Truth and consequences

American politics after a year of #MeToo

The defining movement of the Trump era is turbocharging existing trends



“THE political nightmare that has faced my colleague,” said Mark Hatfield on September 7th 1995, “is coming to an end.” The colleague was Bob Packwood, his fellow senator from Oregon, who was resigning. The “nightmare” was a Senate Ethics Committee investigation that found Mr Packwood had been sexually harassing subordinates since the 1960s. Mr Packwood battled the committee for three years, destroying evidence and appearing “perplexed or confused…about what actually constituted sexual harassment”. When he resigned, he won praise from senator after senator—not one of whom managed a single word of concern for his many victims.

In one sense, times have changed. Over the past year—ever since the #MeToo hashtag went viral in the wake of gruesome allegations of sexual assault levelled against Harvey Weinstein, a film producer—nine members of Congress have resigned or declined to run for re-election after facing credible charges of sexual misconduct. Two White House officials left after being accused of spousal abuse (they deny the charges) and three congressional candidates lost or quit their campaigns.

But that change is unevenly distributed across the political spectrum. Republicans remain devoted to President Donald Trump, who has been recorded boasting about sexual assault and whom at least 19 women have accused of sexual misconduct. His second Supreme Court nominee, Brett Kavanaugh, has been accused of sexual misconduct by at least four women. The furore surrounding his nomination has become a partisan referendum on the #MeToo movement, which itself has become the defining cultural phenomenon of the Trump era.

That movement may have begun after the allegations against Mr Weinstein, but those were petrol poured on a fire kindled by Mr Trump’s election. On January 21st 2017, one day after his inauguration, millions of people across America (and the world) took to the streets for the Women’s March. Many of those who marched said that watching the first major-party female presidential candidate lose was painful; watching her lose to a man who has referred to several women as “dogs” and “piece[s] of ass” was infuriating.

It has also been inspiring. During the previous election cycle, 920 women contacted EMILY’s List, a political action committee devoted to electing pro-choice Democratic women, about running for office. Since Mr Trump’s election, more than 42,000 have. Half the Democrats’ first-time House candidates this year are women, up from 27% in 2016 (and far higher than the Republican share of less than 20%). From a field that includes Senators Elizabeth Warren, Kamala Harris, Kirsten Gillibrand and Amy Klobuchar, the Democratic presidential ticket in 2020 will probably include at least one female candidate.

And as quickly as women are flocking to the Democrats, many appear to be fleeing Republicans. The 2016 gender gap of 24 points (women supported Hillary Clinton by 13; men went for Mr Trump by 11) was already the largest on record. According to an average of three recent polls compiled by National Public Radio, the same gap exists for this year’s mid-terms, but with a stronger leftward lean. Women favour Democrats by 21; men favour Republicans by 3.

Since women vote at greater rates than men, that swing should worry Republicans. In 2016, despite his claims to the contrary, Mr Trump won narrowly. For Republicans to prevail this year and in 2020, he needed to expand his coalition. Instead he is driving away marginal supporters. His approval rating seems to have a ceiling in the low 40s, and has fallen even further among women, particularly non-white and educated women.

That is not entirely due to sexual harassment, of course. But because polling shows that voters in both parties care about the issue, the Republican response to #MeToo represents a failure of opportunity. As the movement gathered strength late last year, Democrats pressed Senator Al Franken to resign his seat amid claims of groping and unwanted sexual advances. Republicans backed Roy Moore in a Senate race in Alabama, despite multiple allegations that he had molested teenage girls when he was a grown man.

Mr Trump has loudly defended multiple men accused of sexual misconduct, including Mr Moore; Rob Porter, one of his aides accused of spousal abuse; and Bill O’Reilly, who left Fox News amid sexual-harassment claims. Bill Shine also left Fox News after being accused in multiple lawsuits of abetting sexual harassment; Mr Trump hired him to be White House communications director.

Mr Trump has defended Mr Kavanaugh and cast doubt on his accusers. Unsurprisingly, the rest of his party has followed suit. Mitch McConnell, the Senate majority leader, vowed to “plough right through it”, promising to confirm Mr Kavanaugh “in the very near future”. Several other Republican senators also appear to have made up their minds before hearing from the judge’s accusers, the latest of whom has multiple security clearances and signed an affidavit, under penalty of perjury, that she was gang raped at a party that Mr Kavanaugh attended.

