in coming months.

It remains to be seen if GPF’s forecast on German exports comes to fruition, but whatever the precise figure of export change ends up being is ultimately less important than understanding this key German weakness. The news that China has become Germany’s largest trading partner should be read as nothing more than a story about the precarious economic situation in which Germany finds itself.



Swiss prepare to vote on corporate tax unification

Reforms to sweep away attractive deals for multinationals head for referéndum

by: Ralph Atkins in Geneva

It is not only Geneva’s lakeside setting that multinational companies find idyllic.
Switzerland has a long history of offering preferential fiscal terms to international investors, and low tax rates have helped to attract companies such as Caterpillar and Japan Tobacco.

But the country faces a huge challenge if it wants to retain those companies. Under international pressure, voters are being asked in a national referendum next Sunday to approve reforms that would sweep away selective tax deals and introduce unified low rates for all companies.
The vote is on a knife-edge. Supporters of reform say Switzerland cannot afford to be so generous. But rejection could prompt other countries to retaliate for the continued tax breaks, creating economic uncertainty and instability.

“It is very important for Geneva,” says Serge Dal Busco, the canton’s finance minister, who backs the reforms. “Some 62,000 jobs in the canton rely directly or indirectly on multinationals.

If they don’t have a favourable tax environment, we could lose at least some of those jobs.”

Switzerland, one of the most affluent countries, has had to rethink its economic model during the past decade. US-led legal action against banks that helped overseas clients to evade taxes has led to greater transparency in the financial system.

Threats of retaliatory action by trading partners led Bern to agree to corporate tax norms set by the EU, with which it has vital business links, and the Paris-based OECD.

“The Swiss government had to recognise that instruments which worked well for many years could no longer be used,” says Peter Uebelhart, head of tax at KPMG Switzerland.



The reputation for being attractive to business started after the second world war. Switzerland gave international companies special status, with cantons competing to offer the best tax breaks.

Multinationals with “auxiliary status” in Geneva pay an average corporate tax rate of 11.6 per cent, compared with the 24.16 per cent for ordinary businesses, one of the highest rates in Switzerland.

Under the proposed reforms international and domestic companies would pay the same rates. Rather than multinationals paying significantly more, cantons would slash standard corporate tax rates.

Geneva’s main corporate tax rate would almost halve to 13.49 per cent.

Business wants the referendum to pass. “Keeping the jobs, keeping the companies — that is what is at stake,” says Blaise Matthey, director-general of the Federation of Romandy Business, which represents companies in the French-speaking part of Switzerland, including Geneva.
 
“We are rethinking our economic model and it is changing quite rapidly. People complain but there is no choice. If you don’t abide by international standards, you get put on a blacklist.”

Although the federal government has promised to help the cantons to bridge any revenue shortfalls from the unified lower rate, the implications for local budgets alarm opponents.

“The reforms will cost much more than the [federal] parliament thinks,” says Sandrine Salerno, Social Democratic finance director in the Geneva city government. “For sure the level of tax is important for companies, but it is not the only reason why they come to Geneva and Switzerland. They also come because of the good quality infrastructure — the schools and safety, for instance.”

Fuelling voter suspicion is the complexity of the reforms, which opponents argue will line the pockets of tax advisers and lawyers. The new system would introduce an internationally approved “tool box” of tax relief measures that cantons could offer companies. These would include incentives for research and development, relief for income from patents and tax breaks on shareholders’ equity.

Supporters of the reforms point out that while multinationals will face slightly higher rates, for ordinary companies tax bills will be much lower. That could stimulate investment and job creation, which in time would boost cantons’ coffers, though the impact is hard to predict.

Geneva scores highly for its qualified workforce and transport connections, says Jan Schüpbach, economist at Credit Suisse. The tax reforms would remove “its main disadvantage — a relatively high corporate rate”.

Opponents say the package could easily be made more acceptable. “Everyone agrees on the main principle that all companies should pay the same tax rates,” says Ms Salerno.

But those who worked on the proposals say they took years to negotiate and finally balance Switzerland’s attractiveness as a business location with international requirements and pressures on public finances. “This is the best possible package you could have within the limits,” says Mr Uebelhart.

Mr Matthey says: “Multinationals want a stable tax framework, they want a solution that is agreed with the EU . . . If we can’t do this, they will leave, because you can’t do business in an unstable environment.”


Why Millennials Will Reject Trump

Jeffrey D. Sachs
. San Francisco airport muslim protest



NEW YORK – The key political divide in the United States is not between parties or states; it is between generations. The millennial generation (those aged 18-35) voted heavily against Donald Trump and will form the backbone of resistance to his policies. Older Americans are divided, but Trump’s base lies among those above the age of 45. On issue after issue, younger voters will reject Trump, viewing him as a politician of the past, not the future.
 