Others seem to think that sexual assault is no big deal. Kevin Cramer, a Senate candidate in North Dakota, called the incident “an attempt or something that never went anywhere”. Gina Sosa, who ran for Congress in Florida, wondered, “What boy hasn’t done this in high school?”

Some have wondered why Mr Trump does not withdraw Mr Kavanaugh’s nomination in favour of an equally conservative judge, such as Amy Coney Barrett. But to ask that is to misunderstand contemporary Republican politics which, under Mr Trump’s leadership, has become less about ideals than about power and dominance. Withdrawing Mr Kavanaugh would mean admitting that historical accusations of sexual assault can be disqualifying, which leads back to the president.

In his book about the Trump White House, Bob Woodward quotes the president advising a friend accused of sexual misconduct: “You’ve got to deny, deny, deny and push back on these women…If you admit to anything and any culpability, then you’re dead.” If such attitudes lead the Republicans to mid-term losses on the back of energised female turnout (and candidacy), that may start to push the party towards a reckoning with Trumpism.

Dollar dominance prevails despite global efforts

Developing economies have tried, but failed, to boost local currency bond markets

Gillian Tett

Remember The Trade Wars? This Isn't Complicated

by: The Heisenberg

- Despite the fact that this week saw the official implementation of "phase 2" of the U.S.-China trade dispute, trade wars took a back seat to domestic political theatre.

- Rest assured, trade wars won't remain relegated to the news cycle back burner for long.

- What I wanted to do on Saturday is bring you a straightforward assessment of tariffs' likely impact on S&P 500 earnings and on the U.S. consumer.

- There isn't anything complicated about this.
 

 

The title here is of course a reference to the fact that trade war news took a back seat to domestic politics in the U.S. this week.

 

It's a quip, and not a particularly creative one, but it resonated on Friday, and it speaks to the manic nature of the news cycle that has, at various times over the past two years, overwhelmed market participants' collective ability to process the deluge of potentially relevant incoming information.

 

And please, save me the "it's all noise" line, because anyone who really trades knows it's only "all noise" until an algo misreads a headline and runs everybody's stops.

 

"Remember XYZ?" has become something of a common refrain on financial Twitter (or, "FinTwit", for short), and while anyone could have made the quip that serves as the title to this post, I'll attribute it to one of FinTwit's more widely followed pseudonymous accounts:

 

 

 

Well, let me assure you that to the extent folks forgot about trade wars this week, the market's memory will be jogged soon enough. While I'm obviously predisposed to suggesting that most political news has market ramifications, the political soap opera that captured everyone's attention in the U.S. this week only matters for markets to the extent it influences the U.S. midterms. That effect might be large, but it's a second order effect, which means it's inherently untradable in the short run.

On Thursday, as everyone scrambled around at their desks to try and find a live feed they could stream of the Senate Judiciary Committee proceedings, the World Trade Organization was like that kid in the back of the classroom who never gets called on by the teacher ("Me, me, call on me, please!").

 

Had anyone cared to call on the WTO Thursday, they would have discovered that the organization slashed its 2018 trade growth outlook to 3.9% from 4.4% in April.

Additionally, the WTO said merchandise trade growth will be 3.7% next year, down from a projected 4% in their previous Outlook.

 

Here's what WTO Director General Roberto Azevedo said in a statement:

While trade growth remains strong, this downgrade reflects the heightened tensions that we are seeing between major trading partners. More than ever, it is critical for governments to work through their differences and show restraint.

That warning came just three days after the latest round of U.S. tariffs on China went into effect. On Monday, levies on $200 billion in Chinese goods were implemented and it's widely expected that the Trump administration will move ahead with duties on an additional $267 billion in goods before year-end.

 

Perhaps the most important thing for investors to understand about the trade frictions in the context of U.S. equities (SPY) is that stocks aren't "ignoring" the effects. Rather, the effects simply aren't showing up in the fundamentals yet. More simply: There's nothing to "ignore" or to respond to.

 

The tax cuts and expansionary fiscal policy have created enormously powerful tailwinds both for U.S. corporate bottom lines (record earnings growth) and for the domestic economy (while the "hard" data is starting to disappoint relative to consensus, it's still robust, and the "soft" data is simply euphoric).

 

Those same policies are dollar positive (via the read-through for U.S. monetary policy). A stronger dollar puts pressure on ex-U.S. risk assets (think: emerging markets that have borrowed heavily in USD) while the threat of further trade tensions dents the outlook for global growth.

In sum, there are fundamental reasons to be long U.S. stocks and fundamental reasons to be concerned about ex-U.S. assets.

 

Little wonder then, that U.S. equities have diverged from their international counterparts. It isn't some "mystery". In fact, it's the opposite of a mystery. Sure, the unprecedented divergence argues for a scenario where ex-U.S. assets "catch up" into year-end (that's the "convergence trade"), but if all you're looking at are the fundamentals, well then the current juxtaposition is not only not a mystery or an example of U.S. stocks "ignoring" reality, but rather everything acting exactly like you would expect it to act.

 

Sure, markets are supposed to be forward-looking, but they're also supposed to be efficient price discovery mechanisms. Those two characterizations of markets' "proper" role sound good in theory and in the textbooks, but in reality, market participants are a myopic bunch and post-crisis monetary policy has stripped capital markets of their ability to act as mechanisms for price Discovery.

 

I'm going to go ahead and assume that although you and I are, like everyone else, tempted by short-sightedness and the allure of riding the next assumed leg higher ("climbing the wall of worry", as it were), we're also interested in thinking about what the longer-term ramifications of the trade frictions are for the U.S. companies in which we have an ownership stake via equities. Remember, this isn't supposed to be a casino. Don't lose sight of what it means to own stock.

 

As I put it earlier this week, if the trade tensions keep headed in the direction they're headed, it will affect corporate bottom lines and guidance.

 

On that score, there isn't anything particularly complicated about the math or, more generally, about the transmission mechanism between tariffs and the stocks you own.

 

To reiterate, it now seems highly likely that the U.S. will end up taxing the entirety of Chinese imports to the U.S. The Trump administration adopted a 10% initial rate in the latest round of tariffs, but promised to more than double that to 25% starting in 2019 if there's no resolution.

The President and his aides have made it abundantly clear that retaliation from China will be seen as cause for the U.S. to slap levies on the remainder of Chinese imports.

 

If we assume that the rate in a theoretical "third phase" would be 25% (and that's probably a reasonably safe assumption, although I suppose it would be possible to lift the rate on the list that corresponds to "phase 2" while applying a 10% rate to the prospective new list), then earnings growth for the S&P 500 flatlines in a worst case scenario.

 

What constitutes a "worst case scenario"? Well, here are the specifications and numbers, via a Goldman note out Friday evening:

Tariffs represent a threat to corporate earnings through higher costs and lower margins. For all US industry, roughly 15% of cost of goods sold is imported. Given S&P 500 constituent firms are more global in nature and have more complex supply chains than overall industry, we estimate imports account for roughly 30% of S&P 500 COGS. This estimate is consistent with the 30% share of S&P 500 sales generated outside the US. Imports from China account for 18% of total US imports. Our baseline earnings forecast is S&P 500 EPS jumps by 19% to $159 in 2018 and climbs by 7% to $170 in 2019. Consensus bottom-up estimates are slightly higher at $162 (+22%) and $178 (+10%), respectively. 

For a top-down tariff sensitivity analysis, we conservatively assume no substitution to other suppliers, no pass-through of costs to consumers, no boost to domestic revenues, and no change in economic activity. Given those assumptions, a 25% tariff on all imports from China would lower our 2019 S&P 500 EPS estimate by roughly 7% to $159, flat vs. 2018. If forecast EPS drops to $159 and the forward P/E contracts by 5% to 16.4x, the S&P 500 would fall to roughly 2600 (-10% from current levels). 