Of course, these are averages, not absolutes. Yet the numbers confirm the generational divide.

According to exit polls, Trump received 53% of the votes of those 45 and older, 42% of those 30-44, and just 37% of voters 18-29. In a 2014 survey, 31% of millennials identified as liberals, compared with 21% of baby boomers (aged 50-68 in the survey) and only 18% of the silent generation (69 and above).
 
The point is not that today’s young liberals will become tomorrow’s older conservatives. The millennial generation is far more liberal than the baby boomers and silent generation were in their younger years. They are also decidedly less partisan, and will support politicians who address their values and needs, including third-party aspirants.
 
There are at least three big differences in the politics of the young and old. First, the young are more socially liberal than the older generations. For them, America’s growing racial, religious, and sexual plurality is no big deal. A diverse society of whites, African-Americans, Hispanics, and Asians, and of the native-born and immigrants, is the country they’ve always known, not some dramatic change from the past. They accept sexual and gender categories – lesbian, gay, trans, bi, inter, pan, and others – that were essentially taboo for – or unknown to – their grandparents’ (Trump’s) generation.
 
Second, the young are facing the unprecedented economic challenges of the information revolution. They are entering the labor market at a time when market returns are rapidly shifting toward capital (robots, artificial intelligence, and smart machines generally) and away from labor. The elderly rich, by contrast, are enjoying a stock market boom caused by the same technological revolution.
 
Trump is peddling cuts in corporate taxes and estate taxes that would further benefit the elderly rich (who are amply represented in Trump’s cabinet), at the expense of larger budget deficits that further burden the young. Indeed, the young need the opposite policy: higher taxes on the wealth of the older generation in order to finance post-secondary education, job training, renewable-energy infrastructure, and other investments in America’s future.
 
Third, compared to their parents and grandparents, the young are much more aware of climate change and its threats. While Trump is enticing the older generation with one last fling with fossil fuels, the young will have none of it. They want clean energy and will fight against the destruction of the Earth that they and their own children will inherit.
 
Part of the generational divide over global warming is due to the sheer ignorance of many older Americans, including Trump, about climate change and its causes. Older Americans didn’t learn about climate change in school. They were never introduced to the basic science of greenhouse gases.
 
That is why they are ready to put their own short-term financial interests ahead of the dire threats to their grandchildren’s generation.
 
In a June 2015 survey, 60% of 18-29 year-olds said that human activity was causing global warming, compared with just 31% of those 65 and older. A survey released in January found that 38% of American survey respondents 65 and older favored fossil-fuel expansion over renewable energy, compared with only 19% of those 18-29.
 
Trump’s economic policies are geared to this older, whiter, native-born America. He favors tax cuts for the older rich, which would burden the young with higher debt. He is indifferent to the $1 trillion overhang of student debt. He is reprising the 1990s NAFTA debate over free trade, rather than facing the far more important twenty-first-century jobs challenge posed by robotics and artificial intelligence. And he is obsessed with squeezing a few more years of profit out of America’s coal, oil, and gas reserves at the cost of a future environmental catastrophe.
 
One might attribute Trump’s backward-looking mindset to his age. At 70, Trump is the oldest person ever to become president (Ronald Reagan was slightly younger when he took office in 1981). Yet age is hardly the sole or even the main factor here. Bernie Sanders, certainly the freshest mind of all the 2016 presidential candidates and the hero of millennial voters, is 75.
 
The young are enchanted with Pope Francis, 80, because he puts their concerns – whether about poverty, employment difficulties, or vulnerability to global warming – within a moral framework, rather than dismissing them with the crass cynicism of Trump and his ilk.
 
The main issue here is mindset and political orientation, not chronological age. Trump has the shortest time horizon (and attention span) of any president in historical memory. And he is utterly out of touch with the real challenges facing the young generation as they grapple with new technologies, shifting labor markets, and crushing student debt. A trade war with Mexico and China, or a tragically misconceived ban on Muslim migrants, will hardly meet their real needs.
 
Trump’s political success is a blip, not a turning point. Today’s millennials, with their future-oriented perspective, will soon dominate American politics. America will be multiethnic, socially liberal, climate conscious, and much fairer in sharing the economic benefits of new technology.
 
Too many observers remain fixated on the traditional party divides in the US Congress, not on the deeper demographic changes that will soon be decisive. Sanders nearly captured the Democratic nomination (and would likely have triumphed in the general election) with a platform appealing powerfully to the millennials. Their time is coming, most likely with a president they support in 2020.