Please note that there is exactly nothing complicated about that analysis. A first-year college econ major could understand it on the first read. If a third of your COGS is imported, well then, you're going to get significant margin pressure in a protectionist environment. The only way you don't get margin pressure is to upend your supply chain (i.e., source from locales that aren't subject to the tariffs) or raise prices. At the aggregate (i.e., index) level, the only way to mitigate these effects barring a significant rethink of supply chains and/or higher prices, is to sell a bunch more stuff, presumably on the back of a continued upswing in domestic economic activity.

 

Here's a bit more from Goldman on margins:

Rising input costs force firms to raise prices or sacrifice profitability. In part due to the boost from corporate tax reform, S&P 500 net margins have surged to all time highs (10.7%). However, earnings results and management commentary have underscored the challenge companies are facing to keep up with rising costs and the pressure this could eventually put on profit margins. The most recent National Association of Business Economics Survey showed a large share of respondents reporting rising material (48%) and wage costs (48%), and a much smaller share reporting rising prices charged to customers (20%). In the past, this dynamic has preceded declining S&P 500 EBIT margins.

Again, there is nothing at all complicated about this and that's what makes it perplexing when I see retail investors suggest that somehow the trade wars can continue on the current trajectory without ultimately impacting U.S. stocks.

 

The only way that kind of thinking is consistent with reality is if either the trade frictions dissipate or else if multiples expand. The former option (i.e., easing trade tensions) is obviously the more desirable outcome, because the latter simply means paying more for every dollar of earnings.

 

And see, here's the other thing: I continue to worry that the incessant media attention on the U.S. economy is leading directly to a scenario where U.S. consumers are increasingly oblivious to the straightforward costs that will accrue to them from trade frictions. The Bloomberg Consumer Comfort Index, for instance, is sitting at its highest level since 2000.

(Bloomberg)

 

 

Contrast that with the following commentary from Barclays, excerpted from the bank's latest sweeping global outlook piece (which, by the way, strikes an overtly optimistic tone, so please don't mistake the following for bearishness):

Although losses from a global reduction in trading volumes following a withdrawal of the US from the global trading system would not be trivial, the losses from a bilateral US-China trade dispute or an increase in auto import tariffs may be less than some expect given the heightened rhetoric regarding the subject of trade barriers. One reason it is so heated, despite what appear to be minor economic costs short of a full-blown trade war, is that the net costs obscure concentrated losses. By this we mean that tariffs act as a tax on consumption, with losses borne primarily by consumers, and the net economic costs include offsets from increases in producer and government surpluses. In our baseline US-China scenario, for example, we estimate plausible losses to US consumers at about 0.6% of GDP, only some of which is transferred to the government and corporate sector in the form of tariff revenues and profitability. 

The same is true for tariffs on trade in autos; plausible losses to consumers could be several times the net economic loss. On one hand, durables represent the most volatile part of personal spending, and sizeable price increases will impose costs on households. Yet domestic production may expand, and additional revenues to the government, if largely saved, could provide offsets. Altogether, relatively modest estimates of the net economic costs may trade off up-front losses for consumers against medium-term gains from producer and government surplus. 

Got that? The cost of this is ultimately going to be borne by consumers. It is not at all realistic to expect corporate management teams to avoid passing on the costs associated with a new global trade regime forever. In order to avoid raising prices, management would have to be willing to renegotiate every aspect of their supply chains that involves imported COGS and eat whatever's left over in terms of cost pressures. Does that sound realistic to you? Of course not. Especially not in an environment where U.S. corporations are perhaps more zeroed in on the interests of their shareholders than ever before.

 

When you think about that in the context of an economy that depends heavily on consumer spending, you start to wonder whether ebullient consumer sentiment might be sorely misplaced.

 

In any event, I was excited on Saturday to write the above, because in stark contrast to a lot of the commentary I pen for this platform, it is all very straightforward and easily digestible by everyday investors.

 

I would encourage you to think about everything said above as you ponder the relative merits of a market that is trading like this:

 

(Goldman)

A load of rubbish

Emerging economies are rapidly adding to the global pile of garbage

But solving the problem should be easier than dealing with other environmental harms, says Jan Piotrowski




THE OFFICES OF Miniwiz in central Taipei display all the trappings of a vibrant startup. The large open space on the 14th floor of an office block overlooking Taiwan’s capital is full of hip youngsters huddled around computer screens. A common area downstairs includes a video-game console, a table-tennis table and a basketball hoop. But a hint that this is not just another e-commerce venture comes from neatly sorted sacks packed with old plastic bottles, CDs and cigarette butts.

Rather than peddle brand-new virtual products, Miniwiz derives value from physically repurposing old rubbish. Chairs in the conference room began life as plastic bottles, food packaging, aluminium cans and shoe soles. The translucent walls separating it from executives’ dens owe their amber-like quality to recycled plastic mixed with discarded wheat husks. Coffee is served in glasses made of broken iPhone screens. Arthur Huang, the company’s 40-year-old founder and chief executive, who holds a masters degree in architecture from Harvard, first tried setting up shop in New York in the mid-2000s. That effort failed when he discovered that few Americans shared his obsession with limiting the world’s waste. By contrast, many of his fellow Taiwanese did.
They still do. The island is a poster child for recycling, recovering 52% of rubbish collected from households and commerce, as well as 77% of industrial waste, rivalling rates achieved by South Korea, Germany and other top recycling nations (America recycles 26% and 44% respectively). Its recycling industry brings in annual revenues of more than $2bn. Lee Ying-yuan, the environment minister, boasts that 16 of the 32 teams competing at this year’s football World Cup in Russia sported shirts made in Taiwan from fibres derived from recycled plastic.

For more than two centuries since the start of the Industrial Revolution, Western economies have been built upon the premise of “take, make, dispose”. But the waste this created in 20th-century Europe and America was nothing compared with the rubbish now produced by emerging economies such as China. According to a new World Bank report, in 2016 the world generated 2bn tonnes of municipal solid waste (household and commercial rubbish)—up from 1.8bn tonnes just three years earlier. That equates to 740 grams (1lb 6oz) each day for every man, woman and child on Earth.

That number does not include the much bigger amount produced by industry. Industrial solid refuse contains more valuable materials like scrap metal and has long been better managed by profit-seeking firms. And then there is the biggest waste management problem of all: 30bn tonnes of invisible but dangerous carbon dioxide dumped into the atmosphere every year.

As people grow richer, they consume—and discard—more. Advanced economies make up 16% of the world’s population but produce 34% of its rubbish. The developing world is catching up fast. On current trends, the World Bank projects, by mid-century Europeans and North Americans will produce a quarter more waste than they do today. In the same period, volumes will grow by half in East Asia, they will double in South Asia and triple in sub-Saharan Africa (see map). The annual global total will approach 3.4bn tonnes.



This special report will argue that waste generation is increasing too fast and needs to be decoupled from economic growth and rising living standards. That will require people to throw away less and reuse more—to make economies more “circular”, as campaigners say. This can only happen if people “equate the circular economy with making money”, claims Tom Szaky of Terracycle, which develops technologies to use hard-to-recycle materials. “Take, make, dispose” must now shift to “reduce, reuse, recycle”, he says.

Virtuous recycle

Global waste may not present as apocalyptic a challenge as climate change, but it may be easier to solve. This is because local action to clean it up and recycle it can lead to immediate local effects. That can in turn transform into a virtuous cycle of change. People are more likely to take action if they can quickly see the results of their change in behaviour. All the more so because reducing waste offers two benefits not just one. It not only removes an affliction (solid waste) but, unlike tackling smog, it also creates a tangible benefit at the same time, in the shape of the recycled materials that can be reused. On top of that, solid waste (the only type that this report will discuss) is a visible eyesore. It is hard for anyone to deny that it exists.

That does not mean it will be easy to move to a more circular economy. Currently 37% of solid waste goes to landfill worldwide, 33% to open dumps, 11% to incinerators (see chart). Some goes to compost heaps. Two-thirds of aluminium cans are currently recycled in America, but only 10% of plastic. All told, only 13% of municipal solid waste is recycled globally. Everyone agrees that this is far too little.




The urgency of the problem is not in dispute. In July India’s Supreme Court warned that Delhi, the country’s capital, is buried under “mountain loads of garbage”. When dumps or landfills catch fire, as more than 70 have in Poland over the sweltering summer, noxious smog smothers their surroundings. Toxic runoff can permeate soils and poison waterways. Some rivers in Indonesia are so blanketed with litter that it completely conceals the water beneath. According to the United Nations, diarrhoea rates are twice as high in areas where waste is not collected regularly, and acute respiratory infections are six times as common.

Discharged into seas, rubbish can return to wreak havoc on land. In August the Arabian Sea spewed 12,000 tonnes of debris and litter onto the shores of Mumbai in two days. Or it can despoil the ocean. Fishermen in the Arabian Sea complain they net four times as much plastic as fish. The “great Pacific garbage patch”, an Alaska-sized ocean gyre in the north Pacific Ocean, where currents channel all manner of flotsam, may contain 79,000 tonnes of plastic debris. Greenhouse gases from the waste industry, mainly emitted by a cacophony of chemical reactions in landfills, could account for 8-10% of all climate-cooking emissions by 2025. Left unchecked, this groundswell of garbage risks overwhelming the planet.

The good news is that around the world politicians and the public appear increasingly alert to the economic, ecological and human costs of waste, as well as to the missed opportunities it presents. Many governments in the developing world are grasping that spending less—or nothing—on waste management means paying more for things like health care to treat its effects. In the developing world, only half of all municipal waste is collected. In low-income countries as much as 90% ends up in open dumps. Lowering these proportions requires more investment in waste infrastructure such as managed landfills or low-polluting incinerators. Taiwan’s example shows that these can be clean and need not discourage recycling.

Rich countries already have such facilities, and more. They need to improve the recovery of valuable materials from their waste streams. For two decades they have relied on emerging economies, primarily China, to recycle their refuse. Over the past 25 years, the world deposited 106m tonnes of plastic in Chinese ports for recycling. The system ran aground in January when China banned imports of virtually all plastic and unsorted paper, out of concern for its environment. This left Western waste-managers with tonnes of unwanted rubbish—and left policymakers with piles of unanswered questions about how to boost the capacity of domestic recyclers, and ultimately change citizens’ carefree approach to waste.

Politicians in Europe and American states and cities—if not Donald Trump, America’s distinctly ungreen president—are issuing ambitious recycling targets and trying to revamp the way they manage their rubbish. Techies and entrepreneurs like Mr Huang or Mr Szaky are dreaming up clever—and lucrative—ways to manage and reuse it. Multinationals are toying with resource-light business models based on service contracts rather than product sales. And many consumers are adopting leaner lifestyles.

But municipal budgets are tight everywhere. Trade tiffs can dampen legitimate exchange of scrap (as recycled waste is also known). Regulations for handling waste are necessary but can be obscure. Policymakers have yet to devise a way to boost large-scale investment in recycling, which is discouraged by periodic declines in the cost of primary commodities, with which recyclers compete. And some worry that switching to a more circular economy will harm those built on the old model.

These problems are real. But, as this report will argue, they are not insurmountable. In the 1990s, economic growth, rising living standards and soaring consumption outpaced Taiwan’s capacity to clean up its waste, earning it the unflattering moniker of “garbage island”. As recently as 1993 nearly a third of Taipei’s rubbish was not even formally collected and virtually none was recycled. By 1996 two-thirds of landfills were nearing capacity.

In the face of mounting protests the government undertook to erect 24 incinerator plants to burn the waste instead, at a cost of $2.9bn. It also incentivised the Taiwanese to produce less rubbish in the first place. Under an “extended producer responsibility” (EPR) scheme, manufacturers and brands began to contribute to the cost of their products’ disposal, either through paying a fee into a fund earmarked for waste management or sometimes by managing the waste themselves. The less recyclable the product, the more expensive for the company. The scheme continues today. Households are charged for the amount of general mixed waste they produce but not for paper, glass, aluminium or other recyclables. Those caught dumping their trash illegally face hefty fines and public shaming. A typical Taiwanese person now throws out 850 grams daily, down from 1.15kg 20 years ago.

Half a century after environmentalists first began imploring consumers to reduce, reuse and recycle, similar exhortations are now echoing from San Francisco to Shanghai. And the world, drowning in garbage, has begun to listen.

Managing the Global Factor Better

Mohamed A. El-Erian  



SEATTLE – Imagine a world in which the annual meetings of the International Monetary Fund were more client-driven. Ahead of the gathering – this year’s will take place in Indonesia in October – the IMF would solicit from its 189 member countries three key policy issues on which to focus, not only in official discussions, but also in the numerous seminars that are held in parallel. The result would be an agenda that responded better to the continued anxiety that a growing number of policymakers – and populations – are feeling.

For much of the decade since the global financial crisis erupted, countries worldwide have been subject to what London Business School’s Hélène Rey and others have called “the global factor”: a set of external influences that countries cannot manage or control, but that play an important role in determining key domestic variables. This has generated economic and financial volatility that has complicated internal policy management, fueled political polarization, and exacerbated social divisions.

US President Donald Trump’s “America First” approach has tended to amplify international feelings of uncertainty and insecurity, especially in Asia. Now, beyond having to cope with big changes in capital flows, interest rates, and currency movements, these countries must adjust to the reality that they may not even be able to count on some of their basic, long-standing assumptions about international trade.

But this is not just an emerging-economy problem. Despite attempts to boost resilience, including through both micro- and macro-prudential measures, much of the world remains vulnerable to the global factor.

Of course, countries with existing domestic economic and financial vulnerabilities are generally the first to face disruptions. But even in better-managed economies, external factors are affecting local financial conditions in ways that can have little to do with domestic fundamentals.

In Switzerland, for example, the major economic-management challenges of the last few years have had more to do with spillovers from the eurozone than homegrown problems. In confronting these challenges, the authorities have been forced to implement some distortionary measures – most notably, highly negative interest rates.

Some of these destabilizing dynamics could well intensify over the next few months, for two reasons. First, central banks will remain on the path toward monetary-policy normalization – albeit at different speeds – after many years of ultra-loose measures focused on repressing financial volatility. As a result, financial conditions for much of the emerging world are likely to become tighter and more unpredictable.

Second, advanced economies’ performance is diverging, with growth in the United States accelerating, and Europe and Japan losing economic momentum. This will place even greater pressure on interest-rate differentials, already at historical highs, and fuel exchange-rate volatility.

Beyond their economic consequences, these trends are likely to exacerbate political and social tensions. After all, the effects of both trends can be difficult to grasp without a decent understanding of quite complicated market structure and technical factors. This will make the monumental challenges ahead difficult to communicate to the public, leaving many feeling confused, insecure, and frustrated.

The IMF can and should help its members address these challenges by assuming a larger role in providing analysis and leading more effectively discussion in pivotal areas. In such a world, the Fund’s agenda would emphasize bolder action in three areas.

First, at the country level, in addition to focusing on general questions of economic resilience, the IMF would examine the scope for effective “sand-in-the-gears” measures to be implemented during the more extreme stages of global liquidity cycles, including to counter disruptive technical forces. Such an approach would be a natural extension of the work that has been done on micro- (institution-focused) and macro- (system-focused) prudential measures.

Second, at the institutional level, the IMF would continue to push hard for measures to track and address spillovers and spillbacks, including the incorporation and expansion of financial linkages that are superior in terms of monitoring, program design, and early-warning mechanisms. This would prevent the tail of obscure financial instabilities from wagging the dog of the real economy. The importance of such measures was highlighted earlier this year in Argentina, where a traditionally well-designed program was effectively derailed in just weeks by unanticipated technical developments.

Third, at the multilateral level, there is a need for more frank, genuine, and cooperative discussion about the cross-border effects of individual countries’ policies. Such discussion must acknowledge the failure of past efforts to address the issue, as well as the costs of deepening fragmentation of the international monetary system. This will inevitably raise issues of fair representation and governance in multilateral institutions, as well as the persistent bias in the system’s response to large imbalances and to divergence in economic and policy performance.

Without progress in these three areas, the unsettling puzzles and disruptive policy challenges facing many countries around the world will remain largely unresolved. This will raise the risk that countries will implement policies that not only conflict with those of their neighbors, but that may also end up being sub-optimal at home.

The IMF is the body best suited to serve as a trusted adviser and an effective conductor of the global policy orchestra. If it is to fulfill that role, however, it must strengthen its credibility as a responsive and effective leader. That means listening better to its members and then helping them more effectively to iterate more harmonious policies.


Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.